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With Sales Up and Costs Down, Novartis CEO Rewards His Staff With Layoffs

Novartis (NVS) CEO Joe Jimenez told investors yesterday that he planned across-the-board cost cuts, which his employees ought to interpret as meaning layoffs, in manufacturing, sales and marketing. It's something of a surprise because revenues at Novartis are rising (13 percent in Q3 2010), the company is becoming increasingly efficient at generating those revenues, and its major patent expiry next year -- the hypertension therapy Diovan -- will be offset by the recent launch of its new, $4,000-a-month multiple sclerosis drug Gilenya.

Jimenez didn't actually use the word "layoffs," of course, but I defy anyone to interpret this section of his press release as not meaning job losses in manufacturing and sales:

The company announced plans to further improve productivity which should further sustain operating leverage and drive greater value creation.
To support further improvement of gross margins, the company is initiating a group wide program to review its manufacturing footprint. ... In addition, the program aims to optimize the cost structure across divisions and enhance utilization rates at strategic sites to 80 percent of capacity.
With the pharmaceuticals portfolio shifting to a greater percentage of specialty care business, Novartis will continue to optimize its marketing and sales (M&S) spending by re-allocating resources geographically as well as simplifying current processes. M&S spend since 2007 has continually decreased as percentage of sales from 29.2 percent to 25.2 percent of sales as of third quarter 2010.
On paper, the company is what good Big Pharma management looks like: Its operating leverage is superior to many of its competitors and is trending upward; and (aside from Diovan) it's not dependent on a disaster-area of expiring franchises. Here's a chart showing the number of dollars Novartis earns in revenues for every dollar spent on sales, marketing and admin:

In that kind of scenario, you'd expect Novartis to be hiring. Instead, as other companies such as Roche and Pfizer continue to chase efficiencies by axing their own staff, Novartis must chase them likewise in an efficiency race -- call it "cutting back with the Joneses."

In sum, Novartis' employees are essentially being punished for being too good at their jobs.


Image by Flickr user billaday, CC.
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