As domestic drugmakers continue to outsource sales, the math between pharmaceutical companies and contract sales organizations (CSOs) is becoming more complicated.
In addition to drug prices, fees, and sales efficiency, the responsibility for CSO oversight and tighter regulation has emerged as variables. Both drugmakers and CSOs are seen as entering a phase where they must craft new business strategies.
According to the pharmaceutical industry on the 8th, the Ministry of Health and Welfare and the Korea Pharmaceutical and Bio-Pharma Manufacturers Association (KPBMA) decided to discuss measures to strengthen the management and supervision of contract sales organizations (CSOs) as a key agenda item at the "first public-private consultative body for pharmaceutical industry innovation," which launched on the 2nd.
The consultative body will discuss improving CSO management plans, tightening controls on Nth-level subcontracting, and strengthening drugmakers' responsibility. The body comprises 21 members, including related ministries, industry, experts, and public institutions, co-chaired by the second vice minister of the Ministry of Health and Welfare and the head of the Korea Pharmaceutical and Bio-Pharma Manufacturers Association (KPBMA). Earlier, in May, the ministry also conducted a fact-finding survey, receiving submissions on the status of CSO outsourcing contracts by drugmakers.
An official who requested anonymity said, "Measures under review include tightening qualification requirements for CSOs, limiting the number of re-delegations, and strengthening the management and supervision by the principal drugmakers," and noted, "The plan also includes strengthening CSOs' reporting obligations to drugmakers."
The official explained, "If management and supervision are not carried out properly, there is a possibility of additional penalties, which could make drugmakers hesitant to switch to CSOs."
For drugmakers, using CSOs can cut the expense of shrinking sales forces, but they must also weigh the responsibility and potential penalties if they fail to properly manage those CSOs.
CSOs are firms entrusted by drugmakers to promote pharmaceuticals and sell to medical institutions. Drugmakers can reduce labor costs and fixed costs such as vehicles and offices that arise when running in-house sales teams, while leveraging CSOs' sales networks. They have been seen as advantageous in targeting markets with many accounts dispersed by region, such as clinics.
However, outsourcing does not automatically translate into expense savings. CSO fees are typically cited at around 40% of prescription value. According to a response the Ministry of Health and Welfare submitted to the National Assembly in May, the average fee rate was tallied at 37%, with some reportedly approaching 50%. Some in the industry now view the average fee rate at 40%–45%.
In some items, fee rates are far higher than that. An analysis of previously disclosed CSO fee data showed cases where the top item-level fee rate reached 50%–70%.
As drug price cuts take hold, the burden on drugmakers has grown. When prices fall, sales and profit that can be secured from products decline, and if CSO fees remain at existing levels, item-level profitability can worsen.
In practice, drugmakers are lowering CSO fee rates. Daewoong Bio Co. adjusted fees this year, cutting CSO rates for some items from 40% to 35% and from 38% to 35%.
Beyond items with price cuts, some items saw lower fee rates due to rising costs. HLB Pharmaceutical(047920) also lowered fee rates by 1 percentage point for roughly 100 items entrusted to CSOs in line with the drug price cuts implemented in Aug. The company said the move aimed to improve profitability by factoring in high cost ratios and selling, general and administrative expenses.
Conversely, there are cases of paying high fees to secure prescription share ahead of price cuts. As drugmakers facing expected sales declines from price cuts and CSOs demanding higher fees find their interests aligned, the gap in item-level fee rates is widening, an industry official said.
With price and fee burdens overlapping, drugmakers' strategies are diverging.
Chong Kun Dang pharmaceutical(185750) moved early this year to shift some items to CSOs, focusing on the clinic market. Although starting CSO sales for some items in Apr. was initially discussed, the switch was later put on hold. The timing and terms will be reexamined in light of pricing policy.
Shin Poong Pharm took a more aggressive approach to CSO conversion. It dismantled the team handling clinic-level institutions and handed those sales to CSOs, and by the end of May about 120 clinic sales staff reportedly left the company to move to CSOs. Sales to general hospitals remain with in-house teams.
Ildong Pharmaceutical(249420) chose a dual strategy of direct sales and CSOs. Existing clinic accounts with a high share of sales are handled by in-house teams, while CSOs are used for smaller or new clinic accounts that need to be acquired. The hospital market is excluded from CSOs, and the existing sales organization is maintained.
Boryung(003850) also entrusted sales of some items to CSOs while concentrating in-house selling power on core products. Since May last year, it shifted about 50 prescription drug items for hospitals and clinics to a CSO model, streamlining sales and marketing expense for product groups with low sales and revenue, while focusing resources on its own products such as Kanarb.
By contrast, JW Pharmaceutical(001060) entrusted sales of about 40 non-core generics such as celecoxib, donepezil, eperisone, and valsartan to CSOs in May last year, but decided to withdraw in just over a year. Internal assessments reportedly reflected that there were no expected results in terms of profitability and sales efficiency.
In the past, drugmakers weighed whether to keep in-house sales or switch to CSOs; now they must more closely determine which items and accounts to outsource, and to what extent.
CSOs too must change their math. If the government limits the number of re-delegations and tightens CSO qualification requirements, there could be constraints on expanding sales networks across multiple tiers. If drugmakers' oversight responsibility and CSOs' reporting obligations are strengthened, compliance expense arising in the sales process could also rise. Government efforts to tighten control have also been linked to sales issues such as illegal CSO rebates.
An industry official forecast, "Rather than the CSO market itself shrinking, outsourcing by drugmaker will become more selective and segmented, and restructuring may emerge among CSOs with weaker competitiveness."