Drug dealers

The pharmaceuticals industry may be one of the richest in the world, but it is under pressure to reduce prices. The greatest...

The pharmaceuticals industry may be one of the richest in the world, but it is under pressure to reduce prices. The greatest opportunities for resellers lie in offering specialist services and focused products to meet this need.

The pharmaceuticals industry is very big business. It is worth billions, but it is a business under pressure. The stakes have always been high in the pharma business. For every success, such as Merck's Zocor cholesterol-lowering drug, which raised sales of $1.6bn (£1bn) in the first quarter it was launched, there are around nine failures, each of which will have cost pharma companies millions in wasted research.

Until recently, this had not deterred the big pharma companies. The top firms are multi-billion turnover corporations with growth in double figures (see box). But times are getting tougher. There has been growing concern about the perceived over-pricing of drugs and this has led to government-imposed pricing controls in Europe.

The pharma industry is a highly sophisticated buyer of computer systems for every aspect of its business, from supporting the expensive process of developing new drugs through to sales, marketing and distribution of products once they have been approved.

But now, every aspect of this business is under pressure. Daniel Guns, pharma analyst at research company Visiongain, says increasing use of the Internet for direct sales and the government-imposed pricing controls have forced the industry to reassess many of its standard operational procedures.

"There is a misconception that this is a recession-proof industry," agrees Gary Cusworth, pharma sector manager at software firm Cognos, which supplies its business intelligence tools to 16 of the top 20 pharmaceutical firms. "In fact, shares in pharma firms have dropped by 40 per cent since the beginning of 2002. Pharmas are high-value firms, but with high risks. They are now looking to minimise those risks, while meeting the increasing regulatory standards."

The Internet has had a marked impact on pharma companies, not only as a way to increase their already close collaborative working practices, but also as a means to sell products and to source products and services, cutting costs and streamlining processes. This is vital for an industry struggling to maintain its growth.

A stream of mergers has taken place over the past few years as part of this process, but companies are also looking to technology to help them develop more drugs more cost-effectively.

Information sharing
One analysis by the Boston Consulting Group estimates pharma companies could save as much as $264m in R&D costs and a year in development time by optimising their computer systems, mainly by integrating data and information across different disciplines, departments and processes.

At the sales end, pharma firms are increasingly using the Internet to complement or replace their expensive pharmaceutical representatives in a process known as e-detailing, to push sales and marketing material out to doctors.

Forrester Research says there is a growing need within pharma firms to demonstrate the value of online marketing, largely as a result of regulatory pressures on pharma marketing tactics. Its report on measuring online marketing to doctors says pharma companies' marketing departments need to look carefully at what mix of tactics works best, but acknowledges it is difficult to gauge the effectiveness of much online activity, such as brand-building via banner ads and sponsorship.

This is a growth area. In April, IMS Health, a major information provider to the pharma industry, announced an alliance with online measurement firm ComScore Networks to provide information on how doctors and consumers use the Internet as a healthcare information resource. The aim of the deal is to enable pharma companies to improve the value of their online investments.

But pharma firms aren't getting rid of their extensive salesforces altogether and salesforce automation systems, as well as customer relationship management systems, are in big demand. A recent survey by mobile comms manufacturer AvantGo revealed almost 75 per cent of pharmaceutical sales reps felt they did not have the information they needed when they were out on the road, and half wanted to see better data in their company CRM systems.

That finding is backed up by research company Fair, Isaac, which claims most pharma companies are not properly collecting or using valuable customer data and so are failing to achieve customer loyalty and competitive differentiation. The report acknowledges this is particularly difficult in the pharma industry, where manufacturers tend to focus on product performance.

Many pharma companies still hold customer information in decentralised systems and are unaware of the gains that could be created from centralising this data into a single repository, says the report.

Tough customers
There are many specialised software firms looking to take advantage of these trends within pharma firms, which have always been prepared to spend money on technology, but the question is how much of this investment will be seen by the channel.

Belgian software firm ClinSource, for instance, which specialises in systems for pharma firms in the final phase of the drugs testing process, has until now only sold direct to its customers, which include a number of global pharma corporations with UK subsidiaries. This picture is changing as the company aims to expand into the US.

"We are working at getting resellers on board by the end of this year," comments Frik de Meyere, business development manager at ClinSource. "That will enable us to penetrate the US more easily."

Cognos' Cusworth points out that most of the large pharma firms, buying ERP and CRM systems, are tough negotiators that prefer to deal directly with suppliers. "They have strong procurement and quality control processes and deal with suppliers on a global basis," he says. "What is more, budgets are being tightly monitored. So the reality is that this is a tough market for resellers."

Cusworth also believes that having made substantial investment in major systems, most of the big pharmas are unlikely to consider further major investment, although they are continuing to invest in corporate performance and business intelligence.

Niche opportunities
Despite this, there is still plenty of room in the market for the sale of more specialised systems. The pharma industry has some very large companies indeed - top firm Pfizer is also one of the largest two or three businesses in the world - but because it is also such as huge industry, no single company has more than an eight per cent share of the sector.

That means there are many smaller, more specialised pharma businesses with IT requirements that are prepared to build relationships with the channel, rather than dealing direct with suppliers.

One specialist VAR selling into the UK pharma market is Peak Technologies, which sells bar coding software and printing systems. "The systems we sell to pharmaceutical firms are no different from those we sell to other sectors, but pharmas require a higher degree of traceability," explains Peak marketing manager Mark Woodbridge. "They need to be able to identify a batch at picking level in the warehouse and check-in procedures when receiving goods also need to be more accurate."

Peak, which has 65 staff, sells to pharma companies of all sizes, including giant Johnson & Johnson. "The service element is key," comments Woodbridge. "If we just sold product, it wouldn't work. Services are an essential part of what we do."

Margins in the pharma sector are holding up, he adds. "This is one of the most mature sectors for us, because it was an early adopter of bar coding technology for data capture and that gives us a steady user base as well as prospects for updating as advances are made in this technology."

Richard Althorp, managing director of Reading-based reseller Sol-Tec, agrees pharmaceuticals represent a good opportunity for the channel. "Many pharmaceuticals have joined the growing trend to harness the power of the Internet as a sales and marketing medium, thereby creating many security and development opportunities for resellers," he comments.

"I perceive this sector as technology-driven, relatively cash-rich, with a steady annual revenue stream. Pharmaceuticals look for strong long-term partnerships with resellers that possess specific skills sets, rather than a one-reseller-fits-all model."

Sol-Tec, which employs 30 staff, works with several pharma firms, many of which are looking to implement mobile systems for their sales staff. The reseller also recently designed, supplied and implemented a storage area network for a pharmaceuticals company.

Althorp advises smaller resellers to concentrate on offering niche products and services, particularly those with a tangible return on investment. "Specialised skills and focused products will create a differential, enabling the smaller reseller to build a relationship with the client," he comments.

"The focus should be on the high margin, high value products and services, rather than trying to compete on commodity products."

Market size
The pharmaceuticals industry is very big business: the worldwide market was worth $395.9bn (£250.7bn) in 2001.

The top firms include Pfizer, Bristol-Myers Squibb, Bayer, Merck, Novartis, Johnson & Johnson, Abbott Laboratories, GlaxoSmithKline and AstroZeneca. These are huge companies: in 2001, Bristol-Myers Squibb had a turnover of $19.4bn (£12.3bn) and pre-tax profits of $6.4bn; UK-based GlaxoSmithkline had sales of £20.5bn and pre-tax profits of £6.2bn; Johnson & Johnson's 2001 turnover was $33bn and its net profits $5.7bn.

Pfizer's merger with Pharmacia will create one of the world's biggest companies, with a market capitalisation of $170bn.

There are 3,000 pharma manufacturers in the EU, producing more than 50,000 products, which are sold through 130,000 retail outlets.

Market drivers
A key driver in the pharma sector is the need to share information and collaborate on complex development projects, while tracking changes to comply with a tight regulatory framework.

To develop drugs more cost-effectively, pharma companies are investing in a number of areas, including molecular modelling, data integration, decision support software, collaborative software linking research data from all parts of the organisation, and target validation tools to enable scientists to reduce the number of target validation experiments by identifying all available information on specific targets.

The biggest portion of pharma companies' R&D spending goes on clinical trials, which can last up to six years. Internet technologies, virtual private networks and data warehousing have all helped cut overall trial times, in some cases by up to a third.

Equally important are the sales, marketing and distribution operations. Here, there have been major changes over the past few years, with increasing use of the Internet to streamline and make more cost-effective the massive investment pharma firms make in their front end processes. Online tools are seen as a way to halt the recent big increases in expensive sales forces.

Main players
The top pharmaceuticals companies have made substantial investments in technology in recent years. They have invested heavily in ERP and CRM software and this has benefited the major players in these areas, particularly SAP, JD Edwards, Siebel and Peoplesoft.

Many pharmas have also invested in software to help them plan and run their businesses more efficiently, using a combination of financial modelling and budgeting, business intelligence software and analytical data modelling. Here, vendors such as Cognos have done well. Other suppliers into this area include Hyperion, Business Objects and Oracle.

One advantage for the IT industry is that the pharma industry is dominated by players based in the UK, Germany and the US. They are large corporates, well attuned to developments in these countries' IT technologies, and are prepared to take on the latest software tools.

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