S A LES & M A RKE TING INSIGHTS ZS Associates & eyeforpharma Report: Drivers of Change to Pharmaceutical Commercial Models Dan Frey, Rohan Fernando & Chris Wright Pharmaceutical executives frequently lament the industry’s challenges and contemplate the emergence of a new selling model. While changes to the selling model will indeed occur, we submit that they will be more nuanced than many believe. We will not see the end of sales representatives or the demise of face-to-face selling. The current selling model is rooted in several fundamental features of the health care structure that will remain important into the foreseeable future, especially in the United States. Yet we do foresee important changes. We expect large-scale reductions in pharmaceutical sales forces around the world, driven largely by the lack of sufficient new products in therapy areas treated by general practitioners (GPs). We also expect significant structural changes to the selling model to occur, primarily in Europe. There will be a greater focus on account management and integrating promotional strategy across payers, opinion leaders and traditional prescribers. This change is driven by significant changes to the payer landscape in many European countries. However, given the fragmented payer structure, we do not expect to see the same structural changes replicated in the United States in the near future. Table of Contents 2 3 Introduction 4 The Rise of the General Practice Commercial Model 4 Key Features of the Current Commercial Model 7 Oversizing the Sales Force 10 Different Models Around the World 14 Predictions for the Future ZS Associates Introduction Mounting evidence that the pharmaceutical commercial model is distressed has led executives to explore new approaches to promoting their companies’ products. The promotional model that, in the 1980s and 1990s, helped to change the way doctors practice medicine now appears broken. In offices around the world, physicians have become increasingly frustrated by repeat visits by multiple sales representatives and, as a result, some of them have severely restricted the level of access they grant to anyone besides their patients. Many factors have contributed to the growing perception of the obsolescence of the current selling model, factors both within the companies that make up the pharmaceutical industry and in the broader market in which they develop, market and sell their products. Chief among these are weaker new product pipelines, over-investment in sales force size and the subsequent failure of big pharmaceutical companies to reduce their sales forces as portfolios aged. As a result, the value proposition of a pharmaceutical sales representative to a physician is diminished. While there has been a steady decline in the development of new general practice (GP) medicines in the past decade, only recently has the industry begun to adjust to this change and downsize in any meaningful way. While U.S.-based pharmaceutical companies face a hostile political and regulatory climate, outside of the United States, where payer power and structures have evolved, there has been a corresponding modification of selling models. These shifts are most pronounced in northern Europe, the United Kingdom, the Netherlands, Italy, Spain and Germany, where the devolution of power and budget to regional payers is most advanced. In these parts of Europe, a model has emerged that integrates account management and payer-focused structures, while also retaining some of the elements of the traditional selling model. This paper focuses on understanding the current GP commercial model, how it emerged and how it is expected to evolve. 3 ZS Associates The Rise of the General Practice Commercial Model To predict possible changes to today’s sales model, first it is important to recognize what makes the model unique and then examine how it came about. For the purposes of this paper, the commercial model is composed of two elements: Commercial Model = Structure + Scale Few would suggest that a simple reduction in the number of representatives constitutes a revolutionary change to the commercial model. While most organizations are far more likely to adjust scale in response to industry shifts, this discussion will focus more on the actual structure of the selling model. This distinction is important because managers may wish to focus energy on adapting the sizes (scale) of their sales forces if they are not convinced that the structure is broken. Four key elements characterize the structure of the GP commercial model: 1. It is dominated by face-to-face selling to an intermediary. 2. In the United States, sales interactions are typically short, unscheduled and repeated (though in parts of Europe, often these interactions are scheduled and more infrequent). 3. Sales interactions focus on product features rather than such attributes as price, service or contracts. 4. The portfolio of products a sales person represents is relatively small. It is the combination of these elements that makes the pharmaceutical industry’s commercial model unique. In the next section, we discuss how these key elements have contributed to helping the current sales model evolve. Key Features of the Current Commercial Model To predict possible changes to today’s sales model, it is important to understand the factors that led to the characteristics of the commercial model described above. We will initially focus on the drivers that helped create the current structure, because while the scale of the 4 ZS Associates typical model has been altered significantly over the years, the structure has not followed suit. Face-to-face promotion to an intermediary Patients do not typically choose their medication and, in most cases, neither does the payer. Physicians are the dominant decision-makers and they make dozens of prescribing decisions each day—totaling thousands each year. For a $1 billion primary-care drug, around 20,000 physicians are each likely to represent more than tens of thousands of dollars. For a $2 billion drug, it may be 75,000 physicians. Face-to-face selling dominates other sales methods in the pharmaceutical industry because it is the most effective way to reach these valuable decision-makers. Even though in the United States 20 percent (and upward in other countries) of physicians are unwilling to see sales representatives in person, the relative effectiveness of the model drives companies to rely heavily on this channel. Advertising, direct mail and other forms of communication are incapable of generating anything near the 80 percent rate of exposure and the considerable response that sales representatives can obtain. Comparatively, fewer than 10 percent of physicians opt in on dinner meetings and other alternative forms of promotion. Moreover, the products themselves often are not substantially different, so personal interaction between the representatives and physicians creates emotional reasons to prescribe one product over another. Short, unscheduled and repeated sales interactions A sales representative from a wholesaler who visits Wal-Mart with a high-volume product will almost certainly get the necessary time to speak to his or her buyer at length about the product, customers, promotions and other matters. In the U.S. pharmaceutical industry, by contrast, the vast majority of interactions are often less than two minutes long (though in some parts of Europe, such as Switzerland, interactions are sometimes much longer and more infrequent). The value of the interaction to physicians is simply too low for them to take time away from paying patients. 5 ZS Associates While the general practice physician may be dependent on the pharmaceutical industry as a whole, engaging any single company is relatively unimportant. The industry is so fragmented that even the largest global pharmaceutical company has only an 8 percent share across all products. Most GP products have substitutes. The representative who details a first-in-class product may provide physicians with some vital information at launch, but his or her value declines afterwards. Yet from the standpoint of the pharmaceutical company, there is a need to be ubiquitous. Pharmaceuticals are perhaps the fastest-moving goods in the world per consumer, and the physician is presented with a chance to make a new buying decision multiple times per day. When a representative leaves a physician’s office, the doctor can prescribe their product or a competitor’s for the very next patient, with little or no repercussion, with no additional training or paperwork, no contracts to break and often at no change in efficacy and outcomes. Thus, pharmaceutical companies try to create a near-constant presence that will influence those frequently made and easily interchangeable decisions, and create emotional switching costs for the physician. Unfortunately, in the United States, visits cannot be planned because physicians’ schedules are unpredictable. Doctors’ calendars are often booked weeks in advance and hour-long waiting times—even for patients—are not uncommon. Consequently, sales representatives often show up at doctors’ offices unannounced and hope for the best. Focus on product features The pharmaceutical industry’s primary sales targets—physicians— neither take possession of nor pay for the product. The product itself cannot be customized. Regulation narrowly defines what representatives can discuss with the physician beyond the product features. There is no contract and no service or support per se. Discussions about price are rare in the United States, as fragmentation of payers leads to an overwhelming number of plan design/product co-payment permutations (often around 4,000) that no doctor can accurately track. In addition, the payer environment is constantly changing. In the vast majority of cases, when the physician sits down to write a prescription, he or she has little idea what this medicine will cost the patient. It is not that the doctor is indifferent; it is that he or she has not been informed and has 6 ZS Associates no effective way of accessing this information. Even if the representatives inform the physician of cost per patient for the specific prescription drug and the physician trusts them, this information is not retained. With so many items that a typical salesperson would discuss off the table, the value of the sales representative to the physician is reduced, which further explains the commonality of short interactions. Representatives carry relatively few products Sales representatives from other industries carry portfolios that represent dozens of products. A pharmaceutical representative, in contrast, typically carries three or fewer products, even if the company produces far more. It is often stated that the therapeutic knowledge required is too great for representatives to carry more products, yet the brevity of most interactions means each representative does not need expertlevel therapeutic knowledge. In fact, the brevity of interactions implies that few products can be detailed to a physician at a time, but it does not imply that few be carried by a single representative. (With a larger portfolio, representatives could still promote two or three products to each physician, but focus on the products that are relevant to each.) One reason pharmaceutical representatives promote so few products relates to the power of marketing within organizations. It is easier to manage training and the distribution of messages when teams are structured around a narrow set of products. In addition, brand managers have historically been loath to share details with other products. Oversizing the Sales Force In the 1980s and 1990s, when pharmaceutical sales were flourishing and new classes of drugs (such as CCBs, ACE inhibitors, statins, SSRIs, PPIs, erectile dysfunction drugs and SNRIs) were introduced into physicians’ practices, the current pharmaceutical sales model worked well. The combination of revolutionary new products and their extensive promotion had the desired effect of ultimately changing the way physicians diagnose and treat patients. The number of sales representatives, however, continued to climb even as the number of revolutionary products shrank (Figure 1). While the 7 ZS Associates total number of products may have been growing, many were line extensions, “me-too’s” or late-lifecycle products. As any product indicated for a chronic condition ages, far fewer new patients are treated with it. ZS research has shown that representatives help drive more than half of the sales for new patients and just 11 percent for continuing patients. Thus, as a product ages, representatives have less of an impact on sales. This should come as no surprise, since physician preferences harden and there is often little new information for the representative to add. This may also explain why, in observational research, when representatives are unaware of the researcher’s presence, it is not uncommon to see representatives fail to mention late-stage products at all. 40 60 30 40 20 20 10 0 0 19 19 NMEs 80 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 50 97 100 96 Source: FDA, Verispan 60 19 Figure 1. Sales Force Sizes vs. New Molecular Entities Number of Reps (000s) 120 New Molecular Entities Number of Reps (U.S.) Faced with greater numbers of representatives, each delivering less new information and, consequently, less value, physicians imposed restrictions on the number of visits individual representatives were permitted. Pharmaceutical companies responded by dispatching multiple representatives to discuss the same product to each physician, a strategy known as mirroring, which heightened the representative-to-physician ratio even further. In a sense, pharmaceutical companies compounded the problem they were attempting to address. To make matters worse, the pharmaceutical industry did this in an increasingly regulated selling environment in which representatives had less they could offer physicians. For example, in 2002, the Office of 8 ZS Associates Inspector General (OIG) guidelines in the United States prohibited gifts and other inducements, such as dinners, sports tickets or other outings. These trends occurred worldwide, not just in the United States. In fact, the concept of mirroring first originated in the United Kingdom as a response to greater access restrictions and was then exported. Arguably, sales forces became even more oversized in Europe than in the United States. There were approximately 70,000 pharmaceutical sales representatives in the big five EU markets (Germany, France, Spain, United Kingdom, Italy) in early 2008, compared to nearly 100,000 in the United States. Yet, the U.S. pharmaceutical market is approximately twice as large as the EU5 market, suggesting that if the United States is over-invested in its pharmaceutical sales forces, this problem is even more pronounced in Europe. The cumulative result of this—less value delivered per call, leading to less time per representative, greater access restrictions and frustrated physicians and representatives—seems obvious in hindsight. Then why did the pharmaceutical industry continue to scale up the total number of representatives in this environment? Researchers using analytic models discovered that high-detail frequencies generated more sales, lending support to increases in head count. The short patent life and high value of pharmaceutical products created pressure to generate sales quickly, and companies saw that the revenue lost by under-sizing a sales force outweighed the cost of oversizing. Over time, however, marketing and sales departments helped to push sales force sizes beyond what was reasonable or even profitable by focusing heavily on share-of-voice. In the ‘90s, when the industry was flourishing, “share-of-voice” was a common phrase that implied a need to match or exceed a competitor’s exposure in the marketplace. Often, products with mostly second-line potential were given sales forces that were larger than their bigger competitors’. From the perspective of sales and marketing managers, adding headcount and marginal top-line growth simply enhanced their stature. The companies’ profitability either fell immediately or over time as competitors followed and eliminated any first-mover advantage. 9 ZS Associates This period of unchecked growth suggests that there is now a need for large reductions in pharmaceutical sales forces. Despite recent reductions, sales forces remain oversized by historical standards. Yet this evidence does not suggest a change to the form of the commercial model. Although the pharmaceutical industry is changing, in the United States the fundamental industry drivers remain. It is no surprise, then, that American companies are merely tinkering with their selling models rather than proposing substantive changes. However, as we will see in the next section, in parts of the world where fundamental industry drivers have changed, the result has been a reduction in scale and changes in structure of the sales model. Different Models Around the World Pharmaceutical commercial structures are changing significantly in many parts of the world, especially in the United Kingdom and the Nordic countries. This has been driven by changes in the payer landscape as governments find ways to better manage health care costs. In the United Kingdom, for example, the government began widespread National Health Service (NHS) reform in 2000 with the introduction of Primary Care Trusts (PCTs). PCTs have control in a given geographical area under the provision of NHS (government-funded) health care—over 90 percent of the NHS budget goes through PCTs. They can, and do, regulate prescriber activity in their area to manage their budget. In many cases, the PCTs have significantly reduced GPs freedom to prescribe by implementing financial and other incentive schemes, promoting greater use of generics and also driving specific branded drugs. Figure 2 illustrates the power of the PCT decisions. The graph shows the increased market resulting from a positive formulary PCT decision for a branded cardiovascular drug. 10 ZS Associates Figure 2. Change in market share after a positive PCT formulary decision (branded cardiovascular drug; change is calculated vs. neutral PCTs) Source for data: U.K. company, adjusted for anonymity Change in Market Share (%) Change in Mkt Share After Positive PCT Formulary Decision for branded cardiovasular drug vs. neutral PCTs 14 12 10 8 6 4 2 0 Q0 Q1 Q2 Q3 Q4 Many other countries have systems that achieve similar results, albeit through different means. In Sweden, for example, budgetary control has been devolved to 20 regional county councils, which aggressively manage costs by influencing the action of health care providers. It is important to note that these regional units are not equivalent to U.S. managed care organizations. A U.S. managed care organization has far less market power than European health care organizations. This is the fundamental reason why changes to the selling model will be far more pronounced in Europe than the United States. In the United States, if a managed care formulary becomes too restrictive, the patients or patients’ employers can simply switch their plan. From a doctor’s perspective, any given managed care organization represents only a small fraction of his or her patients. Compare this with a PCT in the United Kingdom: If a patient does not like a PCT’s decisions, he or she will either have to live with the consequences or literally move to a different region of the country! Similarly, for any given GP, the vast majority of his or her patients are paid for by the PCT, so he or she simply cannot afford to ignore PCT directives. It is the wielding of this monopoly power that is driving the changes to the pharmaceutical commercial model outside of the United States. While there is no one “European model,” there are some common features of the new commercial structures that are emerging: 11 ZS Associates 1. The structure requires greater integration of different commercial functions: account management at the payer level, Key Opinion Leader (KOL) management and “traditional” prescriber promotion. 2. The structure needs to be more regional and flexible. National strategies do not work everywhere. 3. Customer interactions are evolving from being solely productfocused to also being value- and outcome-focused. 4. Reductions in sales force investment are more pronounced. 5. Differences will exist across countries, reflecting variations in the health care landscape across countries. These factors—discussed in the next section—will significantly change the pharmaceutical commercial structures that exist today in Europe. 1) Greater integration required across customer groups The new commercial structures evolving in Europe are significantly more complex as they need to integrate multiple customer-facing roles. At least three roles need to be working together effectively: account management with payers, stakeholder management with influencers and “traditional” promotion with prescribers. 1. Account Management: Regional payers (such as PCTs) are “accounts” with their own profit and losses and health care objectives. These regional payers require an account management approach with a fundamentally different kind of customer interaction than with prescribers—not just on product features and benefits, but also on the outcomes of making one decision over another. 2. Opinion Leader Management: Payers and prescribers are influenced by opinion leaders. Effective management of the influences within the local health economy are critical to gaining formulary access or breaking down payer barriers. 3. Traditional Promotion: The traditional reach-frequency promotional model is still very relevant, even with strong payers. For example, when formulary access has been obtained or when payers decide to have multiple products on formulary or remain neutral, physician pull-through is critical to driving sales. 12 ZS Associates The challenge for pharmaceutical companies is both to acquire the skills to manage “new” stakeholders effectively and to integrate the commercial strategy across these different audiences. Traditionally, promotions to payers, opinion leaders and doctors have operated in silos. In the integrated health care economy, where payer decisions have a direct and immediate impact on prescribing potential—and where opinion-leader management can be the difference between being on formulary or not—pharmaceutical companies’ commercial structures need to be integrated in order to be effective. 2) More regional and flexible The traditional model had national strategies that were implemented everywhere within a country. The significant differences that exist among local health economies and that are driven largely by local payers indicate that pharmaceutical companies need to be more flexible and regional. This additional flexibility often leads to both a more localized commercial structure and a differential resourcing model with sales force investments depending on the regional potential and status with the payer. While designing a regional strategy may appear easy on paper, the reality of making it work is operationally extremely complex. In addition, the need for greater flexibility within pharmaceutical companies is also likely to lead to a significant increase in the use of contract sales forces in Europe, especially given the labor market rigidities in most countries. 3) Not only product features, but also value- and outcomes-based Pharmaceutical promotion has traditionally and primarily targeted physicians and has been focused on product attributes. However, payers are also economic buyers who have to manage a profit and loss and meet health care objectives. European pharmaceutical companies increasingly need skills to manage “accounts,” as well as have interactions with payers that are focused on value, explicitly relating outcomes with cost. Those companies positioning themselves in the forefront of the industry are already working with payers to create mutually beneficial relationships linking their programs with outcomes. 13 ZS Associates 4) Reductions in sales force investment Account management commercial models typically require fewer sales force resources. This reduction is primarily driven by lower resourcing needs in certain areas of the country where prescriber pull-through has little value. This suggests that the reduction in sales forces that is occurring because of fewer new products will be accentuated with the moves toward different commercial structures in Europe. That said, this does not necessarily imply a proportional reduction in sales force costs as account manager positions usually have higher costs per head than traditional reps. 5) Different countries will look different While many countries are changing their health care structures, they are not all moving in the same direction. France, for example, is still highly centralized compared with Germany and the United Kingdom. In other “segments” of countries, the traditional share-of-voice model will still be relevant even in the next three years. This all means that there is no one European model but rather different localized structures that will emerge for different markets, at least in the medium term. In summary, these features represent significant changes to the pharma selling model and they are being driven by changes to the payer landscape. Where these changes have been more pronounced and revolutionary, the selling-model changes have been commensurately significant. Predictions for the Future Health care costs remain a major social, political and economic area of concern for all governments. Payers will continue to find new ways to manage spending through greater influence of health care professionals. In countries where payer structures are evolving and where their power is increasingly exercised, we will see more companies move toward payer-focused, account-based commercial models. The winners will be companies that can evolve their commercial structures to partner with these key health care decision-makers and that can develop the skills and programs to help meet their objectives. 14 ZS Associates Companies will continue to push the boundary of working with payers and will find new ways to add value to them. For example, one likely outcome in Europe will be a move to rebating agreements with regional payers, which has not been a focus until today. In the United States, where fragmentation and relative lack of power of payers persists, it is hard to envision dramatic new structures emerging in the near future, barring a political transformation that brings about significantly more payer concentration. However, significant reductions in sales forces are likely worldwide, as there will be a universal focus on improving efficiency. The pipelines for big pharmaceutical companies are currently very weak; AVOS LifeSciences forecasts that for the top 14 global drug manufacturers, products launched between 2008 and 2012 will generate an average of 26 cents for every dollar lost to patent expirations during that time. (Only Schering-Plough and Amgen were forecast to have a pipeline that could even replace the product sales they were expecting to lose.) This weakened pipeline alone should be enough to lead to reductions in sales forces. We expect the new leaders of pharmaceutical companies to critically examine the costs of oversizing and bring sales forces back to more reasonable levels. However, at least part of this new focus on efficiency may also include a slight expansion in the number of products carried by each representative. In the more distant future, however, certain events could transform the model in the United States and elsewhere. The emergence of personalized medicine could bring about completely different sales interactions, as there would be not one Lipitor, for example, but perhaps hundreds. The sales representative would need to know how to guide physicians through myriad choices, thereby providing far greater value. Yet if newly developed tests predicted which product variants were best for which patients, perhaps the representative would become less relevant. Physician-oriented sales forces will remain central to the pharmaceutical industry. Like with advertising, knowing what percentage of sales force efforts work is—if not a complete mystery—certainly an important question worthy of careful consideration. Defining that unknown element of success in pharmaceuticals detailing remains elusive, and it may be the key reason physician-oriented sales forces will survive. 15 ZS Associates About the Authors Rohan Fernando is the Managing Principal of ZS Europe and is based in London. He has consulted with numerous pharmaceutical and biotechnology companies in the areas of sales force strategy, integrations/ mergers, targeting, compensation, and product launch strategy and customer segmentation. Rohan can be reached at rohan.fernando@ zsassociates.com. Dan Frey is a Principal at ZS Associates. He has worked with many pharmaceutical and biotech firms on sales and marketing concerns. Dan can be reached at [email protected]. Chris Wright is the Managing Principal for ZS Associates’ U.S. Pharmaceutical practice. His experience is in an extensive range of sales and marketing issues in the pharmaceutical and health care industries. Chris can be reached at [email protected]. About ZS Associates ZS Associates is a global management consulting firm specializing in sales and marketing consulting, capability building and outsourcing. The firm today has more than 1,000 professionals in 17 offices around the world. It has assisted more than 700 clients in 70 countries. ZS consultants combine deep expertise in sales and marketing with rigorous, fact-based analysis to help business leaders develop and implement effective sales and marketing strategies. As the largest global consulting firm focused on sales and marketing, ZS Associates has experience across a broad range of industries, including medical products and services, pharmaceuticals, biotechnology, high tech, telecommunications, transportation, consumer products and financial services. For more information on ZS Associates, call +1 847.492.3602 or visit www.zsassociates.com. 16 ZS Associates About eyeforpharma eyeforpharma provides a means of communication and learning— through strategic thought leadership, debate and networking—for an open-minded group of senior pharmaceutical executives. These supporters are receptive to change and committed to leading the industry in new directions. Our strongest allies understand pharma’s ultimate purpose and know that there’s more to it than competing on share price or extending patents. They know that the route to profitability and to finally overhauling the industry’s battered reputation lies in a commitment to remembering why pharma companies exist in the first place: to care for and add value to patients’ lives. eyeforpharma organizes 30 conferences worldwide per year and provides a range of leadership articles from many authors on its website, www.eyeforpharma.com. ZS Associates www.zsassociates.com [email protected] +1 847 492 3602 © 2009 ZS Associates, Inc. 02-09 All Rights Reserved All trademarks within this document are either the property of ZS Associates or their licensors.
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