It was only a matter of time. Eventually, Big Pharma was going to implode.
It's hard to feel sorry for these companies, but I do feel sorry for people losing their jobs. I'm looking at the headlines at Fierce Pharma and see it's all about Pharma lay offs. Pfizer and Merck, Wyeth, Novartis, Schering, Abbott, GlaxoSmithKline all are cutting a few hundred million dollars in costs and laying off thousands of people. What's happening here? Last January everything looked so rosy for the entire health care sector. The rest of the economy looked like crap, but pharma was still strong. Health care stocks were considered a "safe haven" for investors.
Not so now.
"It's their own damn fault!" comes to mind. You know their market strategists, upper middle managers and top managers saw it coming and used their knowledge to preserve their jobs while they planned on who to lay off and what expenses to slash. For instance, Fred Hassan of Schering-Plough is going to cut over 1,000 reps that will save the company $1.5 billion by 2012, but nothing about cutting his pay package over the next 4 years. That's the current American way, consolidate wealth upward and cut the expenses of how you create, market and deliver your product. Unfortunately, this is another 10,000 plus people (these companies combined lay offs) who probably can't pay their mortgages and will further fuel housing declines and our current economic crisis.
The health care sector, pharma in particular, is often referred to as "recession proof", but not this time. Our economy has been based on "monopoly money" for years and health care costs have risen at a faster pace than other economic components for the last 10 years. Like oil, health care market pricing is artificially inflated. It's exceeding the price the market will bear.
How soft is the health care sector? The final Kaiser 2008 election poll was released this week. It shows health care affordability is at the top of the list of issues. Two thirds of Democrats and Independents combined believe health care reform must happen now. People are skimping on health care which could be anything from skipping a doctor visit, delaying a diagnostic test to not filling a prescription. It seems the recession proof sector has a far softer demand than any economist thought possible.
Health care costs and the economic downturn: Personal impact one in three Americans report their family has had problems paying medical bills in the past year, up from about a quarter saying the same two years ago. Those with low incomes are even more likely to report such problems – nearly half (46 percent) of those making under $30,000 a year say they have experienced such a problem in the past 12 months.
And these bills are not negligible. Among those who report having trouble with medical expenses over the past year, most say the bills in question are in the thousands of dollars, rather than the hundreds. Overall then, nearly two in ten Americans report problems paying medical bills totaling upwards of $1,000 in the past twelve months. Given these amounts, it is not surprising that among the group reporting problems paying medical bills, a majority say these expenses have had a "major impact" on their families.
It seems that people can't pay for their pills. $400 for three (3!) pills! Pharma fears a $10 bil-$30 billion in profit losses as they see Obama's promise to negotiate the best possible drug prices for Medicare as a threat to their business. It is a threat that has big pharma trying to talk to the Democrats.
How soft is the pharmaceutical market in the U.S.? Considering the U.S. population of 300 million is 5% of the world's population of just under 7 billion people. A relatively wealthy 5%, but 5%. Yet, the U.S. consumes about 1/3rd of the world's pharmaceuticals, so it's probable that the U.S. pharmaceutical market is a great deal softer than previously thought.
The "free market", the one that McCain and the Republican Party is touting? The free market has had nine pharma companies announce lay offs and major cost cutting "restructuring" since September 19th of this year. That free market is "correcting" every greedy phamaceutical exec's ass into next year and maybe into the next. Pharmaceutical companies are slashing costs relentlessly. From pharma execs having to pay for their own helicopter commuting (heh) and giving their CEO the ax to cutting R&D and laying off the sales force.
There hasn't been a single announcement of what they are going to do to recapture the sales they've lost. Pharma isn't about to "down size" their pricing or "right price" their products to levels the market will bear. That would mean it would take too long to recapture their R&D that they don't pay for (government funding). There's no announcement in cutting back their top managment team's overall compensation. There's announcements of replacing their top managers and reassigning them, but nothing about these managers earning less money. There' a 3% announced cut in advertising budgets (that inflate the costs of their drugs). This is one, hard headed bunch. This group would rather have 100% of nothing, cut their work force and hobble their ability to do business rather than take less of what they were getting last year.