Saturday, April 13, 2013

Beginning of the end for big pharma distribution?

Since taking my job at KGI nearly two years ago, one of the questions I’ve been asking is when the existing pharmaceutical distribution model is going to disappear. It’s an important question for graduates of our current school (School of Applied Life Sciences), and also for our newest school, the School of BioPharmacy, where I now spend some of my time. Both schools send (will send) many of their graduates to biotech and traditional pharma companies.

The existing commissioned sales force model is both expensive, and also a barrier to entry that separates traditional pharma from upcoming biotechs and the various generic producers. At the same time, in industry after industry over the past two decades, we have seen expensive distribution channels disrupted by e-commerce and other more efficient delivery mechanisms. Here we have both competition from more efficient channels and also the lost of margins as drug patents expire.

This week, Indianapolis-based Eli Lilly announced it would lay off “less than 1,000” sales representatives. But the Wall Street Journal reported that the total would be close to that ceiling, amounting to 30% of its US sales force. The changes will take effect by July.

The proximate cause is the company’s patent cliff for Cymbalta and Evista. The former accounts for nearly $5 billion annually, $3.9 billion of that in the US, and its patent expires at the end of 2013. Evista accounts for another $1 billion, and will face generic competition in early 2014.

So on the one hand, Lilly is losing the margin that supports this expensive sales force. On the other hand, it wouldn’t be firing nearly a third of the people promoting its products if they continued to be effective at generating sales. As the WSJ dryly noted:
[T]he influence of sales representatives has shrunk, as many physicians no longer have the time to take the calls and some doctors refuse to see pharmaceutical representatives out of concern about improper promotions. Growing numbers of doctors prefer digital marketing.

Lilly's U.S. sales force "will move to a smaller structure that is more directly aligned with our business realities—along with the realities our customers face, and the way they want to interact with us," a spokesman said.
Instead, big pharma is using computerized tools (such as iPad apps) to communicate with doctors.

This reminds me a lot of airlines, which used to have travel agents, ticket offices, customer support personnel and so on. When I started teaching strategy in 2002, I drew the distinction between full service and discount airlines, but after a few years the post-9/11 bankruptcies eliminated almost all of the distinction. (In a separate article this week, the WSJ noted that Pfizer and GSK cut free lunches and other doctor perks last year, in part to save money.)

The WSJ article on Lilly continued:
Today, there are about 60,000 pharmaceutical sales representatives, down from a peak 104,000 in 2006, according to ZS Associates, a sales and marketing consultant that advises many drug makers.
By 2020, I’m convinced that the traditional sales force will be a thing of the past. Those 60,000 employees will be under 10,000, with 90+% of the young salespeople (earning six figure compensation with commissions) looking for other work.

The industry needs to figure out another way to accomplish the same goal. How will doctors keep up with all the new medications — when they’re already having major difficulties doing so? Consistent with other trends, are they going to rely on pharmacists to stay on top of this and let others make the final decision on selecting therapies?

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