Consulting Procurement State of the Market

Report Summary

In 2007, due to the impending patent cliff and the consequent need to cut costs, big pharma began for the first time to outsource chemical API manufacturing to China and India. Prior to this only generic drug companies had manufactured in the two countries. Since then, big pharma has been undergoing waves of layoffs that have been accelerated by the economic downturn, with manufacturing and sales being particularly affected, and outsourcing levels in R&D and manufacturing are expected to increase further in the future.
This report examines the different strategies available for managing the layoffs and site closures resulting from not only the outsourcing of R&D and manufacturing, but also the transition from small-molecules to biologics and the need to exploit new markets. The factors causing change and producing the need for workforce reductions are analysed, and the expected impact across the pharmaceutical workforce in the US is detailed. The consequences of layoffs and site closures in terms of legal compliance, maintenance of productivity, and safeguarding of quality control are discussed in depth. Case studies from the pharmaceutical industry are provided to highlight pitfalls and illustrate best practice. The report concludes with discussion of the long-term risks associated with over-dependence on expansion in nonmarket economies and suggests methods to lower these risks.

Key features of this report

• A single reference for comparing details on employment protection regulations in different countries, and for the US highlights of major differences in specific states with large pharma employment
• Comprehensive coverage of the changes occurring in pharmaceutical industry employment in developed nations.
• Demonstration of how to achieve a cost-effective workforce reduction while maintaining R&D innovation and manufacturing quality.
• Case studies of issues resulting from workforce reductions and outsourcing of manufacturing and R&D, with numerous examples of pitfalls and best practice.

Scope of this report

• Identify current and future trends in pharmaceutical industry employment and understand their causes.
• Assess inter-country (and within the US inter-state) differences in employment protection regulations.
• Gain insight into strategies that have been used for facility divestitures to achieve optimum returns.
• Appreciate the benefits of engaging with key local stakeholders during workforce reductions and site closures, and understand the sanctions which local governments may attempt to impose.
• Understand the important role of employee morale and identify measures to retain key staff.

Key Market Issues

• From 1996–2005, US pharma’s sales force nearly doubled to 100,000 to support a 26% increase in practicing physicians. However, a significant number of drugs will lose patent protection over the next four years, 2010–2014, representing roughly $60bn in total, and the generic share of the drug market has increased from 49% to 74% of total sales in the US from 2000–2009.
• Different companies are adopting various approaches for R&D outsourcing; for example, Eli Lilly plans to outsource 50%, whereas Novartis is committed to a large internal R&D team.
• In 2007, global big pharma including AZ, Pfizer, GSK, and BMS, first announced its plans to outsource API manufacturing to China and India; in the same year, of the 1,154 generic drug applications to the US FDA, only 13% of the manufacturing plants were in the US, while 43% and 39% of the plants were abroad in China and India respectively.
• Discovery R&D scientific jobs in the pharmaceutical industry require significant years of education and on the job training; in particular, the shift of chemistry jobs overseas will have long-term negative effects on the US pool of chemistry talent that will be difficult to reverse.
• Regional stakeholders, including local business and government leaders, are keenly interested in identifying solutions for the future of manufacturing sites and supplying assistance for the displaced employees.

Key findings from this report

• The projected growth from 2008–2018 for US pharmaceutical and medicine manufacturing employment lags behind the projected employment growth for all US industries, at 6% versus 11% respectively, due to generic competition and drug production moving overseas.
• OECD synthetic indicators measure the strictness of overall employment protection against dismissals of part- and full-time employees and restrictions on temporary hires, and are low for the US, Canada, and the UK; intermediate for Ireland, Japan, and Hungary; and high for Germany, China, India, and France.
• Companies that work closely with regional stakeholders will gain partners who assist with marketing and locating financial investment and potential buyers for the closed facility.
• The timing of workforce reduction announcements can be crucial to the reception both within the workforce and in the wider community. In some cases, poorly chosen timing has significantly complicated the layoff process and has generated considerable bad press.

Key questions answered

• What are the employment protection regulations regarding a mass layoff or facility closure in key states in the US and countries in Europe and Asia?
• What happens to the government tax benefits and incentives when a company undergoes employment reduction?
• When and why do companies provide additional severance and displacement support?
• What two factors are key for a cost-efficient workforce reduction?
• How does a company most effectively and quickly recover from a workforce reduction?
• What is necessary to maintain an innovative R&D group after a workforce reduction?
• What are the long-term risks of outsourcing to China and India? How does a company minimize risk exposure to nonmarket economies?

Table of Contents

Strategies for Managing Pharmaceutical Workforce and
Site Reductions
Executive summary 12
Introduction 12
Pharmaceutical employment trends in developed nations 13
Legal regulations and considerations 13
Managing employees through workforce reductions 14
Biotech and pharma workforce reductions 15
R&D and manufacturing site closures 15
Outsourcing and offshoring for research and manufacturing 16
Long-term risks of outsourcing and offshoring 17

Chapter 1 Introduction 20
Summary 20
Introduction 21
Pharmaceutical industry background 21
Pharma background 22
Main pharma therapeutics 23
Biotech background 24
Main biotech therapeutics 25
Current snapshot of the pharmaceutical industry 26
Current sales, manufacturing, and R&D 26
Current challenges facing the pharmaceutical industry 27
Big pharma challenges 29
Biotech challenges 31
Current changes for the pharmaceutical industry 33
Mergers and acquisitions 33
Workforce reductions 35
Outsourcing of R&D 35
Manufacturing moving to China and India 36
Effects of change on the pharmaceutical industry 36
Convergence of big pharma and biotech 37
Effects of change on big pharma 38
Effect on big pharma sales 39
Effect on big pharma manufacturing 39
Effect on big pharma R&D 39
Effects of change on biotech 41
Effect on biotech R&D 41
Future models for the pharmaceutical industry 42
Smaller patient populations 42
Diagnostics and improved efficacy 43
Global markets, both branded and generic opportunities 44
Global market projections 44
Opportunities for generics and branded generics 45
Conclusion 46

Chapter 2 Pharmaceutical employment trends in developed nations 50
Summary 50
Introduction 51
US pharmaceutical and medicine manufacturing, 2008–2018 52
US pharma manufacturing background 53
US pharma manufacturing employment 54
US pharma manufacturing occupations 56
US pharma manufacturing employment change 56
US scientific research and development services, 2008–2018 58
US SRDS background 58
US SRDS employment 59
US SRDS occupations 59
US SRDS employment change 61
Conclusion 64

Chapter 3 Legal regulations and considerations 66
Summary 66
Introduction 67
General legal requirements for workforce reductions 67
North American regulations 69
US 70
US federal 71
US states and territories 75
Canada 79
Canadian provinces 80
European regulations 81
UK 82
Ireland 83
France 84
Germany 85
Bulgaria 86
Hungary 87
Asian regulations 87
Japan 88
China 88
India 89
Singapore 90
Beyond legal requirements 90
Conclusion 91

Chapter 4 Managing employees through workforce reductions 94
Summary 94
Introduction 94
The employee 95
Significant factors 96
Communication 97
Phases of a workforce reduction 97
Before 97
Day of announcement 98
Initial transition 98
Later transition period 99
Case study 100
2009 Sanofi-Aventis US salesforce reduction near US Thanksgiving holiday 100
2009 Sanofi-Aventis US sales background 100
Events over the Thanksgiving weekend 101
Review of Sanofi-Aventis’ timing 101
Conclusion 102

Chapter 5 Biotech and pharma workforce reductions 104
Summary 104
Introduction 104
Insight into employees 105
Biotech culture 105
Pharma culture 106
Survey of concerns regarding impact of workforce reductions 107
Strategies for employee retention and motivation 109
Training and opportunities 110
Financial incentives 110
Workplace conditions and environment 111
Maintenance of previous employment benefits 112
Strategies for workforce reduction 112
General strategies 112
Rigorous environment for quality R&D and manufacturing 113
R&D 114
Productivity 114
Administrative 115
Sales 115
Manufacturing 116
Case study 116
J&J product recalls at its McNeil Consumer Healthcare division 116
J&J and McNeil background 117
“Systemic quality issues” and potential phantom recall 117
Review of contributing factors 118
Conclusion 119

Chapter 6 R&D and manufacturing site closures 122
Summary 122
Introduction 122
Facility closures 123
R&D facility closures 124
Manufacturing facility closures 124
Survey of concerns and management methods with regard to facility closures 125
Case studies 128
Eli Lilly divests and outsources a manufacturing facility in one move 129
Lilly and the Tippancoe facility 129
Sale to Evonik with a nine-year products and services agreement 130
Lilly strategy: divest operating facility to a strong partner 130
Sanofi-Aventis training for the biologics transition in France 131
Sanofi-Aventis in France 131
Sanofi-Aventis to maintain a constant number of jobs in France,
2010-2014 131
The Sanofi-Aventis goal: champion of European vaccine production 132
New York tax break issues for Pfizer closure and workforce reduction 133
Pfizer closure of Brooklyn plant and employment reduction in NYC 133
Pfizer versus Manhattan 133
Tax breaks and negative consequences 134
Conclusion 135

Chapter 7 Outsourcing and offshoring for research and manufacturing 138
Summary 138
Introduction 138
Managing R&D workload 139
R&D outsourcing 140
Maintaining quality 140
Location of contract research organization 141
Offshore research and manufacturing 141
Rule of Law in different countries 142
Rule of Law in India 143
China and India 144
China for small-molecule drugs and R&D 144
India for small-molecule drugs and vaccines 145
China and India drug quality issues 146
Case study of outsourced manufacturing 148
The generic drug company Teva 149
Teva background 149
Teva strategy for quality manufacturing 150
Teva future expansion 151
Conclusion 151

Chapter 8 Long-term risks of offshoring 154
Summary 154
Introduction 154
Long-term risks of offshoring discovery R&D 155
Long-term risks of offshore manufacturing 155
Risks of drug quality and safety 155
Monitoring of manufacturing, storage, and transportation 156
Quality – a marketing attribute in China 156
Dealing with nonmarket economies 157
Dialogue with governments 157
Conclusion 158
Appendix 159
Primary research methodology 159
Survey rating experienced respondent concerns for workforce reductions and facility closures in the health industry 159
Abbreviations 160
Index 164
Footnotes 167

List of Figures

Figure 2.1: Major occupational categories in US pharmaceutical and medicine manufacturing, May 2008 56
Figure 2.2: US pharmaceutical and medicine manufacturing employment of wage and salary workers by occupational category, 2008–2018 57
Figure 2.3: US scientific research and development services employment of wage and salary workers by occupational category, 2008–2018 62
Figure 2.4: Additional details for current and projected US scientific research and development services employment of wage and salary workers by occupation, 2008–2018 63
Figure 5.5: Individual rating of concerns regarding workforce reductions by layoff-experienced respondents in the health industry 108
Figure 5.6: Selection of top two concerns regarding workforce reductions by respondents experienced in the health industry 109
Figure 6.7: Individual rating of concerns for facility closures 126
Figure 6.8: Selection of top two concerns for facility closures 126
Figure 6.9: Methods used for managing facility closures in the health industry 127
Figure 6.10: Selection of two most important methods used for managing facility closures 128

List of Tables

Table 1.1: US R&D spend domestic and abroad, 2006 27
Table 1.2: US drug development costs for novel therapeutics 30
Table 1.3: Global pharma mergers and acquisitions, 2000–2009 34
Table 1.4: Global biotech mergers and acquisitions, 2000–2009 35
Table 1.5: Representation of protein therapeutics in global top-selling drugs, 2010 and 2014 38
Table 1.6: Active US clinical trials by select disease area, 2008 40
Table 1.7: Global pharmaceutical market by region, 2008 and 2020 45
Table 2.8: Overview US pharmaceutical industry employment, 2006 51
Table 2.9: US pharmaceutical employment by state/territory, 2006 52
Table 2.10: US pharmaceutical and medicine manufacturing employment of wage and salary workers, 2008–2018. 55
Table 2.11: US scientific research and development services employment of wage and salary workers, 2008–2018 60
Table 2.12: Additional details for US scientific research and development services employment of wage and salary workers, 2008–2018. 61
Table 3.13: International comparison of overall employment protection by OECD indicators, 2008
69
Table 3.14: Comparison of US federal and 2003 California WARN 76
Table 3.15: Comparison of US federal and 2005 Illinois WARN 77
Table 3.16: US federal and 2007 New Jersey WARN 78
Table 3.17: Comparison of US federal and 2010 New York state WARN 79
Table 3.18: Gross unemployment benefits as a proportion of gross annual income by country, February 2010 91
Table 4.19: Rating of major life stressors 96
Table 7.20: Cross-country comparison of Rule of Law indicator (percentile) from the Worldwide Governance Indicator project, 2008 143