US drug companies, squeezed by falling margins, generic competition and regulatory scrutiny, know that their bloated cost structures belong to a different era.
Pfizer alone has a marketing operation that employs about 38,000 sales representatives worldwide. About five companies have at least 20,000 sales people.
In the US, according to industry data compiled for France's Sanofi-Aventis, Pfizer's salesforce is at least 12,000, followed by GlaxoSmithKline, Sanofi, Merck, Novartis, AstraZeneca and Johnson & Johnson.
In a ruthlessly competitive industry that pits large salesforce armies against each other, no drugmaker wants to be the first to cut back. Indeed, many have increased their salesforces over the years the better to fight a war of attrition.
But even the mighty Pfizer, with $52.5bn in sales and $16.1bn in profit last year, is now finding the burden too great. On April 5 the company is due to present a strategic review that will set out ways to boost profits growth over the next three years and beyond. The date is keenly awaited by rivals and investors: if the market leader acts, they are ready to seize the chance to follow.
James Kelly at Goldman Sachs says: “It tends to be a lead steer that is going to direct everyone else.”
Wall Street, too, has pinned its hopes on Pfizer breaking the deadlock. Pricing pressures, regulatory criticism of the safety of Cox-2 painkillers, Washington's attempts to cut health costs, and not enough new drugs to make up for big sellers losing patent protection for these reasons, say analysts, the industry must find economies if it is to lift share prices that lag behind major indices.
“The combination of swelling generic competition for some of its important brands, as well as the recent setback in the Cox-2 market, could prompt an aggressive swipe at the scale of Pfizer's marketing presence, allowing everyone else below them to follow suit,” said Barbara Ryan at Deutsche Bank in a recent report.
Bristol-Myers Squibb, Eli Lilly, Merck, Pfizer, Schering-Plough and Wyeth posted lower margins last year. Earnings at Bristol-Myers, Merck and Pfizer are expected to fall or remain flat until 2007 or 2008. Wyeth's profit growth is decelerating through to 2007; Schering-Plough is in turnround mode.
Such is the pressure, one top-level pharmaceutical executive concedes, the industry is at a crossroads. “It does give us a sense of urgency, to rise to the occasion to offer some pretty dramatic changes,” he said.
Jami Rubin at Morgan Stanley estimates that Pfizer could save $1.9bn by reducing its salesforce to 28,300. Such a move, she says, could have boosted its earnings last year by 9 per cent to $2.32 per share, from $2.12. Other analysts say Pfizer could cut up to 12,000 people.
Pfizer and the industry may be about to embark on far more radical moves to change how they operate. The industry, says one senior pharmaceuticals executive, “needs to evolve”with a “total revisiting of the way we approach the business model”.
Drugmakers, he argues, need to get the most out of their size. Manufacturing costs could be reduced by outsourcing some functions, and using a company's big buying power to squeeze savings out of suppliers,he says.
Moreover, drugmakers need to react and reshape themselves not only to grow but to ease political pressure and repair their image. To do this, he says, they need to get closer to the patient: cutting out the bureaucracy in between.
He suggested new uses of mail-order pharmacies; using the internet to inform doctors and patients' and working directly with big employers and institutions that are worried about rising healthcare costs. “This is one of those seminal times of discontinuous change,” he said.
That kind of unpredictable change cannot be ignored, other senior industry executives said. Drugmakers must cut the fat while changing their structures and behaviours to lessen risk. A risky business has become much more risky lately due to politics, cost pressures, competition and lawsuits, they said.
Pfizer is expected to serve up the antidote. The reaction of the industry is critical. “We need orderly behaviour,” Mr Kelly at Goldman Sachs said.
Otherwise, recent cost-cutting ideas have not impressed. Merck has cut 4,500 jobs recently, and Bristol-Myers decided that it could not afford to boost its salesforce for big new drugs but would instead find a partner to use its marketing.
Calling such moves mere “tweaks around the margin”, Ms Rubin said Wall Street wants more.