Reward in Life Sciences in state of flux

By: Peter Stevenson, Mercer

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The Life Sciences sector is large and important, comprising a vast array of diverse companies – from global pharmaceutical giants at one end to small fast-growing businesses in sub-sectors such as biotechnology at the other. Its healthcare focus means it has weathered the recent global financial and economic downturn better than many sectors, yet it is subject to strong market forces that are causing seismic shifts in the way it is structured. This has had major effects on the kind of jobs and salary levels that have traditionally characterised Life Sciences businesses.

For example, the sales forces that have traditionally accounted for the bulk of pharmaceutical company headcounts are being considerably reduced in many countries, they are often paid less than they used to be, and there is more emphasis on key account management. In-house research and development (R&D), another big headcount area, is also being cut back and is subject to growing competition from outsourced R&D providers. As such the reward landscape for Life Sciences looks very different from the way it did even five years ago, and it is in a constant state of flux. Life Sciences comprises traditional pharmaceutical companies and related sub-sector businesses, such as animal health (veterinary drugs), over-the-counter (OTC) medicines, contract research organisations (CROs,) generics manufacturers (drugs that are copied when the branded version goes off-patent), biotechnology, medical devices (from heart monitors to contact lenses and hearing aids) and distributors.

Changes are afoot in each sub-sector. One of the most exciting areas is biotechnology, which, since Edward Jenner used a cow to produce a smallpox vaccine over 200 years ago, has been about manipulating life forms to create new therapies. But biotech is becoming increasingly cutting-edge as its potential for solving some of the big global challenges is better understood, and convergence with other technologies is leading to a more systematic approach to new solutions, new vaccines being one example.

CROs are another fast-developing sub-sector. Pharmaceutical companies are increasingly outsourcing at least part of their R&D to CROs because it is cheaper and more efficient than doing it in-house. CROs often locate their research facilities in countries with lower-cost labour, and working for a number of different pharma companies creates economies of scale.

Another way the big pharma companies are trying to offset the enormous cost and risk of developing new therapies themselves is to 'buy in' R&D by taking over smaller biotech firms. Sanofi-Aventis' recent purchase of US biotech group Genzyme – the first company to show that money could be made by producing drugs for diseases that affect relatively few people – for $20 billion, is a case in point. Equally, there have been some mega-mergers over recent years between pharmaceutical titans such as Pfizer and Wyeth, and Merck and Schering-Plough, designed to create both greater efficiencies and a stronger drugs development pipeline.

But the catalyst for the major structural shifts currently reshaping the sector are fundamental changes in the way companies market and sell their therapies. Traditionally, pharmaceutical company sales reps would deal directly with GPs, but increasing restrictions on the marketing of drugs means GPs have become much less important to the sales model.

Instead, governments and health organisations, such as the National Institute for Health and Clinical Excellence (NICE) in Britain, now draw up approved lists of drugs – or formularies – which are available free of charge through the National Health Service (NHS). Consequently, pharmaceuticals companies have switched their marketing focus to these big organisations in order to get their drug (usually in large volumes) onto the formulary. As a result, market access and key account management has become far more important.

The thousands of individual sales people who used to make up the bulk of most pharmaceuticals companies' workforces are being replaced by a much reduced number of 'super' sales people, or key account managers. The net effect of this change is downwards pressure on sales salaries, as redundancies mean that supply exceeds demand.

Mergers also result in job losses – particularly in support functions such as finance and HR, which can be streamlined. This trend too has an effect on salaries. But while median sales salaries may be falling, senior strategic managers – heads of R&D or medical or pharma sales, for example – continue to be paid above the median as they tend to have industry-specific expertise that commands a premium. And while outsourcing R&D may be cost-effective at the moment, CROs in regions such as Central and Eastern Europe and Asia Pacific are finding it increasingly difficult to attract and retain the best talent, driving salaries up. Therefore, big pharma and CRO R&D pay scales in developed and developing economies are converging, and traditional pharmaceuticals companies need to ensure their own reward systems are competitive in order to minimise talent leakage.

Increasingly, the authorities who determine which drugs are listed on the formulary are focusing on cost – a focus that will intensify as the efficiencies such as those being imposed by NICE in Britain, bite. One consequence of the cost focus is that as soon as a blockbuster drug goes off-patent, the generics manufacturers race to copy the formula and sell it themselves. While lower-cost drugs clearly have many benefits, not least for poor countries, the branded pharmaceuticals companies lose out – and so, ultimately, do the public.

While some pharma companies try to address the problem by 'improving' an existing drug and re-patenting it, they are also acquiring their own generics divisions. The problem is that generics manufacturers do no R&D – they simply copy and sell – so they don't bring new therapies to the market. This, combined with the growing financial and competitive pressures on branded pharma companies, affects the development and lifecycle of new drugs – particularly for rare diseases where potential demand for therapies is very limited. Pharma companies concentrate on producing therapies that are likely to have mass-market appeal and cost as little as possible to develop in order to increase their chances of getting them onto the formulary.

This dynamic and challenging state of affairs underlines the inevitability of ongoing change in the Life Sciences sector. The business model that has served the pharmaceutical industry so well for so many years is increasingly being questioned and the hunt is on for a workable replacement. While the sector is in transition, the old certainties no longer apply, which makes it more important than ever for companies to have robust, relevant and current data, from across the sector and across the European region, on which to base their reward strategies.

About the authors:

Peter Stevenson is Mercer's Life Sciences Leader in the EMEA region. Based in Brussels, he can be reached at peter.stevenson@mercer.com.