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The Contract Sales Organization (CSO) Market Outlook to 2015
THE AUTHOR: GC Green
Rising industry pressures
In spite of increasing R&D spending and numbers of developmental candidates, product approvals have seen a steady decline since the mid nineties as shown in Figure 1. 25 products were approved by the FDA in 2009, however, many of these are specialist-driven and niche products with relatively limited market potential. Increasingly high regulatory hurdles with an emphasis on expensive post-approval safety monitoring studies have also contributed to escalating costs. The cost of bringing a drug to market has climbed over $1bn, according to a 2003 TUFTS Centre for Drug Development study.
Figure 1: Number of FDA approvals 1990-2009
A further pressure on the industry is that many governments are focusing on healthcare expenditures with a view to containing costs via generic substitution, negotiating lower prices on branded products. These pricing and reimbursement control strategies are significantly impacting the profit margins of the industry. Healthcare reform in the US will result in reductions of reimbursement rates on Medicaid and Medicare Part D plans for approved medicines, depressing drug prices paid by these members. US pharma companies have also agreed to pay a rebate to Medicare Part D members whose plans do not cover the cost of medications – the “donut hole”. This measure is expected to reduce pharma industry revenues by $80bn over 10 years.
In addition, generics are expected to erode $78bn in global sales of branded drugs from 2010 to 2014. The 2007 financial crisis added to these pressures as credit markets tightened worldwide. Biotech companies have been particularly impacted, with venture capital and IPO funding undergoing a steep decline from 2007 through 2009. Tightening financial conditions prompted project cancellations and delays in the contract research industry leading to declining revenues among some companies in the second and third quarters of 2008. Nevertheless, cost pressures have been widely cited as a potent driver of outsourcing as pharma companies seek to transform fixed costs to variable ones.
Outsourcing as an industry strategy
Outsourcing as a strategy has been most strongly embraced by Eli Lilly which is making a transition from being a fully integrated pharma company (FIPCO) to a fully integrated pharmaceutical network (FIPNET). Lilly reportedly planned to outsource half of its R&D activity by 2010, and has aggressively pursued manufacturing outsourcing in China and India. Smaller pharma and biotech companies are often driven to outsource out of necessity, and the need to retain financial flexibility resource usage.
The advantages of outsourcing are:
- Cost savings from reduced capital outlays needed for new facilities;
- Flexibility afforded by contracts forming variable cost structure;
- Increased performance. As specialists for whom the outsourced function is a core capability, outsourcing providers can often achieve superior results to pharma companies;
- In the case of offshore providers in developing economies, outsourcing can offer large cost advantages;
- A large variety of technologies and skills can be accessed across the globe via outsourced service providers;
- The strategy can also be used to free up resources and allow a company to focus on core competencies.
- Sponsors exert a lower level of control over outsourced projects, bringing uncertainty and increasing the perceived risk of failure. Staff turnover at outsourcing providers can also compromise relationships with sponsors;
- Costs of selecting, contracting and monitoring outsourcing arrangements are not inconsiderable;
- Outsourcing brings a risk that the sponsor company’s intellectual property (IP) will be compromised. The risk may be compounded when outsourcing takes place in countries with poor IP protection;
- Deterioration of internal expertise may follow outsourcing.
For most industry players, the benefits of outsourcing have outweighed the disadvantages, leading to a large expansion in the market. For example the global Contract Research Organization (CRO) market doubled between 2003 and 2008, reaching around $24bn in 2010. The Contract Manufacturing Organization (CMO) market also grew at 14% annually between 2004 and 2009.
Overview of pharmaceutical sales
Promotional spend by the pharmaceutical industry was around $60bn in the US in 2010, and approximately $200bn globally. As shown in Figure 2 in 2008, $12bn of this was spent on detailing in the US. Contract Sales Organizations (CSOs) compete largely for this portion of promotional spending.
Figure 2: US promotional spending ($bn), 1989-2008
Source: Congressional Budget Office
Sales force sizes
Pharma industry sales staff numbers grew rapidly, doubling between 1997 and 2005 as pharma companies engaged in a sales “arms race”, in the context of a 15% growth in numbers of physicians over the period. For example, from 1999 to 2001, Business Insights found that a sample of 40 companies increased their sales headcounts by an average of 40%. However, as the total number of US sales staff swelled to 102,000 in 2007, pharma companies experienced diminishing returns on investment.
Diminishing returns from larger sales forces
The perceived benefits of high returns on investment (ROI) were a key driver for pharmaceutical companies to increase sales force numbers in an effort to gain “share of voice” with physicians. US pharmaceutical companies prospered by following a sales model in which multiple sales representatives, confident that at least one of them will gain access, call on the very same doctors. There used to be a direct correlation between the number of times a physician saw a sales rep and the expected outcome. This has manifested itself in several studies, and has been generalized across the industry. Companies believed that in a market full of “me-too” drugs, a physician would often prescribe the first medication that came to mind. By increasing the size of their sales force, and by increasing the frequency of contact with physicians, companies generated positive results.
But with an explosion in the number of reps as well as a raft of new pressures – busier physicians, proliferation of new drugs, greater competition among the companies that produce and market them, market shifts and evolving customer dynamics, the growing influence of managed care, and increasing physician resistance to the traditional detail – the ROI on detailing has been declining.
According to a manager at ZS Associates, top-prescribing US physicians now are often visited by more than 10 reps a day and receive three to five times as many calls from sales reps as they did ten years ago. Far from thinking that companies are trying to build relationships, physicians feel besieged. This coupled with the demands of managed care, reductions in government reimbursements, and soaring malpractice insurance costs have made office practice more hectic over the past decade. Due to increased time demands, the actual time spent by doctors has not increased proportionally to increased sales force and hence the decreasing returns on sales force investment.
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