Finance: Promotional Productivity

What drugs are cash traps? The truth is, most companies don't know. But a product portfolio analysis can reveal where resources are best directed—and where it's time to pull the plug.
Mar 01, 2006

Blair Gibson
Put your cash where it's doing the most good. Although that seems like a simple idea, most pharma strategists don't allocate promotional resources effectively—they overinvest in some brands, and underinvest in others. Given that top companies have several hundred drugs each, all with different growth rates and market shares, these are certainly complicated decisions. But executives can better direct their resources, and make smarter investments, by using portfolio analysis.

While Pfizer, Eli Lilly, and Bristol-Myers Squibb use portfolio analysis, it is generally underused in the industry: Less than half of the top 20 firms integrate it into their annual planning process. As such, companies continue to throw money into drugs that are rapacious cash eaters and fail to move the market-share needle.

Learn the Lingo
New research from Cutting Edge Information (CEI) shows that 80 percent of pharma companies feel resource allocation is the strongest challenge to brand success. "A chief frustration among brand managers is senior management's apparent willingness to underfund several developing products rather than back a few high-potential and high-performing drugs," says CEI president Jason Richardson. "This practice fiscally handcuffs brands and weakens whole portfolios' commercial viability."

Stars, Cows, Dogs, and Question Marks

Since the 1970s, a familiar way of looking at portfolio analysis is through a model developed by the Boston Consulting Group (BCG). The BCG Growth-Share Matrix describes products in terms of two factors: market growth rate and relative market share, defined as a ratio of a firm's sales of a product relative to the sales of its largest competitor. Positions on the matrix typically correspond to a product's cash-flow characteristics (see "BCG Growth-Share Matrix," below).

Believe it or not, the majority of products in any company's portfolio are cash traps or "dogs" (see "Learn the Lingo"). But the product portfolio of any pharma company should be an exercise in the balance of cash flows. Each firm needs high-growth products in which to invest cash, and low-growth products with high market to ensure excess cash flow. Each drug should eventually generate cash and compound the cash invested in it. Otherwise, it is worthless; it is a drain on EBIT (Earnings Before Interest and Taxes) and only becomes of value to the company in being sold off.

Look at Inspra (eplerenone). Pfizer launched this drug in Q4 2003 and continues to pump money into this problem child, despite anemic sales of roughly $40 million in the $2.7 billion heart-failure market dominated by Toprol-XL (metoprolol). Pre-launch hopes were probably high for Inspra. It was supposed to gain market share and become a star, and eventually a cash cow when the market growth slowed. But Inspra is likely to remain a dog, despite any amount of promotion, given its perceived safety issues and a cheaper, more effective spironolactone in the same Pfizer portfolio. Because Pfizer invested heavily in promotion early on with Inspra, the drug's earnings potential and positive cash flow is elusive at best. A portfolio analysis of Pfizer's cardiovascular franchise would suggest redeploying promotional spend on Inspra to up-and-coming stars like Caduet (amlodipine/atorvastatin) or torcetrapib to ensure those drugs reach their sales potential.

Know When to Grow 'Em

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