MERGERS SQUEEZE DRUG AD BUSINESS;TOP HEALTHCARE AGENCIES DOWNSIZING AS INDUSTRY SPENDING PATTERNS SHIFT

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As consolidation becomes a common theme in the fragmented drug industry, healthcare ad agencies are having to quickly adjust to new business realities.

With the $13 billion merger of Upjohn Co. and Pharmacia; the $7.1 billion union of Marion Merrell Dow and Hoechst; Glaxo and Burroughs Wellcome's $15.3 billion consolidation; and more sure to come, the future for these agencies holds fewer individual drug manufacturers and reduced marketing dollars.

Agencies that specialize in healthcare advertising are looking at how to adapt but the stress is already showing.

"The pie is smaller, and there is tremendous competition among pharmaceutical agencies," said Angela Rosetti, managing director of Ketchum/BRH&M Healthcare Communications, New York.

Worldwide, healthcare agency revenues grew just 5.3% in 1994 to $720.6 million compared with an 8% rise in 1993, according to Med Ad News. Not surprisingly, eight of the top 10 agencies downsized in 1994, making double-digit cuts in their payrolls.

"Budgets change and relationships also change," said Win Gerson, chairman-CEO of William Douglas McAdams. "As companies downsize, those people you've done business with are gone."

Mr. Gerson said that while he kept all the business with Burroughs Wellcome after Glaxo's purchase, he expects to lose two Hoechst brands, antibiotic Claforin and heart drug Trental, in the consolidation with Marion Merrell Dow.

According to Competitive Media Reporting, last year Glaxo spent a total of $50 million in consumer media through William Douglas McAdams, FCB HealthCare, Klemtner Advertising and others.

Burroughs Wellcome, with partner Warner-Lambert Co., shared 1994's estimated $190 million spending on Warner Wellcome Consumer Health Products. Among the top products, Bates Worldwide has Sudafed and Neosporin and J. Walter Thompson USA handles Listerine.

Warner-Lambert formed separate partnerships with Burroughs Wellcome and Glaxo in December 1993 to jointly develop and market nonprescription products, but the partnerships' fates are uncertain. A Glaxo spokeswoman said "there will have to be some changes" in their relationship but declined to elaborate.

Reprioritization and merger overlaps often cause new products and potential marketing support to fall by the wayside. Before their merger, Glaxo and Wellcome worked independently on different migraine remedies. As a result of the marriage, Wellcome dropped the one it had in development.

Currently, Marion Merrell Dow and Hoechst are each running trials for Alzheimer's drugs, though how the merger will effect them is not yet known.

Moreover, companies are focusing research and development only on the most profitable, most likely to succeed products. A March study by New York-based consultants the Wilkerson Group, which was sponsored by Warner-Lambert, concluded that "R&D returns are being slashed by intensifying competition both early and late in the product life cycle."

"By and large, manufacturers don't have the capital to support all these products," said Tom Harrison, chairman-CEO of Omnicom Group's Harrison, Star, Wiener & Beitler.

"With the medical community as it is today, especially with managed care, manufacturers need to develop new compounds," Mr. Harrison said.

While Bristol-Myers' merger with Squibb didn't affect ad budgets at Harrison Star, according to Mr. Harrison, the agency has felt cutbacks elsewhere.

"We had a client [diagnostics company Technicon Instrument Corp.] that merged with a larger one, and a whole line of products lost its budget," he said. "However, with other clients we've emerged as the victor. It's a real roll of the dice-which agencies win and which ones don't."

But Mr. Gerson said he has noticed a pattern in which "agencies of the dominant [company] usually prevail."

Price pressure from managed care groups or health maintenance organizations has been one factor driving consolidation, as companies seek economies of scale and lower prices on drugs. HMOs create lists of approved prescription drugs, called formularies, in various categories based on efficacy and price.

Thus, doctors' drug preferences carry less influence when HMOs consider a drug to be simply an expensive version of another, and patients aren't reimbursed for the added expense. Drugs not included in formularies largely lose their market.

To make up for discounts forced by HMOs, drug companies have pushed up prices of their top 20 selling drugs. But the hikes aren't expected to alleviate the spending crunch.

Drug marketers are now shifting their promotional efforts. Promotion to doctors declined 10% to $3.6 billion in 1994, according to Dun & Bradstreet's IMS America. Direct-to-consumer advertising was up 46.5% to $240.7 million in the same period, according to Competitive Media.

Additionally, some drug companies want to reduce the number of ad agencies they deal with as part of their cost strategies. While many agencies in the consolidation shuffle are not yet certain of their fate, when American Home Products merged with American Cyanamid Co. last year, it consolidated most of its advertising at in-house agency 30 West Advertising. In the process, six to eight agencies were dismissed, though "we still do a lot of work with outside agencies," said Dora Shankman, director of media operations for 30 West.

Despite consolidation, American Home Products Corp. spent more than $320 million on measured media in 1994, up 14% from the previous year, of which American Cyanamid's share was $43.8 million, up 21.6% over the year prior to the merger.

Still, competition for new business is tougher. "There used to be two or three agencies invited for pitches, now there are five or six," said Ms. Rossetti.

Consolidation is a word healthcare ad agencies may start using about themselves. Lavey/Wolff/Swift acquired Dorritie, Lyons & Nickel to become Lyons/Lavey/Nickel/Swift, and Omnicom now owns several healthcare shops as the pace of acquisition increases throughout the industry.

"Some agencies will have to merge to take care of larger clients and some will not be here in five years," said Mr. Harrison.

More overseas units and more flexibility will be required of many agencies if they want to compete in the new world order. "We're seeing with these consolidations a much more global view [for brands]," said Natasha Kavanagh, a partner at Ogilvy & Mather.

Of the top 10 agencies, Medicus Group International and Grey Healthcare Group have agencies throughout the world; Sudler & Hennessey has offices in eight other countries; and Kallir, Philips, Ross is in Belgium and the U.K.

"Agencies must be a multidisciplinary resource," said John Zweig, CEO of WPP Group USA's S.U.N. Health-Core. "They must deliver consulting services that compete with the consultancies" to be sharp and save manufacturers money.

Some agencies are now also seeking less traditional, sometimes smaller, sources of business. Ketchum/BRH&M, for example, now has Dial Corp.'s antibacterial soap (for trade advertising) and the American Gastroenterology Association Foundation as clients.

"It's not all gloom and doom," said Styli Engel, editor of Med Ad News. "Some agencies out there are courageous and look at this as opportunity. Diversification is the key."

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Top healthcare ad agencies by worldwide gross income

Pharmaceutical ad agencies are feeling the brunt of change in their industry, as six of the top 10 experienced income declines, and eight of them downsized their operations as a result.

RANK WORLDWIDE GROSS INCOME NUMBER OF EMPLOYEES

'94 '93 Agency 1993 1994 Change 1993 1994 Change

1 2 CommonHealth USA, Parsippany, N.J. $49,581.1 $60,795.7 +22.6% 193 298 +54.4%

2 1 Medicus Group International Inc., New York $60,969.2 $56,218.5 -7.8% 575 535 -7.0%

3 9 Girgentl, Hughes, Butler & McDowell Inc., New York $25,100.0 $42,910.0 +71.0% 100 324 +224.0%

4 5 Nelson Communications Inc., New York $38,416.0 $41,182.0 +7.2% 622 526 -15.4%

5 3 Sudler & Hennessey, New York $43,662.0 $40,614.0 -7.0% 351 295 -16.0%

6 4 Grey Healthcare Group, New York $39,100.0 $37,100.0 -5.1% 285 278 -2.8%

7 8 Klemtner Advertising Inc., New York $29,840.0 $30,000.0 +0.5% 175 139 -20.6%

8 - Lyons/Lavey/Nickel/Swift Inc., New York $30,814.0 $28,333.0 -8.1% 240 188 -21.7%

9 7 Kallir, Philips, Ross Inc., New York $29,917.0 $27,274.0 -8.8% 239 211 -11.7%

10 6 William Douglas McAdams Inc., New York $31,325.0 $23,952.0 -23.5% 189 152 -19.6%

Dollars are in thousands. Source: Med Ad News, West Trenton, N.J.

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