Winning the Pharma Cap Spending Game

Pharma’s capital spending budgets are up, but the rules of the game are changing. Outsourcing will play a more prominent role than ever before.

By Agnes Shanley with Nancy Bartels, Contributor

Share Print Related RSS
Page 1 of 3 « Prev 1 | 2 | 3 View on one page

THIS YEAR SAW some wrenching changes in the drug industry, as several leading name-brand drugs came off patent, and competitive pressures forced Merck, Pfizer and Schering-Plough to sell or shut down facilities, eliminating hundreds of jobs.

This isn’t the likeliest backdrop for expansion. In a survey on overall market conditions, readers were divided about prospects for this and next year (see Figure 1, below).

 

Figure 1. Capital Spending Survey Results
Capital Spending survey results

Mid-year financial reports suggest that most drug companies will spend more on plants, equipment and services this year, with the largest manufacturers likely to spend an average of $1 billion or more, globally. Within North America, spending is projected to increase by 11%, to $13.2 billion, driven by a few large-scale projects, according to Annette Krueger, pharma and biotech analyst for Industrial Info. Resources (Sugar Land, Texas).

Overall growth may not be dramatic, but most capital spending budgets are increasing (see Table 1, below) and outsourcing is becoming a more prominent part of many pharma companies’ plans.

“Pharma’s been talking about cutting back on spending for the last few years,” says Michael Zbinovec, director of corporate finance at Fitch Ratings (Chicago), who specializes in health care. “Any time you have fewer facilities, you have less spending.” As part of his research, Zbinovec talks to a large number of equipment suppliers. This year, he says, more pharma spending appears to be covering outsourcing, rather than new equipment purchases.

“Big pharma companies are engaged in huge cost-saving initiatives over the next two to three years,” says Vicki Tauscher Phelan, life sciences practice lead at Houston, Texas-based outsourcing consultancy EquaTerra.

 

Table 1. Big Pharma's 2006 Spending (click here for larger image)

Pfizer, for example, launched “Adapting to Scale,” designed to save $4 billion by 2008. Trimming procurement costs, and rationalizing suppliers, is a key part of the initiative, which was introduced last year. Between 2003 and 2008, the company expects to have reduced the number of its manufacturing plants by 25%.

Merck & Co., Inc. (Whitehouse Station, N.J.) also launched a massive restructuring program last year. The company projects overall savings of roughly $4 billion pretax over the next four years, and a $1.2 billion cut in overall purchasing. Merck expects to spend $1.3 billion ($100 million less than it did last year) on plant and equipment this year.

“The big pharma companies have to take a much different look at their businesses than they did 10 years ago,” says Bob Majczan, senior client partner at Korn/Ferry (Los Angeles). “Manufacturing wasn’t a real consideration then because the cost of goods was so small. The issue was availability. Now the financials are much more challenging,” he says.

As a result, Lean and manufacturing excellence programs appear to be shaping more spending plans. “There’s been a culture shift,” notes one anonymous respondent to our survey. “We see reduced spending across the entire organization, to reduce burn and to increase efficiencies with Lean.”

Room for Improvement

Yet, there appears to be room for improvement in the way that pharma companies manage capital projects. Says one consultant, who asks to remain anonymous, “At many drug companies, and all of large pharma, financial effectiveness still isn’t a focus. As a result, $50 million projects often end up costing two or three times that much.”

Flexibility is essential, and the impact of potential market changes should be considered during the pre-engineering stage of any project. “All too often, decisions are deemed absolutely necessary, but wind up making commercial success extremely difficult if market conditions change,” the unnamed consultant says.

Nevertheless, certain patterns have emerged this year: Spending on IT continues to be strong. Frank Scavo, president of Computer Economics, Inc. (Irvine, Calif.) says that pharma and medical device firms will spend roughly 2% of revenues on IT this year, nearly 6% more than they did in 2005. Next year, growth will dampen to 1%, he says.

 

Table 2. Plans for Future Investment
Top investment priorities for 2007  
Manufacturing-scale process equipment

27%

Facility design and construction

9%

Packaging equipment

15%

New IT systems

12%

Building and facilities-related equipment

10%

Pilot-scale equipment

9%

QA products and methodologies

8%

Compliance and validation

6%

Traceability

6%

Page 1 of 3 « Prev 1 | 2 | 3 View on one page
Share Print Reprints Permissions

What are your comments?

Join the discussion today. Login Here.

Comments

No one has commented on this page yet.

RSS feed for comments on this page | RSS feed for all comments