Author: John Cummings
With annual revenues of a little under $3 billion and sales in 91 markets worldwide, New York City-based Coty Inc. is the world's largest fragrance company. It's an organization that's not afraid of remaking itself or its product portfolio. Business Finance editor John Cummings talked with CFO Michael Fishoff about Coty's remarkable agility.
John Cummings: You joined Coty at a time when the company was undergoing a significant transformation. What were some of the key changes?
Michael Fishoff: While the roots go back over 100 years to François Coty, the recent era or latest chapter is a five- or six-year-old chapter that started at the end of '01 with the recruiting of Bernd Beetz into the CEO position. And he assembled his team, some of whom were here and some of whom have been added since, including myself as the last or next-to-last member that's been added. But it was also an approach to focusing on core and global brands -- power brands -- and developing a worldwide, world-class fragrance portfolio, including some of the celebrity fragrances and some acquisitions that we've made on his watch as well.
So it's a more disciplined approach to the business and a focus on the global brands: adidas, Rimmel, the Calvin Klein acquisition, Jennifer Lopez and Davidoff, for example. So while we have a hundred-and-some years that we can claim, for many people the company is really five to 10 years old in terms of its true current look.
JC: Coty prides itself on being an entrepreneurial company, fostering diversity in its people and its products. How does that manifest in the finance department?
MF: We have creative people in the finance department, but we don't have creative accounting and finance practices -- I want to make sure we get that straight! Our people are creative in a couple of ways. One is the extent to which we use and improve the use of technology to promote better information sharing. Nine months ago, we did something a little unique. We took the concept of a reverse auction, which is something a lot of people use to purchase products where they have an online auction with competing suppliers, each trying to lower the price of the others to get the business. We did it in reverse with some closeout merchandise that we were looking to liquidate. We pre-cleared some potential acquirers, used the same technology and the same idea in reverse and had them bid up against each other for our selling price to them.
We also use technology creatively to take the data we have and turn it quickly and efficiently into useful reports and information.
The whole culture of the company, be it in finance or anywhere else, is that people know what their responsibilities are, but how they get the job done is as much their own doing as a mandate. So people are allowed to be as creative as they can in, say, partnering with their client groups or in developing a forecast technique or an analysis technique. It's really very decentralized and individualized.
JC: You've been involved in some M&A activity and in divestitures, too. What special challenges do divestitures pose for finance leaders?
MF: They're both challenging. Divestitures become a little trickier, particularly if it's not a complete, wholesale business, because if you carve out a piece of your business -- assets, for example, or brands -- you're generally left with some infrastructure that is underutilized or under-absorbing. And so the challenge in a divestiture is being objective but firm in evaluating what other costs can be eliminated fairly and appropriately to lessen the impact of the lost revenue from the divestiture. Otherwise, if we agree to divest a brand from one of the divisions, it becomes an interesting dialog with the division president, for example, as to what resources he or she may have to eliminate because they were connected to the now-divested brand. Because if not, the lost revenue becomes more significant than it otherwise might be.
The other challenge is always explaining why you divested something when you're in an acquisitive environment. But that's less problematic. It's a communications challenge and a strategy challenge. As I tell many people, we will certainly acquire and divest assets over the foreseeable future. As our size changes and as we grow, some brands become less significant in the portfolio; they become more local than either regional or global, and they are perhaps better served elsewhere for the integrity and the life of the brand.
JC: The introduction rate and time-to-market for new products at Coty are among the best in the industry. What challenges does that present that you might not encounter in a different sector?
MF: I'm not sure it's any different in any other sector, although it is a very fast-paced environment, and speed to market and life cycle are significant factors. Clearly the issues we have to deal with are good expense control, so that we have to have people who are attuned to fast-paced analysis of spending; brand support as well as development; and, obviously, the ability to track how a project or product is doing in the marketplace. If it's exceeding expectations or commitments, that's one path in terms of more spending, more ability to do things. If in fact it's just the opposite, then we have to curtail activities if we choose to manage the bottom line stringently.
Certainly in all cases it puts huge pressure on the supply chain -- from procurement, to manufacturing, to order-to-cash and shipping, it's pretty integrated.
JC: What leadership qualities and skills do you think are most important to finance leaders?
MF: As with most positions, understanding and quick thinking are always important. You need someone well-rounded. We want business people, not just technicians. We can always find technicians or create technicians, but we look for somebody who can see the forest for the trees. You have to have intuition, a bit of gut instinct. You have to know how and when to tap into all disciplines so you feel comfortable picking up the phone to call the R&D guy or the marketing person or the purchasing person. Networking, internally and externally, is critical. You don't have to be an expert in a lot of things, but you have to know a lot, and you have to know what you do and don't know -- what your boundaries are. And you have to also be comfortable enough to be able to say, "I'll get back to you," if necessary. You can't walk around any more with a 150-pound briefcase.
Author: Joanne Sammer
Lately, the best thing that can be said about prescription drug benefit costs is that they haven't been increasing as fast as they were a few years ago. But that is likely to change over the next few years. Indeed, when it comes to prescription drug costs, companies face a classic good news/bad news scenario. The good news is that thepatents on several major blockbuster drugs, like Zoloft and Zocor, have expired or will expire soon, which means that lower-cost generic versions are now or soon will be available. Considering that these drugs accounted for tens of billions of dollars in prescription drug spending, the savings for companies' prescription drug benefit plans promises to be considerable.
Now for the bad news from a cost perspective. The biotechnology revolution promises to bear significant fruit in the coming years as a host of new and extremely expensive biotech drugs come onto the market. Estimates of the size of the market for specialty and biotech drugs range from $70 billion to $80 billion or more in 2008, compared with $30 billion to $40 billion in 2004.
And when you look at the potential cost of biotech drug usage per patient, the sums seem even more staggering. "The costs of these drugs can range from $5,000 to $50,000 per month per patient," says Michael Jacobs, Atlanta-based national clinical practice leader with benefit consulting firm Buck Consultants. "They have the potential to change the way health care is delivered and certain diseases, like cancer, are treated. But what happens if five or six percent of your employee population needs these drugs?" Moreover, these drugs require long-term usage, which can further affect costs.
What's more, these costs could be just the tip of the iceberg. "Once a drug is approved for use for one condition, it is easier for it gain approval for use for other conditions," notes Helen Darling, president of the National Business Group on Health, a nonprofit association of 250 large employers in Washington, D.C. Managing Utilization
What can companies do to manage prescription drug spending while providing their employees with the most effective drug therapy? In many ways, the steps companies are taking to maintain a handle on prescription drug spending are simply an extension of the overall trend toward encouraging greater health-care consumerism, individual responsibility for health and well-being, and involvement in health-care decision-making.
As drugs become more expensive, companies are shifting their cost-management strategies to focus on ensuring drug therapy compliance (i.e., making sure that individuals are taking the drugs as directed) and utilization management. "With utilization management, companies encourage the use of less costly and less invasive treatments and only move on to the next level of treatment if the first level doesn't work," explains Darling.
"Now is the time to prepare the employee population for how things will be managed and [emphasize] individuals' responsibility for their own care," says Jacobs. For example, a company could eliminate co-pays for drugs that are used to treat certain chronic conditions but impose financial penalties, such as greater cost sharing, if the individual has a medical emergency as a result of non-compliance with drug therapy. On the flip side, the company could reduce cost sharing for employees who demonstrate that they are taking steps to manage their condition and improve their health. Given the number of brand-name drugs that are coming off patent, a company can offer incentives for individuals to switch some brand-name usage to generic forms even if they are taking a drug that is still under patent protection. For example, the cholesterol-lowering statin, Zocor, is now available in a generic form, so individuals taking another brand-name statin that is still under patent -- Lipitor, for example -- might be able to switch to the generic form of Zocor with no adverse effects.
Dollar Thrifty Automotive Group Inc., a company that specializes in car rental services, is attempting to manage costs in its self-insured prescription drug plan by developing a specific strategy to structure the therapy for the person taking the medications, says Angel Stacy, the Tulsa, Okla.-based company's director of employee benefits and HRIS. Because there are several drug options of varying strength and cost available for various conditions, the company's program focuses on working with the patient's doctor to identify the right drug therapy and monitor its effectiveness. If a drug is not working as expected, the patient can switch to more powerful and more costly options. "This way, the individual doesn't go with the most expensive drugs unless they need it," says Stacy.
This close monitoring of drug therapies is also important for other reasons. For example, drugs can lose their effectiveness over time, so a drug therapy that was successful in the past may stop working at some point. Moreover, drug effectiveness can change significantly if the patient's weight fluctuates; close monitoring enables the prescription to be modified quickly, before the condition can worsen or complications can develop. "Our ultimate goal is to have healthy employees," says Stacy. "We are focusing on doing what it takes to help them maintain their health." Encouraging Compliance
Enforcing compliance with prescription drug therapy is another valuable cost management strategy. The rationale behind this approach is that ensuring compliance with required drug therapies helps prevent the patient's condition from deteriorating and requiring additional treatment and hospitalization.
Many new and existing specialty drugs for treating certain chronic conditions -- for example, Hepatitis C -- often have serious side effects that can affect the patient's willingness to continue the therapy. For example, if side effects occur, the patient could stop taking the drug, and his or her condition could worsen unless an alternative therapy is introduced or the patient receives care to lessen the side effects. Without an intervention to deal with the side effects or find another treatment option, the patient's condition will go untreated and might deteriorate. To prevent these types of situations, some companies provide disease or case management services that provide follow-up care and counseling to help ensure drug compliance.
Disease management programs can also be used to help individuals manage common conditions where noncompliance can lead to debilitating and costly complications.
Pitney Bowes Inc., a company that provides mailstream software, hardware, services and solutions, has structured its prescription drug program to focus on increasing drug therapy compliance for the most prevalent conditions among its employee population: diabetes and asthma. "These are high cost conditions, made more so by employees not being on the proper drug therapy or not being compliant," says Dr. Brent Pawlecki, the company's associate medical director in Stamford, Conn. "We needed to find ways to make people more compliant on taking their medications, and we wanted to get rid of barriers to them getting proper care."
Pitney Bowes modified its tiered payment structure for drugs that treat these conditions. The existing tiered structure requires progressively higher co-pays for generic drugs (10 percent co-pay), preferred brand-name drugs (30 percent co-pay), and brand name drugs (50 percent co-pay). To make asthma and diabetes drugs more affordable, the company placed all of those drugs in the first tier with a 10 percent co-pay regardless of whether the drug is generic or brand-name.
As a result of this change, Pawlecki found that the compliance rate for these populations improved, and the rate of emergency room visits and hospitalization declined. Moreover, the overall cost of care for diabetes declined by 6 percent and for asthma by 15 percent, while average annual prescription drug costs for those conditions declined 7 percent and 19 percent respectively. Disability rates also fell among those populations. "Once we got people on the right therapies and increased compliance, they had fewer health problems and complications and didn't need hospital care or additional medications to deal with those problems," Pawlecki reports.