Big Pharma is currently experiencing a recession, with layoffs, R&D cuts, and restructuring rife among the top 25. But why? Yes, there are some macroeconomic factors and industry-specific challenges at play, but these are modest in context.
I think the pharma companies have stock-price tech envy and are succumbing to standard Big Consulting recommendations all at the same time, creating an artificial recession. A better path is available.
The Influence of Big Consulting
Big Consulting has been ringing the alarm bell for Big Pharma for the last few years. Their published general observations say:
- The pharma industry has historically been resilient to adverse macroeconomic conditions, but:
- The high-inflation, high-interest-rate environment is a threat we haven’t seen in a while.
- The industry is facing many upcoming patent expirations.
- Potential government regulation and price negotiation are threats.
- The confluence of the above is going to challenge the resilience of the industry in a way that hasn’t been seen before.
- Urgent action by Big Pharma is needed.
But the factors listed are not new. They have been evolving over time, and the urgency is false.
The Big Consulting companies have all been giving the same advice:
- Adjust your R&D portfolio and strategy. Cut some programs. Put more emphasis on using AI to increase R&D efficiency.
- Use M&A to reduce risk, and let smaller companies do the early R&D.
- Restructure, cut SG&A costs, and improve manufacturing efficiency.
Sound familiar? (Do you notice that the areas Big Consulting have been advising action on are also areas where they happen to do consulting work?)
While none of this is necessarily bad advice, it appears many Big Pharma companies are following this advice at virtually the same time. This is the real reason behind the current pharma recession. They’re restructuring, cutting R&D, and doing other cost-cutting and efficiency work simultaneously, causing an unnecessary bubble in layoffs and probably eventually driving up acquisition costs. A self-fulfilling prophecy.
A Mature Industry with Tech Envy
Why are seasoned industry executives so eager to follow the advice?
I think a little introspection would probably show Tech Envy. Pharma stocks have moved in the last 20 years from heavy growth stocks to more steady, modest-return stocks. In the 1990’s and early 2000’s, many pharma stock prices grew rapidly. But since the early 2000’s, most pharma stock returns have lagged the S&P 500 and been way behind the NASDAQ and tech stocks. The cycle is not new; all industries eventually mature and move from high growth to balanced returns. But shareholders are asking for more, and the pharma execs are trying to comply.
Rather than take a metered approach, almost anyone that’s not Lilly or Novo is doing significant restructuring and cost cutting. And they’re creating a false recession the rest of the economy isn’t seeing.
What should they do? Take the measured approach of mature companies.
- Don’t pursue pure growth. Focus on a reliable 15-20 percent return on equity.
- Avoid the “all functions need to reduce operating costs by 5 percent” mandate. This just creates initiatives with low return for the effort. Cut costs only where it’s needed. And avoid offshoring; keep your internal services close to their customers, which creates efficiency in the long run. As industries mature, they eventually develop a mindset of continuous efficiency. Pharma should do the same, and it is overdue. But they should do it intelligently for the long-term, not short-term initiatives focused on the next year or two.
- Don’t reinvent your R&D just because. Only do it if you need to. How do you know? Look to see if your portfolio is balanced. Are you balanced among low-, medium-, and high-risk endeavors? Are your patent positions spread out over time? Make sure you don’t overvalue net present value. We all know the industry is notorious for not being able to predict the value of a drug. (I wonder what Lilly’s NPV for tirzepatide was 10 years ago?)
The pharmaceutical industry is maturing. They need to embrace that business aspect and continue to do the fantastic work producing life-changing therapies that we all need.
October 17, 2024
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