Drugmakers Get A Taste Of Their Own MedicineJoseph Weber
Pharmaceutical powerhouses Merck & Co. and Pfizer Inc. got a harsh dose of the new reality in drug marketing last fall. Fed up with the drugmakers' refusal to discount prices, Group Health Cooperative of Puget Sound ordered its doctors to stop prescribing all but an essential handful of the companies' drugs. Instead, the Seattle-based health-maintenance organization's half-million members would get equivalent drugs from rivals willing to cut prices 10% to 20%. Adding insult to injury, Group Health barred both companies' salespeople from all its facilities except the drug-purchasing office, preventing their access to doctors. "We said, 'If you guys really aren't interested in doing business with us, then we're not interested in doing business with you,'" says Peter M. Penna, director of pharmacy for the HMO.
For the first time, pharmaceutical buyers are powerful enough to change even the mightiest manufacturers' selling habits. Drugmakers that once raised prices shamelessly are learning how to bargain for business. They are building managed-care teams, schooled in finance along with science. Some are cutting bloated sales staffs. And salespeople who used to woo doctors with luxury vacations and freebies now face financial executives who want data on cost-effectiveness. "It used to be you would go to the office, bring some samples, and schmooze," says Albert Wertheimer, dean of pharmacy at the Philadelphia College of Pharmacy & Science. "Now you have to sit down with some MBA or a committee staring at you."
MENDING FENCES. Merck and Pfizer are reeling. Until very recently, the drugmakers could get away with offering no or minimal discounts because health care providers had few alternatives to their many proprietary medicines. In cases where they invent unique treatments, pharmaceutical companies will still have the upper hand. But with competing drugs available for many older key products, buyers are pushing them to bargain. Merck is taking the threat so seriously that it plans on Apr.15 to dispatch its president, Richard J. Markham, to Group Health in Seattle to mend fences. Group Health says it's now getting discounts from Merck, and Pfizer officials say they will do whatever it takes to stay competitive.
Managed-care providers have growing leverage to dictate terms. Jean-Pierre Garnier, North American president of SmithKline Beecham PLC, says 40% of his company's $2.5 billion U.S. drug sales go to managed-care organizations. An estimated 60 million Americans--more than a third of the privately insured public--are covered by managed-care groups, according to consultant SMG Marketing Group Inc. As those ratios swell under the Clinton Administration's plan to boost managed competition, such providers will wield even more clout.
A growing number of drugmakers are learning that price is becoming a paramount part of the marketing mix. For example, Merck recently had to discount one of its star drugs, cholesterol-reducer Mevacor. Many managed-care providers draw up approved-drug lists, known as formularies. As Bristol-Myers Squibb Co. has made inroads with its cheaper cholesterol buster, Pravachol, formulary managers have threatened to make it the preferred brand. To shore up sales, Merck in March temporarily lowered its price 4.5%, to about $44 for a month's supply. Some big buyers get the same amount of Pravachol for as little as $41.
SmithKline, meanwhile, is using price leverage to its advantage. In the mid-1980s, its ulcer drug Tagamet was pummeled by Glaxo's copycat Zantac, whose sales force described Tagamet's supposedly greater side effects. Now that the drugs are known to be nearly identical, sales turn on price. SmithKline has slowed Tagamet's slide with aggressive discounts to bulk buyers.
Frightened drugmakers are watching California-based Kaiser Permanente HMO as a harbinger of things to come. The group reins in expenses by operating its own hospitals and clinics and employing its own doctors and nurses full time. In many Kaiser facilities, drug salespeople, or detailers, can't see Kaiser physicians during patient hours but must offer presentations at, say, lunchtime. Free samples go to the Kaiser pharmacy, not to doctors. Detailers may pitch only drugs already on the Kaiser formulary and must sometimes share the podium with a house pharmacist who boosts competing products. For instance, for high-cholesterol patients, Kaiser might recommend over-the-counter niacin, which managed-care buyers get for as little as 44 a month.
Drugmakers are finding that HMOs are even affecting their non-HMO business. Thousands of private physicians have joined preferred-provider organizations that share the HMOs' cost-cutting fervor. Notoriously brand-loyal, such doctors tend to prescribe the same medicines for their private patients that their PPO sanctions.
The changes could have a silver lining for drugmakers. HMOs provide a bulk market, saving money on handling and providing a predictable revenue stream. And companies that inflated their sales forces in the 1980s are leveling off or downsizing. Merck has cut its direct detail force some 8%, to about 2,500, since the fall of 1991. True, some salespeople were moved over to rapidly growing joint ventures, such as with Sweden's Astra, but new staffing is being tightly controlled. Since a detailer can cost more than $125,000 a year in salary, commissions, and promotional expenses, cutbacks can save a bundle.
NEW SCRIPT. Even so, personal calls to doctors are likely to remain a staple of drug marketing--especially when a company has a potent new drug to sell. Says Laurence G. Poli, who runs a pharmaceutical marketing MBA program at St. Joseph's University in Philadelphia: "Sales reps won't die out in the 1990s." But he adds that plenty--50 in his 300-student program alone--are scampering back to school for training in cost-effectiveness along with science.
For detailers, that's a far cry from the sales techniques of the past. The about-face by the drug industry is no less dramatic. Drugmakers, under the gun for relentless price hikes during the 1980s, have persuaded few people that the rises were justified. Now, they are learning that effective products at reasonable prices are a much easier sell.
DEATH OF A SALES STRATEGY OLD WAY -- Blitzing doctors with calls by drug salespeople, known as detailers, bearing free samples -- Incentives including weekends at plush resorts and air-travel credits for each prescription -- Studies that demonstrate product's scientific merit but ignore cost-effectiveness -- Resisting approved-drug lists among health-care providers -- Disguising sales pitches as doctor education new way -- Minimal time with doctors, fewer of whom want to see detailers during patient hours -- Freebies such as office supplies and anatomical models, usually worth less than $100 -- Studies prepared under guidance of in-house economists and wielded by MBAs -- Caving in to discounts demanded by tight-fisted administrators -- Winning business with hard data DATA: BUSINESS WEEK JANET ATKINSON
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