Novartis Cuts 2,000 as Pharma Industry Continues to Falter

Novartis (NYSE: NVS) said it would cut 2,000 workers and outsource some functions to companies that will do the work for less than it can. Novartis will take a restructuring charge of $300 million. This is another sign that the world’s largest pharmaceutical corporations cannot survive the pressure of the loss of patents on some of their most important drugs. So restructuring within the industry will be nearly endless. It has been underway already for several years.

A new study by Booz & Co. shows that pharmaceutical multinationals are among the companies that spend the most on R&D. They have little to show for it. Each of these corporations, from Merck (NYSE: MRK) to Pfizer (NYSE: PFE), has been unable to develop a large portfolio of blockbuster drugs — the kind that sustained them with tens of billions of dollars in sales. Consequently, these companies will begin to slip down the Booz list of big R&D spenders. It is not one they can afford to head anymore.

One answer to pharma’s endless problems has been a series of mergers and layoffs. Merck bought Schering-Plough for $41 billion in 2009. Pfizer bought Wyeth for $68 billion in the same year. Each deal called for layoffs in the tens of thousands. What the drug companies could not create from new sales-based R&D, they tried to accomplish with M&A based on balance sheets that patented product sales had helped build over decades.

The Novartis disclosure shows that the dream that large pharmaceutical companies might reestablish robust product pipelines has been abandoned. There is little left these firms can do but to cut costs as quickly as they can.

Douglas A. McIntyre