Ventiv's European Vision: Sometime--Not Yet
Executive Summary
As Ventiv Health learned the hard way, CSOs contemplating establishing new European businesses, or expanding existing ones, must confront the reality that while development and marketing can be increasingly global, sales remain stubbornly local. Swimming against that tide--even as it ebbs--makes the notion of a Europe-wide CSO far from practical.
American CSO Ventiv is withdrawing from Europe after finding a continent still far from harmonized, where selling drugs is largely a local matter.
These are tough times for contract sales organizations (CSOs). A slowdown in new drug approvals, combined with the creation of super-sized sales forces via drug industry consolidation, mean drug companies are less likely to augment their own sales capabilities. Moreover, the fortunes of CSOs are inextricably linked with those of its troubled pharmaceutical clients. Even in the US, which remains the most profitable market, the dominant CSOs—inVentiv Health Inc. ; Innovex (a unit of Quintiles Transnational Holdings Inc. ) and PDI Inc. —are all struggling.
The problems facing CSOs are particularly acute in Europe. Though the key international players, Ventiv and Innovex, have US-based parents, Europe's CSO industry is considerably older and better established: Innovex started out as a UK firm in 1979. But alongside the general industry downturn, the European CSO market poses its own unique set of challenges. Ventiv's experience there illustrates these well.
Like all CSOs, Ventiv has been wrestling with the effects of growing pricing pressures that have some pharmaceutical companies threatening to withhold new products from certain European markets. And since restrictive prices mean drug firms get lower margins on promotional spending, observes David Windley, an analyst with US-based Jeffries & Company, those marketing drugs in both Europe and the US are more likely to devote sales and marketing to the latter. The CSO model "performs pretty well in an environment where the pharma industry is making additional sales and marketing investments; if they're not, it doesn't work well, because if anything they're pulling resources in-house," sums up John Kreger, an analyst at William Blair & Co.
The battle for this smaller and increasingly price-sensitive set of clients, confirms Ventiv's CEO Eran Broshy, has kept prices and margins low. Although Europe accounted for roughly 25% of Ventiv's total revenues in 2001—a figure projected to reach 30% this year—"the earnings contribution is basically zero," says Broshy.
The challenges have apparently proved too much for Ventiv, which first set up shop in Europe during the late 1990s. This summer, Ventiv's management announced that they were actively pursuing the divestiture of their European operations--then consisting of businesses in the UK, France, Germany and Hungary—in order to concentrate on their more profitable US business. In mid-October, Ventiv announced a management buyout of its German CSO and the sale of its UK operation to United Drug PLC (whose CSO subsidiary is Ashfield Healthcare). The company is still exploring opportunities to sell its French and Hungarian units. So far analysts approve of the moves, applauding Ventiv's renewed focus on its US activities and voicing optimism about the company's long-term prospects.
In addition to the regulatory and competitive hurdles they faced, Ventiv's management found that certain key assumptions underlying their European strategy did not match the realities of the marketplace. And perhaps the most significant lesson to be learned from Ventiv's travails—and one that should serve as a cautionary tale to other CSOs contemplating a European expansion—is that it's wrong to even think in terms of a European market.
A fundamental premise behind Ventiv's European initiative, and its acquisition of CSOs in a number of countries, was that drug companies would increasingly look to purchase CSO services on a multi-country basis. Ventiv's goal, says Broshy, was to strike more lucrative deals—and also benefit from cost-saving synergies on the back end—by offering a client services across several major markets.
But however much pharmaceutical companies may be pursuing global strategies for the marketing and branding of their products, selling drugs remains a local matter. Ventiv's multi-country pitch to pharmaceutical executives in Europe thus fell on largely deaf ears. Drug companies have worked "over the years to create synergies across Europe," observes Broshy, "but they've done a lot of that by pulling out administration, distribution and finance" and by centralizing clinical studies and manufacturing. "What's left for country managers at the end of the day right now is largely sales and marketing—that's the piece that headquarters wants to leave at the local level."
One reason behind maintaining that local control, says Broshy, is that drug company portfolios differ from country to country, each with its own sales force configuration. Moreover, adds Broshy, coordinating launches is difficult without a uniform European approval process.
The traditionally local nature of pharmaceutical sales and sales outsourcing in Europe also meant Ventiv had trouble building a cohesive and cost-effective European organization. Ventiv's European business was cobbled together through a series of acquisitions made between 1997 and 1999 by Snyder Communications Inc. (from which Ventiv was spun-off in 1999), including the purchase of two UK CSOs, two in France and one in Germany.
Ventiv ran into two problems—one with the basic premise of its internationalization strategy and the second with its local execution. Locally, it ran into integration problems. In the UK, for example, the acquired CSOs were formerly head-to-head competitors. Key leadership at the two companies departed soon after the transaction, leaving Ventiv to bring in new management to integrate the organizations. That process, says Broshy, created considerable turmoil, diverting attention away from customer-oriented activities. Some clients who had established close ties with the acquirees' previous senior management either reduced or terminated their activities with Ventiv.
Meanwhile, Ventiv's overall strategy seemed to get in the way of success. Ventiv wanted to save costs by centralizing as much as possible the administrative and other aspects of its European operation. But in the end, says Broshy, "there weren't significant [synergies] to be had, since you really needed to run it as a local business" in order to be sufficiently flexible and responsive in meeting the needs of customers in particular markets.
Management's preoccupation with internal issues, and a flawed strategy, cost Ventiv clients. The managing director of H. Lundbeck AS ' UK subsidiary, Jarne Elleholm, reports that Lundbeck considered, but ultimately rejected, the idea of outsourcing some of its sales work to Ventiv. At some point, suggests Elleholm, Ventiv's management problems and turnover led it to lose track of its customers' needs. In particular, he says that Ventiv was overemphasizing future innovative offerings at the expense of paying adequate attention to its core CSO activities. He recalls, for example, Ventiv officials spending considerable time trying to sell Lundbeck on "long-term projects like ETMS [electronic territory management systems]" which had yet "to get off the ground." They "were trying to create a future competitive edge and forgot about the current business."
Lundbeck currently gives all of its UK sales outsourcing to Innovex, which it has been using for the last four years. Indeed, Innovex's strength in the UK undoubtedly added to Ventiv's troubles there. Innovex has been in the UK for nearly a quarter of a century, and in a highly penetrated market owns more than a 50% share, according to some accounts. Approximately one-third of total UK sales reps are contracted, estimates Greg Ernest, a consultant with ZS Associates. And Innovex UK's piece of that pie, says Ernest, makes it the single largest sales force in Europe (Innovex is, in fact, the leading European CSO, capturing nearly a quarter of the market in 2001 to Ventiv's 9%).
Even More Competitive in France
France didn't prove much easier for Ventiv. The French CSO market is crowded and highly competitive, and consists mostly of small local firms. This has driven margins "so low that no one can make a profit," according to Drew Harrison, business development director at Ashfield. Incumbents, according to Harrison, "have had to reduce margins to retain business," and new business is being "picked off by anyone willing to match the lowest prices." Those margins are driven even lower by the sharp drug pricing constraints imposed by the French government.
France's labor laws, which are considerably more restrictive than in the UK, present a further hindrance to new entrants into the French market—particularly for companies like Ventiv which market themselves as offering sales forces on a par with in-house pharmaceutical teams. The lack of flexibility in hiring and firing, says Drew Harrison, makes it very difficult to assemble and maintain quality sales forces. Ironically, those same tough labor laws provide an important incentive for drug companies to outsource in the first place: by using an outside contractor, they pass the labor hassles off to someone else—who nonetheless can't charge enough to make the added labor responsibilities worthwhile.
A third problem for CSOs in France has been that they are viewed as less reputable than in-house sales teams, more as "rent-a-reps" rather than selling experts, explains ZS's Ernest.
Europe's Time Will Come
Notwithstanding Ventiv's misfortunes in Europe, Eran Broshy predicts that a pan-European CSO business will develop. For one thing, if Big Pharma is launching few new drugs, biotechs—currently only a very minor source of CSO revenue—will begin to pick up the slack. Broshy believes that they may turn to CSOs in lieu of investing heavily on building their own infrastructures across Europe. UK biotech Ardana PLC has already announced its intention to use CSOs to launch its products (see "Getting Late Stage Products Early," In Vivo Europe Rx, September 2002 (Also see "Getting Late Stage Products Early" - In Vivo, 1 Sep, 2002.)).
Some observers suggest that CSOs are also becoming the preferred method of entry into Europe for Japanese drug firms, increasingly forced to test the water outside their troubled home market.
Moreover, argues Broshy, traditional clients will want to better coordinate launches and marketing strategies across Europe. And it would certainly seem that as drug companies increasingly look to create global brands, sales efforts will also follow a more centrally directed strategy.
The problem is timing. Selling pharmaceuticals is still a national activity. For now, CSOs contemplating establishing new European businesses, or expanding existing ones, must confront the reality that while development and marketing can be increasingly global, sales remain stubbornly local. Swimming against that tide—even as it ebbs—makes the notion of a Europe-wide CSO far from practical.
--by Jeffrey Dvorin