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LEDERLE LABS PLANS 1,000 JOB CUTS AS PART OF CYANAMID RESTRUCTURING; PFIZER, UPJOHN ANNOUNCE REDUCTIONS IN FORCE: PMA FIRM RIFs TOTAL 26,650 JOBS TO DATE

Executive Summary

Lederle's U.S. pharmaceutical business will be reduced by approximately 1,000 people as part of a restructuring announced by Lederle parent American Cyanamid Oct. 19. Cyanamid plans to cut 2,500 positions over a three-year period, with most of the cutbacks affecting the company's medical business rather than the chemicals or agricultural divisions. About half of the targeted 2,500 positions will come from Cyanamid's overseas operations, including some outside the medical business. Lederle's Pearl River, N.Y. facility will be reduced by about 500 positions, mostly in the manufacturing and support services sectors. Lederle is also redesigning some of the manufacturing operations at Pearl River to improve efficiency. The balance of the 500 reductions at Lederle will affect every department to some extent, the company said, with cutbacks occurring at all levels and throughout the country. The cost of the restructuring is estimated at $150 mil. to $200 mil. over three years and will appear as a charge for the 1993 fourth quarter. The streamlining will be achieved by means of attrition, staffing changes and retirement. Cyanamid initiated an early retirement program two years ago that allowed the company to eliminate 500 positions. Pfizer and Upjohn joined Cyanamid Oct. 19 in announcing workforce reductions. Pfizer plans 3,000 cuts; Upjohn is targeting 1,500 positions. "This restructuring, coupled with earlier initiatives already completed or in progress, is expected ultimately to reduce Pfizer's total work force by approximately 4,000 people, or approximately 10%," Pfizer said. The company indicated that it expects the majority of the 3,000 cuts in the current restructuring to be "involuntary separations." To account for the cutbacks, Pfizer announced a $750 mil. restructuring charge in its quarterly sales and earnings report Oct. 19. The restructuring charge will also cover manufacturing, distribution and administrative consolidation. "Some projects will begin immediately while others will be phased in over the next several years." Pfizer anticipates savings of at least $130 mil. per year from the restructuring. Upjohn plans to eliminate or reduce excess manufacturing capacity at 14 plants worldwide over the "next several years"; write down "certain intangible assets"; and increase liability reserves. An after-tax charge of $183 mil. for the restructuring is being taken in the third quarter; Upjohn said the actions are expected to save $150 mil. in annual operating expenses. The latest round of cutbacks at Upjohn continues a program begun in early 1989 to decrease employment levels at the company. Previous reduction efforts have consisted of two early retirement programs, hiring freezes, the divestiture of two businesses and the elimination of non-core activities. Since 1989, Upjohn has reduced its worldwide workforce from 21,000 with the expectation that employee levels will be 17,500 by the end of this year. A total of 12 Pharmaceutical Manufacturers Association member companies have announced worldwide reductions of an aggregate of 26,650 employees in the past year. The reductions represent 7.5% of the total worldwide employment by U.S.-owned PMA member firms in 1991. According to PMA's Annual Survey Report "Trends in the Pharmaceutical Industry," member firms employed 200,452 workers in the U.S. while an additional 153,291 workers were employed by U.S.-owned PMA firms outside the U.S. The 1991 employment figures likely reflect the crest of the drug industry's growth of the 1980s as company payrolls swelled during a period of significant profit increases, The survey shows that PMA firms increased domestic employment by over 25,000 between 1987 and 1991. The 26,650 cutbacks reported by PMA firms so far effectively cancel out that five-year domestic growth trend. As firms contract in light of the recent downturn in the pharmaceutical market, companies are seeking to identify their primary areas of strength and thus where they need to keep up the workforce levels. The PMA survey shows that, between 1990 and 1991, domestic employment by PMA firms grew almost across the board. Production workers increased by 10%, R&D employment increased by 5%, marketing departments grew by 7% and administrative staff increased by 2%. Only distribution workers, by far the smallest of the segments, saw employment decrease in 1991, dropping 12% to 6,477. Total U.S. employment by PMA firms grew by 6% between 1990 and 1991, the survey shows. While most of the firms announcing cutbacks have cited manufacturing consolidation as one area of potential savings, FDA's continuing regulatory demands in manufacturing compliance have increased the personnel requirements for that sector. The added payroll, however, can also add value to a company if it produces a strong regulatory record, as was shown by the recent proposal by Hoechst-Celanese to acquire a controlling interest in Copley for $546 mil. ("The Pink Sheet" Oct. 18, p. 3). Another potential source of cutbacks, the large detail forces, has not been aggressively targeted in the downsizing initiatives. It has become a truism in industry that the trend toward consolidation among pharmaceutical purchasers may one day allow smaller detail forces. Moreover, the boom in cross-licensing deals in the past decade has left some companies with detail forces larger than would be needed to market only their own products. However, most top executives in the industry continue to live with the formula that more sales people translates into more sales. Schering-Plough Chairman Robert Luciano, for example, pointed out in May that each sales rep continues to generate a 10- fold return on investment ("The Pink Sheet" May 10, p. 10). The downsizing of the PMA firms is matched by growth in other sectors of the pharmaceutical industry, suggesting an overall industry reshuffling rather than streamlining. The biotechnology industry is in a period of strong growth. Ernst & Young's "Biotech 94" report states that employment in biotechnology companies increased by 18,000 to 97,000 last year. New company formation is proceeding at a pace one-third higher than the previous peak year, 1988, Ernst & Young found ("The Pink Sheet" Sept. 20, p. 13). Lederle, one of the firms planning layoffs, transferred more than 100 employees to the biotechnology sector as part of its acquisition/merger with Immunex ("The Pink Sheet" Dec. 21, 1992, p. 20). Other firms involved in cutbacks, such as Lilly, Pfizer, Marion Merrell Dow and Ciba-Geigy, have been active investors in biotech via equity and licensing deals. Another locus of growth is contract clinical research organizations. Quintiles Transnational Corp., for example, recently completed an $11 mil. private placement that it expects to use "for acquisitions and continued expansion of the contract research organization. "As in the manufacturing compliance arena, the clinical trial/application process is likely to become more resource intensive as FDA steps up its review programs to meet user fee goals. At the same time, companies are having to determine how much of that expertise they need in house. "Like the automobile industry, which allows for individual parts to be assembled in different markets," Quintiles maintains, "the maturing pharmaceutical industry is decentralizing its R&D process. Therefore, pharmaceutical companies are contracting specialized services because the market demands that they become more efficient."
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