Increase marketing RoI or cut back, analysts warn
pharmafile | October 22, 2003 | News story | |Â Â Â
Pharmaceutical companies must make their sales and marketing more cost-effective or cut back, according to a new report.
Analysts Datamonitor warn that the growth in promotional investment is now outstripping that of product sales, and must be brought back into line if the industry's profit margins are to be maintained.
Jennifer Coe, Strategy Director at Datamonitor Healthcare, says this situation is "unsustainable".
"To improve the situation, pharmas must increase the impact of their promotion or cut expenditure. Neither strategy is being adopted", she said. "Instead, leading firms continue to invest heavily in current business practices in an attempt to increase revenues".
Promotional spending among the top 14 pharmaceutical companies was compared against their ethical pharmaceutical sales and revealed the companies making best use of their promotional budgets were not those at the top.
GlaxoSmithKline and Pfizer, the world's two largest pharma companies, both under-performed their peer group last year in terms of promotional return on investment. Pfizer generated $15.4 per promotional dollar against ethical revenues of $18.6 billion, while GSK's RoI was $12.4 from revenues of $12.8 billion.
In comparison, Wyeth, with revenues of only $6.1 billion, achieved an RoI of $18.1
Datamonitor suggests that mergers and acquisitions are not a practical, long-term growth strategy for increasing promotional RoI after one-off cost savings have taken place, and cited Eli Lilly, Wyeth and Johnson & Johnson as examples of best practice in promotion.
GSK and Pfizer are both products of large-scale mergers in 2000, promote a diverse number of products and consequently are less focused than firms with fewer products or that operate in fewer therapy areas.
"As a growth strategy, M&A is not practicable over the long-term" says Jennifer Coe. "When profits exceed a certain size threshold, it is not possible to acquire another sufficiently large partner to maintain profit and margin growth at the same rate. At this point, margin growth can only continue by improving productivity, using existing capital more efficiently rather than investing additional capital. A shift in emphasis is required and it starts with improving the effectiveness of promotion".
Returns on promoting to primary care physicians and patients fell from $22.2 to $17 between 1998 and 2001. The period also saw the onset of a general decline in R&D productivity and a growth in merger and acquisition activity.
A senior executive from one of the largest companies observed: "We dominate our markets through investment rather than best practice. There are a lot of companies whose money gets better results just look at Wyeth and Lilly. There's a lot we can learn from those guys. They're clearly doing something right".
