[Reporter’s View] Trending CSO sales and their treatment

How to regard the trending CSO sales in the industry

Contract sales organizations (CSOs) are trending in the pharmaceutical industry.

 

The Ministry of Food and Drug Safety announced that 45% of the 195 companies it had surveyed use CSO companies.

 

When limiting the subjects to small-to-mid-size companies, the industry expects the rate to far exceed 70%.

 

The Top 10 pharmaceutical companies in Korea are also preparing to use SCO sales for their products.

 

Kyung Dong Pharma also chose to outsource sales to CSOs at the beginning of the year.

 

The company laid off 180 of the 250 sales representatives.

 

As a result, the number of employees (excluding fixed-term workers) decreased from 569 at the end of last year to 397 by the end of Q1 this year.

 

Company K also announced plans to start using CSO for sales from 2H this year.

 

The company will use CSOs instead of its local workforce.

 

The change in the company’s number of employees is expected to be reflected in the company’s Q3 report.

 

However, two major challenges must be addressed for the trending CSO sales to go mainstream in Korea.

 

The first is in preserving the sustainability of each company’s management.

 

Pharmaceutical companies that introduce the CSO system undergo major changes.

 

Their number of employees plummet and commissions paid out to the CSOs soar.

 

Performance fluctuates in this process.

 

Since the companies have never used such methods before, if they fail to implement the CSO system well in the beginning, it can lead to poor performance.

 

Therefore, the company should share its revamping process and share their future management policies.

 

Kyung Dong Pharma’s case is worth referring to.

 

After switching to a CSO system earlier this year, the company distributed press releases even though it marked a deficit for 2 consecutive quarters.

 

This was unusual considering how performance reports are mainly released by companies that show an improvement in their performance, such as record-high sales.

 

However, the press release showed the reason why.

 

Through the release, the company explained the reason for the deficit and the company’s future management direction.

 

“The decline in profits in 1H is within the expected range due to the company’s introduction of a marketing agency system.

 

We will do our best to turn a profit in the 2H this year by launching combination drugs and new products, increasing defense of drugs subject to price cuts, and strengthening sales competitiveness.” Although the message was simple, from an investor's point of view, the press release provided ‘thankful information’ on when to expect a surplus and how the company is planning to overcome its deficit.

 

The second task that remains for the CSO sales culture to settle in Korea is managing the point organizations exposed to rebates.

 

This is an issue we are all already aware of, and it is now the time to act on it.

 

Companies that are using CSOs are on the up and rise.

 

The ‘Increase in commissions=increase in sales” settled as a formula.

 

Some companies are investing more than half of their sales revenue as commissions to drive sales through CSOs.

 

However, the management of the CSOs that are made up of point organizations, remains a challenge.

 

Some say it is virtually out of control.

 

Some describe them as rebate windows due to overheated commission competitions.

 

This is why the CSO reporting system should be legislated with a soft landing.

 

Although CSO legislation is an option, in the end, it all depends on the will of the pharmaceutical company owners.

 

The CSO reporting system only suppresses rebates but is not a fundamental measure.

 

If CSO is the trend, it is necessary to devise a way to use CSOs without triggering a dumping war based on the owner's determination to fight cleanly.

 

This is also connected to ESG management.

 

The patent for the blockbuster antidiabetic ‘Januvia (sitagliptin),’ worth KRW 110 billion a year, is set to expire in a month.

 

It is expected that sales competition will intensify around CSOs for the sales of generic products.

 

Rebate concerns are rising.

 

For CSOs, which is settling as a method of pharmaceutical sales, to make a soft landing in Korea, the owner's will for the clean competition will be ever the more important.

 

The company should also share its prediction of its business sustainability to its shareholders consistently.

 

These two will be essential for companies that seek to use CSO sales.