1

1.1

Background

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 key events 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 Ethical (Prescribed drugs) Branded OTC (Non-prescribed drugs) Biotech Generics Strategy Develop strong R&D and global sales marketing structure Develop strong direct-to-consumer marketing Innovation and protect intellectual property 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 the second 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
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The Global Pharmaceutical Industry

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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 inhouse 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 &D expenditures 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 & D productivity. 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
2.1 2.2 Key Player

Problem Identification and Key Role Players

Primary Problem

Currently there is no specific goal or strategies available for the global pharmaceutical industry which has made the industrys future uncertain. 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. Supporting Player Worldwide Health Insurance Companies Health Development organizations e.g. WHO, Unicef and so on Individual buyers

The 10 Companies Governments

2.3

Secondary Problems Absence of Specific goal or strategy Too many generic products Higher selling and marketing expenses Higher R&D Expenses Stricter Regulation on clinical tests and price

Primary Problem Secondary Problem

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.
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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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3
1. 2.

Analyze Decision Context (SWOT/ PESTEL/ Porter)

In this section the following two questions will be answered: What are the main environmental forces currently affecting the pharmaceutical industry. 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

Strengths S
1. High entry barriers 2. Strong R&D departments 3. Inelastic demand

Weaknesses W
Most growth over the past decade has been in volume rather than new drugs

Opportunities O
Biotechnology gives scope for new drug lines

Threats T
1. Public opinion regarding profiteering in life saving drugs 2. Expiry of patents allowing generic drugs to enter the market

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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% Pfizer GlaxoSmithKline Merck, 5.00% Johnson & Johnson, 4.60% All Others*, 54.20% AstraZeneca, 4.50% Novartis, 4.10% Aventis, 3.60% Merck Johnson & Johnson AstraZeneca Novartis Aventis Bristol-Myers Squibb Roche All Others*

*individual shares negligible

Bristol-Myers Squibb, 3.60% Roche, 3.10%

2011 Mkt Share (%)

Pfizer Pfizer6.6% , Novartis6.0% , Merck & Co, 4.7% Sanofi, 4.6% All Others*, 46.2% Astrazeneca4.3% , Roche, 4.0% G laxoSmithKline, 4.0% Johnson & Johnson, 3.2% Abbott3.0% , A mgen, 1.9% Bayer Schering Pharma, 1.9% Teva2.8% , Lilly, 2.8% Takeda, 2.1%
*individual shares negligible

Novartis Merck & Co Sanofi Astrazeneca Roche G laxoSmithKline Johnson & Johnson Abbott Teva Lilly Takeda Bristol-Myers Squibb Bayer Schering Pharma A mgen All Others*

Bristol-Myers Squibb, 1.9%

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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 Factors Porters Five Forces Analysis 1950-1985 High cost of R&D and clinical testing 1985-1995 Existing high entry barriers were increasing 1995-2005 Firms specializing in moving specific molecules along the value chain could be tomorrows main competitors. Emphases on disease prevention and early detection begin to shift R&D priorities; and could favor pharmacogenomics providers.

Large and expensive sales force required Threat of Potential Entrants

Lead times for new drugs to be marketed increasing from 35 years in the 1960s to 12 years in the mid-1990s Already high costs of R&D and clinical testing increasing Low Loss of brand loyalty as medical practitioners are forced to become cost conscious and consider prescribing generic rather than brand drugs. Patients expectations are rising Government policy to increase competition. Governments (EU) and managed health

Long lead times for new drugs, Low The decision to buy was imposed by doctors on patients (final consumers). Doctors had no responsibility to contain costs. In the US, a mail-order channel starts to develop to help highly price sensitive patients.

Moderate Controls on pricing, reimbursement and market access continue to tighten.

Bargaining Power of Buyers

Growth of managed care is expected to continue deteriorating the profitability of big pharmaceuticals regardless of the Page 7

Case Study:

The Global Pharmaceutical Industry

Low Cost of drug ingredients are very low percentage of total costs.

organizations (US) imposing systems to control prices. 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 High Global sourcing by drug companies has led to further reductions in the costs of raw materials

outcome of regulation.

High 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 upward pressure on outsourcing costs

Bargaining Power of Suppliers

Pharmaceuticals tend to be fully vertically integrated (from molecule search to mass marketing)

Low

Major pharmaceutical companies come increasingly to rely on out-sourcing and inlicensing for new products, enabling supplying companies to place a high price on such deals. However, counteracted by global over-capacity in outsourcing and R&D Low

Low

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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)

Consumer suspicion of drugs leads to increasing use of alternative remedies

Threat of Substitutes Lead times of 67 years over competitors (time for rivals to produce me-too drugs) Improved chemistry and computer generation of analogues

Low

Moderate

Biotechnology and combinational chemistry further reduce lead times to market Diversification into generics protects the market share (but not the profit) of big pharmaceutical companies. 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 High

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The Global Pharmaceutical Industry

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Low concentration (lots of producers in several therapeutic applications, hence low price competition)

High cost of R&D expenditure is effectively an exit barrier

Continued industry consolidation results in fewer larger global companies, focused on specific franchises, with intense rivalry within therapeutic franchises

Rivalry Among Competitors

Large and expensive sales forces were developed on the back of brand recognition to target doctors

Profitable, cash rich industry but margins are declining.

Moderate 3.4 3.4.1 PESTEL Analysis Political Factors

Mergers and acquisitions are expected to continue as they could lead to economies of scale, better sales and marketing and more efficient R&D efforts High

High

Source: Pearson Education Limited 2005

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 national pharmaceutical 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 massmarket 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
4.1 Steps

Identify Alternate Courses of Action

We have identified four alternative courses of action: Do Nothing Replace in Volume Outsource R&D Differential Pricing

Possible Outcome 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. 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. 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. 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. The Global Pharmaceutical Industry Page 14

Do Nothing

Replace in Volume

Outsource R&D

Differential Pricing

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5.1

Implementation of Action Plans

The pharmaceutical industry is facing tough times ahead, with poor public perception, increased competition and stringent regulations from the authority. 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 their perception 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.

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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.

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