September 8, 2002, Sunday
By David Stievater
Opinion / At Issue Biotechnology
The Boston Globe
Imagine the dismay at Cambridge-based Biogen upon hearing of the recent co-promotion deal between Pfizer and Serono (the Swiss drug company with US headquarters in Rockland). Biogen was still smarting from the FDA's approval in March of Serono's multiple sclerosis treatment Rebif for the US market. In June, Biogen lowered earnings forecasts due to Rebif's anticipated impact on Avonex, the multiple sclerosis product that accounts for 90 percent of Biogen's business. Now there's news that Pfizer, the world's largest drug company, would lend its vaunted marketing expertise and an estimated 190 neurology sales reps to promote Rebif to doctors in the United States.
Pharma companies have long used joint marketing agreements to gain additional reach for their products and to fill unused capacity in their sales forces. Biotech and pharma companies made over 300 such agreements in the 1980s and 1990s. However, Pfizer has gone further than any other big pharma player to make co-promotion a part of its business strategy. Its co-promotion deals (others include Pharmacia, Warner-Lambert, UCB, and Eisai) are redefining how the pharma marketing game is played, and they're catching the attention of investors.
On the day it announced the Pfizer co-marketing deal, Serono's market value increased over $2 billion. This makes sense. Pfizer should help grow overall demand for MS therapy and increase Rebif's peak sales potential (Serono had dedicated only 80 sales reps to Rebif in the United States). Pfizer's market value also rose due to the deal - but this time by an astonishing $10 billion. This cannot be explained simply by Pfizer cutting the deal. Analysis by Stievater & Associates estimates Pfizer's net present value at between $500 million and $1 billion from Rebif - an excellent return, to be sure, but far short of $10 billion.
A more likely explanation for the market's reaction is that investors believe Pfizer, of all the big pharma players, has found a way to consistently produce strong profits from its marketing activities. Investors are estimating the future value they believe Pfizer will earn from having a superior marketing organization.
The market has this one right. Pfizer is one of the biggest spenders on direct-to-consumer advertising and has repeatedly used clever tactics to get attention. The company has excelled at what the industry calls "feet on the street" - the sales reps who call on health care professionals (mostly doctors) in an effort to change their prescribing habits.
Cost pressure from managed care and proliferation of me-too drugs and generic alternatives have made it difficult for pharma sales reps to get doctors' attention anymore. Harried doctors are interested in hearing new information - not reminders about products they already know.
Without access to physicians, the economics of having a large dedicated sales force are lousy. As doctors have played hard to get, sales force productivity has fallen almost 50 percent. In 1995, 36,000 sales reps completed 51 million calls. In 2000, 83,000 reps completed only 62 million calls. Pfizer has figured out that co-promoted products give it better access to doctors. The company not only earns commission payments, but also significantly improves the productivity of its sales reps.
Pfizer's management is smart. Expect the company to find further productivity gains by challenging traditional pharma sales force orthodoxy. For example, having sales reps bring drug samples to physician offices turns a valuable selling resource into a delivery service. Don't be surprised to see Pfizer redesign the sample delivery process to emphasize mail order.
As the pharma industry continues to consolidate and sales forces grow ever larger, expect only a handful of companies to control access to doctors. Pfizer's co-promotion strategy will allow it to build deeper relationships with its physician customers and emerge a winner. This builds long-term value for the company, and it explains why the market rewarded the Serono deal so handsomely.
David Stievater is president of Stievater & Associates, a Boston
health care strategy consultancy.
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