compilation global pharma industry print
TRANSCRIPT
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1.1 Background
The case started with Contradictory verdicts, one from Guardian Newspaper stating Global
Pharmaceutical Industry is in very good shape, on the other end analysts of Dresdner Kleinwort
Wasserstein saying that the industry is in a vulnerable position.
In the 70s, the pharmaceutical market had some unusual features having Medical Practitioners key
influence on the sales. Thalidomide tragedy and patent protection of 20 years length were two keyevents during this period. The later one (after 20 years of patent period) gave the birth of the concept
generic medicines- drugs that have same chemical structures. Governments remain the main buyer of
the industry worldwide during this period.
The global recession at the beginning of 90s, put pressure on global pharmaceutical industry,
governments asked for more new brands rather than mere generics. This created the inception of Small
Bio-technology firms with limited production capacity funded by venture capitals. Due to their limited
financial power, Bio-technology firms merged with generic and branded drug companies.
In the millennium, US became the largest market of the world. For different types of companies
emerged in the global pharmaceutical industries with different strategies during this period:
Company Type Strategy
Ethical (Prescribed drugs) Develop strong R&D and global sales marketing structure
Branded OTC (Non-prescribed drugs) Develop strong direct-to-consumer marketing
Biotech Innovation and protect intellectual property
Generics Focused on supply chain and manufacturing cost
Previously the firms rolling out the most innovative products in the market were the most successful
ones. But due to the changing landscape we see this trend reversing. Oftentimes the firms who are thesecond in line to produce the medicines are more successful as they examine the pitfall of the
innovators and rectify those mistakes to launch a better similar medicine in the market.
For the proliferation of the generic medicines firms are increasingly taking risky moves of introducing
Blockbuster medicines in the market. Blockbuster medicines are those which have sales of over $1B in a
single year. Firms are focusing in the unmet category or lifestyle medicines in order to get a sizable share
in the market. But the R&D cost of making a new product has increased by over 3 times in the last 2
1 Background
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decades. Companies have to undertake many more clinical trials and regulatory enforcement has
increased in nature, thus greatly increasing the product introduction cost.
Due to rising costs and declining sales, firms have become efficient in operation by focusing in their core
competency. There is more focus in outsourcing their R&D operations to Creative Research
Organizations (CRO) to cut down costs. Also big firms are collaborating with university and biotech.Financially poor biotech firms are selling their businesses to big firms. In this way the companies can use
those purchased patents to manufacture new drugs in the marketplace.
Sales and marketing capability became an increasingly important source of competitive advantage. A
company that developed a strong global franchise with its customers could maximize return on its in-
house products and was in a good position to attract the best in-licensing candidates. Traditional
approach of using direct methods to persuade doctors prescribing medicines have come under scrutiny
due to unfair methods and busy schedule of doctors. Return of investment from advertisement has
decrease by 30% over the last 10 years. To stop this decline firms have shifted their strategy from
personal selling to above the line (ATL) selling. The ATL activities create informed customers and help to
increase brand equity, which ultimately helps when the patent protection expires.
Companies are focusing in creating a global brand. Thats why we see the launching of global brands
because it helps to create a rapid tip-off in sales in their high compression marketing strategy. In
addition to seeking an earlier, higher sales peak, marketers in pharmaceutical companies also aimed to
extend the product life cycle. As a product approached patent expiry, effort might be invested in
switching patients to new improved formulations with longer patent protection.
Even though medicines have helped the humanity in innumerable ways there is surprisingly negative
stigma involved with the big medicine companies. The biggest criticism they face is in their profit
motives. The drugs are inexpensive to manufacture but expensive to produce due to the R &Dexpenditures and the cost of the failed methods. There were also instances where drugs were
administered to patients even though they didnt require it. Also firms have rolled out drugs with
dangerous side effects which have instances of fatality. These steps have greatly tarnished the image of
the companies. Firms have realized the negative image they have created so they now sell life-saving
drugs at zero cost.
Even though the marketplace looks fragmented on the outside, globally it is a different scene. Due to
the recent incidences of mergers and acquisitions the top 10 firms control 37 percent of the global sales.
A key rationale for mergers and acquisitions was to combine a company with a strong pipeline but weak
sales and marketing with its converse. The arguments for increasing size were to improve R & Dproductivity. Rather than investing a lot on the R&D they can share infrastructure. But creating mergers
creates bureaucracies and increases layers, decreases freedom to operate and has a reduced research
output.
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2.1 Primary Problem
Currently there is no specific goal or strategies available for the global pharmaceutical industry which
has made the industrys future uncertain.
2.2 Key Role Player and Supporting Players
According to the case majority of the total market share is hold by the ten giant companies of the world.
They are our key role players of our analysis.
Key Player Supporting Player
The 10 Companies
Governments
Worldwide Health Insurance Companies
Health Development organizations e.g. WHO, Unicef and so on
Individual buyers
2.3 Secondary Problems
Primary Problem Absence of Specific goal or strategy
Secondary Problem Too many generic products
Higher selling and marketing expenses
Higher R&D Expenses
Stricter Regulation on clinical tests and price
2.3.1 Too many Generic Products or me too Products
New variants of medicines are coming more quickly in the market rather than new products.
2.3.2 Higher Selling and Marketing Expenses
The sales per dollar of advertising have dropped to 17 now from 22 dollars five years ago. More number
of companies is fighting for the same customers raising their selling and marketing expenses. In addition
firms have to adapt aggressive marketing strategies to gain market share as well.
2.3.3 Higher R&D Cost:
The R & D costs for introducing a new product to the market has increased 3-fold in the last 2 decades.
2 Problem Identificationand Key Role Players
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2.3.4 Strict Regulation
Since Thalidomide Strategy in 70s, the global pharmaceutical industry has been facing tighter regulation
policies. The regulation on clinical test is stricter than ever. Price restrictions imposed by the
governments have reduced the profits substantially.
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In this section the following two questions will be answered:
1. What are the main environmental forces currently affecting the pharmaceutical industry.
2. What are the likely implications of the changing business environment on pharmaceutical firms?
In order to that, we have used PESTEL, Porter, SWOT, and Double Helix analytical tools and using these
tools we have also tried to show business implications of the findings.
3.1 SWOT Analysis
3 Analyze Decision Context(SWOT/ PESTEL/ Porter)
Weaknesses
WMost growth over the past
decade has been in volume
rather than new drugs
Opportunities
O
Biotechnology gives scope for
new drug lines
Threats
T1. Public opinion
regarding profiteering
in life saving drugs
2. Expiry of patents
allowing generic drugs
to enter the market
Strengths
S
1. High entry barriers
2. Strong R&D
departments
3. Inelastic demand
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3.2 Double Helix
The pharmaceutical industry started as small chemical research firms, (each with minor market share)
that later grew and merged to dominate the global market.
Due to the monolithic structure of the final products, the integration effect has dominated so far, with
companies choosing to merge and grow in order to reduce costs.
Share within Global Retail
Pfizer, 10.30%
GlaxoSmithKline, 7.00%
Merck, 5.00%
Johnson & Johnson, 4.60%
AstraZeneca, 4.50%
Novartis, 4.10%
Aventis, 3.60%
Bristol-Myers Squibb, 3.60%
Roche, 3.10%
All Others*, 54.20%
Pfizer
GlaxoSmithKline
Merck
Johnson & Johnson
AstraZeneca
Novartis
Aventis
Bristol-Myers Squibb
Roche
All Others*
*individual shares negligible
2011 Mkt Share (%)
Pfizer, 6.6%
Novartis , 6.0%
Merck & Co, 4.7%
Sanofi, 4.6%
Astrazeneca, 4.3%
Roche, 4.0%
GlaxoSmithKline, 4.0%
Johnson & Johnson, 3.2%
Abbott, 3.0%
Teva, 2.8%
Lilly, 2.8%
Takeda, 2.1%
Bristol-Myers Squibb, 1.9%
BayerSchering Pharma, 1.9%
Amgen, 1.9%
All Others*, 46.2%
Pfizer
Novartis
Merck & Co
Sanofi
Astrazeneca
Roche
GlaxoSmithKline
Johnson & Johnson
Abbott
Teva
LillyTakeda
Bristol-Myers Squibb
BayerSchering Pharma
Amgen
All Others*
*individual shares negligible
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The scenarios in 2002 and 2011 are shown above. The same companies dominate in both cases, but in
2011, the market share is reduced due to the entry of small biotech companies. Going by past trends in
the industry, many of these will be acquired by the existing giants dominating the market. While we may
also see some of the major corporations splitting off some units in order to concentrate on others, given
that the major entry barrier to the market is patents held by these companies, this is extremely unlikely,
as the spinoffs would have to compete against cheaper generic versions, once the patent expires. At
that point, it would probably be more cost effective to close them down.
3.3 Porters Five Forces Analysis
Factors 1950-1985 1985-1995 1995-2005
Threat of Potential
Entrants
High cost of R&D and
clinical testing
Existing high entry
barriers were increasing
Firms specializing in
moving specific
molecules along the
value chain could be
tomorrows maincompetitors.
Large and expensive
sales force required
Lead times for new
drugs to
be marketed increasing
from 35 years in
the 1960s to 12 years in
the mid-1990s
Emphases on disease
prevention and early
detection begin to shift
R&D priorities; and
could favor
pharmacogenomics
providers.
Long lead times for new
drugs,
Already high costs of
R&D and clinicaltesting increasing
Low Low Moderate
Bargaining Power of
Buyers
The decision to buy was
imposed by doctors on
patients (final
consumers).
Doctors had no
responsibility to contain
costs.
Loss of brand loyalty as
medical practitioners
are forced to become
cost conscious and
consider prescribing
generic rather than
brand drugs.
Controls on pricing,
reimbursement and
market access continue
to tighten.
In the US, a mail-order
channel starts to
develop to help highly
price sensitive patients.
Patients expectations
are rising
Growth of managed
care is expected to
continue deteriorating
the profitability of
big pharmaceuticals
regardless of the
Government policy to
increase competition.
Governments (EU) and
managed health
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organizations (US)
imposing systems to
control prices.
outcome of regulation.
Growth of distributors
of drugs who, acting
as middlemen, buy
drugs in bulk to
achieve cost reductions
Harmonization of
government
approaches
to healthcare and drug
approval amongst
EU countries and
between the EU and the
US
Low High High
Bargaining Power of
Suppliers
Cost of drug ingredients
are very low percentage
of total costs.
Global sourcing by drug
companies has
led to further
reductions in the costs
of raw materials
Lack of profitability of
outsourcing markets
for R&D, clinical trials
and managing the
approval processes may
result in a shakeout
with fewer suppliers
able to put upwardpressure on out-
sourcing costs
Pharmaceuticals tend to
be fully vertically
integrated (from
molecule search to
mass marketing)
Major pharmaceutical
companies come
increasingly to rely on
out-sourcing and in-
licensing for new
products, enabling
supplying companies to
place a high price onsuch deals. However,
counteracted by
global over-capacity in
outsourcing and R&D
Low Low Low
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Threat of Substitutes
Few substitutes. High
profits associated
with introducing
products that greatly
improved the quality of
healthcare for many
patients
Cheap generics (from
not very reputable
manufacturers)
Biotechnology and
combinational
chemistry further
reduce lead times to
market
Consumer suspicion of
drugs leads to
increasing use of
alternative remedies
Diversification into
generics protects the
market share (but not
the profit) of big
pharmaceutical
companies.
Lead times of 67 years
over competitors (time
for rivals to produce
me-too drugs)
Improved chemistry
and computer
generation of analogues
Biotechs may become
more successful at
bringing successful
products to market as
genomics allows
targeted application so
that clinical trial size
and length can be
shortened
Low Moderate High
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Rivalry Among
Competitors
Low concentration (lots
of producers in several
therapeutic
applications, hence lowprice competition)
High cost of R&D
expenditure is
effectively an exit
barrier
Continued industry
consolidation results in
fewer larger global
companies, focused onspecific franchises, with
intense rivalry within
therapeutic franchises
Large and expensive
sales forces were
developed on the back
of brand recognition to
target doctors
Profitable, cash rich
industry but margins
are declining.
Mergers and
acquisitions areexpected to continue as
they could lead to
economies of scale,
better sales and
marketing and more
efficient R&D efforts
Moderate High High
Source: Pearson Education Limited 2005
3.4 PESTEL Analysis
3.4.1 Political Factors
The pharmaceutical industry is unusual, as in many geographic markets there is effectively only one
powerful purchaser, the government. In the 1980s and 1990s, governments around the world began to
focus upon pharmaceuticals as a politically easy target in their efforts to control rising healthcare
expenditure and demand greater value for money.
On balance, the types of controls used by governments are a reflection of deep-rooted cultural
differences but the choice of strategy is also affected by the importance or otherwise of the nationalpharmaceutical industry as a contributor to GDP, balance of trade and employment. As the industry
globalizes and ownership and employment become concentrated in fewer countries, this may result in
less benign intervention.
Regulators have been challenged not to overburden new growth areas in biotechnology research.
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There are growing pressures arising from inter-country pricing disparities and parallel trade. Notable
examples include the dispute between US and Canada as well as HIV/AIDS treatment in South Africa.
The latter also points to the urgency of attending to the needs of poor countries or risk a breakdown in
the international system for patent protection.
3.4.2 Economic Factors
Demand: Patients (i.e. ultimate users) have traditionally had little influence on the choice and price of
pharmaceuticals. First, it is doctors who make the prescription and medical practitioners tended to favor
branded products instead of memorizing complex chemical names. Secondly, incentives to shop were
diminished as costs were assumed or reimbursed by insurers, employers (in the US) or healthcare
authorities (in Europe).
During the 1990s funded systems found it hard to cope with rampant healthcare costs. It was recognized
that healthcare had none of the normal checks of a free market that would balance supply and demand,
and so free-market incentives were introduced to control demand.
The high margin branded prescription market has globalized, reflecting world-wide convergence in
medical practice and regulatory harmonization. Big pharmaceuticals have proven expertise to mass-
market products on a global scale. However, the market appears set to become more US-centric, leaving
the industry heavily exposed to fluctuations there.
Supply: The global pharmaceutical market remains relatively fragmented, with no company holding
more than an 11% market share in 2003 (i.e. Pfizer). However, this disguises the fact that some
companies have over 80% market share in some therapy classes hence the importance of blockbuster
drugs. At the same time, the industry still features relatively strong non-internationalized players based
in Japan, France and the developing world (notably India). However, the imperative to achieve a global
return on R&D investment suggests that these companies will struggle to survive in the medium term.
Spending on R&D has grown while the number of new products reaching the market has fallen. In 1981,
global R&D expenditure was around $5.4 billion dollars while it is estimated to exceed $50 billion dollars
in the year 2000. Conversely, 51 new chemical entities (NCEs) were introduced in 1980 but only 32 in
1999, 24 in 2001 and 17 in 2002. Hence, there is an impending need for cost containment especially in
the light of resource-hungry R&D platforms.
3.4.3 Sociocultural Factors
As the baby boom generation approaches retirement, there have been new efforts to develop drugs
for the treatment of the elderly (such as solutions for Alzheimers disease).
Final consumers are now better informed, have higher expectations and want greater say in their
treatment. This could open new marketing opportunities but, at the same time, educated consumers
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have become more demanding of advances in therapy. Here the possibilities associated with
information technology developments which grant greater access to detailed healthcare information
(for both providers and patients) could be important to push forward cost-effective treatments.
There are significant differences for R&D and marketing amongst international trading blocs. R&D is
primarily driven by European and North American needs while satellite economies (such as Latin
America, South East Asia or India) are major markets for generic products and antibiotics.
There has been growing investor activism in both Europe and the US, suggesting shareholders could be
increasingly susceptible to ethical, social and corporate governance issues.
3.4.4 Technological Factors
Given the ageing profile of the Western population and the growing number of middleclass consumers
in developing countries, the long-term prospects for the industry look good. However, with the advent
of genomics, potential new ways to discover drugs, to better target their use and to conduct medical
trials suggest there could be a major reorganization of the industry.
The impact of the Internet on traditional business models is as yet uncertain. The internet could
reinforce a trend to switch from prescription to OTC drugs and in the process dis-intermediate retail
chemists. If successful, these innovations will challenge both regulators and the competences of
established providers.
After the mapping of the human genome there was much hype about the possibilities for genetic
research in pharmaceuticals. Genetic research has yet to have an impact on drug discovery or clinical
trials.
3.4.5 Environmental Factors
The introduction of cradle to grave policies in the EU should result in greater need for green (i.e.
environmentally-friendly) management.
3.4.6 Legal Factors
The intervention of health authorities is key to determine the length of patent protection as well as
approving new products to be marketed. The move towards international harmonization of regulatory
controls could bring significant benefits in terms of reduced costs and accelerated time to market for
pharmaceutical companies.
Clinical trials still remain as the stage that demands the greatest share of resources to develop a drug.
Big pharmaceuticals will point the finger at cumbersome regulation as responsible for lengthy trial
periods. This is partially true but taking a drug through the trial-and-approval process still requires from
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10 to 12 years because a) the trials themselves are more and more difficult to conduct; and b) because
of the trend to target diseases that take a long time to manifest themselves (such as osteoporosis).
Pharmaceutical companies often find problems in enforcing patent protection in developing countries
(particularly in Asia). The threat of the South African and Brazilian governments around the HIV/AIDS
treatments is another case in point.
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4.1 We have identified four alternative courses of action:
Do Nothing
Replace in Volume
Outsource R&D
Differential Pricing
Steps Possible Outcome
Do Nothing
Carry on business as usual, developing new patents as old ones expire. However,
the rate of new drug discovery has decreased. This, along with new stringent
testing rules means that there are fewer new patents in process to replace the
old ones. Moreover, there is a growing public outcry against the price of life
saving drugs, which could result in loss of patent protection.
Replace in Volume
Make drugs cheaper, but increase the volumes produced. The demand for drugs
is inelastic, meaning people will not buy more if the price is less. This has caused
a shift in the industry towards recreational drugs to overcome this. On the plus
side, decreasing the price of life saving drugs will allow more people to buy
them, thus increasing sales as well as reducing public outrage. On the other
hand, this reduces the returns within the patent lifetime, which would
discourage R&D.
Outsource R&D
Instead of doing their own research, maintaining their own staff and labs,
companies could outsource their research to specialist labs and research centers
such as universities. However, this means that rather than dedicated scientists
working full time for them, they would have to queue for their attention. This
would severely slow down the R&D process. There is also the risk of leakage of
confidential research in a shared workspace, so that this would not be a favored
option. On the other hand, other industries have benefited from such
collaborations as well as saved huge operating costs.
Differential Pricing
Companies could subsidies certain lifesaving drugs in specific markets, in
response to criticism. However, this could lead to smuggling that would benefit
none of the targeted groups.
4 Identify Alternate Courses ofAction
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The pharmaceutical industry is facing tough times ahead, with poor public perception, increased
competition and stringent regulations from the authority.
5.1 Improve Public Perception through Societal Marketing
Despite playing instrumental role in improving peoples life, the pharmaceuticals have received bad
press for quite some time largely due to over priced products (in an effort to recoup the massive R&D
costs by the pharmaceutical industries). There is a need for the pharmaceuticals to improve theirperception among the general population; even the investors recognize the need for the
pharmaceuticals to cleanse its tarnished image among the general population. Differential pricing is
something on the card, charging higher prices for patented products in the developed countries and
charging lower prices among the masses in the poor under developed countries. The tarnished image
can hurt the industry badly, as the talented scientists will be discouraged from joining these companies
and thus signaling an eventual decline.
5.2 Target Untapped Markets
The market forces has changed drastically in last few years, emerging markets in Asia and Latin America
can prove to be more profitable in future, so there is a need to focus marketing effort in these areas.
Outsourcing and licensing should continue its course, as it has proven to be quite profitable. Analysts
should be cautious about the increasing merger and acquisition taking place in the industry, which is
increasingly turning the companies vertically integrated. Vertical integration can risk making the
industries oversized and redundant, which is not only bad for the industry but also for the general masse
as this can curb innovation. While genomics has helped the pharmaceuticals in cutting down the trial
time, caution must be exhibited while investing in genomics; it can prove futile in the long run. Small and
Mid-size Biotech have proven to be very effective in competing against the industrial giants which
indicates that there is need to streamline the size of the operation among the industry giants. There is
urgency among the pharmaceuticals to instill a culture of innovation.
5.3 Diversification
The pharmaceutical should diversify and invest in complementary businesses, as Pfizer took the
initiative in late 2000s to reorganize their global market-leading pharmaceutical segment into
customer- focused business units devoted to Primary Care, Specialty Care, Oncology, Emerging Markets
and Established Products.
5 Implementation of ActionPlans
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5.4 Develop Favorable Legal Environment through Lobbying
The biggest threat facing the industry is from the legislations targeting the patents; this can hurt the
practice of innovation that has been the corner stone of the pharmaceuticals. The companies should
work closely with the regulators and hire lobbyists in an effort to bypass any legislation that may target
the patents.