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At Sepracor, a Cost-Cutting Exercise Proves Expensive

Sepracor CEO Adrian AdamsLast year, Sepracor, the maker of sleeping pill Lunesta, announced it would reduce its sales and marketing expenses by $90-100 million in 2008, "including an anticipated reduction of approximately 300 sales force positions." The company said it needed to make the layoffs because, by last October, its revenues were falling.

But Sepracor's own numbers seem to show that the plan has had mixed results. Its sales expenses -- the money it spends on drug reps and their company cars -- have actually gone up, and the productivity of its sales force has arguably declined, not improved, since the cuts were made.

Sepracor wasn't the only company laying off sales reps, of course. But Sepracor's sales expenses are interesting because historically they have formed a much larger portion of the company's expenses than most large drug companies. Those expenses are currently about 70 percent of its revenues; at Pfizer they're only 30 percent.

In Sepracor's recent second quarter conference call, CEO Adrian Adams (pictured) and chief commercial officer Mark Iwicki both hailed the layoff program as a success. Here's what they said:

"Since the restructuring and realignment was implemented at the beginning of this year, our valued field forces have begun to gain traction with new call plans, quality training, focused targeting and what we believe our best practice incentive schemes." -- Adams
"One of our key 2008 objectives was to significantly increase field force productivity. We believe that we are now seeing increased momentum from our sales organization as a direct result of the changes that were implemented." -- Iwicki
Iwicki cited some numbers to back up his claim:
Average calls per day are up 18%. ... Call frequency is up 30% and our calls to target are up a 11%.
Curiously, he didn't put any dollar numbers on those stats. So let's look at Sepracor's financials: Revenues from product sales actually fell from $275 million in the quarter when the efficiency drive was announced to $270 million in the most recent quarter. Worse, over the same period, Sepracor's sales expenses ballooned from $175 million to $208 million.

Put another way, in October last year Sepracor gained $1.57 in revenues for every dollar it spent on sales and marketing. Today, it only earns $1.30 cents on its money -- a decline of 17 percent.

Of course, you can argue about the numbers. We're not comparing quarters year-on-year here, but that's why the declining ratio of product sales to sales expense is so interesting. Plus, this is the timeline the company gave Wall Street in its own conference calls. In fact, UBS analyst Annabel Samimy raised this very issue in the most recent call, suggesting that a development deal had made the whole plan moot:

Are you going to be able to realize the $100 million in savings that you had talked about on third quarter call last year?
Robert F. Scumaci, Sepracor's CFO, gave this answer:
I think it's not moved, but I think if you look at the $80 million to $100 million I think we will realize those expense savings on the original base, but yes that business development deal has created an increase to that and offset to that.
Translation: Er, yes and no.

Also, Sepracor has changed the way it reports selling expenses. It used to break out selling from administration, but now bundles them together. (I used bundled totals from all periods and excluded royalty revenue.) And Sepracor has had to restate a lot of its financials following an unfortunate Medicaid pricing mistake. But the bottom line is that Sepracor's restructuring seems to have resulted in a more expensive, less efficient company.

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