Managing the Middle

Jul 01, 2010

It's well known that cost pressures and changes in the customer base are forcing a rethink of pharma's reliance on the in-house sales force to build revenue and market share. What's less evident is the direction companies are taking to cope with this turbulence—especially the impact of emerging strategies such as outsourcing on the bottom line. The following survey of current trends in sales promotion re-deployment suggests that the payoff from outsourcing is significant, with ROI improvements of 25 to 30 percent on direct sales force costs, which for most companies remains their single biggest promotional spend commitment.

The sales function is under close scrutiny because its key partner has left the dance floor: There are fewer "blockbuster" Rx drugs coming to market, and thus less need for the large, mirrored sales teams that previously saturated the provider community with basically the same message. An increasingly difficult operating environment that demands differentiation adds to the problem. Federal healthcare legislation is already having a major impact, with the industry being squeezed on pricing by an increase in Medicaid rebates from 15.1 to 22.1 percent, and the upcoming 2011 requirement to provide 50 percent discounts on Rx drugs to Medicare patients. Another factor is an uptick in FDA regulations around risk, which requires more diverse clinical evidence and slows the approval of drugs in the pipeline.

As a result, the industry is addressing its cost drivers by shifting focus away from revenues towards driving profits, and moving to manage the middle of its P&L ledger, thus boosting ROI. For some, this strategy has led to mergers—and for almost all, a commitment to seek cuts in the largest contributor to their product commercialization cost base: the sales force.

In-house Sales Reps: A Shrinking Force

According to survey firm SDI, the total number of U.S. biopharmaceutical sales representatives peaked at 102,000 in 2005. As of the first quarter of 2010, it stood at 80,000—a 21 percent decrease in less than five years. While an effective short-term cost-cutting measure, this reduction in field force is merely a precursor to the focused strategic plan necessary to capitalize on the shifting payer landscape.

Historically, the industry's SG&A has averaged 30 percent of sales, according to reports by Verispan, JP Morgan, and SDI. A recent report by the Congressional Budget Office put the total field force portion cost at $12 billion in 2008. However, projections by JP Morgan show the SG&A number declining to 26 percent by 2013. This will most likely come from a reduced spend on the field force, cost improvements through more tightly managed marketing spend, and a move to cost-effective strategic outsourcing. Targeted austerity is the theme.

The Evolving Sales Model

What's happening in the biopharmaceutical industry today is not dissimilar to what has occurred in other industries such as financial services. If you look back 20 years, the financial services industry was driven by high-priced, high-commission retail brokers. The customer always spoke or met live with the broker to place stock orders and to manage their account. This approach was expensive, inflexible, and time consuming.

Fast forward to today, and the vast majority of brokerage transactions are conducted online or triaged to different types of brokers based on the level of sophistication of the client, along with their net worth and potential return (ROI) to the investment advisor. Technology and regulatory changes have been the primary drivers for this transformation.

A similar dynamic is now playing out in the biopharmaceutical industry. With an unprecedented number of representatives taken out of the field in the last five years and the prospect of ever-decreasing physician access time, finding a new model that improves flexibility and information delivery is of paramount importance. This is true from both a cost-contribution standpoint and as a way to meet the needs of an evolving customer base, which now includes not only physicians, but also patients, payers, pharmacists, and various government entities.

The new field deployment model results in greater "white space" and reduced sales call frequency as some targets lose priority. Meanwhile, internal field forces become smaller, more specialized, and increasingly regionally deployed. Although more cost-effective, this reduced internal bandwidth negatively impacts a company's ability to focus on secondary brands, maximize portfolio potential, or respond quickly to market conditions. As a result, many companies are turning to outsourcing to build flexibility into their sales organization while retaining smaller, specialized internal forces.

Demand for Specialized Expertise

This move towards more specialized field forces replaces the "one-size-fits-all" model that was so popular until the recent downturn. A more robust sales model is evolving; it blends a variety of field representative types having different levels of training and skills and commensurate pay levels, including tele-representatives linked to call centers and even "virtual" representatives. In that way, non-personal information delivery channels, including web portals, e-sampling, mobile messaging, video consultations, and e-detailing, are playing a significant role. In fact, in 2009 one company engineered the replacement of an entire 400-person rep field force detailing a major brand with a 300-seat call center. It is clear an industry mind shift has occurred.

Essentially, the industry is acting upon the fact that product loyalties are driven not by the brand or its promotion. Rather, physicians prescribe a brand based on what is best for the patient, not which brand has the best promotion. Their loyalty to the company and its representation are of secondary importance—though it certainly cannot be overlooked. For that reason, in-person detailing will never disappear; there will always be physicians and physician offices that will require scientific information, and updates on reimbursement and local disease conditions, which are best delivered in person.

The new representative types better align with the varying promotional needs within the brand life cycle, and are therefore more cost-effective, providing values commensurate with revenue potential. For instance, for mature brands, maintaining visibility—and in turn maintaining sales volume—is often the primary promotional objective. When a product is already well understood by physicians, customer service, mature market, or virtual representatives can often achieve a more favorable promotional impact-to-cost ratio than traditional representatives. This type of representation is tasked with dropping off samples and/or reinforcing core messages, and providing updates on managed care coverage to maintain market share and potentially to enhance share of voice as a back up to a more traditional field force. Because they do not require the same experience and/or educational background typical of traditional representatives, these next-generation representatives offer a lower cost, but equally effective alternative. By the same token, virtual representation also offers a lower cost alternative for the promotion of mature or secondary brands, and many non-personal strategies are also flourishing today as a result.