PDI Sticks to Contract Sales

While its competitors in the contract sales industry sell themselves as all-purpose marketing outsourcers, Professional Detailing Inc. is sticking to its core business of providing sales reps to pharmaceutical and biotech companies. Although PDI will eventually need to expand and diversify, most likely through acquisition, it should remain successful for some time as a pure play CSO.

Will PDI prosper as a pure-play, while its larger competitors sell themselves as all-purpose marketing outsourcers?

by Jeffrey Dvorin

• The CSO industry has boomed over the last five years, and PDI has emerged as an industry leader and the only publicly traded pure CSO.

• But with big players like Cardinal entering the CSO arena, offering an array of promotional services, some think that PDI's bubble will soon burst.

• Although it must eventually diversify and expand, most likely through acquisition, PDI should remain successful for some time by maintaining its focus on the business of providing sales reps.

As failed policies go, the nearly DOA Clinton health care reform package stands out for its far-reaching and long-term impact. Although fears were never realized that the proposed reforms—together with a brave new world of managed care—would lead to drastic, government-imposed cost containment measures and price controls, the threat alone led to much belt tightening in the health care industry, and by pharmaceutical companies in particular. One sector that clearly benefited from this heightened cost consciousness was outsourcing, which offers drug companies a means of augmenting their internal resources without creating additional fixed overhead costs. A booming CRO industry is the best example of this post-Hillary phenomenon. But CSOs, albeit more quietly, have grown just as dramatically.

CSOs, which took hold in Europe during the eighties and became a significant factor in the US during the mid-nineties, initially consisted of small companies offering temporary sales help to pharmaceutical companies. The CSO reps consisted almost entirely of part-time workers, whose calls on physicians often amounted to little more than dropping off samples of OTC products. How times have changed.

Beginning around 1995, several CSOs made concerted efforts to improve the quality of their sales forces so as to offer pharmaceutical companies a true alternative to expanding their internal sales teams, or in some instances, to co-promotion deals. CSOs thus invested in retaining full-time reps and providing them with training and compensation comparable to the packages offered by major pharmaceutical companies. They also began offering a range of marketing and strategic planning services that could form the basis of comprehensive contract sales agreements.

This reinventing of the CSO has paid some pretty impressive dividends in the last few years. CSO contracts with drug companies have become longer-term and more lucrative, with some in the $40 million range. As the number of total drug industry sales reps has risen steadily, from about 43,000 in 1994 to an estimated 61,000 in 1998, so too has the utilization of CSO reps, from an estimated 2.6% of total reps in 1994 to 13.4% in 1998 (See Exhibit 3). The numbers are somewhat inflated because a substantial percentage of CSO reps are part-time). CSO revenues grew fourfold between 1994 to 1997, from $80 million to $325 million. Big Pharma has also become more willing to entrust its products to outsourced reps; roughly 20 of the top 50 companies now use CSOs.

There has also been significant growth for CSOs outside the US, mostly in Europe. However, the US accounts for 50% of global CSO spending and the major CSOs are all concentrating their efforts on increasing penetration in the states. Large pharmaceutical companies remain the primary CSO customers, accounting for about 80% of revenues at the leading CSOs. And there are likely to be growing opportunities among smaller emerging drug and biotech companies that have products coming to market, but lack sophisticated sales and marketing infrastructures.

Most industry observers see continued growth in the CSO industry for the foreseeable future. Marshall Solem, a principal with ZS Associates, a consulting firm specializing in sales force issues, anticipates CSO revenues continuing to grow at substantial levels—although not at the torrid pace seen in recent years. Analysts generally peg CSO revenues increasing at a rate of about 25% annually over the next few years.

But the very CSOs which have led the industry growth, will face challenges as the territory they pioneered becomes more settled. New companies, from CROs to wholesale distributors are redefining, or at least raising questions about, what it means to be a CSO. In particular, the new players are banking on a market for full service sales and marketing outsourcing—with contract sales just one of several offerings. This leaves the established CSOs having to decide whether they must broaden their portfolio to compete successfully or whether there's still room for a pure CSO.

Fast Times For CSOs

One of the companies that helped turn around the CSO business is Professional Detailing Inc. (PDI). Founded in 1986 by John P. Dugan as a division of Dugan Farley Communications, a medical advertising firm, the company became independent in 1991. Dugan, who remains the majority stockholder, eventually left the advertising business to focus on contract sales and now serves as board chairman.

As the industry has prospered in recent years, so has PDI, with revenues increasing from $8.1 million in 1994 to $101.1 million in 1998. That most recent total reflects an 84% one-year gain from 1997 to 1998. The number of sales reps deployed by PDI has also grown, from 135 at end of 1994 to 1500 at end of 1998. PDI went public in May 1998, has a market cap of around $300 million, and is the only publicly traded pure CSO.

But PDI is far from alone in riding the crest of a thriving CSO market. Eyeing the growing opportunities, several heavy hitters have entered the CSO arena in the US. After establishing a European CSO business, Innovex Inc. started its US CSO operations in 1995. Innovex, which was purchased by Quintiles Transnational Corp. in 1996, has the largest complement of full time reps, as well as the leading market share (40%), as measured in contract sales. Snyder Corp., which built its CSO business on the backs of several acquisitions made in the last few years (MMD, Pharmflex and Health Care Promotions), takes second place in market share at about 25%, and claims that its sales force of 2700 full and part-time reps is the largest. Nelson Communications' Nelson Professional Sales, which in its former incarnation as Professional Detailing Network entered the CSO business in 1988, comes in fourth in revenues at about a 14% market share, just behind PDI's 17% (See Exhibit 2. These figures represent rough estimates which a number of the companies, claiming larger shares for themselves, dispute). In a highly competitive and concentrated market, these four companies took in over 90% of total CSO revenues in the US last year.

That is likely to change dramatically as new players, some of them huge, begin to tap into the CSO market. This month, Cardinal Health Inc. announced the launch of Cardinal MarketForce , a contract sales organization which the drug wholesaler says will offer services ranging from providing sales reps to telemarketing to strategic and tactical planning. McKesson HBOC Corp. is reportedly also on the verge of offering CSO services.

PDI stands out among the field as the lone standalone CSO. Perhaps, even more significantly, it is the only company among the top players which markets itself as essentially a pure CSO. The others, claiming to draw on the resources of their parent companies, all boast of offering a full-range of sales and marketing services.

At least on the surface, PDI faces the risk of being left behind as the competition begins a new era of full-service contract marketing and promotion organizations. But as CSOs gear up for an ambitious push of a wide range of sales and marketing services, they beg an important question: will anyone buy them? Phrased differently, despite its recent success, can the CSO industry convince Big Pharma that it represents something more than a temporary or quick-fix solution to sales force needs?

Hardly the Fuller-Brush Man

One needs look no further than PDI's 27,000 square foot headquarters for evidence of its success over the last several years. After moving from an 11,000 square foot space just last summer, PDI's new site is already 90% filled. Chuck Saldarini, PDI's president & CEO says that the company's recent prosperity is the product of a corporate vision that started taking shape in the early nineties. Back then, according to Saldarini, PDI's sales force consisted largely of nurses who did sales work on the side and were retained by PDI as independent contractors. Given pharmaceutical companies' natural reluctance to allow outsiders—let alone amateur part-timers—to represent them in face- to-face interactions with their customers, PDI's management recognized that changes were needed if the company were to become more than a sales rep temp agency.

PDI thus embarked on an effort to build an entirely new type of CSO business: one which offers pharmaceutical companies a quality alternative to taking on additional reps internally. As Saldarini puts it, PDI wanted to become the "go to choice over sales force expansion or co-promotion."

The company switched from independent contracting and made all its reps PDI employees. Instead of continuing to pay its sales force based on activity (e.g. per call, per hour), PDI instituted a results-based compensation scheme which includes a fixed salary and bonus incentives based on products' sales performances. The percentage of full-time reps increased from zero in 1996 to roughly 85% at the end of 1998. And, to obtain the best possible reps, says Saldarini, the company established a fully dedicated hiring and recruitment organization which subjects candidates to multiple interviews and thorough background checks. Those hired are then trained and assessed by PDI, unless the client wants to handle that in-house, as part of a rigorous training and development program, according to Saldarini. To top all this off, the company recently announced that it had become the first CSO to offer cars (spanking new Tauruses) to all of its sales reps.

A particular strength of PDI, according to Steve Budd, EVP & COO, is the ability to provide customized services to its clients. This includes offering clients full-time and part-time teams, as well as hybrids of full and part-timers. In addition, PDI clients can choose from among four basic deployment models which call for PDI to: 1) bear sole responsibility for a particular brand; 2) be the exclusive sales force in a given geographic area; 3) work a particular portion of a geographic area in tandem with in-house reps; or 4) mirror the activities of in-house reps in an area. In addition, PDI assigns fully dedicated teams of managers, reps, and support staff for each client program.

Anything you can do….

Saldarini's pitch sounds good. It also sounds a lot like the pitches made by PDI's major competitors, each of which claim to go PDI one better by offering a wider range of sales and marketing solutions. Indeed, these companies go to considerable lengths to sell themselves as something other than mere CSOs.

When asked to comment about PDI in particular and CSOs in general, Innovex's president and general manager David Stack remarked that PDI might appropriately be called a CSO, because "if you're looking for a company that only wants to be a CSO then you've probably got the only one that is willing to wear that moniker." His company, Stack adds is not a CSO, but rather is a "commercial solutions provider." Innovex, he goes on, "is primarily a marketing company, with a very significant investment in information technology—something over $30 million in the last three years." While claiming that Innovex, with offices in the US, Canada, Europe, and Asia, is the largest US and worldwide provider of contract sales reps, Stack says that reps are not always the answer. "We're here to use our information technology platforms to evaluate a customer's opportunities and then suggest the best strategic marketing approach for maximizing that opportunity: reps when that's the right answer," something else when it's not. And Innovex, he argues, is poised to supply additional commercial solutions in the form of market research, telemarketing, telesales, peer meetings, and medical education.

To build its information technology base, Quintiles\Innovex has made several significant acquisitions in recent years, including: Envoy Corp., a provider of electronic interchange and data mining services; Data Analysis Systems, which provides sales force planning and territory optimization systems; and, most recently, the health care information company Scott-Levin.

Stack says that Envoy, in particular, boosts Innovex's marketing capabilities. Envoy provides Innovex Inc., and other Quintiles Service groups with access to about 40% of all the claims-based prescriptions in the United States within 36 hours of the time that they are filled. "If you want to look at a product, identify the physicians who wrote the prescription, and obtain an anonymous profile of the patient by disease category, age and sex, I could have that for you almost immediately from information already in the database," says Stack. That information, he contends, "can be used by Innovex's marketing and sales groups to make analyses based on information less than 36 hours old." They can then communicate to sales reps "any subtle nuances or strategic changes that we see based on real-time information." Innovex's competitive advantage, he concludes, is "our ability to take a product, use real time data that even our pharma customers don't have access to, and do a solid strategic market-based analysis of the product."

While perhaps not enjoying the same access to prescription data as Innovex, Snyder Health Care Sales (SHC), a division of Snyder Health Communications Inc., offers strategic analysis and assessment services through its sister company Health Products Research. Moreover says EVP, business development, Gary Talarico, SHC is able to exploit the capabilities of the various companies under the Snyder umbrella to offer non-CSO capabilities such as telemarketing, direct-to-consumer advertising, medical education, and other promotional and marketing services. Talarico is fully the salesman when he says: "When you start putting all those things into one integrated program, no one, absolutely no one can touch us." He says Innovex comes closest to offering a comparable package and, he acknowledges, can also offer CRO services through its Quintiles parent.

Cardinal Gets Into the Act

If the name of the game is combining state-of-the-art information capabilities and a broad range of services, Cardinal's just-launched Market-Force would appear likely to make its mark quickly. Don Wetherhold, MarketForce's president, says that, among other things, his company's clients can opt to use the resources of Cardinal Information Corp. to obtain data for strategic sales and marketing plans. Wetherhold argues that MarketForce's unique ability to leverage the products and services of other Cardinal Health companies, coupled with its access to and capacity to process data— including real-time data— makes it an ideal partner for product launches (See "Outcomes: Changing Drug Distribution's Cardinal Rule," IN VIVO, June 1998.)

But Cardinal's ambitions go beyond those of any of its CSO competitors. Wetherhold says that the creation of MarketForce is part of a strategy to provide one-stop outsourcing shopping for manufacturers by offering everything "from contract manufacturing to sales and marketing." And, although Cardinal has yet to get into the CRO business, Wetherhold says that, given its goal of becoming the leading outsourcer to manufacturers of health care products, he "wouldn't be surprised if we investigated it."

Additional evidence that a new day may be dawning for the CSO industry is recent changes made by Nelson Communications Inc.'s CSO, Nelson Professional Sales (NPS). From the time it began operations, until earlier this year, Nelson's CSO arm was known as Professional Detailing Network. NPS' president, Doug Everson, says that the name change represents more than an effort to avoid being confused with PDI, or with those in the old paradigm of detailing. Rather, he says the new name is intended to accomplish two major goals: promote the CSO's status as a member of the Nelson corporate network and to stress that it is not limited to providing just detailing services. In other words, to distinguish it from a company like PDI.

In language that could just as easily come from Snyder and Innovex, Everson speaks of offering "seamless integrated programs" through the various companies under the "Nelson Umbrella." He also promotes, in another familiar refrain, NPS' ability to offer clients an array of sales and marketing solutions, of which contracted sales is but one option. Among the Nelson companies from which Everson says he may draw resources are the Medical Phone Company (telemarketing), Arista Marketing Associates (peer influence programs) and Lyceum Medical Education.

Everson adds that NPS has at least two major assets that give it an edge over some of the other CSOs looking to widen their service portfolio. First he notes that he and Christy Taylor, NPS' group chairman, bring a client's perspective to selling CSO services: he from serving as director of strategic alliances at Astra Merck Inc. (now part of AstraZeneca PLC ), and she by way of her former position VP, sales and marketing at Allergan Inc. He also argues that Nelson has an unsurpassed reputation as a health care specialist in marketing and communications services.

More than Rent-A-Reps?

While all of the major CSOs are working hard at marketing themselves as more than just well-trained professional contract sales reps, the question remains whether, and to what extent, drug companies are even willing to use a CSO at all.

The three "main drivers" of the CSO industry, according to PDI's Chuck Saldarini, "are speed to market, operational flexibility, and lower aggregate cost." Ramping up a sales force quickly, whether to launch a new product or increase market voice on an existing product, can tax considerably the resources of a drug company, he says, with the recruitment, hiring and training of sales reps distracting from ongoing programs. A CSO, argues Saldarini, is prepared to handle that entire process, do it quickly and allow the client to remain focused on other activities.

From a financial standpoint, the flexibility which a CSO affords its clients by allowing them to augment their sales forces as needed, for as long as needed, and without adding to their fixed costs, is the primary benefit of a CSO. PDI's contracts, which are typical of the industry, generally provide for terms of six months to two years, are subject to renewal, but can be terminated at-will by either the client or PDI on 30-90 days notice. "Flexibility," Saldarini cautions investors, "is a euphemistic term for easy exit." He hastens to add, however, that PDI's Big Pharma clients have consistently renewed their contracts over the years.

Flexibility, says Saldarini, also means giving clients the option of retaining as much or as little control over the CSO sales force as they desire: the CSO may be responsible for recruitment, hiring and management of a sales operation or may simply provide reps for the client company to use as it sees fit. In addition, PDI and several other CSOs can supply combinations of part- and full-time sales forces, depending on the client's needs.

Although all CSOs advertise themselves as equipped to provide services at any stage of a product's life, some companies, citing their broad competencies, market themselves as particularly well-suited to working on product launches. Cardinal's MarketForce, hoping to successfully leverage the breadth and depth of its capabilities—including pre-market research, strategic and tactical planning and access to real-time sales data—is one such company. David Stack, while noting that his company does not promote itself as a launch specialist, says that because of Innovex's record of quickly deploying large sales forces, its multiple service offerings, and its launch experience (he launched several major products while promotion manager and then product director at Roche ), it is viewed as particularly skilled at bringing new products to market.

But Glaxo Wellcome Inc. 's VP, commercial operations, training and development, Mike Pucci, sees an evolving strategy for CSOs in carving out a niche at what he calls the tail end of the selling cycle: where profits are tailing off as a product is about to go, or has already gone, off patent. In such instances, a drug company may want to emphasize its bigger projects, while not abandoning other products that are still earning money.

Companies that have recently merged, says Thomas Gartenmann, a partner and worldwide topic leader for marketing & sales with Boston Consulting Group (BCG), will often consider using CSOs to sell products to which the new company does not want to devote large resources. Mike Pucci notes that CSOs provided a handy option during the Glaxo/Wellcome merger. While the company was understandably concerned about the Zantacand Zovirax patent expirations, it also had over a dozen new products ready to go. We were, he observes, "facing an extreme loss of revenue but also extreme potential on the upside; using a CSO was a nice alternative during uncertain times to get resources without committing to more Glaxo staff."

An Alternative To Co-Promotions

Indeed as consolidation in the drug industry continues, along with the need to produce more and more blockbusters, drug companies may be increasingly inclined to bring in CSOs to sell drugs in the $200-300 million revenue range. PDI's executive director, marketing, Peter Dugan, says that there's a "feeding frenzy" on middle tier products "that aren't getting any promotional spending but are still generating a revenue stream." Marshall Solem sees similar, if not so frenzied, possibilities with respect to orphan drugs that do not fit within the merged company's pipeline or portfolio.

In addition to offering an alternative to internal sales force expansion, CSOs can also be an option for companies contemplating co-promotion deals. In some instances, of course, pharmaceutical companies are looking for some sort of quid pro quo arrangement in co-promotion deals (I'll sell yours today if you'll sell mine tomorrow). But, says PDI's Steve Budd, where the interest "is in incremental sales calls to get a competitive share of voice and it's really a sales-force driven co-promotion, we think we're rapidly becoming a very good alternative."

Outsourcing has at least two clear advantages over co-promotion according to Chuck Saldarini. First, it avoids the various entangling alliances of co-promotion agreements. Second, it provides a selling partner who is focused entirely on the client company's needs. As the years go by, and priorities change, a co-promotion partner may lose interest in the project.

Innovex is aggressively positioning itself as a co-promotion alternative through agreements calling for the CSO to work on a backend commission basis. According to David Stack, the client takes all the revenues up front—thus adding to the top line—and then pays the commission to Innovex.

Ken Greathouse, VP and general manger of the CSO division of Boron Lepore & Associates, a relative newcomer to the CSO wars, argues that outsourcing also provides an alternative to outlicensing for large drug companies who have to prioritize promotional efforts for their large portfolios and want at least some return for products that they don't have time for. "It always struck me as ridiculous," says Greathouse, "for a company to develop and market a product only to sell it to somebody else."

There's No Place Like Home

If the key benefits of sales force outsourcing are the flexibility, potential cost savings, and the alternatives to co-promotion and outlicensing that it offers drug companies, what are the downsides of using a CSO?

One drawback for at least some pharmaceutical companies involves the very basic issue of entrusting their names and reputations to outsiders. Mike Pucci, who has contracts with Innovex and PDI for nearly 800 reps, says that the fundamental question as to whether non-Glaxo employees should be representing the company to physicians and other prescribers remains "the essence of a great debate" within the company. So far, he says, the economics of the market have required the use of CSOs where internal expansion is impractical.

Glaxo's concerns about CSOs are evidenced by the fact it conducts in-house training of all CSO reps—despite the heavily advertised training capabilities of PDI and the other major CSOs. Pucci, who speaks highly of the quality of both the PDI and Innovex reps, says that selling is a core capability for Glaxo and that he would never farm out training: it's always better, he says, to learn from people in the industry who work full-time with the products. As good as Pucci may feel the outsourcers with whom he's worked are, it's clear that he continues to believe that the best reps remain the homegrown ones.

Other major pharmaceutical companies share this view. Merck & Co. Inc. and SmithKline Beecham , which each have highly regarded internal sales forces, do not currently use outsourced reps. In fact, roughly 30 of the top 50 drug companies aren't currently using CSOs. The CSO industry is a relatively new one in the US, notes BCG's Thomas Gartenmann, who adds that some large pharmaceutical companies are still quite sensitive about going outside for sales help and consider sales a strategic area which they should cover on their own.

Another concern of pharmaceutical companies, says Gartenmann, is that experience and information obtained by the CSO while selling one company's products may later inure to the benefit of the company's competitors who use the CSO on another project. With any outsourcing arrangement, the client company runs the risk that the supplier may later share skills and abilities developed during the course of the contractual relationship with another company, according to Gartenmann.

Finally, a cost, if not a downside, of using a CSO is the effort which must be expended to insure that the CSO performs properly and is integrated with internal functions. Gartenmann says it's critical to create a mechanism for monitoring and coordinating the CSO-company interface to insure that the client company's strategic objectives are being met.

NPS' Doug Everson concurs. While at Astra Merck, he headed a team whose entire responsibility was to oversee strategic alliances, including those with CSOs. He says that all too often, companies lack that sort of dedicated structure to handle interactions with the CSO. According to Everson, the task frequently falls on senior executives with numerous other duties. "With all of the other responsibilities that those people have on their plates, a CSO can sometimes be out of sight, out of mind, and not getting the attention and thought needed from a planning perspective." The point is that using a CSO doesn't mean just dumping a sales job off on someone else.

Death of the Old-Fashioned CSO?

The cost/benefit analysis becomes fuzzier and more complicated with the emergence of the valued-added CSO. Some of the additional CSO offerings are really a logical extension of the industry's efforts to demonstrate that CSOs can provide sales professionals equal to their client's own reps. Thus, for example, most CSOs have established training and recruitment operations which are not only used by the CSO to train its reps, but which are also marketed—not entirely successfully—to drug companies to assist in training their own sales forces. The major CSO companies, including PDI, also use sophisticated data collection and management systems to monitor the effectiveness of their sales activities.

The real question is whether the information tools and range of services offered by companies like Innovex, Snyder, and Cardinal will prove so attractive as to relegate standalones like PDI to also-ran status. The answer is far from clear.

A recent report produced by Datamonitor suggests that CSOs still have a long way to go in even convincing potential clients that they offer anything more than quick-fix solutions to temporary sales force needs. The report goes on to state that there is a significant gap between the full range of detailing services (i.e. training and recruitment, territory management, and market research) CSOs are capable of providing and the services that pharmaceutical companies are willing to outsource. This is consistent with Glaxo's use of CSOs only for the limited purpose of providing reps.

Karen Young, a senior analyst who prepared the Datamonitor report, says that the pharmaceutical executives with whom she spoke were not about to hand over sales management functions to an outsourcer. She says that while companies like Innovex, Snyder, and Cardinal may be pushing impressive service packages, the Big Pharmaceutical companies aren't buying that message. Big drug companies, according to Young, want to control the quality and content of the sales message; going to an outsider, they believe, cuts the direct link between them and their customers.

Datamonitor's skepticism would seem to be at least partially belied by the willingness of some pharmaceutical companies to entrust CSOs with major products: PDI has provided reps for the promotions of Prilosec, Cardura, and Wellbutrin SR. In addition, Innovex has provided sales forces exceeding 400 reps on at least eight occasions. Nonetheless, with only 6% of total rep spending going to CSOs and a number of major companies avoiding CSOs completely, there's a lot more convincing left to be done.

Bill Mattson, president of the Mattson Jack Group, agrees that Big Pharma is far from sold on using CSOs for anything more than a short-term boost to their own sales teams. Many large drug companies, he says, view CSOs as "troops in the trenches" that can be quickly deployed and just as quickly undeployed.

But Mattson also argues that this view is shortsighted and likely to change. For one thing, he says that the arms race-like build up of internal sales forces is likely to top off in the near future, leading to increased outsourcing. Mattson also believes that drug pricing will be subjected to growing public scrutiny in the coming years and that the resulting cost containment pressures on drug companies will help the CSO business by forcing them to turn more to external help and less to building internal resources.

Still, for the time being, he says, many of the large pharmaceutical companies still take the rent-a-rep view of CSOs. And it is debatable whether, given Big Pharma's reticence to hand over even the basic detailing function to an outside contractor, they are about to hand delegate any significant part of their overall sales and marketing operations. Full-fledged promotional outsourcing could thus prove an even tougher nut to crack.

One very new entrant into the US CSO market is building its business, at least in part, around the notion that Big Pharma may not generally be in the market for one-stop outsourcing shopping. Headcount, a subsidiary of Healthworld Corp., began its CSO operations last year. The company's president Mark Abbonizio is a veteran of the CSO business, having spent ten years with PDN, where he was general manager just prior to joining Headcount. Speaking for a company that, for the foreseeable future, cannot compete with the likes of Quintiles, Snyder, and Cardinal on their terms, Abbonizio questions whether there is presently that strong a market among large pharmaceutical companies for full service promotional outsourcing.

While a company like Innovex has an impressive set of tools to offer, Abbonizio says that he is "unaware of any company using that level of services: "You're not going to Pfizer and influencing their marketing department. That's probably not what they're looking for." He adds that small or emerging companies, on the other hand, may need a more complete sales and marketing package.

Abbonizio says that Headcount will focus on a core competency in furnishing quality sales representatives, while also offering other services as needed, either through its parent company or by outsourcing in such areas as IT, recruiting, and training. The key, he argues is to have access to a full panoply of services without having to build the expensive infrastructure necessary to put them all under one roof. Headcount thus seems to be adopting a position somewhere between a pure CSO, like PDI, and those companies, like Snyder and Innovex, that are developing powerful in-house capabilities.

Big pharmaceutical companies, in particular, may prove less than enthusiastic about turning over significant control of promotional activities to outsiders. Such companies have made considerable investments in building their own sales and marketing infrastructures and view those activities as central to their strategic focus. Also, most of the large companies have made concerted efforts to integrate their commercial and scientific operations and establish a team approach to product development and commercialization. Bringing in a third party to work on promotions is unlikely to facilitate that integration.

Sticking With What Got Them There

Companies such as PDI and Headcount may actually benefit from Big Pharma's skepticism regarding sales and marketing outsourcing. By pitching themselves as experts in filling a very specific need of drug companies, without distracting from that message by offering a wide range of services that large pharmaceutical companies don't seem ready to outsource, the pure or semi-pure CSOs may continue to find an audience. On the other hand, biotechs and emerging drug companies may become more and more receptive to outsourcing a variety of sales and marketing functions for which they lack the resources to handle on their own. At least for the immediate future, those smaller companies may prove to be the more receptive audience for companies like Snyder, Innovex, and Cardinal.

Chuck Saldarini insists that there is, and will continue to be, a strong market for a company that concentrates on providing top flight sales reps. For one, he says, clients frequently seek out a CSO to quickly put together a sales force team: "Clients and prospects in our experience often do not have the time to embark on a wholesale corporate-wide strategic review of requirements." He also argues that PDI's message is clear and focused. "We can tell them we sell pharmaceuticals, design the contract around their needs and provide the flexibility to adjust the contract down the road." Saldarini says that their message is a lot easier to understand than that of a company offering everything under the sun.

The bottom line, he says, is that it has yet to be shown how all the data resources offered by companies like Quintiles will improve sales force performance. Value-added, he says, is a great term, "but unless these other organizations are literally going to give away the other services they provide, I'm hard-pressed to see how it can be brought into the contracts sales platform at this time."

Innovex's David Stack sees things differently. He argues that pure CSOs are at risk, if for no other reason than the likelihood that spending on sales reps will begin to level off. The industry, says Stack, "isn't going to add 15,000 reps every year forever. You've got to get into other service platforms that will allow you to grow or drive the growth of sectors not dependent on fee-for-service contract representatives. That's partly why we got into the big IT platforms and the IT-driven business."

Diversification, he says, is also part of a broader strategic approach that will lead to Innovex being viewed as more of a co-promotion partner than a CSO vendor. In fact, Stack says that he views co-promotion and outlicensing—not companies like PDI—as his main competitors.

Ken Greathouse agrees that those companies marketing themselves as strategic partners will dominate the CSO/promotional outsourcing industry in the future and that pure CSOs are at risk. He adds that having a variety of services to offer clients not only makes an outsourcing company more attractive from a strategic standpoint, it also allows for bundling various services in packaged deals that can be sold at discounts. With only one service to sell, a company like PDI, he argues, will have difficulty in maintaining competitive prices.

The CSO-plus companies also have a clear edge, contends Doug Everson because they are equipped to work, with a client to develop an overall promotional strategy which, in some instances, may involve reps and in others may call for telemarketing, direct-to-consumer, or other services—all of which can be purchased from a single source. As Marshall Solem puts it: "everybody likes one-stop shopping."

While most of the of the broad-based sales and marketing outsourcers say they are targeting the currently more lucrative Big Pharma market, biotechs and smaller emerging companies may prove to be the best customers for total-package deals. Steve Cottrell, VP, marketing for Snyder Health Care, gives the example of a small biotech company for which Snyder Health Care Sales will essentially handle all sales and marketing responsibilities, including the launch of a new product. Along these same lines, Bill Mattson observes that smaller companies, and foreign firms looking to build a US base, have proven more receptive to promotional outsourcing than Big Pharma. And Datamonitor's Karen Young predicts biotechs in particular, as they begin to get more products ready for market, will look to outsourcing their promotional needs.

Still a Place For The CSO Specialist

Although PDI may lose some market share as the competition from larger and more diversified companies grows, it should, even its competitors acknowledge, continue to find a market for its services. Doug Everson posits that a two tier industry is likely to emerge: "There will be the key players that are providing the full range of services and have the expertise to do the sales and marketing function in an integrated fashion, and then the second tier of companies that are basically just providing heads to the organization." Snyder's Gary Talarico agrees that PDI "will find some small niche somewhere."

But Chuck Saldarini is hardly looking to occupy a tiny corner of the CSO universe. And, the somewhat patronizing words of comfort expressed by his competitors notwithstanding, PDI isn't about to let the parade pass it by.

Citing PDI's portfolio of blue chip clients, its record of success with major products (e.g., Pfizer Inc. 's GlucotrolXL, Glaxo's Wellbutrin SR and Astra Merck's Prilosec), and strong reputation among pharmaceutical companies, Saldarini argues that PDI has established itself as an industry leader. The company has managed to maintain relationships with Glaxo and Astra since 1993, and with Pfizer since 1994. Mike Pucci, who praises PDI's strong sales leadership, says that the comfort level generated by such long relationships is no small matter for companies like Glaxo.

Also, PDI is plainly offering more than just heads. The company has invested considerably in the recruitment and training of quality salespeople who are compensated on a par with their pharmaceutical counterparts. While not possessing the information or data management capabilities of some companies, PDI has a state-of-the-art technology platform for tracking sales reps and for monitoring calls via palm-top computers carried in the field.

Bill Mattson is confident that a company like PDI can remain highly competitive. For him it's largely a matter of common sense: "Focus may be more important than breadth. Companies that talk about soup-to-nuts capabilities don't usually do each one of them as well as a focused company." Karen Young also forecasts future success for PDI, whose management, she says, has done a good job of assessing the types of services that pharmaceutical companies are willing to outsource and in framing their message accordingly.

As impressive as all the talk about integrated information systems and one-stop shopping sounds, the extent to which drug companies will be willing to outsource major sales and marketing functions remains to be seen. It will continue to take some selling to get pharmaceutical companies to fully accept the idea of CSOs as a quality alternative to in-house expansion or co-promotion. At least for the foreseeable future, it is likely that there will be a demand for companies providing the core CSO service—how much more they'll accept is still uncertain.

For long-term growth, however, PDI will have to pursue expansion—probably through acquisition and at least some diversification—even if it plans to continue its emphasis on the contract sales business. Bill Mattson says that just as the CROs built up larger and larger critical masses, so too will the CSOs. He notes, however, that the industry is quite young—at least in the US—and there's still plenty of time for PDI to expand.

One area in which size may matter is recruitment and retention of quality reps. PDI's larger competitors argue that they will ultimately have an edge by virtue of their ability to offer advancement not only within their large sales teams, but within other divisions of the parent company. Don Wetherhold says that active recruitment is a cornerstone of Cardinal's CSO efforts and that he is looking to attract top salespeople who would otherwise go with the large pharmaceutical companies. Because service contracts have finite terms and can suddenly end, a company built solely around its CSO business cannot offer the kind of stability that a big drug company can. On the other hand, says Wetherhold, "Cardinal is a $21 billion company with a lot of different potential career and developmental pathways for people. So beyond just moving people from one contract to another, there are other avenues within Cardinal for talented people."

Also, it is imperative that PDI build its client base. While Pfizer, Glaxo, Astra, and Allergan have proven to be loyal customers, those companies account for roughly 80% of PDI's total revenues. Given the increased competition, and the minimal contractual commitments made by CSO clients, PDI will have to reduce its dependency on a few major relationships.

With Cardinal and McKesson entering the arena, there are likely to be 4 or 5 mega-players on field; just to keep up in terms of contract sales capabilities, PDI will probably have to look beyond internal growth. Also, at least with respect to smaller drug companies, it is likely that there will be increasing interest in non-CSO services. Saldarini says that, having gone public and proven itself to the investment community, the company will be looking to buy and possibly diversify into other promotional areas.

In the end, though, Saldarini sees CSO services as remaining the driving force for his company. In this regard, he notes that, of the $8.4 billion spent by the pharmaceutical industry on promotional activity in the US in 1998, $5.4 billion was spent on detailing. It just makes sense, he argues, to focus on the sales rep business: "Why did Willie Sutton rob banks? Because that's where the money was."