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June 17, 2011
How's All That Cost-Cutting Working Out?
From the Financial Times, here's a look at our industry from a business perspective:
A big justification for the mergers that have consolidated the global pharma industry was that overhead costs would be cut, reducing the impact to profits of the patent-expiration wave. Has consolidation delivered on this promise?
Note that we're already seeing things from a different angle here than we're used to thinking about. From an investor's perspective, all this outsourcing/site closure upheaval is probably a good thing, because it cuts costs that apparently need to be cut. And the question is, has it done what it's supposed to do?
The FT editorial gives a "conditional yes" answer, but they worry that cutting costs is a tactic that's run about as far as it can, and that may not be far enough, financially:
Much overhead has already been removed, and expanding into emerging markets, essential for all the global pharmas, will cost money. Cost of goods and research and development expense ratios have mostly stayed put, and it is hard to see why that would change now. If the savings story is petering out, the industry needs revenue growth more than ever.
That we do, and where we're going to get it is the answer. If there's a bright side to all this, it might be that we're close to the end of the relentless cut-cut-cutting that's characterized this business in recent years. The dark side, though, is that one answer to "what's next?" is more mergers, since that's one way to get back to cutting costs. And let's face it - cutting costs, that's something that managers know how to do. Improving R&D productivity, well, not so much. Stick with what you know, eh?
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