Is Pfizer Signalling an End to the Sales Arms Race?
Pharma’s Cutting Edge
Vol. 3 Number 2 - February 2005
Is Pfizer Signalling an End to the Sales Arms Race?
Dr. Smith, a GP, has had a busy day, caring for 25 office patients after completing morning rounds at the hospital. Now as the day winds to an end, Dr. Smith looks forward to having a couple of relaxed conversations with two of his favorite pharmaceutical sales representatives.
This description of a typical day in the life of a private practice U.S. GP is far from today’s reality, where busy Dr. Smith perhaps allows one or two minutes to speak with a sales representative he barely knows in between patient visits. The representative just has time to introduce the drug(s) he/she represents and drop off some samples.
This more realistic description is also overly rosy, as it does not account for the increasingly high hurdles to getting an appointment and being granted permission to sample.
The forces propelling the recent evolution (devolution?) of the pharmaceutical sales representative-doctor relationship are fairly obvious—both parties are caught in the middle of an all-out sales arms race. Manufacturers know that face time with doctors and sampling make a difference in prescribing. Until very recently, they also once believed that more is necessarily better.
As the industry consolidated, sales forces grew and redundancy of territory coverage became the norm. No longer would Dr. Smith sees a single representative selling a major product, he would see five or more. Rather than building relationships and establishing trust, the majors, led by Pfizer, hoped that different reps selling the same product would prevent a backlash against any one unfavorably viewed representative, increasing the odds that a representative would get in the door to ply her wares.
A welcomed accompaniment of this redundancy strategy was that it was cheaper to train and retain sales reps who weren’t expected to become thoroughly versed in their therapeutic area. The bulk of today’s primary care force consists of this more flexible, less highly trained force than its predecessor of a decade past.
For the most part, big pharma has been compelled to maintain the pace of sales force growth. No company wants to be the first to break ranks and let a competitor dominate a primary care therapeutic target.
But the majors have to face the primary care sales reality. Revenues and profit margins of primary care products are diminishing. According to IMS, primary care accounted for 84% of total global sales volume in both 1998 and 2003. In contrast, primary care sales accounted for 75% of 1998 revenue but only 60% of 2003 revenue. This trend is expected to continue, as generics further erode the pricing power of innovator products.
As a result, all eyes have been watching what Pfizer will do. With what is by far the industry’s largest sales force, a unilateral shift of strategy by Pfizer would be an implicit call for reductions of arms across the industry.
During its earnings call Feb 10th, GSK CEO J.P. Garnier was quoted by the Pink Sheet as saying “If sanity can be restored and the arms race starts to slow down, it will be good for the industry. We do not need these large sales forces to do the job. We need them because the competition is trying to increase their noise level.”
According to the Wall Street Journal, Pfizer is poised to raise the white flag. The day after Garnier made his pronouncement, the Journal reported that Pfizer plans to announce a major restructuring of its sales efforts along with a re-deployment of $2 billion of its annual $17 billion in SG&A expenses to other areas in time for its April 5th analyst meeting.
Major reductions in sales headcount are not expected. However, Pfizer reportedly plans to shrink sales territories and reduce the number of sales representatives calling on each doctor.
If the restructuring proposal comes to fruition, it will mark a strategic shift away from the redundancy model and should serve as the signal to other companies that it is safe to restructure their own internal sales forces.
Already, some other companies have constrained the pace of sales spending by trimming back their contract and internal sales growth and by limited sales force restructuring. Among the first was Bristol Myers Squibb, which reported in October that it had informed 500 members of its sales force that they would lose their jobs. The sales people dismissed by BMS had called on primary care physicians and sold drugs such as Plavix, Pravachol, and Avapro.
The October move followed an announcement in 2003 by BMS that it would focus its R&D efforts on specialty areas, such as oncology. BMS’ more recent decision to co-promote muraglitazar, a diabetes drug aimed primarily at the primary care market, with Merck is consistent with a strategy of reducing its reliance on a large primary care sales force to drive future profits. Merck also has taken preliminary steps at sales force restructuring. At a Dec 14th analyst meeting, Merck announced the redesign of its sales, marketing, and managed care approach. “[E]ach one of our professional representatives have fewer products that are promoted by that individual…Each one of our representatives also has fewer physicians that they call on..”, a Merck executive was quoted by the Pink Sheet as saying. Merck eliminated 4,700 full-time equivalent positions in 2004, about half of which were in manufacturing and the remainder in sales and administration.
At the Pharmaceutical Leadership Forum Nov 16th, AstraZeneca CEO Tom McKillop was quoted by the Pink Sheet as saying that “…there is perhaps a saturation of sales and marketing effort.” On Dec 20th, the contract sales firm PDI announced that AstraZeneca was reducing its U.S. sales representative investment with the company, saving AstraZeneca $60 M in 2005. AstraZeneca’s original agreement with PDI in 2002 called for up to 600 reps to sell gastrointestinal, cardiovascular, and CNS products.
Clearly, genuine soul-searching is occurring among all the majors. Wyeth CEO Bob Essner told investors Jan 5th that “I think we have to be very careful about thinking about the number of people in the field and making sure that Wyeth builds relationships with our customers through our representatives.”
You read that correctly, Wyeth wants to build relationships with its customers. The company appears to recognize now that sales force headcount is not enough. GSK and AstraZeneca want to stop the insane sales expense growth. BMS wants to end its reliance on a large primary care sales force. To different extents, they are each waiting for the signal that it’s okay for them to take definitive action. If Pfizer acts as expected, that signal will come very soon.
The impending changes in sales force deployment should be heartily welcomed by pharmaceutical industry investors. They stand to benefit not only from an improved profit margin outlook but also, and even more importantly, from a much-needed rebuilding of withered relationships between the industry and the health care professionals it serves.
