Sanofi's home market France may be its biggest handicap

Mon Oct 14, 2013 10:40am EDT

* Sanofi plans 186 net job cuts in French R&D - memo

* Drugmaker wants to regroup scattered R&D sites into hubs

* Unions plan protests at French sites throughout the week

* Dispute is roadblock in race for higher R&D efficiency

By Natalie Huet and Noëlle Mennella

PARIS, Oct 14 (Reuters) - Sanofi, trying to squeeze more out of R&D spending like other big drugmakers, is finding its home market France a difficult place to cut costs because of complex labour laws, union opposition and a government eager to protect jobs.

The company, which scaled back job cut plans in France a year ago due to political pressure, will start a new round of talks with unions on Tuesday that are likely to be tough.

Unions have called for lab workers to walk off the job throughout the week to protest against Sanofi's latest plans, which involve 186 net job cuts in research and 453 transfers to other sites, according to an internal memo seen by Reuters.

Like its peers, Sanofi has been regrouping research operations around the world and shifting resources away from Europe, where austerity-driven price cuts and delays in the roll-out of new drugs have reduced rewards for innovation.

Merck, Pfizer and AstraZeneca have cut jobs by the thousands also partly in response to competition from cheaper generic medicines.

But Sanofi has had to tread carefully due to its strong presence in France, where the government is battling to protect high-tech jobs and stem unemployment already above 10 percent.

France, home to about a third of Sanofi's R&D resources worldwide, is its biggest headache in terms of boosting research efficiency, something rivals are focused on to improve returns.

"Having the operations in France is sort of a handicap for them (Sanofi) given the strict labour laws there ... especially compared to U.S. companies," said Damien Conover, a Chicago-based senior analyst for Morningstar.

German-Canadian CEO Chris Viehbacher - Sanofi's first non-French boss - has already cut research jobs in Britain and the United States and now wants to regroup sites scattered across France into clusters around Paris, Lyon and Strasbourg.

The fate of a research centre in Toulouse, where Sanofi employs around 600 people, has been the focus of unions and local politicians. Sanofi agreed in May to keep a presence there for about five years. But in the memo detailing its latest plans, Sanofi aims to cut staff there to 370 jobs, despite a government-commissioned report recommending it keep 500.

"Management told us there would be ultimately be layoffs because some people will refuse to leave Toulouse or Montpellier and they'll find themselves without a job," said Stephane Galiné, who represents R&D workers at the moderate CFDT union.

BREAKING BARRIERS

The Toulouse site, isolated in the south of France, epitomises an old-fashioned, inward-looking approach to R&D. Sanofi wants to create more open, collaborative research hubs that bring together academic institutes and budding biotechs in life science hotbeds.

In the United States, the company has been building a research hub around Boston since it took over U.S. biotechnology Genzyme in 2011. It has R&D sites in Germany, Canada and Japan.

But a quarter of Sanofi's global workforce is in France - some 28,000 people - including around 5,000 in R&D.

"Sanofi is and will remain the biggest private investor in research in France," a Sanofi spokeswoman said, noting that with 1.8 billion euros ($2.44 billion) last year, France accounted for 40 percent of the company's R&D budget worldwide.

But out of 12 drugs Sanofi expects to launch by 2015, only two come from in-house research, she said, highlighting the need to reorganise research in France to make it more productive.

In the internal memo seen by Reuters, Sanofi said that while it spent more than its peers on research, it took the company on average 20 percent longer to develop a new drug.

Between 2008 and 2011, Sanofi spent around 105 million euros for each new molecule entering clinical trials, compared to an industry average of about 35 million euros, the memo said.

Sanofi R&D chief Elias Zerhouni put the case for radical change at an investor conference last month. "The pride of internal innovation has been the bane, in my view, of main-line pharma companies. I think this is sort of a mirage, a delusional thing," Zerhouni said. "That kind of arrogance, I think, has to be chased away. No barriers. Go where the best science is."

Sanofi's attempts to remedy this situation, however, are up against the French government's efforts to protect jobs.

Last year, when unions predicted Sanofi could scrap 2,500 jobs in the country, Industry Minister Arnaud Montebourg said a company making profits by the billions could not behave like a company in trouble. Sanofi later scaled back its plans to around 900 job cuts by 2015. Last week, the Socialist government warned it could block job cut plans at telecoms firm Alcaltel.

This highlights tensions between a state with a long history of intervention in the corporate sector and the global aspirations of the French companies it once helped to grow.

In 2004, when France pushed Sanofi to merge with rival Aventis, the aim was to build a French powerhouse. Now Sanofi, the world's fourth-largest drugmaker, makes nearly a third of revenues in emerging markets and less than 8 percent in France.

"Although Sanofi is a global company ... it certainly appears to be still very much perceived as a national champion," said Federica Benassi, analyst at IHS.