So the news is finally out, after months of speculation. Pfizer, the #1 drug company which started the arms race among pharmaceutical sales forces, is finally cutting back.
And they’re not cutting back lightly. 20% reduction is a huge change when it comes to the 11,000 sales people they have on board. Most doctors, however, probably won’t miss those displaced sales reps, since Pfizer also pioneered having multiple sales forces calling on the same doctor. So I guess the cutback means those docs will only get bagels once a day in the future.
And while this is a sad development for the people involved, it probably isn’t a bad development for patients. Less sales people means less hype. But let’s get real. 2,000 more or less sales people among around 100,000 in the entire sector isn’t going to make much of a difference.
The real difference may be that for the first time Pfizer is changing course, and since many of the smaller companies are simply trying to mimic what Pfizer is doing, they will feel they have the permission to do the same.
So careful disarmament appears to be underway in the drug business.
And here’s the part you may not read anywhere else, since most journalists really don’t know how a cutback such as this one affects a drug company.
The truth is, it doesn’t; not much anyway.
Here’s the deal. I’ve reviewed lots of sales force models, sales force restructuring scenarios, etc. And based on all the data we had, we found not only that more sales reps give a diminishing return, but we also found something else, which we didn’t expect.
We learned that before that diminishing return hits home, there is a very wide flat area. What that means is that each new rep pretty much paid for himself; but he didn’t add much incremental revenue.
So the good news was that you didn’t have to be a rocket scientist when you organized a pharma sales force. A few thousand more or less really doesn’t make much of a difference. In the end, whichever size was used, they brought home about the same profit.
So why is Pfizer doing this?
For those of you who don’t know, Pfizer is trying to achieve annual savings of $4 billion by 2008.
2000 reps, with a salary cost of $100,000, plus car and a few other costs, probably no more than a total of $200,000 brings in a saving of about $400 million a year. That’s not exactly chicken shit, but it is less than 1% of Pfizer revenue and only about 3% of profit.
No major celebration from Wall Street in sight based on those cutbacks.
So, again, why is Pfizer doing this and why now?
On Thursday, November 30, 2006 at 10:00 AM EST, Pfizer will hold its 2006 Analyst Meeting. And they probably don’t have terrific news. So they want to show they can be tough. Instill confidence in the Wall Street types.
And that’s the reason they do this now.
After all, when Pfizer’s biggest new product, torcetrapib, which reduces cholesterol, turns out to actually raise blood pressure, well, then a mass-firing of sales reps may detract some of the attention from Pfizer’s dry pipeline.
But there is more. When we look back at the drug industry, ten years from now, we will probably recognize that this was the turning point, when an entire industry started seriously contracting. So if you own drug company stocks, watch out. The worst may yet come.