Global Pharmaceutical Industry Analysis September 21 2009 Dibakar Mitra (P08017) I Manoj Joshi (B08026) ? Table of Contents EXECUTIVE SUMMARY 3 INTRODUCTION4 ORIGIN AND EVOLUTION5 ENVIRONMENT ANALYSIS (PEST)7 STRUCTURAL INDUSTRY ANALYSIS (PORTER)8 STRATEGIC ISSUES FACING THE INDUSTRY11 STRATEGIC GROUPS IN THE INDUSTRY ACCORDING TO MARKET/DRUG/FUNCTIONING 15 PROCESS FLOW: IMPORTANT FUNCTIONS16 STRATEGIC RESPONSES TO CHALLENGES: SIMPLE CORRELATION BETWEEN GROUP AND PERFORMANCE19 REGULATOR’S ROLE 21 POSSIBLE FUTURE DIRECTION21 CONCLUSION22
REFERENCE 22 Executive summary This report provides an analytical strategic review of the global pharmaceutical industry; its origin, evolution, development and competitive environment within which it operates and the strategic issues facing the industry.
The report also offers an overview of the industry, its key strategic groups, their strategic outlook, the impact of technological developments and possible future direction. 1. Introduction The pharmaceutical industry develops, produces, and markets drugs licensed for use as medications.
Pharmaceutical companies can deal in generic and/or brand medications and are subject to a variety of laws and regulations regarding the patenting, testing and marketing of drugs.
Over a period of time many of these chemical companies moved into the production of pharmaceuticals and other synthetic chemicals and they gradually evolved into global players. The introduction and success of penicillin in the early forties and the relative success of other innovative drugs, institutionalized research and development (R&D) efforts in the industry.
The industry expanded rapidly in the sixties, benefiting from new discoveries and a lax regulatory environment. During this period healthcare spending boomed as global economies prospered. The industry witnessed major developments in the seventies with the introduction of tighter regulatory controls, especially with the introduction of regulations governing the manufacture of ‘generics’. The new regulations revoked permanent patents and established fixed periods on patent protection for branded products, a result of which the market for ‘branded generics emerged. The top 10 firms and their particulars are provided in the table below.
Rank 2008 Company Country Total Revenues(USD millions) Healthcare R&D 2006(USD millions) Net income/ (loss) 2006(USD millions) Employees 2006 1NovartisSwitzerland 53,3247,12511,053138,000 2PfizerUSA48,3717,59919,337122,200 3Bayer Germany 44,2001,7916,450106,200 4GlaxoSmithKline United Kingdom 42,8136,37310,135106,000 5Johnson and Johnson USA 37,0205,3497,202102,695 6Sanofi-Aventis France 35,6455,5655,033100,735 7Hoffmann–La Roche Switzerland33,5475,2587,318100,289 8AstraZeneca UK/Sweden26,4753,9026,06350,000+ 9Merck & Co. USA22,6364,7834,43474,372 10Abbott Laboratories USA22,4762,2551,71766,800 2.
Origin and evolution The origins of the modern pharmaceutical industry can be traced to the late 19th century, when dyestuffs were found to have antiseptic properties. Roche, Ciba-Geigy, and Sandoz all started out as family dyestuff companies based near the Rhine in Basel, Switzerland, which moved into synthetic pharmaceuticals and eventually became global players. Penicillin was a major discovery for the emergent industry, and during the 1940s and 1950s R&D became firmly established within the sector. The industry expanded rapidly in the 1960s, benefiting from significant new discoveries with permanent patent protection.
Regulatory controls on clinical development and marketing were light and healthcare spending boomed as economies prospered. The pharmaceutical market developed some unusual characteristics. Decision-making was in the hands of medical practitioners whereas patients (the final consumers) and payers (governments or insurance companies) had little knowledge or influence. As a result, medical practitioners were insensitive to price but susceptible to the sales efforts of individual representatives. This enabled numerous “me too” drugs to achieve satisfactory returns on investment.
Imitating a known drug reduced R&D risk considerably, while the marketplace was open to products offering minor advantages such as a more convenient dosage with fewer side effects, but with much the same therapeutic outcome. Generics legislation had a major impact on the industry, providing incentives for innovation and a race to market. The time during which R&D costs could be recouped was drastically curtailed, putting upward pressure on prices. By the end of the 1970s generic entrants and more stringent controls on clinical trials had led to substantial increases in R&D spending.
There were two important developments in the 1970s which further shaped the industry in the form that we see today. Firstly, the Thalidomide tragedy (where an antiemetic given for morning sickness caused birth defects) led to much tighter regulatory controls on clinical trials, greatly increasing development costs. Secondly, enactment of legislation to set a fixed period on patent protection (typically 20 years from initial filing as a research discovery) led to the appearance of “generic” medicines. Generics medicines are those that have exactly the same active ingredients as the original brand, and compete on price.
Another important feature of the pharmaceutical industry was the fact in that in many countries it was subjected to “Monopsony” wherein the all powerful buyer was the government. In the 1980s, governments around the world began to focus upon pharmaceuticals as a politically easy target in their efforts to control rising healthcare expenditure, although drugs typically accounted for less than a tenth of that expenditure. Many countries introduced some form of price or reimbursement control and price increases began to be outlawed. The industry lacked the public or political support to resist these changes.
Entering the 1990s, worldwide economic recession reduced cash for provision of healthcare through tax-funded systems (Canada, Italy, Spain and UK); social security supported systems (France, Germany and Japan), as well as employer/privately-funded systems (US). It was recognized that healthcare had none of the normal checks and balances of a free market to match supply and demand. But as far as back in the 1980’s a new type of player had already appeared in the market which in the near future was going to be more than just a blip on the screen. These were small biotechnology start-ups backed by venture capital.
These were companies that wanted to explore the myriad opportunities in the field of molecular biology also called “Biologicals”. By the year 2003 there were more than 600 publicly traded biotech firms worldwide. But this field was more complex than traditional pharmaceuticals and hence due to rising costs and rising prices, for many biotech firms, the originally planned strategy of integrating and performing all functions from research to sales was perceived to be a hazardous one. Moreover most of these firms lacked the finances to cope with risks involved in the aforementioned strategy.
Therefore biotech firms started using the global reach of research based multinationals to leverage the return on R&D through out-licensing and strategic alliances. 3. Environment analysis (Pest) The modern pharmaceutical industry is an increasingly tough and competitive environment because of a number of factors, most important of them being the enormity of the spending and revenues involved the rate of growth of technology, the cross border regulations for global pharmaceutical companies and the patent rows that crop up every now and then.
In this light we shall analyze the industry using PEST analysis. Political Over the years, the industry has witnessed increased political attention due to the increased recognition of the economic importance of healthcare as a component of social welfare. Political interest has also been generated because of the increasing social and financial burden of healthcare. Examples are the UK’s National Health Service debate and Medicare in the US. Economic In the decade to 2003 the pharmaceutical industry witnessed high value mergers and acquisitions. With a projected stock value growth rate of 10. 5% 2003-2010) and Health Care growth rate of 12. 5% (2003 2010), the audited value of the global pharmaceutical market is estimated to reach a huge 900 billion dollars by 2010. Only information technology has a higher expected growth rate of 12. 6%. Majority of pharmaceutical sales originate in the US, EU and Japanese markets. Ten geographic markets account for over 80% of global pharmaceutical sales these are, US, Japan, France, Germany, UK, Italy, Canada, Brazil and Spain. Of these markets, the US is the fastest growing market and since 1995 it has accounted for close to 60% of global sales.
In 2000 alone the US market grew by 16% to $133 billion dollars making it a key strategic market for pharmaceuticals. Social Good health is an important personal and social requirement and the unique role pharmaceutical firm’s play in meeting society’s need for popular well being cannot be underestimated. In recent times, the impact of various global epidemics e. g. SARS, AIDS, Swine flu etc has also attracted popular and media attention to the industry. The effect of the intense media and political attention has resulted in increasing industry efforts to create and maintain good government-industry-society communications.
Technology Modern scientific and technological advances in science are forcing industry players to adapt ever faster to the evolving environments in which they participate. Scientific advancements have also increased the need for increased spending on research and development in order to encourage innovation. 4. Structural Industry analysis (Porter) Key markets: characteristics The majority of global pharmaceutical sales originate in the “Triad” (US, EU and Japan), with ten key countries accounting for over 80 per cent of the global market.
The US has been by far the largest pharmaceutical market by volume and value with the strongest growth among key markets, contributing 65 per cent of global market growth. Projecting out to 2010, the US was predicted to increase its share of the global market, while the shares of Japan and the EU would decline. Non-Triad countries were expected to retain around 11 per cent share between them. Overall, the world market was set to become even more US-centric, leaving the industry heavily exposed to fluctuations in that market. USA
Following regulatory changes in 1997, pharmaceutical companies were permitted to market directly to US consumers. Direct-to-consumer (DTC) advertising transformed the marketplace and fuelled rapid sales growth. However, the US operating environment was getting tougher. Managed care, in which plan administrators set cost and reimbursement limits on healthcare services, was also changing market dynamics. MCOs began to encourage the use of generics through schemes where the consumer paid less if a generic was prescribed and extra for newer drugs. Furthermore, powerful bulk purchasers, such as the Veterans Administration with 6. million members, were able to extract prices even lower than those in Canada, so that average US prices paid were actually significantly lower than headline figures in the popular press suggested. Japan Japan has traditionally been the second largest market for pharmaceuticals. The Japanese operating environment has historically been very different from that of the US or the EU. This divergence occurred at all levels, from medical practice, healthcare delivery and funding, to regulatory requirements, higher prices, the lack of generics, distribution, and the accepted approach to sales and marketing.
Not surprisingly, relatively small domestic companies dominated the market. Europe Europe makes up the third part of the Triad, with the top five markets (Germany, France, Italy, UK, and Spain) predicted to continue contributing around three quarters of EU sales out to 2010. European markets each have their own unique operating environments but they are generally characterized by strong payer pressures and consequently lower prices than the US or Japan. Combined with slowing economies, these pressures constrained EU market growth to 8 per cent in 2002.
Expansion of the EU, however, provided opportunities for growth, especially in Poland and central Europe, but also brought new challenges from generics and low-priced parallel imports. Emerging market Although growth prospects for emerging markets were considered modest in 2003, their enormous populations and high levels of unmet need offered significant long-term potential. Many had strengthened patent protection and liberalized equity controls. The pharmaceutical markets in Latin America had proved highly volatile, reflecting underlying economic trends.
Nevertheless they had large numbers of wealthy consumers who were able to afford branded drugs. Pacific rim Pacific rim countries were becoming more important. Copy products were traditionally a significant issue in these markets, where patent protection was absent or very difficult to police. Pharmaceutical companies focused particularly on China, which had one of the fastest growing pharmaceutical markets. LDC’s Although least developed countries were not in a position to offer a significant market opportunity, they did present the industry with important trategic choices in the area of corporate social responsibility which had global ramifications. Industry Competition (HIGH) The majority of share of the pharmaceutical industry is in the hands of very few competitors and with high barriers to entry (huge initial R&D expenditure and long product development lead time), some features like first mover advantage and blockbuster drugs (explained later), this remains for a very long time until a breakthrough technology is provided by a new player. Therefore it is safe to say that the industry competition is high. Supplier Power (HIGH)
The suppliers are few and with years of marketing, a good distribution network and referring doctor network in place they have ingrained themselves in the market as the default suppliers and hence their enormous power. Moreover medicines are something that patients take for very long periods if they are satisfied once with it. Hence the supplier power is very high. Buyer Power (LOW) The end users i. e. the consumers have very less buying power. Brand identity exists but still a lot is in the hands of the prescribing doctors as they play a critical role in moulding a consumer’s choice of medicine.
Price sensitivity is less. Substitutes (LOW) The substitute to medicines is nothing except Biotechnology which is rapidly emerging as a substitute for synthetic pharmacy products and probably other alternative medicinal techniques like homeopathy, acupuncture and techniques like Yoga (which can be used in certain conditions only) Barriers to Entry in the Global Industry (HIGH) Like many industries, any new entrant into the pharmaceutical sector will be faced with various “hurdles” that have been previously erected by already established businesses and by national and international standards and regulations.
These include: ?Economies of scale – manufacturing, R&D, marketing, sales ? Distribution product differentiation – established products, brands and relationships ? Capital requirements and financial resources ?Access to distribution channels: preferred arrangements ? Regulatory policy: patents, regulatory standards ?Switching costs – retraining employees, new equipment, technical assistance 5. Strategic issues facing the industry The pharmaceutical industry is today still one of the most inventive, innovative and lucrative industries.
Development of a brand new drug is estimated to need an investment of more than $1. 2 billion and takes more than 12 years to bring it as a finished, legally registered and approved product to the market place (Pharma Strategy Group, 2005). This is, at the same time, a very complex, comprehensive and highly risky job with no final guarantee that the potential new product might succeed on the market and bring back revenues. The new drug development process is explained below with a figure. Most R&D projects never result in a marketed drug. Of those that do, 80 per cent fail to recoup their R&D investment.
When the costs of all the projects that do not reach fruition are considered, it becomes clear that pharmaceutical R&D is a very high stakes game. Given the enormous risks and considerable investment involved, it is not surprising that pharmaceutical companies compete fiercely to establish and retain intellectual property rights. Only by securing a patent that can be defended against imitators can the value of this entire R&D be recouped. The patent clock starts from the moment that a promising agent is identified in pre-clinical tests and its chemical structure and synthesis filed with patent offices worldwide.
Once the patent application is made public, other companies are likely to try to create improved, patentable versions. Where genuine discoveries or inventions are made, patents can also be obtained for manufacturing method and even mode of administration. All of these supplementary applications can extend patent life and the earnings period for a new drug. Phase I trials determine whether the product is safe to use in humans. Phase II trials aim to select dose and demonstrate efficacy. Phase III trials are conducted versus the best current treatment, with the goal of proving superiority.
Typically only 1 in 10 molecule survives from Phase I to launch, with late failures (Phase III) being more costly. If a pharmaceutical company wants to achieve market success with a brand new product, it needs to invest strongly into marketing and sales activities. Thus, by no surprise, we may conclude that basic research and development (R&D), together with marketing and sales activities are two of the most important operative and even more strategic priorities of the world pharmaceutical industry. The key strategic issues faced by this sector are as follows: Increased globalization and increased importance of strategic management Pharmaceutical companies perform their business activities in a very turbulent environment which requires constant adaptation to changes and quick final action decisions. Pharmaceutical companies which want to be globally leading ones and successful business performers in the future have to primarily think entirely and differently about customers, markets, competitiveness, competitors, and strategy with relation to structure to reach the planned goals.
They need to especially bear in mind that the needs of tomorrow’s customers are different from the needs of today’s customers and they do change fast and tremendously in relation to the elements and facts which are important to the pharmaceutical industry itself. In that relation, there is a decisive role of strategic management with a strong market orientation as crucial and most important as well for the pharmaceutical companies to be successful performers in the future and even more globalized world. Thus, it is important to act and react quickly and to be proactive. Changing structure of competition and increased competitiveness In order to understand the strategic issues faced by the industries it is important to understand the four types of players in the industry. They are ?Ethical ?OTC (Over the counter) ?Generic ?Biotech Firms Each has different strategic issues facing them. Producers of branded prescription drugs require strong R&D and global sales and marketing infrastructure. Branded OTC drugs demand direct-to-consumer marketing capability. Generics companies focus on supply chain management and manufacturing cost leadership.
Biotech Firms must create and defend intellectual property in specialized research fields. The industry overall since it is a combination of these four groups faces a mix of all the issues faced by them. •Fast consolidation and concentration of the world pharmaceutical industry According to a report cited in the reference there have been over 10000 alliances in the previous decade thereby creating totally new players. Therefore it can be safely assumed that the industry has been more “Oligopolistic” in recent years.
Alliancing processes are continuing to speed up as pharmaceutical companies try to follow their competitors’ strategies of M (Mergers and Acquisitions) in an endeavor to maintain their strategic global market position and long-term competitiveness. •Sharing Knowledge for effective co-operation Another important strategic issue for Pharmaceuticals industry is evolving newer ways of sharing knowledge for effective cooperative working through diverse licensing arrangements between organizations. In order to do this the following strategic steps will have to be taken by the pharma players Efficient use of Knowledge engineering techniques, ?Structured management of innovation, ?Authentic documentation ?Accessing & creating new knowledge, ensuring its protection using appropriate IPR, ? Setting up systems to enforce the acquired rights ?Evolving creative process of cooperative working and sharing of benefits. •Corporate Social Responsibility activities One problem is that the market for pharmaceutical innovation has the characteristics of what economists describe as a “public good” – i. e. expensive to produce but inexpensive to reproduce.
The manufacturing cost of drugs is usually tiny compared with the amortized cost of R that led to the discovery. Setting prices that attempt to recoup R therefore looks like corporate greed in comparison with the very low prices that can be charged by generic manufacturers. Similar issues are faced by the software, film and music industries. However, unlike those, there is also something inherently distasteful to some people about making a profit from addressing unmet medical need – they would prefer pharmaceutical companies to have a social mission.
Most of these same people will have pensions partly invested in pharmaceutical shares, on which they expect a healthy return. So the pharmaceutical industry needs to be very good at explaining the nature of its business and balancing societal and shareholder expectations. •Development of new therapeutic fields and technologies The thing being talked about this is called as the field of “Genomics”. 90% of drugs only work in 30-50% of people, and by eliminating the people that will be non responders it is possible to do smaller, faster and cheaper drug trials. As a consequence, pharma firms will have better and better targeted drugs, better and fewer side effects, thereby ultimately leading to a much better bottom line. •Ageing of world population and opening up of new, not yet satisfactorily covered therapeutic fields •Consumers and the internet Increasingly vocal, well-informed and demanding consumers seemed inevitable. As the convergence of telephone, information technology and television accelerated, it was difficult to envisage how a ban on DTC in the EU could be maintained. Patients with Internet access could obtain information on new products directly themselves.
It was easy for non-US citizens to access US websites, and information on new drugs reached consumers via both company and independent web sites and through distribution of press releases to PR services. Health was one of the top two reasons for people to conduct searches on the Internet. This trend was likely to increase patient demand for new effective, better-tolerated therapies, particularly in litigious countries such as the US. The increased transparency of information provided by the Internet was not, however, an unmixed blessing for the industry.
It also raised awareness of price differentials that might exist between brands and for the same brand between countries. This posed a further challenge to pricing levels. Consumers were even beginning to purchase across borders, but with no guarantee that the drugs they received had been stored and shipped correctly and were not adulterated, contaminated, or counterfeit. More worrying, it was easy to purchase addictive painkillers and other potentially harmful drugs over the Internet, and rogue websites even offered miracle cures for cancer and AIDS.
The pace of change was outstripping the capabilities and powers of regulators. •Quick development of the world generic markets •Lack of new products, despite increased investments into R (Research & Development) activities. 6. Strategic groups in the industry according to market / drugs / functioning At the turn of the millennium, prescription-only or “ethical” drugs comprised about 80 per cent of the global pharmaceutical market by value and 50 per cent by volume.
The remainder were “over the counter” medicines (OTCs), which may be purchased without prescription. Both ethical and OTC medicines may be branded or “generic”. The typical cost structure at ethical pharmaceutical companies comprises manufacturing of goods (25 per cent), research and development (12 to 21 per cent), administration (10 per cent), and sales and marketing (25 per cent). The key strategic capabilities at these companies are R and sales and marketing, and manufacturing historically suffered from low utilization, high fixed costs and low productivity.
Growing pressure on margins became an incentive to restructure manufacturing, rationalizing the number of production sites and placing them in strategic locations offering tax advantages. Companies also improved supply chain management to release the value trapped in high inventories. However, manufacturing and distribution efficiency at research-based companies was not comparable with that of generics manufacturers who competed on price. During the late 1990s, there was a collapse of generics prices in the US and a shakeout to determine cost leadership.
In this environment economies of scale proved decisive and the sector underwent consolidation. As a result the speed and aggression of generic attacks on branded products increased sharply. By 2002 generics captured 65 to 80 per cent of new prescriptions within 5 weeks of patent expiry on major drugs and overall accounted for nearly a third of market volume. Given the number of major global brands with patent expiries looming, the outlook for the generic sector was rosy. Thus there are four broad types of industry player: ethical, OTC, generic and biotech.
Each requires very different strategic capabilities. Producers of branded prescription drugs require strong R and global sales and marketing infrastructure. Branded OTC drugs demand direct-to-consumer marketing capability. Generics companies focus on supply chain management and manufacturing cost leadership. Biotechs must create and defend intellectual property in specialized research fields. Because of the different attributes and cost structures involved, multinationals which own OTC and generics businesses generally operate them separately, frequently using another company name.
Similarly, those that have acquired biotechs normally leave them to operate fairly autonomously. 7. Process flow: Important functions R & D Ethical pharmaceutical companies establish competitive advantage by developing products that are innovative and differentiated, patentable, can be developed rapidly; and marketed globally. Companies with consistently high levels of R spending and productivity became industry leaders. For this reason, stock market valuations place as much importance on the R “pipeline” (i. e. the products in development) as on the currently marketed products.
Basic research is vitally important to probe into the causes of disease and identify new potential targets for pharmaceutical intervention. As well as conducting in-house research, many companies sponsored academic research, although it was becoming much more difficult and expensive to secure intellectual property rights from academia. Companies also sought research alliances with biotechs and genomics companies. The holy grail of pharmaceutical R is the “blockbuster”. Blockbuster drugs are genuine advances that achieve rapid, deep market penetration which can often determine the fortunes of individual companies.
Glaxo went from being a small player at the beginning of the 1980’s to the world number one, with a presence in 50 countries, on the strength of a single drug – Zantac for stomach ulcers. A blockbuster drug is typically a long-term therapy for a common disease that offers a substantial perceived improvement in efficacy or tolerability and is marketed globally. Annual sales must normally exceed $1 billion for a drug to earn this accolade. While blockbusters made immense contributions to company fortunes and provided tremendous returns on R investment, they were few and far between.
Seeking a blockbuster was clearly a high risk R strategy, but was fast becoming the only game in town, exposing an already high stakes industry to even greater levels of risk. However, over-dependence on blockbuster sales rendered companies highly vulnerable to generic competition at patent expiry. Between 2003 and 2008, twenty blockbuster drugs were due to lose patent protection. So even if the risky R pipeline delivered a blockbuster, blockbusters vastly exacerbated the volatility of the corporate sales line.
Unfortunately for the industry, development times were lengthening and R productivity was in decline. The time taken for drugs to move from laboratory to market increased by nearly seven years from 1960 to 2000. Most of this increase occurred in the clinical development phase. The average number of trials and the number of patients for each new drug application increased enormously which resulted from more stringent regulatory hurdles, the need to produce evidence to convince payers, and the desire to maximize return by launching with a broad platform of promotional claims.
As a consequence clinical trials became, by far, the most expensive element of the development process. As clinical trials became ever more complex and costly, there was a sharp rise in R expenditure. But despite increasing average R spend from 11 to 12 per cent of annual sales to 16 or even 17 per cent, pharmaceutical companies had not much to show for it. The launch of 24 genuinely new drugs in 2001 in the US was considered poor and the 2002 figure dropped further to 17, the lowest for 20 years. The European Medicines Evaluation Agency received only 31 applications, down from 58 in 2001.
While this loss of overall productivity could have been a natural consequence of blockbuster focus, half of the applications were for treatment of diseases with a limited commercial market. Some large companies attempted to rekindle innovation and productivity by reorganizing their R so as to create smaller and more nimble units – like internal biotech companies. Others sought external innovation, entering alliances where technology was emerging, and only acquiring in-house capability once the technology was proven. For example, Aventis prided itself on managing a complex web of alliances with more than 300 universities and biotechs.
In such companies, the management of alliances itself became a key competency. The organizational infrastructure required to deliver a new drug application had become large and complex. However, because of high attrition in new drug development, company pipelines could often be “lumpy”. Many companies concluded that maintaining a high fixed-cost clinical development capacity did not make sense. Instead, they out-sourced some clinical development to Contract Research Organizations (CROs). Typically it would cost more to conduct a trial via a CRO, but capacity could be switched on or off at will.
Overall the industry faced substantial R overcapacity. Financially-tight biotech firms offered acquisition opportunities for cash-rich pharmaceutical firms. For instance, in 2003 Novartis acquired a 51 per cent stake in Idenix, a biotech that had been forced to abandon plans to float. Sales and marketing 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.
In fact Bristol-Myers Squibb built the world’s leading cancer business based entirely on in-licensed compounds. The traditional focus of drug marketing was the personal “detail” in which a sales representative discussed the merits of a drug in a face-to-face meeting with a doctor and often handed over free samples. Payer efforts to influence prescribing in the 1990s gave rise to a belief that large sales-forces were becoming obsolete and could be replaced by small numbers of specialist payer liaison salespeople.
However, companies that also continued to increase their conventional sales-force size and resulting “share of voice”, such as Pfizer, found that it paid off handsomely. Experience taught firms that the more sales reps they deployed, the higher their sales. However, doctors had less time to see sales reps with the average call lasting less than 5 minutes. More reps selling fewer drugs resulted in returns from every dollar invested in marketing falling. Although cutting sales-force numbers would have made sense overall, firms were caught in a classic “prisoners dilemma”- no one was willing to call off the arms race.
Given the resulting squeeze on margins, maximizing sales-force effectiveness became crucial. Pharmaceutical companies became more sophisticated in the tools they gave reps and in the targeting of their selling efforts. Novel communication channels such as e-detailing, where the doctor heard a presentation over a computer link, suited busy doctors’ schedules and saved costs. There were important differences in the marketing of “primary care” and “specialist” products. Office based practitioners generally prescribed primary care products, whereas treatment with specialist products was typically initiated in hospitals.
Sales volume, marketing spend and skills required differed for the two segments. Product-led muscle marketing was the name of the game in the primary care sector, while specialist products involved targeted relationship marketing. A small number of companies built their strategies around under-served specialized customer groups, aiming to satisfy their needs on multiple dimensions. However, most pharmaceutical companies were product-led rather than customer-led, probably as a consequence of the unpredictability of the R process.
Successful drug launches correlated strongly with product superiority, high prices and high promotional spend. An interesting trend began to emerge where drugs that were second to market were more successful than the original pathfinder drug. Evidently, it proved relatively easy to identify flaws in the first drug and deliver a follow-up positioned as “best in class” or targeted at specific sub populations. The period of market exclusivity for first in class drugs was also shrinking fast. The term “high compression marketing” was coined to describe the approach adopted by leading companies to launch global brands.
This involved simultaneous worldwide launches, global branding, and very heavy investment in promotion and share of voice around time of launch. High compression marketing aimed to create a rapid take-off curve that would maximize return from the product by creating higher peak year sales earlier in the product lifecycle. 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.
Another strategy involved moving drugs from prescription-only status to OTC. The aim here was to encourage patients to recognize and buy a familiar brand. Consumer brand loyalty could then be used as a defence against generic competition. 8. Strategic responses to challenges: simple correlation between group and performance While the pharmaceutical market remained relatively fragmented, with very large numbers of domestic and regional players, it was consolidating at the global level. No company held more than a 7. per cent market share in 2002, but Pfizer’s acquisition of Pharmacia took this over 10 per cent in 2003. The top 10 players accounted for nearly half of global pharmaceutical sales and significantly only 2 blockbuster drugs were held outside the top 20 corporations. A strong trend was for previously diversified conglomerates to divest their non-healthcare businesses (e. g. agrochemicals), to focus purely on high-margin pharmaceuticals. There was a strong belief that companies needed critical mass in R and global marketing presence in order to compete effectively.
Hank McKinnell, CEO of Pfizer, while talking about the issue of size and amalgamations, rejected the notion that big drug acquisitions were short-term financial bandages for research woes and stated that: “Pfizer’s strategy, including the $60bn acquisition of Pharmacia [in 2003] and that of Warner-Lambert two years before, recognized the need to hedge the risk of failure in research… such deals have covered Pfizer from exposure, while rivals claiming ‘smaller is better’, with good research growth, have often stumbled over lack of strong resources. I suspect if we had not [gone ahead and merge], we’d be like the other list of names. Mergers had resulted in the formation of Novartis, Aventis, AstraZeneca and GlaxoSmithKline, while Pfizer acquired Warner-Lambert and then Pharmacia. Leading companies were under pressure to consider further mergers after Pfizer’s acquisition of Pharmacia. Eliminating duplicated costs remained one sure-fire way to keep profits relatively healthy. But there was little conclusive evidence that mergers had actually enhanced revenue or R&D productivity. There was a noticeable polarization in corporate performance, with companies either outperforming or underperforming -there was no longer a safe middle ground.
Successful mergers were based on strategic purpose and fit, rather than exacerbating weaknesses, and managing the process effectively had itself become a strategic capability. A key rationale for mergers and acquisitions was to combine a company with a strong pipeline but weak sales and marketing with its converse. For example, the acquisition of Warner-Lambert gave Pfizer full marketing rights to the cholesterol-lowering agent Lipitor, which Pfizer then built it into the world’s best-selling drug. Another argument for increasing size was to improve R&D productivity.
The larger the total R&D programme, the greater the number of individual projects that could benefit from the new capability, and amortize these costs. Pfizer’s acquisition of Pharmacia gave the new entity an R&D budget of nearly $7 billion, 50% greater than its nearest rival. Others argued that mergers actually reduced R&D productivity: more management layers resulted in greater bureaucracy, less freedom to innovate and a reduced research output. The success of biotechs in drug discovery suggested creativity was greater in small R&D organizations.
Portfolio management could also be problematic in merged companies. Cutting too many projects in the search for blockbusters could exacerbate risk. Cutting too few meant under-resourcing potential winners and risked an over-stretched and unfocused organization. Another argument for increasing size was to invest in larger sales-forces to secure greater “share of voice” and to acquire global reach. Pfizer’s acquisition of Pharmacia took the new entity from No. 4 in Europe and No. 3 in Japan to No. 1 across the Triad.
Supporters of organic growth claimed that marketing success came from combining the right skills, resources and competencies rather than sheer sales force size, pointing to the success of smaller “franchise” players. Some advocates of further industry consolidation emphasized that its purpose should be to create dominance in just a few therapeutic franchises, with non-core activities being sold off, making these huge corporations more manageable, and focusing R&D and sales and marketing efforts. Others proposed that the R&D and commercial functions could operate autonomously.
The commercial organization would develop a product portfolio based on therapeutic franchises, using clearly defined business relationships with external R&D partners. In turn, this would free in-house R&D to discover and to develop innovations beyond the commercial portfolio strategy. Most biotechs lacked the finances to cope with the huge risks involved in an integrated sales and research platform and by 2003 only three companies had achieved this goal namely, Amgen, Biogen and Genzyme. Moreover, only 40 out f 1,466 biotech companies in the US were trading profitably. Biotechs had thus largely abandoned attempts to market drugs themselves (although they often sought to retain US marketing rights) and instead used the global reach of the research-based multinationals to leverage return on R&D through out-licensing and strategic alliances. As stock market funding dried up, the sector began to consolidate to marry revenue streams with promising pipelines. In the UK, for instance, British Biotech merged with drug company Vernalis, while Celltech acquired Oxford Glycoscience.
On the other hand, in 2002, nine of the top 10 fastest growing pharmaceutical companies were generics manufacturers and predicted compound annual growth rate of 12 per cent was forecast to deliver $60 billion dollars in sales in 2010. 9. Regulator’s role The industry is subjected to rigorous regulatory scrutiny. Government agencies such as the Food and Drug Administration (FDA) in the USA thoroughly examine all of the data to support the purity, stability, safety, efficacy and tolerability of a new agent.
The time taken is governed by legislation and is at least six months. Every regulatory authority is different and while FDA endorsement is very helpful it does not guarantee approval in other countries. Companies must address varied geographic requirements as regulatory authorities wish to ensure that the product is suitable for their population – for example, some Japanese people may metabolize the drug differently from Western subjects – and delivers improved health outcomes when compared with the standard of care in their country.
Obtaining marketing approval is no longer the end of the road in many countries, as further hurdles must be overcome in demonstrating the value of the new drug to justify its price and/or reimbursement to cost-conscious payers. 10. Possible future direction •Distribution of R&D fixed cost fairly across all developed countries so as to reduce unfair pressure on US consumers. •Make price in triad countries similar to keep as less as possible arbitrage opportunity because it destroys value without giving anything back. •Ask governments to have stringent customs check to prevent generic drugs import •Mergers and acquisitions for economy of scale Smaller companies can shift focus from only blockbusters •Traditional pharmacy companies will evolve into pure marketing organizations •Outsourcing of manufacturing, clinical trials and drug discovery to business partners in China and India will take place due to comparative cost advantage •The supply chain function will become revenue generating as it becomes integral to the health care package and enables access to new channels. •Collectively, the pharmaceutical industry must continue its efforts to enhance its public image and demonstrate its commitment to the advancement of healthcare. 1. Conclusion Many large pharmaceuticals companies are facing their toughest outlook in a decade. The industry has made a tremendous contribution to human well being, yet is vilified in the media and targeted by governments in their efforts to curb spiraling healthcare costs. R&D costs have risen sharply, while the product life cycle has shortened. Product approval, pricing and promotion are subject to increasingly tougher regulation, yet free trade allows wholesalers to extract a large chunk of value from the chain without adding anything back.
Companies must balance shareholder return against the huge unmet need of developing nations. Exciting opportunities do still exist – more educated consumers, advances in genomics, regulatory harmonization and of course unmet medical need. Industry consolidation is driven by the dominant belief that size is what counts, although a few players prefer to build focused franchises or offer integrated healthcare solutions. Ultimately, meaningful innovation is what matters most, but it is not clear whether a business formula based only on inventing and selling blockbuster drugs can continue to sustain double-digit growth rates.
Reference 1. http://www. efst. hr/management/Vol14No1-2009/4-Kesic. pdf 2. http://en. wikipedia. org/wiki/Pharmaceutical_industry 3. Global Pharmaceutical Industry – Intellectual Wealth and Asset Protection by Prabudh Ganguly 4. The global pharmaceutical industry by Sarah Holland and Bernardo Batiz-Lazo 5. http://www. verbigena. com/case_studies/history_analysis. pdf http://www. scribd. com/doc/10052160/SWOT-N-PORTER-5-forces-indian-pahrma
Cite this Global Pharmaceutical Industry Analysis
Global Pharmaceutical Industry Analysis. (2018, Jan 30). Retrieved from https://graduateway.com/global-pharmaceutical-industry-analysis/