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Executive Summary

Downsizing pharmaceutical detail forces is likely to emerge as an important trend of the 1990's, Arthur D. Little's Skip Irving predicted at a forum sponsored by the consulting firm on June 11-12. Protection and enlargement of sales force size was an axiom of pharmaceutical business strategy in the U.S. throughout the 1980s. Through periods of cutbacks and post-merger reductions, sales forces have been sacred cows. Irving suggests a swing in the pendulum toward smaller sales forces based on the pressures to cut fixed costs and prepare for lean times when the R&D effort hits a trough. Irving is the leader of Arthur D. Little's health industries practice. One of the prime areas of cost-cutting focus, Irving said "will be the detail force, one of the largest concentrated organizations within the [pharmaceutical] company." Citing changes in the role of the doctor in drug purchase decisions and the decline in the patient/physician ratio in the U.S., Irving said "the effectiveness of that detail force will be decreased." In the future, he said, drug firms will use the detailforces almost exclusively for education and promotion of new innovative products. "Companies will use other tools -- journal ads, seminars -- that are less expensive to maintain awareness over the [extended] life of a product." "Companies are going to be thinking more about their pharmaceutical detail forces as a fixed cost, rather than as a variable cost, that they can shuttle around from one product to another," Irving said. That fixed cost can become a liability in dry periods for new pipeline flow. Using SK&F Labs' U.S. detail force size and pharmaceutical sales trends from 1983-1988 as an example, Irving argued that the large sales forces become costly to maintain if major products start to lose market share. He noted that SK&F increased its domestic ethical sales force from just over 800 to more than a 1,000 in 1986 and 1,100 by 1988. At the same time, U.S. pharmaceutical sales began a two-year decline. He questioned the cost of supporting an increased sales force during that period without new products in the nearterm. Irving did not look at the sales force as a fixed asset for enticing new products from other companies, as Roche has done throughout the decade with Glaxo and, more recently, Syntex. The reanalysis of the sales force size will take place within the context of more demands for R&D spending. Irving compared a composite industry P&L chart for the eary 1980s with a recent model. R&D spending increases from 10% of sales in the first chart to 16% in the later model. The extra R&D spending has to come from sales, marketing and administration and cost of goods or else it will squeeze profits, he observed. Arthur D. Little also predicts a potential trend toward breaking out pharmaceutical businesses from some of the diversified corporate parents as separate financial entities -- in the style of Marion Merrell Dow. "There are a lot of other companies who are newcomers to this game, companies like Monsanto, DuPont, Kodak," Irving observed. "They are going to require autonomous direction for the pharmaceutical operations," he suggested. "Perhaps, we will see more of arm's-length financial structures like we have seen with Marion Merrell Dow, which gives them the flexibility to create structures for competing." Similarly, Irving sees the pharmaceutical or medical device spinoff as a potential model for some of the companies trying to hold together broad health care industry portfolios. "On the surface, health care may look like health care. But in reality devices, equipment, diagnostics have very little to do with pharmaceuticals," Irving maintained. The health care conglomerates will start managing the separate business as a portfolio, Irving said. "For them to succeed, they have to give the direction" to the separate entities. He suggested that "perhaps, they too should be thinking about considering arm's length type financial structures in order to give them the visibility and the value that they deserve."

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