Compilation Global Pharma Industry Print

7/30/2019 Compilation Global Pharma Industry Print

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C a s e S t u d y : T h e G l o b a l P h a r m a c e u t i c a l I n d u s t r y Page 1

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.

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Compilation Global Pharma Industry Print