Disclaimer

All opinions are my own.

Saturday, October 27, 2007

Downsizing

The news of layoffs at pharma companies had been unheard off and were unimaginable. Reasons were simple. Companies made profits, as there was no realistic competition. Generics from India have changed the playing field. The status quo does not exist anymore. Drugs are being commoditized and profits are going to shrink. In addition, the blockbuster model is not working.

This is history repeating itself. We saw this in chemicals, textiles, steel etc. in the developed countries. Toyota changed the playing field and US automobile companies did not react. Did anyone ever imagine GM would seize to the largest auto company? Globalization is bringing new intellectual capital to every aspect. This has resulted in some improvements in manufacturing processes and technologies in every aspect of business in the companies from India. This is not being the case at companies in the developed countries. With the layoffs, the knowledge base will start disappearing.

Established companies have followed the practice of closing plants, reducing R&D and outsourcing everything they can. These are short-term gains to appease the stock markets. Cumulative effect of layoffs is demoralizing on the work force. Why would some one want to put their heart and soul in innovation if he/she might not have a job? Humans pride in innovation. If that road is closed, humans stop putting their best and in the long run, the knowledge base is lost. Recent announcements at major pharma companies are just the start of reduction in knowledge base and intellectual capital.

There may be still opportunities. This is through simplification of the manufacturing technologies and processes, the heart of any manufacturing company. We need to revive the heart before it totally fails. This can only happen if the chemistry, physics and engineering of a chemical reaction and formulation is properly understood and accordingly commercialized. This has not been the case. USFDA clearly states that the current practices are antiquated.

Companies have to step out the box and use every possible resource (inside or outside) to re-invigorate the manufacturing and R&D of their companies. This is necessary to stop the downward spiral.

It is well known in the specialty chemicals businesses that the yield and the on-stream-time have to be high for any business to survive. In pharmaceuticals (specialty chemicals with disease curing value) the yield of active ingredients are low. I have seen yields as low as 5% and “on-stream time” is less than 50%. Yes, one can charge high price for the drug to cover up for inefficiencies and lack of innovation for some time. However, this cannot last forever. One has to improve the processes to reduce overall business costs. If this is not done, history will repeat itself and we are beginning to see this in pharmaceuticals. Is it too late? Again, the answer is NO. Pharma companies need to put an effort to improve manufacturing and process technologies and that is the only way companies will survive.

Girish Malhotra

No comments: