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Distribution of Sales and Marketing Spend Must Change
In recent years, pharma companies have reduced their cost base in response to decreasing revenues due in part to patent expirations and thin pipelines.
Companies have taken the budget axe to both their R&D and Sales organizations, often drastically reorganizing R&D in an effort to generate improved productivity. While considerable effort has gone into reshaping the structure of R&D, commercial organizations have not given parallel attention to the assumptions and structure underlying sales and commercialization processes. In today’s column, I’ll discuss how changing customer demands call for the commercial organization to adopt a new model - one that should further reduce the existing cost base. There is clearly room to do so; one study conservatively estimated the U.S. pharmaceutical industry spent 24.4% of revenues on promotion[i], compared to R&D activity, which accounts for approximately 13%.
The main cost centers within the commercial organization have been the sales force, marketing and market access. The current commercial model is based on years of improving the means of influencing physicians as decision-makers. This resulted in the well-documented arms race for sales reps. “Sales calls to doctors’ offices were the most powerful tool for driving new prescriptions,” said a Vice President of Marketing. It also led to large promotional expenditures dedicated to a variety of activities such as conferences, CME training, disease management programs, samples, couponing, journal articles and DTC advertising. These promotional activities were also aimed at educating and influencing a physician’s decision-making. Market access in this environment was the third leg of the stool but often deployed in a tactical manner to negotiate price and reimbursement late in the launch process.
Revisiting the mix
As the voice of the physician decision-making becomes less critical, pharma companies need to revisit the mix of sales, marketing and market access activities. Since 2006, the industry in the U.S. has reduced the number of reps by 25%[ii]. At first, companies reduced the size of the salesforce as products they were carrying went away due to patent expirations. They took further steps to reduce costs by replacing sales reps with e-detailing which preserved the interaction with physicians at lower cost. According to the Wall Street Journal, “tens of thousands of pharmaceutical sales reps have been eliminated in the U.S., creating a void that drug makers are now increasingly filling with websites, iPad apps and other digital tools to interact with doctors who prescribe their treatments.”Physicians can use web portals for sample ordering and formulary information. They can also access educational materials for their patients. As younger physicians who are more comfortable with Web-based communications take the place of older colleagues in the medical community, this trend is likely to continue.
This does not, however, address the need to open up channels of communication with institutional decision makers. In my previous columns, [the future of pharmasales], I discussed how the changing customer landscape will require a new sales approach in order to target and communicate with key stakeholders within complex accounts. At the time, I suggested that the whole commercial model needs to be re-examined.
Marketing spend no longer needs to focus on ensuring that physicians are aware of the product’s brand, features and benefits at the point in time when they are making a decision to prescribe, since treatment options will be baked into pathways derived from clinical guidelines, providing individual physicians fewer opportunities to make treatment decisions. Marketing in the future will need to create messages that align with the customer’s need for information about how a product provides them and patients with differentiated value. By improving the understanding of target customers and their needs, companies will be able to take a more strategic approach to marketing and gain better insight into which marketing vehicles are most effective. This in turn will lead to lower promotional spend, as there will be less of a hit and miss approach. In the old model, the return on increasing the salesforce was better understood than marketing activities. Does the doctor write a script because he read a journal article, because the patient who saw a DTC advertising campaign requested a particular drug, or because of a conference that he attended in which a KOL extolled the clinical virtues of the drug in question. Similar to the sentiment attributed to department store merchant John Wanamaker about his advertising spend, pharma executives have felt much of their spend is wasted, but they just don't know which part.
Elevated Role for Market Access
Market access needs to be elevated to a more strategic role earlier in the process such that the right evidence is generated to support decision-makers choosing formulary and pathway decisions based on rational economic and clinical factors. For instance, when a hospital is looking to reduce the number of antibiotics they stock and use from 13 to 4, they need to understand that the patient population that doesn't respond to any of the preferred treatments will require further hospitalization and incur additional costs that cannot be passed on to payers in an environment of capitation and risk sharing. Based on the size of this population, the cost of not stocking a drug may far outweigh the inventory charges of an expanded formulary.
Companies will need to invest more in market access capabilities to ensure they are able to identify the appropriate questions that their customers need answered, develop the evidence to support product claims and generate the value proposition that ensures market access. The increase in costs associated with market access will be more than offset by the reduction in sales and marketing expenditure.
The need to further reduce the cost base will become more acute as pricing pressures continue to constrain revenue growth in the U.S. while market access hurdles increase as decision makers focus more on value. Leading companies are turning their commercial organization on its head, giving market access a more prominent role and in shaping clear and targeted messages that will be delivered through a smaller and increasingly technology-driven sales channel.
i. Gagnon, Marc-André and Lexchin, Joel The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States,” PLoS Medicine January 3, 2008
ii. Challenger/Gray and Christmas Inc.
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