The myth of “lean­er and mean­er” phar­ma

Pas­cal So­ri­ot, chief ex­ec­u­tive of­fi­cer of As­traZeneca, pos­es for a pho­to­graph out­side the Hous­es of Com­mons on May 13, 2014 Bloomberg/Get­ty

Is phar­ma shed­ding em­ploy­ees to pro­tect and grow the bot­tom line? Judg­ing from the head­lines, you might think so. But ac­tu­al­ly, in­stead of get­ting “lean­er and mean­er,” most big drug com­pa­nies are get­ting fat­ter and soft­er — and a re­sult, phar­ma’s hu­man cap­i­tal ef­fi­cien­cy has been most­ly stag­nant.

From 2011 to 2015, em­ploy­ee num­bers ac­tu­al­ly in­creased at six of the 10 most R&D-in­ten­sive glob­al phar­ma com­pa­nies, and fell by less than 10 per­cent at three oth­ers. On­ly Mer­ck cut a sig­nif­i­cant por­tion of its work­force, trim­ming 21 per­cent of staff over that pe­ri­od. What­ev­er job loss­es you’ve read about ap­pear to have been off­set by tran­sient growth due to M&A or un­re­port­ed hir­ing in oth­er ar­eas, nei­ther of which tends to grab head­lines.

Change from 2011 to 2015 
Head­count and Prof­it/em­ploy­ee

But per­haps phar­ma com­pa­nies are find­ing oth­er ways to boost pro­duc­tiv­i­ty? Af­ter all, many have boast­ed of site clo­sures and re­struc­tur­ings as ways to bol­ster prof­its, par­tic­u­lar­ly af­ter ma­jor ac­qui­si­tions. And out­sourc­ing has con­tin­ued to grow in per­son­nel-in­ten­sive ar­eas like clin­i­cal de­vel­op­ment. So, even though head­count is stay­ing sta­ble, is each em­ploy­ee gen­er­at­ing more re­turns for the com­pa­ny?

Alas, that doesn’t seem to be the case. Us­ing in­fla­tion-ad­just­ed prof­it per em­ploy­ee as a sim­ple mea­sure of la­bor ef­fi­cien­cy, we found net re­turns per head fell in eight of the 10 drug com­pa­nies we an­a­lyzed – and by more than 50 per­cent in three of them. So at most big phar­ma firms, the work­force isn’t be­com­ing more pro­duc­tive, at least by cor­po­rate fi­nan­cial met­rics.

To be fair, the de­nom­i­na­tor of prof­it per em­ploy­ee in phar­ma in­cludes R&D staff, whose ef­forts may not pos­i­tive­ly im­pact the bot­tom line for many years, if ever. Ide­al­ly, we would cal­cu­late per-capi­ta pro­duc­tiv­i­ty based just on non-re­search work­ers, and mea­sure how the folks charged with run­ning op­er­a­tions and gen­er­at­ing prof­its quar­ter to quar­ter are per­form­ing – but sad­ly, vir­tu­al­ly no phar­ma com­pa­nies pro­vide suf­fi­cient­ly de­tailed head­count break­downs to per­form this analy­sis.

And in fact, the chal­lenge of ac­cu­rate­ly mea­sur­ing la­bor pro­duc­tiv­i­ty in phar­ma high­lights a key op­por­tu­ni­ty for drug mak­ers and their in­vestors. If firms want to ar­gue that much-bal­ly­hooed re­struc­tur­ings, IT in­vest­ments, out­sourc­ing plans, and the like are lead­ing them to be­come “lean­er and mean­er,” they should start re­port­ing prof­it per com­mer­cial em­ploy­ee or some oth­er re­li­able met­ric that can be tracked over time. Un­til then, in­vestors should be skep­ti­cal of claims that lay­offs and oth­er “strate­gic ini­tia­tives” are boost­ing phar­ma’s net re­turn on tal­ent.

This analy­sis was writ­ten by End­points News read­ers Frank David and Matthew Mur­phy from the biotech con­sul­tan­cy Phar­mag­el­lan.

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Scott Gottlieb, AP Images

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