Biotech Values

[DewDiligence]

PFE Salesforce Cuts Could Spur Competitors to Follow Suit

[Duh]

http://online.wsj.com

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By Peter Loftus
11-29-06 1305ET

Pfizer Inc.'s (PFE) planned 20% reduction in its domestic sales army could pave the way for rivals to make their own cuts, potentially halting what one industry leader has called an "arms race."

Pfizer said Tuesday that it would reduce its U.S. sales force by 20%, cutting about 2,200 jobs in a move the company said "will better align our sales organization to our overall customer and business needs." Analysts saw the job cuts as a response to slowing sales growth, as the New York-based company faces pricing pressure and generic competition for its blockbuster drugs.

While rivals such as Wyeth (WYE) have previously reduced their U.S. sales forces, Pfizer's decision is more significant because it's the biggest drug company as measured by sales and has the biggest sales force, analysts said. Rivals would no longer need to maintain bloated sales forces just to keep pace with Pfizer.

"Competitively, if Pfizer backs down, it gives other big companies a chance to back down," said Richard Evans, analyst with Sanford Bernstein. He expects additional Pfizer cuts, possibly in sales-support staff. Pfizer said Tuesday that it would announce additional steps in its "transformation" in January.

The cuts could save about $400 million to $450 in annual costs, according to Bear Stearns analyst John Boris. Deutsche Bank analyst Barbara Ryan estimated the cuts could add about 3 cents a share to annual earnings. Pfizer is expected to earn about $2.14 a share in 2007, excluding one-time items, according to analysts surveyed by Thomson First Call.

The savings will help Pfizer's earnings in the face of declining sales. Also, some analysts said Pfizer might sink more money into research-and-development, or use it for potential acquisitions.

However, it might be premature to say Pfizer's job cuts are permanent. If other large pharmaceutical companies don't cut their U.S. sales forces, Pfizer may have to rehire sales representatives in order to avoid losing market share for certain products, Evans said. [Possible but unlikely, IMO.] Also, longer-term, Pfizer might have to rebuild its sales force if it successfully brings enough new drugs to market to sustain sales growth.

Beginning in the 1990s, Pfizer led the way in building up a mammoth sales force for products such as the Viagra anti-impotence drug and Lipitor for cholesterol. Other companies followed suit. But the proliferation of drug reps produced a backlash among doctors who complained about visits by multiple reps from the same company, promoting the same drugs. Others complained that sales reps -- armed with prescription data provided by third-party vendors -- were becoming confrontational if they found out doctors were prescribing rival drugs.

Last year, GlaxoSmithKline PLC (GSK) Chief Executive J.P. Garnier said the sales-force buildup amounted to an arms race, and suggested it would be good for the industry to retrench. But U.K.-based Glaxo itself had to maintain a large sales force because competitors had so many sales reps, Garnier said.

…"They've got too many sales people for the drugs that they have to sell," HSBC analyst Kevin Scotcher said of Pfizer's plans. "It's a simple business decision -- too much overhead and no sales growth to sustain it."

What Others Have Done

Wyeth, Madison, N.J., cut about 15% of its U.S. sales force last year. "We found it helped us become more efficient in working with our customers and bringing more value to our interaction with customers," spokesman Doug Petkus said Wednesday. "It seems now that a company like Pfizer is following in our footsteps."

Other companies have tweaked their sales forces. Sanofi-Aventis SA (SNY) of France said in October that it would cut nearly 400 sales-force jobs in France, citing regulatory changes there. A Sanofi spokesperson couldn't immediately be reached Wednesday. Johnson & Johnson (JNJ), New Brunswick, N.J., trimmed the sales force for its Procrit anemia treatment earlier this year amid a sales decline because of intense competition. A J&J spokesman declined comment Wednesday on future plans.

Merck, Whitehouse Station, N.J., has switched hundreds of sales reps from promoting branded prescription drugs to hawking three vaccines it has launched this year, including Gardasil for cervical cancer. A Merck spokesperson couldn't immediately be reached.

GlaxoSmithKline has kept its U.S. sales force steady even as it introduced new products, said spokeswoman Mary Anne Rhyne. She declined comment on whether the company would make changes in the wake of Pfizer's cuts. "We've tried for a few years to be more efficient with what we have," she said.

Evans, the Bernstein analyst, thinks Schering-Plough, Kenilworth, N.J., has room to cut its sales force because the company hasn't made meaningful reductions since it lost market exclusivity for allergy drug Claritin in 2002. A spokesman declined immediate comment.

One company that may not have much room to cut is Bristol-Myers Squibb Co. (BMY) of New York, because it has shifted its focus to marketing drugs to specialist doctors and away from primary-care physicians, Evans said. A Bristol spokesman couldn't immediately be reached.

The trend isn't uniform across the industry. Novartis AG (NVS) of Switzerland said this week it expects to hire about 1,000 U.S. sales reps to promote new drugs. A Novartis spokesperson couldn't be reached Wednesday.

Still, analysts generally expect the trend of sales-force cuts to continue. "We do feel that the right-sizing process is going to accelerate," said Hussain Mooraj, research director of life sciences at AMR Research in Boston. "It's been happening already, it's just [Pfizer's cuts] will certainly accelerate it to some extent."
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