Sales Force Bubble May Soon Burst; Slowing R&D Is Cause, Takeda Says

Industry has reached a peak in terms of sales force expansion after years of annual increases, Takeda VP-Sales Dean Hart said Nov. 19 at a conference sponsored by The Economist in Philadelphia.

"I think we are reaching the tipping point" in sales force expansion, as a result of the "number of products that are going off patent," coupled with a slowing R&D pipeline, Hart said.

"There is definitely a slowing of new products coming onto the market," which will lead to a "slowing of the need for representatives," he said. "In the next five years, there are only 20 products coming out that will surpass a billion dollars," Hart estimated.

"All in all, I see a constriction of the sales force," he said. Industry is reaching a point in time when companies will be forced to reduce their total number of sale representatives in order to meet the demands of the market and the effects of managed care, Hart said.

Managed care companies are starting to tell drug manufacturers: "'we're going to put you on third tier with a $25 copay and let's just see if the demand is there,'" the exec said.

"This is going to be an interesting dilemma for the pharmaceutical industry. Do you put the horse out there to drive the demand and hope that the formulary pulls through...or do you wait?"

Merger-driven efficiencies will also contribute to a reduction in sales reps, Hart predicted. "In my mind, consolidation over the past few years has been a pipeline grab...and so far most of the time we have seen a maintenance of the different sales force structures," Hart said. However, "it's not going to be too long until we start looking at the efficiencies."

For example, he suggested, Pfizer's merger with Pharmacia has likely left the combined company with a need to implement sales force cutbacks in order to meet future earnings expectations.

When Pfizer looks "at their ability to provide 10%-15% growth on $40 bil., I mean, how do you do that? You have to start looking at costs and the question is, do you need 10,000 representatives? Can you afford 10,000 representatives? I would guess no," he said.

Following the glory days of the 1990s, pharmaceutical companies are likely to face increasing pressures to cut costs in light of a perceived disparity between investor expectations and actual results.

The consulting firm AT Kearney estimates the revenue "gap" to be $40 bil., translating into about a $10 bil. income deficit over the next five years, VP-Pharmaceuticals & Healthcare Practices Christopher White said.

However, "some belt tightening will make a difference," he added. "A 20% reduction in sales, general and administrative expenses would reduce this gap by $5 bil."

"I see it as a choice....The choice is to reconcile the fact that the growth story isn't there" and "look for ways to protect margins [and] protect income," White said.

The AT Kearney consultant was generally positive on industry's ability to meet investor expectations, with the right amount of cost cutting. "There are opportunities...to recapture a [price to earnings] ratio that you enjoyed in the not so distant past," he said.

"Looking particularly at the cost side of the equation, which historically hasn't been a focus of the industry, may be more of a priority today than it's ever been in the past. With that sort of a focus, the expectation of the investment community can be realized."

In the meantime, Hart offered some suggestions about how manufacturers can improve the efficiency of their current sales forces.

Takeda plans to implement a three-pronged strategy: improve its hiring process; increase its commitment to training; and "maximize the focus and scope of the field managers."

Takeda recently restructured its sales force in preparation for its co-promotion deal with Kos for the cholesterol products Niaspan and Advicor . The company moved to an "integrated [district manager] approach," where the reps carry different products and report to a single district manager, Hart said. Takeda announced its agreement with Kos Nov. 4; the company will begin detailing Niaspan and Advicor in January (¹ (Also see "Takeda Adds Niaspan, Advicor To U.S. Product Line Via Deal With Kos" - Pink Sheet, 10 Nov, 2003.), p. 27).