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AstraZeneca job cuts expose dilemma facing the pharmaceutical industry

While slashing costs to keep investors happy, firms face pricing pressure, generic rivals and falling returns on drug discovery

The bald numbers for AstraZeneca’s job losses are extraordinary. Some 12,600 posts at the biopharmaceutical company were axed in 2007-09. At stage two, in 2010 and 2011, a further 9,000 went. Now another 7,300 jobs will be lost.

AstraZeneca has been adding positions during the period (mainly in Asia) but its overall workforce is still shrinking at quite a pace.

It must, of course, to keep shareholders happy in a climate of “intensified pricing pressure and generic competition,” as chief executive David Brennanputs it.

But even investors could soon start to worry about whether such endless cost cutting, with some savings recycled into share buy-backs (another .5bn is planned for 2012), can keep the ship steady.

In the past year sales were down 2% and core operating profits fell 4% to .2bn. There’s probably worse coming, as generics arrive competing with the anti-cholestrol drug Crestor.

AstraZeneca faces the same conundrum as most of its big rivals. Drug companies require new drugs to ensure long-term prosperity; but drug discovery is becoming less certain, with returns on capital lower than in the past.

So what’s the best way to allocate cash? Should you prefer share buy-backs to protect earnings per share in the short-term? Or invest more in research and hope patience is rewarded, especially if rivals can stand the pace?

There are no easy answers.

Brennan’s working assumption is that 40-50% of AstraZeneca’s post-tax cash flows should be recycled into research and development. Is that the right ratio? It looks reasonable, but assumes nothing else changes.

The big fear is that big-paying, but hard-pressed, western governments will seek to cut their healthcare bills further.

“Downward pressures on revenue from government interventions in the marketplace have intensified in 2011, but have not as yet constituted a sustained ‘step-change’ in trend,” reports the company.

Okay, but AstraZeneca will also know that western governments tend to look more favourably upon companies that add jobs rather than take them away. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds