Another Perfect Health Care Investment
By Rob Fannon, editor, Phase 1 Investor
July 11, 2008
Today, I want to tell you about a group of stocks ready to explode as the world's largest drugmakers slim down...
As I've explained before in Growth Stock Wire, Big Pharma is in trouble. The industry is facing slowing sales, patent expirations, generic competition, and withering pipelines. Now drugmakers are on a massive diet. The biggest losers – Pfizer, Merck, and Sanofi-Aventis – are dumping employees and slashing costs.
One of the winners in this situation is contract research organizations, or "CROs." Rather than perform the work in-house, drugmakers are outsourcing research and clinical trial work. As I've written before, I love CROs. They get paid whether or not new drugs make it to market. So they're a uniquely safe health care investment.
I recently told Phase 1 subscribers about another industry set to reap big rewards from drugmakers' downsizing. Let me explain...
By far, the biggest victims of Big Pharma's cutbacks are drug reps: attractive, well-paid twenty-somethings visit doctors bearing free samples and branded mugs. The largest drugmakers in the world are firing their rank-and-file sales force in record numbers. For the first time in more than a decade, the total number of drug reps actually fell last year.
Leading the bloodbath is Pfizer, the world's largest drug company. Last October, it kicked off a cost-savings plan that included a 10% reduction in its global workforce: 10,000 jobs. That includes 2,200 sales positions, nearly 20% of its U.S. fleet. Shortly after, Pfizer's peers announced similar cutbacks...
Britain-based AstraZeneca will trim 7,600 jobs, 11% of its roster, including most of its European sales force. Johnson & Johnson will cut 5,000 folks, including 400 drug reps right away. Sanofi-Aventis is firing one-third of its domestic sales force. And 3% of Novartis' employees, including 500 U.S. sales reps, got canned.
Of course, these companies still need to sell drugs. But at $165,000-$170,000 a year, traditional drug reps are too darn costly. The industry must sell more efficiently. That's where contract sales organizations, or CSOs, come into play.
Today, Big Pharma players can "borrow" sales reps on a temporary basis from a few CSO players. For example, Novartis may need a short-term team to push its flu vaccine in the fall. Or Merck might want to boost a drug launch and build brand awareness quickly. Using CSOs, drugmakers can supplement their internal sales force with top reps without taking on permanent, costly employees.
Right now, CSO reps make only 5% of total drug sales. This figure is set to triple in the next three years. That would make the substitute sales-rep industry worth about $2 billion. But CSOs do much more than farm out salespeople. They also recruit, train, and place new reps at drug companies. And they do market research, brand management, and other types of consulting.
The industry's biggest player is inVentiv Health (VTIV). The company loans out sales reps, crafts sales and marketing strategies, and provides staffing services. It brings in about $1 billion per year
Like CROs, the CSO industry is a perfect example of a low-risk, high-reward way to profit on Big Pharma's crash diet.
Good investing,
Rob Fannon
