Pharmaceutical
giants over-invest in promotion
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.
If you enjoyed this
article from Datamonitor you may be interested in Datamonitor’s related
report “Pharmaceutical Promotional Effectiveness: Benchmarking top tier
companies by country, channel, therapy area and ROI” -priced $6,100.
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