PROBLEM

Big Biotech has just won FDA (Food and Drug Administration) approval for OTC (over the counter) sale of an anti-depressant drug it had been doing R&D (research and development) on for the last several years. However, sales & marketing is not their core competency, R& D is. They have hired you to craft their go-to-market strategy. How would you go about formulating the strategy?

SOLUTION

(Note: The client's / interviewer's words are in italics, and the consulant's words are in bold.)

Consultant: Does Big Biotech have any experience marketing drugs, either prescription or OTC?

Interviewer: None whatsoever. They are essentially a biotechnology company. That is why your advice on drug marketing will be critical to their success at this juncture.

Consultant: OK. How well funded are they in terms of building a direct sales force, if they have to go for one?

Interviewer: They are pretty well funded, and consider themselves very successful in inventing new drugs. However, they are not experienced in selling drugs. In short, their CEO thinks that building complementary assets like a sales force will not be a good strategic move, unless they win FDA approval on their other drugs, which are in Phase 2 and Phase 3 clinical trials.

However, complementary assets are essential in a go-to-market strategy. They have no choice but to go for indirect sales, if the CEO wants to rule out direct sales. What are the channels which a drug maker typically uses to place a drug on the counter? In other words, between drug manufacturers and retailers like Walgreens, CVS, Rites Aid and other pharmacy retailers, are there any distributors or wholesellers involved?

Yes. Wholesale distributors like McKesson and Cardinal Health are the ones who deal with not only prescription drug whole-selling, but also with whole-selling of OTC drugs. However, broadly speaking, the channels of distribution for OTC drugs are somewhat similar to those for dietary supplements like vitamins. For example, it is not only Walgreens which sells Vitamins and Tylenol. Tylenol and Vitamins are sold in stores ranging from discount whole-sellers like Costo and Sams Club to office stationery retailers like Staples to mainstream retailers like Walmart and Target.

While a Walgreens will like to have a direct relationship with a drug maker like Pfizer for both its OTC and prescription drugs, intermediaries do come in when the final segment of the channel is a Staples or a mom and pop store. Pharma companies who have a sales & marketing arm have business relationships with these intermediaries, buyers in Walmart and Walgreens, etc. So, selling OTC drugs is an established business practice in itself.

Additionally, let’s consider the logistical details of selling OTC drugs. Currently all OTC drug products intended for retail sale bear a bar code (Universal Product Code, or UPC) on the outer container as a means to track channels of distribution, inventory management, and sales by channel. Thus, the manufacturer will need to have a tie-up with a channel partner to properly package its products for sale. This packaging will be required, whether the manufacturer sells direct or indirect.     

Thank you. I now know more about OTC drug channels of distribution than I did my whole life. Before I give my whys on whether direct or indirect selling will be more appropriate for the client, I would like to know more about the competition.

You want to know who the company’s biotech competitors are?

Yes. Specifically I want to know if the drug has any competition in the marketplace.

Indeed. There are three antidepressant drugs in the OTC market currently. One of them has less side effects than the other two, and consequently sells for a higher price. Our client’s product is more similar to the ones selling at the lower price.

How about the market growth rate?

In one word, it is excellent. It is projected to be more than 26% CAGR (compounded annual growth rate).

Can our competition meet this demand, if for example, our client does not push its drug through the channels?

No, the manufacturing capacities of the other companies to keep up with the market demand are limited. So, your client’s drug has excellent chances of being a profitable venture, even though it has more side effects compared to the one which has less side effects. We will just have to price it lower.

Thanks for the clarification. How about the fixed and variable costs for manufacturing and selling this drug? Has the client run any estimates?

Yes, it has. As per the estimates for the next ten years, if the client has to go for its own direct sales force, the manufacturing component of the cost structure is going to be 12% to 15%, and the sales component is going to be 65% to 75%.

Have any estimates been done on indirect sales? For example, if the product was co-marketed with a pharma company with a well established sales force, will the sales component go down?

Actually, estimates have not been done on this front. The costs would vary depending on the nature of the co-marketing agreement, but so will the profits. But the idea of co-marketing has merit, considering the CEO’s allergy towards building their own sales force. Can you give any other reasons, apart from costs, as to why the co-marketing idea has merit?

Sure. Under a co-marketing agreement, if our client plays its cards right, it can leverage everything from a big pharma: marketing power, brand equity, sales force, etc. In particular, if a pharma partner with no anti-depressant drugs in the market is chosen, the partner can bundle its other products with the clients anti-depressant drug, thus effectuating good price discrimination and reaching the various customer segments with differing price elasticities or sensitivities.

Indeed. Does the client have any other option, apart from co-marketing?

Yes, how about licensing the technology to a pharma company in return for royalties?