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Putting Promotion in Perspective: Part I--A Strategic Overview
Decision Resources, Inc., June 2005, Pages: 14
Promotional expenditure is the principal area of cost for the pharmaceutical industry. Fully expressed, these costs far outweigh R&D expenditure, yet they tend to receive less attention from pharmaceutical and biotechnology companies than other cost areas and are prioritized far behind sales when companies gauge the factors that determine a products or projects viability.
In this report, the first of a two-part series, we present quantitative data to support a realistic perspective on promotional expenditure in the pharmaceutical industry, and we explore the implications that modifications of promotional spend would have for pharmaceutical and biotechnology companies. We explain how close attention to this critical area of cost can increase the accuracy of decision making regarding the commercial viability of products and suggest how the industry should view recent trends in promotional expenditure. We offer advice on how the role of promotion should be conveyed to those outside the industry.
Business Implications
- Commercial management in the pharmaceutical industry remains much less conversant with promotional expenditure than with sales because of the lack of high-quality promotional audit data, a poor understanding of the true cost of promotional expenditure, and the complex relationship between sales and promotional spend.
- The true level of promotional expenditure by the pharmaceutical industry is generally understated, both in terms of cost and duration, leading to an underestimation of the importance of this type of expenditure in strategic decisions about the commercial viability of products.
- In commercial evaluations, giving full weight to promotional expenditure tends to militate against primary care-oriented products and to favor specialist products targeted at small physician groups. Some companies concentrating on specialist products saw double-digit percentage sales growth in 2004.
- Pharmaceutical industry critics have been particularly vociferous in the past year, focusing their concerns on the high price of drugs and high-cost, high-visibility drug advertising. However, as a percentage of sales, total promotional spend remained fairly constant from 1996 to 2003. The suggestion that pharmaceutical companies should restructure costs to focus more spending on R&D fails to acknowledge the significant percentage of sales already spent by the industry on R&D relative to other industries.
- A reduction of promotional expenditure is justified when products are no longer promotionally responsive. However, if this is not the case, a reduction of promotional spend from current levels is likely to lead to losses in market share and sales that considerably outweigh the savings in promotional expenditure. Despite a slowdown in total promotional spend during 2004, the promotion 'arms race' looks set to continue for the foreseeable future.
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