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Big pharma: tightening the marketers' purse strings

Posted on: 06 Dec 02

Summary

According to new research pharmaceutical companies are investing more than ever to promote their drugs. Growth in promotional investment is thought to be increasing at a faster rate than growth in ethical sales. With this trend unlikely to continue because of economic constraint can the drug companies increase the impact of their marketing or do they face the prospect of slashing expenditure?
According to new research pharmaceutical companies are investing more than ever to promote their drugs. Growth in promotional investment is thought to be increasing at a faster rate than growth in ethical sales. With this trend unlikely to continue because of economic constraint can the drug companies increase the impact of their marketing or do they face the prospect of slashing expenditure? Datamonitor research has shown that promotional return on investment is declining across the board. 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." Lack of financial reward Pharmas have continued to sacrifice return on investment (ROI) in order 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, pharmaceutical organizations have only two options. They can either cannibalize investment in other operations to fund further promotional activities or 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 it represents the most significant drain on the pharmaceutical purse. 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. "Merger and acquisition (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," comments Jennifer Coe, strategy director at Datamonitor Healthcare. New strategies "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." Pharmaceutical companies are having to accept that is promotional excellence not simply expenditure which 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), under-performed compared to other members of their top tier peer group in 2001. Pfizer generated $15.4 per promotional dollar against global ethical revenues of $18,558 million, while GSK's ROI was $12.4 from revenues of $12,820 million. In comparison, Wyeth with revenues of only $6,112 million, 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." Internet to offer hope Pharmaceutical companies are being forced to consider alternative strategies in a bid to maximize their ROI. The industry is, for example, only beginning to exploit the potential of Internet direct to consumer (DTC) marketing. In the US, pharmaceutical companies are primarily using product based websites as part of their Internet DTC marketing strategy. However, based on primary research with leading advertising agencies, consumers mainly use the Internet as an educational or research tool. Product based websites, while providing information on specific conditions, largely fail to gain patients' trust because of their lack of objectivity and limited depth of disease information. Due to its unique characteristics, the Internet has a different role to play in DTC marketing compared to other media, such as television and print. While television and journals are ideal media to promote brands, the Internet should be used to develop patient-company relationships. Building relationships with patients becomes a valuable source of consumer information for pharmaceutical companies, although patients have to give their consent for companies to use the collected information. If pharmaceutical companies succeed in providing consumers with the information they are looking for, in terms of depth of content, accuracy and objectivity, this will improve the trust consumers have in both the company and its website. If a company also can provide personalized health solutions and support via the Internet, this will increase the likelihood of patients requesting its products and driving sales growth. The value of good PR The situation is slightly different in Europe where DTC marketing is only expected to be legalized within the next five years. In the meantime, pharmaceutical companies can communicate directly and indirectly with consumers in Europe within the current legislation. The effectiveness of marketing activities can be increased by launching disease awareness campaigns and intensifying PR activities. Increasing disease awareness is set to benefit companies directly, as it increases the potential market size for targeted conditions. To maximize the impact of disease awareness campaigns, pharmaceutical companies need to forge strong links with patient groups in all European countries, as this enhances credibility and consumer knowledge. In addition to disease awareness campaigns, pharmaceutical companies can use PR as a DTC-like tool. Pharmaceutical companies are already widely using PR operations to communicate information about a specific product, including its name, to the public. In Europe, Datamonitor believes that this is an effective strategy to increase awareness of high profile diseases and brands. For example, Viagra's penetration of the European market was greatly helped by large scale PR campaigns in all major markets. Examples to follow DTC spend is forecasted to reach $7.2 billion globally in 2007, becoming a key tool in the pharmaceutical marketing mix. Companies with the highest revenues are however, not necessarily 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. 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 found this week's Expert View useful, you may be interested in Datamonitor's reports, all available from www.datamonitor.com/healthcare
  • · Direct-to-Consumer Marketing 2001 : Converting Patient Awareness into Drug Prescriptions in the US and Europe priced $5,800
  • PharmaVitae 2002: Pfizer
  • For a free Datamonitor healthcare report please click here For more information on Datamonitor products please go to www.datamonitor.com

    Michael Randle

    Last updated on: 27/08/2010 11:40:18

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