A Bitter Pill To SwallowJoseph Weber
After a decade of sizzling growth that turned Bristol-Myers Squibb Co. into the nation's second-largest drugmaker, its executives weren't used to bad news. Maybe that's why Wayne A. Davidson, president of Bristol's pharmaceutical and nutritional group, had such a hard time telling workers that he planned to eliminate 2,300 of their 38,000 jobs: Davidson announced the cut at the very end of an Oct. 29 memo to employees that hailed their "many accomplishments."
He needn't have been so coy. Bristol's paltry 5% gain in earnings for the first nine months of this year is startling evidence that gloom and doom rapidly is becoming business as usual for drugmakers. This year, a half-dozen of them have wrestled with subpar sales, disappointing earnings, or layoffs. "This promises to be among the most trying times for the U.S. drug industry since World War II," says Neil B. Sweig of Capital Institutional Services Inc.
Nor will prospects improve any time soon. Washington is insisting that makers of pharmaceuticals contain price hikes--pressure that President-elect Clinton almost surely will intensify. Worse for the long term, drugmakers have few blockbuster products in their pipelines. That's likely to cast a pall over revenues and profits for years. "The industry is under a lot of pressure," observes Randy Thurman, president of Rhone-Poulenc Rorer Inc., a $4 billion drugmaker that has shed 1,000 jobs in the past two years.
It's a painful turnabout for companies that handily weathered the economy's dips over the past decade. During the 1980s, drugmakers hiked prices an average of 9.6% annually--more than double the inflation rate. They regularly tallied double-digit gains in annual revenues and profits. And they boosted research and development spending from 11.7% of revenues in 1980 to 16.1% today
Now, cost-cutting to fend off hard times is becoming routine in the drug biz (table). At Eli Lilly & Co., write-offs dealt the company a $269 million loss in the quarter ended Sept. 30--its first quarterly red ink in more than 30 years. And Syntex Corp. eked out a disappointing 9% rise in its fiscal fourth-quarter earnings. Syntex has announced a plan to downsize, either through layoffs or attrition, while Lilly plans to streamline manufacturing. Even industry leader Merck & Co., keen to maintain its 17% third-quarter growth in earnings this year, has been shrinking its 2,800-member sales force.
Some drugmakers are making cuts to deal with an accounting change; others no longer need so many salespeople because of the the rise in managed-care concerns, which typically buy for hundreds of doctors and hospitals.
OPEN SEASON. But the industry contraction is symptomatic of a much deeper problem: Drugmakers have few blockbuster new products waiting in the wings. That's ominous, since many of the drugs that became stars in the 1980s will lose their patent exclusivity soon. Once patents expire, rivals are free to introduce cheaper versions. Bristol, Syntex, and Upjohn are among the companies whose patents on key products will expire over the next few years.
Already, an estimated 40% of all new prescriptions are filled with low-priced generic versions. That figure could top 50% by 1995, as more drugs become vulnerable to copycats.
Some drugmakers have long masked shortcomings in their R&D by raising prices on existing drugs. No more. This year, Bristol, Merck, and others agreed to limit hikes to the inflation rate in hopes of placating critics in Washington. Those voluntary restraints could become mandatory with the advent of the Clinton Administration.
To boost growth, drug companies are stepping up efforts to buy new drugs developed elsewhere, especially by biotechnology outfits. In August, Lilly purchased marketing rights to biotech startup Centocor Inc.'s septic-shock drug, Centoxin. Such deals are far less costly than internal development or buyouts of smaller manufacturers.
If any companies are ripe for mergers, it could be the large drugmakers. This year, drug stocks as a group are off 17%--a discount likely to pique the interest of potential buyers. Syntex is down some 57% from its 52-week high of 54 1/4. Because Syntex is incorporated in Panama, acquirers had shied away from it. But the stock is now so low that "I would not rule out Syntex being acquired," says analyst Christina Heuer of Smith Barney, Harris Upham & Co. Before managements seek rescuers, though, they'll try restructuring, joint ventures, and licensing. That means a lot of ferment in an industry that had forgotten how risky the drug business can be.
DRUGMAKERS CATCH A CHILL BRISTOL-MYERS SQUIBB Plans to cut 2,300 jobs, or 6% of its drug and infant-formula staff, because of slower earnings growth ELI LILLY Plans a restructuring after posting a $269 million third-quarter loss--the company's first loss ever MERCK Is shrinking its sales staff by attrition, saying the rise of managed-care buyers requires fewer salespeople RHONE-POULENC RORER Has eliminated 1,000 jobs in two years, thanks to its sale of four European plants SYNTEX Plans to cut jobs and spending because of slowing sales and the prospect of Naproxen's patent expiration in 1993 WARNER-LAMBERT Will trim 2,700 of 35,000 jobs by 1996, to try to preserve margins DATA: BW