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Bulk buying changes pharmaceuticals game

Published Oct. 9, 2005

Meet the new generation of pharmaceutical salespeople.

They carry laptops instead of free samples. Their briefcases brim with legal documents, not giveaway scratch pads. They rely on scientific knowledge and business acumen rather than the smooth sales pitch.

As the influence of individual doctors diminishes, pharmaceutical companies are selling more drugs to burgeoning networks of physicians, clinics and hospitals, which buy in huge quantities _ and demand steep discounts. Leading drug companies now derive about 50 percent of their U.S. revenues from these so-called "price-sensitive" bulk buyers.

"The trend is very clearly in the direction of ultimately 100 percent of sales" coming from bulk purchasers, said Ronald Nordmann, a drug industry analyst for PaineWebber Inc.

That means drug makers are relying more on a select group of salespeople to meet with pharmaceutical boards of managed-care concerns and hospitals, which often establish formularies, or lists of drugs their doctors may prescribe.

A study conducted by the Boston Consulting Group Inc. and sponsored by Pfizer Inc. showed that about 50 percent of the nation's health maintenance organizations use formularies, and 70 percent require the substitution of generic drugs for brand-name medicines whenever possible.

Kaiser Permanente, the nation's largest HMO, is partly responsible for the sales force evolution. Each year Kaiser spends $700-million on prescription drugs for the 6.6-million Americans it cares for. It's not unusual for Kaiser to buy $20-million worth of a single drug in a given year.

As health-care reform draws more people into HMOs, which provide total medical care for a fixed price, drug companies will need fewer "detail" people, the traditional emissaries who go cold-calling on doctors, brief them privately, flood them with free samples and hope they prescribe the product. These salespeople cost companies about $100,000 each in salary, benefits and office support a year.

"We want to see people with serious pharmaceutical backgrounds who can answer scientific questions, and we want business people who can handle tough negotiations," said Donald Kitajima, Kaiser's director of pharmaceutical operations.

Costs associated with selling drugs consumed about 36 percent of drug company revenues for the past decade, Nordmann said. By the year 2000, he estimated, that figure will drop to 25 percent, partly because drug companies will need fewer salespeople.

"Companies can take one-third of their selling expenses out in a managed care environment without skipping a beat," he said. Over the past year several leading drug companies _ including Merck, Warner-Lambert and Bristol-Myers Squibb _ have begun trimming workers.

Meanwhile, several HMOs have taken steps to restrict or even forbid salespeople from soliciting their doctors.

Seattle's Group Health Cooperative of Puget Sound barred Merck and Pfizer salespeople from its facilities because the companies refused to discount their products. The cooperative, which operates in Washington state, spends $40-million a year on prescription drugs.

Pharmacy director Peter Penna estimated drug companies spend as much as $14-million to promote their drugs to the cooperative alone.

Kaiser, too, has been adamant about getting a deal. Kitajima said the huge HMO has "wiped out a couple drugs right off the map." That is, when a company wouldn't negotiate, Kaiser simply bought the medicine from another supplier, though therapeutic substitutes aren't always available.

"They couldn't believe they should give us a price, and they didn't believe we'd take our business elsewhere," Kitajima said.

A turning point came a few years ago, when Kaiser found an alternative for Vasotec, Merck's big-selling high blood pressure medicine. The leading drug company realized it had to reconsider its one-price policy.

"Kaiser always has been a force to reckon with," said Richard Lane, president of Merck's U.S. Human Health unit. "As HMOs as part of the health care system grew larger and larger, it got to the point where we had to pay a lot more attention to it. . . . We have had to be more price competitive."

Drug makers like to say they have a working "partnership" with bulk purchasers. Barbara Senick, executive director of managed health care at the Merck unit, recently spoke of "partnering effectively with customers."

But drug makers aren't perceived as playing on the same team. Kitajima called it an "uneasy, mutually dependent relationship."

James Olson, a vice president at Galen Health Care Inc., a Louisville, Ky.-based concern that operates 75 hospitals, said, "We have a business relationship (with drug makers). It's not adversarial, but it's business, based on competitive pricing, quality products and proper service."

Bulk purchasers and pharmaceutical salespeople negotiate contracts that set the purchase price for individual drugs or groups of drugs over a period of time. The length of a contract is determined by several factors, including whether a generic version might become available, whether a more sophisticated drug is in the pipeline and general trends in prescribing.

Because they are guaranteeing a company a stream of sales over time, the purchasers say they are entitled to a discounted price. Sellers say they can only go so far.

Still, the Pharmaceutical Manufacturers Association, the industry's Washington-based trade group, said discounting has increased significantly, from an average 4 percent off in 1987 to a 16 percent price break last year.

Kitajima and other Kaiser managers meet with drug company salespeople every week. While Kaiser buys tens of thousands of drugs to stock its 236 medical clinics and 34 hospitals across the country, only about 150 medicines account for 75 percent of the company's total spending.

Doctors aren't officially restricted from prescribing off the formulary at Kaiser, but about 96 percent of their prescriptions are for medicines sanctioned by the pharmacy board.

"That adds tremendous power to pharmaceutical negotiations," said Dr. Francis Crosson, an associate executive director at Kaiser.

Kaiser often repackages drugs into standard dosages at a central location, then ships them to its facilities. That saves on labor costs at Kaiser pharmacies, since "we can't afford to have people sitting and counting pills," Kitajima said.

Kaiser also has decided to limit the one-on-one "detailing" or soliciting of its 9,000-plus doctors. While Kaiser doesn't forbid contact, it requires drug salespeople to have an appointment with a doctor rather than "wander the halls and buttonholing people," Crosson said.

Today, salespeople must wear identifying badges, cannot offer anything of value, and mustn't leave samples of drugs excluded from Kaiser's formulary. Any company that accumulates three violations in a year is suspended from Kaiser facilities for six months. Crosson said "many major companies" have been suspended, but declined to identify them.

Kaiser deploys its own force of people to educate doctors about prescription medicine, which it calls "counter detailing." Crosson said Kaiser wants to "provide doctors with information on the other side of the question, on choices of drugs."

Drug makers say they always will need some one-on-one educational effort with doctors. But it is becoming more important for companies to convince pharmacy boards, the key decision makers, about the value of their products.

Altered prescription

Pharmaceutical makers are relying more on large institutional customers and selling more drugs at a discount. This is part of the broader shift to managed health care in the United States.

Estimated U.S. sales to large pharmaceutical buyers in 1992:

Shering Plough 30%

Smithkline Beecham 30%

Warner Lambert 50%

Pfizer 40%

Merck 52%

Bristol-Myers Squibb 30%

Discounting across 1987 1992

pharmaceutical Discount % of Discount % of

distribution channels level sales level sales

Mail order pharmacies 15% 1% 30% 5%

Managed hospital pharmacies 15% 5% 30% 15%

Managed retail pharmacies 10% 20% 25% 35%

Traditional hospital pharmacies 5% 15% 5% 5%

Nursing homes, other 0 15% 5% 15%

Traditional retail pharmacies 0 45% 0 25%


Sources: Alex, Brown & Sons, Inc., The Boston Consulting Group