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For several decades, conventional wisdom in the pharmaceutical industry has held that a large sales force is the key to commercial success. However, in recent years, a number of warning signs have emerged about the effectiveness and long-term viability of this expensive asset. While few are saying it publicly, a number of pharma executives are now exploring the possibility that it could be only a matter of time before the industry's dependence on personal selling comes to an end.
FOR SEVERAL DECADES, conventional wisdom in the pharmaceutical industry has held that a large sales force is the key to commercial success. However, in recent years, a number of warning signs have emerged about the effectiveness and long-term viability of this expensive asset. While few are saying it publicly, a number of pharma executives are now exploring the possibility that it could be only a matter of time before the industry's dependence on personal selling comes to an end.
Kim D. Slocum
As with any substantial change to a business model, timing is critical in regard to significant sales-force downsizing. Jump too soon and risk losing market share to competitors who maintain their representatives. Jump too late and damage the firm's income statement by maintaining a large and wasting asset. While daunting, this timing challenge is not insoluble. There are six triggers that industry executives should be monitoring to better understand the appropriate timing for substantive change in their selling models.
At present, pharmaceutical companies are highly profitable. This means that they are the only constituency in all of healthcare that can afford the considerable expense associated with maintenance of a large sales force. Any substantive decline in industry profitability would be a key event in forcing a rethink regarding the fixed costs of a large sales force. Over the past five years, industry has seen a steady decline in annual sales growth rates. In the crowded chronic-disease categories, the declines have been even more dramatic. In large part, this has been due to cost shifting to consumers in the form of three-tier benefit designs, and more recently, the advent of "consumer-directed" (aka high-deductible) health plans. These vehicles have offered growing proof that the markets for a number of pharmaceutical products are much more price-elastic than previously thought. The advent of new four- or five-tier benefit designs that impose significant coinsurance for specialty pharmaceuticals may well slow the explosive growth that sector has experienced.
Medicare is the wild card in this equation. While at present the Part D program appears to be in good fiscal health, Medicare as a whole is not. It is unlikely that Congress will leave prescription drug coverage untouched in the event of continuing concerns about the solvency of the program under which it is housed. Notably, all these pressures come into play downstream from the physician's prescribing decision and represent forces over which the medical community presently has little influence. They therefore represent factors that really can't be influenced by the efforts of sales representatives, but do have significant impact on the effectiveness of physician-focused promotion.
There are clear signals from both the public and private sector that we will experience ongoing changes in physician compensation. At present, physicians are generally cost-insensitive prescribers of pharmaceuticals, since they have little personal financial stake in the consequences of their prescribing decisions. As a consequence, they tend to be responsive to the benefit presentations that are the stock in trade of pharmaceutical sales reps.
Should pay for performance or alternative physician-compensation programs become more mainstream—especially if the metrics for such programs incorporate "efficiency" parameters, such as total generic prescribing—the effect of pharmaceutical sales representatives may be blunted unless companies do a much better job of tying representatives' sales messages to this new phenomenon.
Related to this is the potential growth in the use of techniques like health technology assessments or evidence-based medicine that increasingly will help payers make determinations about which agents are appropriate for physicians to utilize.
The recent enactment of New Hampshire's Prescription Restraint Law and the AMA's "Opt-Out" program for prescriber-level data are the latest indicators of a trend that has been accelerating in the past few years—legal and/or regulatory constraints on promotional practices or access to the data needed to manage sales forces. A number of policy makers see these new gambits as harbingers of things to come as other states look more critically at industry marketing practices—driven at least in part by an ongoing spate of negative books and newspaper articles on the topic. For better or worse, industry critics see sales and marketing as driving "inappropriate" product demand and feel that by limiting how promotion is conducted, they can reduce the growth of sales for innovative products. Further restrictions or outright bans on certain aspects of promotion will continue to erode the effectiveness of representatives and represent a key consideration in evaluating sales-force viability.
Personal promotion to physicians exists, in large part, because of the lack of other means for companies to efficiently and effectively communicate medical information. To the extent that alternative means of communication evolve and are utilized by physicians, the need for personal promotion may decrease. Industry executives should pay close attention to the ongoing healthcare information-technology revolution now underway in the United States. With strong backing from the Bush Administration, Congress, state governments, and private-sector payers, the push is on to deploy electronic medical records (EMRs) and health information exchanges across the country. Many EMRs contain clinical-decision support tools that prompt a physician at the point of care regarding tests to perform and products to use. The growth of physician connectivity also means easier access to medical literature and clinical guidelines. As these tools proliferate, much of the rationale supporting the "feet on the street" model of promotion will fade.
The research-based pharma industry has acquired the reputation of being a "herd animal." Companies traditionally have matched the actions of their competitors across large portions of their business. Comments made by senior industry executives over the past couple of years regarding the need for remodeling of promotion have attracted considerable attention, but have not yet spurred definitive action. This may be due, in part, to concerns about the impression that reductions in field-force size would generate on Wall Street about a company's future prospects. One bold move in this area might precipitate a host of "fast followers."
Industry executives increasingly recognize that representatives are at their most effective during the launch of new and innovative products. To the extent that firms are receiving approvals for significant numbers of new molecular entities, sales-force sizes are likely to stay at or near current levels. If the approval drought seen in the last few years continues, pressure to reduce the numbers of representatives in the field is likely to increase.
What does the future hold? Five years from now, it's very likely that industry sales forces will be smaller. How much smaller? A 10-to-20-percent reduction from current levels seems like a reasonable place to start. What would make that percentage larger? More rapid enrollment of American consumers in high-deductible health plans could trim another 5-to-10 percent off the total number of representatives in the field. If the 2008 election were to leave the United States with a Democratic president and majorities in both houses of Congress, it's fair to assume repeal of the "non-interference" clause in the Medicare Modernization Act, and that alone could add another 20 percent to the losses in sales-representative counts. In addition, by 2012, it's quite possible that there will be at least one state with no pharmaceutical sales representatives at all, due to legislative action.
Is there anything that could reverse this trend of shrinking sales forces? Yes: a return of NDA approvals to the 40-plus compounds-per-year level, with a significant shift back toward primary care products.
Where can we look for innovation in sales and marketing practices? Companies with "blank slates" will have a much easier path to experimentation with new marketing models than firms with a significant vested interest in the tried-and-true way of doing things. Therefore, it seems unlikely that the first company to go to the market with a radically different commercialization model will be one of the industry's major players. Rather, the first truly innovative marketing model will come from the ranks of mid-cap pharma or biotech.
Following the evolution and interaction of all these forces seems a daunting task, and it is tempting to put off consideration for a time when the problem is acute. But now more than ever, companies need a strategic early-warning system to scan their external environment and interpret new developments. With the rapidly changing world confronting pharmaceutical companies, one thing is certain—ignorance is no longer bliss.
Kim D. Slocum is president of KDS Consulting. He can be reached at email@example.com