Boosting profitability in your Pharmaceuticals business

No regrets, only results: Boosting profitability in your Pharmaceuticals business

As the Indian Pharmaceutical market becomes increasingly competitive, Indian Pharmaceutical companies and MNCs operating in India alike will need to consider every source of potential profitability that they could tap. A key driver of this will of course be dependent on which of several alternate strategic paths they adopt which was referred to in an earlier article.  However, these firms would also do well to consider a number of what we would call ‘No-Regret Moves’.   These are steps that companies could take independent of whatever long term strategy they choose to pursue. There are at least three categories of no-regret moves pharma companies could pursue: 

Reducing sourcing costs:

Globally, raw material costs comprise a relatively small proportion of revenues and hence are not a focus area.   On the other hand, in India due to the lower prices prevailing in the market, material costs can often account for 30-40% as a percentage of sales for a pharmaco operating in India – and this figure does not even include the ‘indirect spend’ which we discuss later in this section.  As a result, companies can benefit substantially from an effort to reduce costs of outsourced materials.   In our experience, cost reduction comes from multiple sources – companies that focus purely on pushing vendors to reduce price rarely capture even 25% of the opportunity to reduce sourcing costs.   For instance, certain raw materials which used to have to be imported by many pharmaceutical companies have recently become available in the local market. By identifying these and sourcing them locally, Indian companies can reduce costs substantially.   Other savings come from working with suppliers and R & D to assess whether the specifications of the items they are buying e.g. packaging materials can be modified given what competitors are doing, newly available technologies and package design to reduce costs. One pharmaceutical company which conducted a systematic analysis of its sourcing costs found that it could save costs by introducing a creative change in packaging: A leaflet with indications for a medicine which used to be inserted with a bottle  containing the formulation was eliminated completely and the same indications were simply printed on the packaging. The resulting saving was almost 20% of the total cost of the product.  Similarly, the same company was able to achieve more than 10% savings in packaging costs by rationalizing the number of different types of cartons used to ship formulations to its distributors.    A third idea involved dropping a measuring cup shipped with certain liquid formulations when marketing indicated that customers rarely used this item, preferring instead to use a teaspoon to measure the syrup. Indirect spending such as travel, insurance, bank charges, telephone bills are often not reviewed by sourcing cost reduction efforts.  These can and should also be studied as they usually yield double digit savings opportunities as well.  

Ramping Up Sales Force Productivity:   

A second source of value creation is in boosting the productivity of the sales force of a Pharmaco as measured by the sales or profit generated per sales rep.  Companies frequently find that benchmarking with their competitors they are well behind on these measures.  Further, even within their own company there are often large variations in sales/rep across individuals.  Our analysis indicates that Indian pharmaceutical company sales force productivity varies by up to 100% between the best performing company and the weakest company on this dimension not unlike the US market where sales/sales rep vary by more than 100% depending on the company.  While sales force productivity comparisons are affected by product mix, they are nevertheless indicative measures companies would do well to review.Addressing this issue involves focussing on two dimensions – the efficiency of the sales force i.e. how well does the sales force cover the market and the effectiveness of the force i.e. how well do individual reps perform once they are with the prescriber.One Indian Pharma major which undertook such an effort found that a large part of the market of high potential, large prescribers was not well covered by its sales force which was focussed mostly on smaller doctors who were easier to access and meet.   Addressing this issue alone yielded a more than 50% increase in the market the firm had access to.   A Japanese pharmaco found that while it was covering all the key doctors, its sales reps were very poor at closing sales with doctors and that its sales reps spent a lot of time in administrative tasks away from doctors.  A major sales force training and redeployment exercise went a long way to boost profits.  In both these cases, the companies found that by a focussed effort in this area, they could secure in excess of a 30% increase in revenues.  In a relatively flat market, the Japanese company was actually able to realize a 30% growth in revenues for 3 years in a row(leading to a doubling of sales after 3 years) by pursuing a systematic sales force productivity programme. Boosting sales force effectiveness also creates two other sources of value:  First, companies which have higher sales force productivity are likely to be more attractive partners of choice for foreign companies looking for marketing partnerships in
India.  Secondly, as the mix of drugs sold in the Indian market evolves in a post patent era, there would be an increased need to have a more sophisticated sales force which adopts the latest techniques adopted by world leaders. 

Pricing:  

Pricing is the most powerful operational lever a pharmaceutical company can deploy.  This is a valuable lever inspite of the price controls currently in force for some molecules.  A 1% increase in price overall typically translates to a 3-5% increase in profits. Our work in this area suggests that a systematic focus on pricing can typically increase profit by between 3 and 5 percentage point of sales.  In the Indian context where a number of products similar to each other are sold, Indian pharma companies would do well to benchmark their prices, margins and product volumes to the pricing that competitors are showing in the market.  One Indian Pharmaceutical major which had the lion’s share of a molecule class observed that its price was also much lower than that of its immediate competitor and that its margins on this product were minimal. By increasing its price substantially but still keeping it well below competition, it found that it could maintain its market share, still sell at a lower price than this competitor but make a substantially greater profit through the increased margins.   As many of the above examples indicate, it clearly pays to ‘look inward.’ As pharma companies operating in
India begin their strategy deliberations about whether to tap unregulated markets overseas, or pitch to be manufacturing or marketing partners to global giants, etc. they should simultaneously work to ensure that they are operating at maximum profitability given the current business they have. With this approach there can be no regrets, only results. 

Paresh Vaish is a Director and Abhinav Sinha is a Principal at The Boston Consulting Group, Mumbai, India