Zelnorm Suit Presages More Job Cuts at Novartis

A class action suit representing people who suffered cardiovascular events after taking Zelnorm, Novartis' now-recalled irritable bowel syndrome drug, has been filed in Canada. Trudy Metzger, was a healthy 36-year-old before she took the drug. Then she was felled by a heart attack and is now the media-friendly lead plaintiff. The case demands $125 million in compensation. On its own, the suit isn't a big deal for Novartis -- even if it lost, the damages would not significantly impact the company, which reported Q3 revenues of $11 billion.

But the suit does represent one more depressing drag on a company that, unlike some of its peers, seems unable to shake off its funk.

Like its rivals, Novartis has responded to the loss of patents and drug withdrawals that have afflicted many companies in the business with massive layoffs. About 550 sales reps were let go in October.

Unlike its rivals, however, those cuts have not made the company's remaining sales and marketing investments more productive. Before the cuts, Novartis received $3.06 in revenues for every $1 it invested in sales and marketing. Normally, cutting your sales expenses will (at least temporarily) boost the money you get in revenues per dollar spent. But that hasn't happened at Novartis: Today, the company gets only $2.96 per dollar spent. Its revenue yield per dollar spent on sales has declined two quarters in a row.

That's a worrying trend for the company, because competitors that are dealing with the same storm have managed to turn the corner on sales productivity. Pfizer's yield is trending up to $3.40. Johnson & Johnson's also rose. GlaxoSmithKline's did too ... the list goes on. Even troubled companies like Sepracor and Schering-Plough managed to goose their efficiency, through layoffs.

So what's going wrong? The answer seems to be that despite the cuts, Novartis hasn't yet swung the ax enough. Selling and administration costs at the company rose 2 percent last quarter and 10 percent the quarter before. Those numbers should be going down, not up. The irony is that Novartis's total revenues are generally trending up. (It has diversified nicely into generics).

But as the company grows, it runs the risk of turning a healthy business into a lumbering behemoth that can't respond quickly enough to competition. Which is why those 550 job cuts are unlikely to be the last of layoffs at the company.