During an investor presentation the other day, Novartis execs spent considerable time not only discussing recent financial performance and pipeline progress, but also the many steps taken to save money. These include a raft of cuts across various divisions around the globe and, in the US, consolidating some operations, such as shifting some research from Boston to New Jersey.
For instance, over the last 18 months, more than $1.6 billion was saved by reworking procurement, mostly from the pharma unit. Since November, six manufacturing sites are in the process of being "exited." Selling, general and administrative expenses have dropped from 5.2 percent of sales to 4.9 percent since 2009 (see the slides). And marketing and sales expenses fell from 29.3 percent of sales to 27.2 percent during the same period, including the elimination of 1,400 sales reps (read here).
But there will be still more as Novartis tries to exceed cuts reached last year. As an example, Novartis hopes to wring about $350 million in savings from the recently acquired Alcon unit. "This business revolves around science, not marketing. We have spent too much money on the sale and marketing of our medicines," Novartis ceo Joe Jimenez said the during the presentation (read here). "But we can save still more here, even if the business grows." He also told the Swiss newspaper Handelszeitung that "we have 83 factories and we only use about 50 percent to full capacity. That isn't good," according to Dow Jones.
Meanwhile, the drugmaker is spending about $750 million to expand its US headquarters in East Hanover, New Jersey, which is, essentially, making room for people who may be shifted from other locales as part of the cost-cutting drive (look here). This includes shifting or consolidating research, such as some oncology work, in the Garden State, according to sources familiar with the plan.
axe pic thx to brittgow on flickr
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Not just NVS, but if you follow the history of these preannouncements re. numbers of layoffs it becomes very hard to reconcile the announced numbers with the actual numbers. At first I thought it was to keep the Wall St analysts off balance, but I'm not too sure what is to be gained by such a stratety.
I'm now convinved that with the rapidly deteriorating demand for all consumer products, including pharmaceuticals, the accuracy of the layoff forecasts has likewise deteriorated. It's difficult even to model the forecasts because of multiple shifting variables.
As demand shrinks the relative manudacturing overcapacity enlarges. For example, only one-half of NVS's 83 plants around the world are operating at full capacity.
It may be too late for my somewhat radical idea for reducing overcapacity, but one approach could be what I call "industrial cities". One example is my former company, BASF, headquartered in Ludwigshafen, Germany. By concentrating worker housing, commercial and transportation lines, as well as other chemical companies within this single industrial hub significant efficiencies can be achieved. It is almost the opposite of the "urban spread" model we've had in the United States for the past half century, but as manufacturing continues to decline stateside I can visualize the industrial city as an economically intelligent model.