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Changing Fortunes in Pharmaceutical Manufacturing
Pfizer, Inc.'s (New York, NY, www.pfizer.com) announcement earlier this month—that it would reduce its workforce by 10%, close three manufacturing facilities, rationalize research and development (R&D) operations, and restructure its US pharmaceutical operations—is further evidence of the cost pressures being placed on the pharmaceutical majors as they seek to improve new product development and contend with growing generic competition for certain products. Pfizer's plan continues a strategy of refining its supply-chain management as it focuses on reducing internal manufacturing capacity and aligning capacity with future growth. As Pfizer and other pharmaceutical companies undergo this process, medium growth is expected for the US and global pharmaceutical markets in 2007, and US pharmaceutical production and trade is slated for moderate growth in the near term.
Pfizer leads the way in supply-chain reform
In its most recent effort, Pfizer will continue to consolidate its worldwide manufacturing operations with the closure of two additional manufacturing sites: Brooklyn, New York and Omaha, Nebraska. The company also will pursue the sale of a third site in Feucht, Germany, subject to consultation with works councils and local labor law. With these moves, Pfizer will have reduced its global network of manufacturing plants from 93 in 2003 to 48 by 2008.
As part of an ongoing effort to cut down on bureaucracy and reduce management layers, Pfizer says it has eliminated many unnecessary committees and cross-functional teams and is in the process of cutting at least three to four layers of management in its pharmaceutical, R&D, and manufacturing divisions, as well as company-wide support functions.
The restructuring by Pfizer follows Eli Lilly and Company's (Indianapolis, IN, www.lilly.com) decision earlier this month to lay off 250 employees at its Tippecanoe manufacturing site in Lafayette, Indiana in response to excess capacity in the company's small-molecule API operations. It also is stopping construction of a planned insulin-manufacturing plant in Prince William County, Virginia. The company expects to meet growth in insulin demand with existing sites and new insulin capacity that is being built in Sesto, Italy. These moves, along with Eli Lilly's earlier decision to close its manufacturing site in Basingstoke,United Kingdom, are based on current capacity needs and an assessment of the future mix of products in the company's portfolio, which includes further penetration of biotech-based products.
To support production of its biotech-based products, specific investments include an expansion to Eli Lilly's site in Kinsale, Ireland to manufacture active pharmaceutical ingredients (APIs) for future biotech products. In addition, Lilly will expand its Indianapolis parenteral operations so that the site can convert the biotech APIs made in Kinsale into their final dosage forms. Both expansions are part of a $1.5-billion investment in the company's biotechnology capabilities announced over the past five years. These expansions follow the recently completed $1-billion expansion of Lilly's Puerto Rico manufacturing operations, which includes new bulk capacity for "Humalog" (insulin lispro [rDNA origin] injection).
Other recent manufacturing restructuring in the pharmaceutical industry includes that undertaken by Astellas Pharma Inc. (Tokyo, www.astellas.com ), which in late December agreed to transfer three European plants to the Temmler Group (Marburg, Germany), a pharmaceutical company and contract manufacturer, as part of a move to reduce the number of its production sites. Astellas will transfer to Temmler the bulk assets of its plants in Munich, Germany and Klinge, Ireland and all stocks of Produzioni Farmaceutiche Carugate S.r.l. Astellas had announced earlier (in its mid-term five-year management plan, ending in fiscal year 2010) a plan to reduce the number of its production sites from the current 18 (nine in Japan and nine outside of Japan) to around 10. Astellas was formed in 2005 following the merger of Fujisawa Pharmaceutical Co., Ltd. and Yamanouchi Pharmaceutical Co., Ltd.
Meanwhile, Merck & Co, Inc. (Whitehouse Station, NJ, www.merck.com) is continuing with its plan for a new supply strategy, first announced in November 2005. The plan is designed to create a global facility network that uses Merck's internal manufacturing capacity combined with external partners' manufacturing capabilities, uses lean manufacturing principles, and seeks to sell or close five manufacturing sites and two preclinical sites by the end of 2008.
Pharmaceutical market growth moderates in 2007
The need for the pharmaceutical majors to adjust their manufacturing strategy may be seen in the growth patterns of the global pharmaceuticals market, with projected higher growth for biotechnology-based products and generic drugs. In 2007, biotechnology products are expected to grow at 13–14% and the generic drug market at 10–11%, according to IMS. In 2007, marketed products with a value of more than $16 billion will likely lose patent protection, which follows $23 billion of products that lost protection in 2006. Generic drug penentration is particularly keen in the US market, where several key brands valued at $10 billion will lose patent protection in 2007, following the patent expiry of $19 billion in branded products in 2006.
The geographic balance of the pharmaceutical market continues to shift away from the United States toward emerging markets, defined as countries with a per capita gross national income of less than $20,000. These countries now represent 17% of the global market, but will contribute 30% of growth this year, according to IMS. Growth in the emerging markets is offsetting the slower growth coming from the US market, which will contribute about 36% of total market growth in 2007, significantly less than the 54% it contributed five years earlier.
Emerging markets, including China, India, Brazil and Turkey, grew more than 10% in 2006 and will do so again in 2007, largely because of their growing economies and broader access to medications, according to IMS. Growth in China will be 15–16%, and the market size will reach $15–16 billion in 2007. In general, locally manufactured generics dominate these markets.
US pharmaceutical production expected to rebound in 2007
While US output of pharmaceuticals has varied over the past decade, global production of pharmaceuticals has increased at a fairly constant pace and is expected to continue to grow moderately. In 2007, global output of pharmaceuticals (finished products) is expected to increase 3.3% and 3.5% in 2008, according to the ACC. These increases are on par with growth of 3.9% in 2006, 3.0% in 2005, 3.8% in 2004, and 3.9% in 2003. The pattern of moderate growth in global output of pharmaceuticals from 2003–2006 followed recent peak growth of 6.8% in 2002 and 8.6% in 2001 (see Table 2).
US pharmaceutical trade deficit escalates
During this same period, US imports of pharmaceuticals increased 582% reaching $39.5 billion in 2005 (see Table 4), giving the United States a negative balance of trade in pharmaceuticals of nearly $14 billion in 2005. The United States has experienced a trade deficit in pharmaceuticals since 1997, when it was $547 million and which has steadily escalated since then (1) (see Table 5).
Tracking US pharmaceutical shipments
Shipments measure the nominal value of products shipped from manufacturing facilities as reported by the Bureau of Census. It includes total sales minus imports and plus exports. Pharmaceuticals include prescription and over-the-counter drugs, in vitro and other diagnostic substances to monitor human and veterinary health, bacterial and virus vaccines, toxoids, serums, plasma, and other biological products.
On a global basis, pharmaceuticals (finished products) represented 25% of chemical shipments or $648.4 billion in 2005, again continuing an upward trend. In 2004, global pharmaceutical shipments were $618.1 billion and $554.0 billion in 2003 (1).