Healthy Skepticism Library item: 1068

Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.

Publication type: news

PR Newswire Association LLC
Pharmaceutical giants over-invest in promotion
2002 Nov 27
http://www.bioportfolio.com/news/report_1.htm

Full text:

A new publication from independent market analysis company, Datamonitor (DTM.L), reveals that pharmaceutical companies are investing more than ever to promote their drugs. In fact, growth in promotional investment is increasing at a faster rate than growth in ethical sales. To improve the situation, pharmas must increase the impact of their promotion or cut expenditure. Neither strategy is being adopted. Instead, leading firms continue to invest heavily in current business practices in an attempt to increase revenues. This strategy is unsustainable.

Promotional ROI is declining – investing more in promotion will only increase revenues, not margins

Growth in promotional expenditure is outpacing growth in ethical sales. Among the top 14 pharmas, the average return on primary care physician and patient targeted promotion declined from $22.2 to $17.0 between 1998 and 2001. This highlights an unavoidable aspect of pharmaceutical promotion: it costs more to achieve more. Every dollar invested in promotion generates as much as, but no more than, the previous dollar, indicating a lack of scale economies. This is passively accepted by Datamonitor’s industry interviewees, one of whom lamented: “We accept that, if we need revenue fast, we just get in more reps.”

Pharmas will continue to sacrifice ROI to hit investors’ growth targets, but this is an untenable growth strategy

Since the relationship between investment and sales is no more than linear in pharmaceutical promotion, profit margins and hence shareholder value will not increase by merely spending more. Trapped in this business model, pharmas have only two options:

• cannibalize investment in other operations to fund further promotional activities

• merge with or acquire another company to expand the overall size of promotional funds

The obvious operation to cannibalize for funds is R&D since, together with S,G&A, it represents the most significant drain on pharmaceutical purse strings. However, the industry as a whole is suffering from declining productivity in R&D. Deflecting a portion of R&D investment towards promotion will merely exacerbate this problem. With an ongoing flood of blockbuster patent expiries and a lack of innovative products emerging to replace lost revenues, now is not the time to cut R&D expenditure.

Jennifer Coe, Strategy Director at Datamonitor Healthcare, comments: “M&A to increase the size of the promotional pot is not a viable alternative. Two companies merging to increase their promotional resources will find (and have found) that the returns they generate on promotional investment will not improve post-merger, after one-time cost savings. Every dollar spent on promotion post-merger will generate as much as, but no more than, it did pre-merger. As a growth strategy, M&A is not practicable over the long-term. When profits exceed a certain size threshold, it is not possible to acquire another

sufficiently large partner to maintain profit and margin growth at the same rate. At this point, margin growth can only continue by improving productivity, using existing capital more efficiently rather than investing additional capital. A shift in emphasis is required and it starts with improving the effectiveness of promotion.”

Promotional excellence, not expenditure per se, drives commercial success

Higher ethical revenues do not signify higher returns on promotional investment. In the therapeutic markets analyzed by Datamonitor, the market leaders, Pfizer and GlaxoSmithKline (GSK), underperformed compared to other members of their top tier peer group in 2001. Pfizer generated $15.4 per promotional dollar against global ethical revenues of $18,558m, while GSK’s ROI was $12.4 from revenues of $12,820m. In comparison, Wyeth, with revenues of only $6,112m, achieved an ROI of $18.1. The lack of correlation between ROI and ethical sales demonstrates the variable performance of companies – some are just better at promotion than others. As a senior executive from one of the largest companies observed:

“We dominate our markets through investment rather than best practice. There are a lot of companies whose money gets better results – just look at Wyeth and Lilly. There’s a lot we can learn from those guys. They’re clearly doing something right.”

Companies with the highest revenues are not the most effective at maximizing individual product revenues

Datamonitor applied its proprietary Revenue Potential Index methodology to quantify the impact and quality of promotion independent of a product’s inherent ability to generate revenue. Eli Lilly and Johnson & Johnson emerge as examples of best practice in promotion, relying more on the productivity of their promotional efforts than on the absolute size of their investment to generate revenues. The primary reason for the poorer performance of companies with higher ethical revenues appears to be the size of their portfolios. Pfizer and GSK promote a diverse number of products and are not overly reliant on one franchise or product to drive growth. This has resulted in over-promotion relative to the commercial potential of their products because they are less focused than firms that rely on fewer products or therapy areas for growth. The strength of a company’s promotional capabilities is not a function of its size. It is the quality or effectiveness of promotion, not the quantity of investment, which determines the level of return.