A part to play

The idea of a European Union sometimes conjures up the suggestion that the pharmaceutical market across Europe represents a common set of trading problems. In reality, nothing is further from the truth and, while the US has grown steadily in importance in terms of its contribution to the world's pharmaceutical profits, Europe has continued to decline.

The principle differences between the two trading blocks stem largely from contrasting healthcare drivers. In the US, high prices are possible as insurers are willing to pay for them. In contrast, across Europe a mix of different healthcare systems means that each imposes different constraints on the supply of medicines.

There are, in effect, two main types of markets within Europe: those that permit relatively high prices and those that don't.

The first group includes countries like Germany, Holland and the UK, where higher pharmaceutical prices and government encouragement has resulted in markets with a thriving generic industry and net positive imports of cheaper parallel imported products. The second group includes France and Italy for example, where government intervention leads to low pharmaceutical prices with the net result that generic substitution is low and these countries are net parallel exporters. Management of these two market types present different problems.

It is also misleading, in many respects, to think in terms of companies rather than products. Each product presents different opportunities and a different set of obstacles to overcome. In fact in the simplest case, a company may be built largely on one or possibly two products (eg, Amgen or Bayer) and although company reputation can aid or hinder marketing success, the correct focus for maximising return on investment (ROI), is the segment, because marked inter-segment differences exist.

Research at Aston University demonstrates clearly that the specific promotional spending that drives return on investment differs markedly between segments. In a situation where prices are low, the threat of substitutes is also low.

This means that products may enjoy long life cycles, in the order of 25 years, where the principle threat to market position comes from technological obsolescence. Here, promotional investment may benefit from front loading with an emphasis on establishing a viable and clear market position.

New products tend to be more rapidly adopted in these low price markets but, equally, can soon be replaced by established therapies and 'habit' if the experience of a limited number of patients does not match with expectation. In these situations Maister's Law prevails: ie, satisfaction is equal to perception minus expectation, which means that the benefits of a new product must stand the test of a limited trial of 'suitable' patients.

In these circumstances, clear market position linked to specific patient types is the key to success. Advertising and specific types of sales calls are also likely to perform particularly well in the marketing mix, especially during the early phases of the life cycle.

In terms of maximising ROI, the key requirements are to know (Ä in for Ä out) what the return is for a given activity, or mix of activities. With lower margins but longer time horizons to play with, effective planning requires a very clear strategy to capture and sustain a profitable market position.

To continually invest in promotion over such sustained periods without being able to identify which activities drive sales and produce a return in excess of expenditure is unfortunately common, but in reality equivalent to continually betting 30 per cent of your income on the lottery - with no appreciation of the odds.

High price market
In higher-priced markets, such as the UK, a different situation prevails. The time taken to enter the market may be slowed by devices such as the National Institute for Health and Clinical Excellence (NICE) which issues guidance on new products and is in effect a variant of the Australian system that separates price from reimbursement.

In the UK, the Pharmaceutical Price Regulation Scheme (PPRS) modulates drug pricing, but NICE guidance is now becoming seen increasingly as a major factor in marketing success.

However, aside from intervention by bodies such as NICE, the common marketing model adopted in countries such as the UK is to spend what can be afforded until patent expiry. This practice may waste the opportunity to return 30 per cent to 50 per cent of promotional spend to company funds. If made available, these valuable resources could either drop directly onto the bottom line and contribute to shareholder profits or, alternatively, be deployed elsewhere on higher return investments.

Of pharma's promotional expenditure in high price countries, the impact of salesforce costs is by far the largest driver, but one which often does not provide the best ROI. This appears to be due largely to the adoption of multiple field forces directed at a largely common target.

Here the logic stems from two ideas: the first, that the optimal call pattern for a given product may be six, eight or even ten calls per year; the second is that market threshold effects render large field forces more efficient. However, neither of these propositions may in fact be true and return on sales calls really depends on three main factors: first, the characteristics of the specific market segment, in particular the relative position and strength of the existing competitors; second, the additional benefits of the product and the degree to which these benefits match existing therapeutic needs; and third, the number of customers within the specific market that contribute to the decision to use the product and the type of selling task which must be accomplished.

Certainly our research indicates that some salesforces contribute very effectively to a given product's sales, while others appear to have little, or even no, effect.

There are differences between salesforces, but it is notable that what worked well `last year' may work far less well now. Our research has also uncovered a number of instances where either calls upon target doctors do not now contribute more than non-target calls, or where meetings calls do not contribute to sales.

In fact, there are now reputed to be as many as 12,000 medical representatives operating in the UK today, where previously 6,000 sufficed. What justification is there for this? If it is the idea that promotion should be kept at a maximum until patent expiry, then the evidence appears to suggest otherwise.

The only logical rationale for this behaviour is to deny your competitor the `oxygen of market access' by mopping up all available call slots. Yet, the effect may in fact be more detrimental to your own profits than to those of your competitor.

If 20 per cent of your total income is spent on deploying and managing your salesforce, then you should, conservatively, be able to save between 25 per cent and 30 per cent with no detriment to your sales for the year; 5 to 6 per cent of sales could then be directed at higher return projects. But simply spending what you spent last year, or spending a given percentage of sales, implies that the market has not changed which, in turn, implies that you had no effect last year!

More importantly, the position of your product in its life cycle, when viewed in terms of the specific market segment, means that priorities and opportunities shift from year to year. By simply accepting last year's sales results, or worse still last year's marketing budget as the template for the next year, it is almost certainly likely to lead to sub-optimal marketing decisions.

Marketing mechanism
It is important each year to zero your budget and reassign monies for investment based upon a sound understanding of the tasks to be managed, in order to bring about the required results and the expected return on each and every promotional investment.

To do this, it is key that you first gain a clear idea of how your marketing plan will work, the actual mechanism, and what part each investment component plays within it.

It is very telling to note how many companies invest each year on the basis of what they spent the year before and, even worse, rapidly spend any remaining money towards the end of the year for fear of encouraging a budget cut for the following year. Such reactionary measures may significantly reduce profits, especially when you consider that some marketing investments are antagonistic to others and may actually produce a sharply negative return!

Review promotional spend
The implications of the research at Aston carried out on behalf of a number of successful pharma firms are that promotional effects cannot be taken for granted but should be reviewed regularly. Certainly some salesforces are very effective but equally many are not and, even within a well performing salesforce, there may actually be seven or eight different strategies being deployed, some of which are much more effective than others.

Activities like meetings should not be taken for granted and while, in some cases we have found sales results to be driven largely by promotional meetings, in the case of established products a heavy and highly expensive meeting schedule may contribute little, or even nothing, to sales results.

Certainly across the product life cycle, the opportunity to tailor your promotional investments in order to significantly increase ROI exists, but the majority of firms invariably stick to old ways, believing that what worked last year will work well again. In reality, good results frequently cover wastage in some promotional areas and until pharma routinely zero budgets and actively interrogates the next year's promotional plans (based upon an accurate dissection of this year's results), this situation is likely to continue.

If we assume that 20 per cent of promotional investment each year is poorly deployed (a rather conservative estimate), then on average 6 per cent of sales revenue is wasted every year throughout the product life cycle.

This situation exists both in high- and low-priced markets but is probably more marked in the former because of the pressures to meet investor expectations before the Armageddon of patent expiry. Yet, plenty of opportunities to maximise return through clever deployment of lower risk investments exist; in advertising, for example.

In the 1980s, multi-page product advertising was common, swelling GP journals and spawning a number of new titles, but today advertising is markedly less prominent within the average marketing mix. Despite this trend, our research indicates that advertising frequently contributes strongly to sales and if the decision as to which of the existing products remain on the formulary in the face of new entrants relies, to some extent, on brand identity, advertising may be crucial.

Certainly in our research, advertising has frequently performed better than expected. Perhaps with less advertising pressure, strong advertising now provides a better return?

Closer scrutiny required
In summary: the pressure to consistently grow sales in the face of competition has never been stronger but the market now is very different from before. Across Europe, markets align into different camps based in part upon relative price, driven by differing healthcare systems. The supply of new products is drying up and in order to produce superior returns companies must now look to improve the return on their promotional investments in order to squeeze greater profits out of their existing products. In such a situation, habit often acts against reason and the investments of last year are frequently redeployed with greater vigour. However, markets are changing and what worked well before may now produce a fraction of the previous ROI. Without zero budgeting and regular review, this situation will continue leading to greater wastage over time - perhaps not losses, but certainly lower returns; which means reduced profits and dissatisfied investors.

In contrast, clarity of purpose and more effective tailoring of market responses aimed at maximising return in specific markets can result in a significant performance improvement, without relying heavily on risky new product entries. This increased elbow room may also provide an opportunity to invest in the less important products in the portfolio where a little investment may go a long way and certainly produce higher returns than another punt on the lottery.

The Author
Dr Graham Leask is a member of the Economics and Strategy Group at Aston University in Birmingham, UK, and may be contacted at g.leask@aston.ac.uk