Watch CBSN Live

Why Bayer Needs Luck as Much as It Needs Layoffs

Bayer (BAYRY) CEO Marijn Dekker's announcement that he will cut 4,500 jobs across his company is not a surprise -- other companies such as Pfizer (PFE), AstraZeneca (AZN), Roche (ROG.VX) and Novartis (NVS) also announced rounds of layoffs in the pharmaceutical sector recently -- but the specific problem behind the cuts at Bayer is: When you compare the German company to an American company such as Johnson & Johnson (JNJ) it becomes clear just how inefficient Bayer is at generating sales.

Bayer and J&J are similar because both are drug companies that also sell non-prescription consumer health products and other non-drug brands (medical devices at J&J, chemicals at Bayer). Bayer only gets about $2 in revenues for every dollar it spends on sales, marketing and admin costs, a drug company's major quarterly expense. J&J, however, gets more than $3 for its investment:

Worse, J&J is generally becoming more efficient over time (despite its troubles with Tylenol) whereas Bayer is becoming slightly less efficient. Dekker knows this, which is why he explained the job losses with this statement:

I am convinced that with more innovation and less administration, Bayer can become a better and faster company.
You cannot cut your way to greatness, however. Bayer's fortunes are greatly dependent on the launch of its new blood-thinner, Xarelto:
Bayer is pinning hopes on its anti-blood-clotting pill Xarelto, which could generate more then 2 billion euros in annual sales and which was shown this week to have mass-market potential in a late-stage trial
The blood thinner category, which already has competition from warfarin, a cheap generic, is becoming increasingly crowded. Eight companies are vying to launch new blood-thinners, according to Reuters. It's also a category in which high hopes sometimes do not pan out. Eli Lilly (LLY)'s antiplatelet drug Effient was expected to be a billion-dollar seller, but its sales are insignificant. While Dekker can control his costs by making these layoffs, he cannot control whether Xarelto is a success. Which is why Bayer's strategy for success relies as much upon crossed fingers as it does on "more innovation and less administration."


Image by Flickr user comedy nose, CC.