As Pharmaceutical Workforce Marches Out, Construction Marches On

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Researched by Industrial Info Resources (Sugar Land, Texas)--Much has been written in the past few years about layoffs in the United States, particularly in the Pharmaceutical Industry. According to the outplacement firm Challenger, Gray and Christmas Incorporated (Chicago, Illinois), the Pharmaceutical Industry is second only to the government/non-profit sector for the number of layoffs in 2009 and year-to-date 2010.

Sector	2010 (YTD)	2009
Government / Non-Profit	112,378	109,433
Pharmaceutical	37,265	52,683
Retail	30,805	88,352
Transportation	20,102	61,578

Despite the layoffs, the Pharmaceutical-Biotech Industry has experienced a large amount of construction projects during this time.

Sector	2010 (YTD)	2009
Pharmaceutical / Biotech Construction	$11.8 Billion	$13.2 Billion

Therefore, the question is: What is the driving force behind this antinomy between the decrease in Pharmaceutical Industry manpower and the sector's increase in bricks and mortar?

The Pharmaceutical Industry can trace its roots to the late 1800s incipient chemical industry, cradled in the Upper Rhine Valley of Switzerland. Pharmaceutical giants Hoffman-La Roche Limited (Basel, Switzerland) and Novartis AG (NYSE:NVS) (Basel), which was formed from the merger of Sandoz and Ciba-Geigy, originated as chemical and dye manufacturers in this region. By chance, the chemicals produced by these concerns were discovered to have antiseptic qualities. This fortuitous revelation, coupled with the close proximity of prominent universities that provided institutional research, planted the seeds of the Pharmaceutical Industry.

In the following years, the accidental discovery of penicillin in the 1920s by Sir Alexander Fleming set the tone for the modern-day research and development of new drugs. The industry expanded rapidly in the 1960s, benefiting from new therapeutics and a lenient regulatory environment. During this period, health-care spending boomed, and the economy prospered. The Pharmaceutical Industry observed major developments in the 1970s with the introduction of tighter regulatory controls, especially with the inauguration of regulations governing the manufacture of generics. The new policies rescinded permanent patents and established rigid periods on patent protection for branded products. As a result, branded generics emerged.

After this rapid expansion, pharmaceutical companies fortified their marketing efforts with an army of sales representatives. Today, there are approximately 90,000 pharmaceutical representatives, or approximately 1 for every 6.3 physicians. This huge segment of pharmaceutical employees has been hit the hardest by the most recent layoffs.

Historically, the Pharmaceutical Industry has spent far more on marketing efforts than research and development. As an example, the world's top two pharmaceutical companies, Pfizer Incorporated (NYSE:PFE) (New York, New York) and sanofi-aventis SA (NYSE:SNY) (Paris, France), pour substantially more capital into marketing efforts than research and development.

Percent R&D and Marketing Expenditures of Total Operating Expenses
	2009	2008	2007
Pfizer
- R & D	26%	28%	27%
- Sales / Marketing	50%	51%	53%
sanofi-aventis
- R & D	28%	27%	29%
- Sales / Marketing	42%	44%	47%

The reasoning behind these expenditures is that all areas of a pharmaceutical company are cost centers, except the sales and marketing efforts. The economies of scale for pharmaceutical marketing far outweigh those of research and development (R&D). A wonder drug may be developed by a firm, but, without popularizing the discovery in the medical community, the drug will go overlooked and undersold. In a perfect world, all monies would be spent on R&D and manufacturing, but in the capital-driven marketplace, this scenario cannot exist.

The Pharmaceutical Industry is maturing in the way of other market segments. Companies are merging and acquiring other companies. Pfizer has acquired Wyeth; Merck & Company (NYSE:MRK) (Whitehouse Stations, New Jersey) acquired Schering Plough, and Abbott Labs (NYSE:ABT) (Abbott Park, Illinois) acquired Solvay. The trend for major pharmaceutical companies is to outsource services and buy up the rights to pipeline drugs. The drug industry is not shrinking, but rather having a paradigm shift to a more streamlined and economical model, with contract research organizations (CROs), contract manufacturing organizations (CMOs) and technology-driven marketing (i.e, e-marketing, webinars) having a greater presence. This has taken a toll on the pharmaceutical sales reps. However, with the aging population and increased pressure for new cures, the industry must still physically expand to meet increasing needs and growing demand.

The infrastructure of pharmaceutical manufacturing and R&D facilities, whether in-house or contracted, must constantly be upgraded and expanded to meet not only consumer needs, but also those of regulatory agencies like the Food and Drug Administration. This is why the infrastructure segment of the industry continues to flourish and does not follow the trends of the workforce.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.