global pharmaceutical industry

This is the case CASE STUDY The global pharmaceutical industry: swallowing a bitter pill Sarah Holland The case describes the evolution of the pharmaceutical industry and its unusual strategic environment. Attention is drawn to environmental pressures from regulators and payers. Key forces driving the industry are discussed, including addressing unmet medical needs, the importance of innovation and time to market, and globalisation. The case illustrates how an increasingly hostile environment, combined with a decline in R&D productivity, led to waves of job losses, and sparked a fresh round of consolidation in the industry. On the global level, the historical supremacy of the US was being challenged with the highest market growth rates recorded in emerging markets. The case is designed to facilitate teaching of analysis frameworks including PESTEL, Porter’s five forces, the concept of the ‘strategic customer’ and industry critical success factors. It may also be used for stakeholder analysis and as a basis for discussion of social responsibility. l l l development (R&D) process, intense competition for intellectual property,2 stringent government regulation and powerful purchaser pressures. How has this unusual picture come about? The origins of the modern pharmaceutical industry can be traced to the late nineteenth century, when dyestuffs were found to have antiseptic properties. Penicillin was a major discovery, and R&D became ?rmly established within the sector. The market developed some unusual characteristics. Decision making was in the hands of medical practitioners whereas patients (the ?nal consumers) and payers (governments or insurance companies) had little knowledge or in?uence. Consequently, medical practitioners were insensitive to price but susceptible to the efforts of sales representatives. Two important developments occurred in the 1970s. Firstly, the thalidomide tragedy (an anti-emetic for morning sickness that caused birth defects) led to much tighter regulatory controls on clinical trials. Secondly, legislation was enacted to set a ?xed period on patent protection – typically 20 years from initial ?ling. On patent expiry, rivals could launch generic medicines with exactly the same active ingredients as the original brand, at a lower price. The dramatic impact of generic entry is illustrated by A CEO’s dilemma On 23 September 2008, P?zer CEO Jeff Kindler took to the stage at the World Business Forum to be interviewed by Fox News anchor Liz Clayman. P?zer was the world’s number 1 pharmaceutical company with $13 billion1 (x9.5bn or £8.6bn) in annual revenues from its blockbuster cholesterol-lowering drug Lipitor. Contributing almost a third of company turnover, Lipitor faced patent expiry with dramatic loss of sales value in 2011. A key drug intended to replace it had failed in late-stage clinical testing and investors were losing con?dence. Clayman wanted to know how Kindler planned to keep P?zer a?oat. Acknowledging that no one drug could replace Lipitor, Kindler described P?zer’s broad pipeline of new drugs and ‘very strong balance sheet and signi?cant amount of cash’. Kindler faced the legacy of the blockbuster business model, and his company was focused on conventional medicines at a time of increased regulatory scrutiny and declining R&D productivity. Something needed to change, but what? Industry evolution As described in Box 1, the pharmaceutical industry is characterised by a highly risky and lengthy research and 1 $1 = x0.73 or £0.66. 2 Terms given in bold italic are de?ned in the Glossary at the end of the case. This case prepared by Sarah Holland. It is intended as a basis for class discussion and not as an illustration of good or bad practice. © K.S. Holland 2010. Not to be reproduced or quoted without permission. Allegra, a treatment for hay fever, which lost 84 per cent of US sales in just 12 weeks following patent expiry. Generics had a major impact on the industry, driving innovation and a race to market, since the time during which R&D costs could be recouped was drastically curtailed. The pharmaceutical industry is unusual since in many countries it is subject to a ‘monopsony’ – there is effectively only one powerful purchaser, the government. From the 1980s on, governments around the world focused on pharmaceuticals as a politically easy target in efforts to control rising healthcare expenditure. Many introduced price or reimbursement controls. The industry lacked the public or political support to resist these changes. 548 THE GLOBAL PHARMACEUTICAL INDUSTRY The drug development processBOX 1 The pharmaceutical industry has long new product lead times, with discovery to marketing authorisation typically taking almost 12 years (Figure 1). New product development can be divided into distinct research and development phases. The research phase produces a new chemical entity (NCE) with the desired characteristics to be an effective drug. Development encompasses all of the formulation, toxicology and clinical trial work necessary to meet stringent regulatory requirements for marketing approval. During all of these phases ‘attrition’ occurs, as promising agents fail particular hurdles, so most R&D projects never result in a marketed drug. Late-stage failures are particularly costly and not uncommon – in 2005–06 AstraZeneca lost three Phase 3 drugs, Pfizer and BMS one each. Of those that reach the market, 80 per cent fail to recoup their R&D investment. The cost of developing a new drug is estimated at over $1 billion. When the Figure 1 Creating new pharmaceuticals It takes 10–15 years on average for an experimental drug to travel from the lab to patients. Source: PhRMA, Medicines in Development – Biotechnology – 2006 Report, p. 51. 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 all this R&D be recouped. 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 typically averages 12 months. 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 price and/or reimbursement to cost-conscious payers. Business environment Ageing populations create pressure on healthcare systems, since ‘over-65s’ consume four times as much healthcare per head as younger people. Combined with an epidemic of chronic disease linked to obesity, this created an unsustainable situation. Universal coverage systems (such as in Spain and the UK) were slow or unable to introduce the latest treatments, while the insurance-funded system in the US could afford the latest innovations but were unable to share the bene?ts with an increasing part of the population. A 2008 report estimated that 46 million Americans, over 15 per cent of the population, lacked health insurance.i In response to these pressures, payers used a variety of methods to control pharmaceutical spending (see Table 1). Some put the emphasis on the manufacturer and distributor, others on the prescriber and patient. Controls were designed to reward genuine advances – price and/or reimbursement levels were based on perceived innovation and superior effectiveness. In countries with supply-side controls, negotiating price or reimbursement could take up to a year. In those with demand-side controls, market penetration was delayed while negotiating with bodies such as the National Institute for Clinical Excellence (NICE) in the UK. NICE typi?ed a general trend towards evidence-based medicine, where payers expected objective evidence of effectiveness to justify funding new therapies, often in comparison to existing drugs. The impact of NICE decisions reverberated well beyond the UK, as countries collaborated internationally on value assessments. Where new drugs were approved for funding, this was increasingly in the context of formal patient selection and treatment guidelines, so their use was carefully controlled and individual prescribers had limited decision-making power. Switching to generics is one way to cut drug expenditure. Many countries experimented with ‘e-prescribing’ where physicians were presented with recommended options, in?uencing their decisions. Payers were increasingly effective in establishing generic drugs as ?rst-line treatment for Table 1 Methods used to control pharmaceutical spending Controls on suppliers • Negotiated prices • Average pricing • Reference pricing • Positive and negative lists • Constraints on wholesalers and pharmacists • Imposed price cuts * Where the patient pays some of the drug cost. common ailments such as osteoporosis, asthma, dyslipidemia and depression, with patented drugs only used if those failed. In volume terms, generic drugs were growing and patented drugs were in decline – so sales growth for patented drugs relied on securing ever higher prices for innovation. The industry adopted a number of strategic responses to these challenges. A common response was to conduct pharmacoeconomic evaluations to demonstrate the added value offered by a new drug from improved ef?cacy, safety, tolerability or ease of use. For example, a study of the cost of diabetes – the fastest-growing chronic disease in the world – found that 60 per cent was driven by hospitalisations, 27 per cent was medicines, and correct outpatient treatment could avoid much of the hospital costs. Some companies introduced disease management initiatives, which involved understanding the goals of the healthcare system in addressing a speci?c disease. The ?rm offered a broad-based service to improve disease outcomes, positioning its products as one part of the solution. A later innovation was the ‘pay for performance’ deal, for example UK reimbursement of the cancer drug Velcade was linked to disease response. Government price controls created another challenge for the industry in the form of ‘parallel trade’. The principle of free movement of goods across the Single European Market meant that distributors were free to source drugs in low-price markets and ship them to high-price markets, pocketing the difference. EU parallel trade was estimated at x4.7 billion by 2008, with the highest penetration in Denmark where it accounted for 15 per cent of pharmacy sales. Parallel trade was prevalent in Asia and raised concern in the US due to price differentials with Canada. Canada had stringent and in?exible pricing and reimbursement criteria. In contrast, historically the US had no formal price controls and price increases were customary. Over time, this led to a wide disparity in prices (Lipitor was nearly twice the price in the US), which exposed the industry to sensationalist newspaper headlines and consumer backlash. THE GLOBAL PHARMACEUTICAL INDUSTRY 549 Mixed effect • Partial reimbursement at price negotiated with manufacturer • Generic substitution Controls to influence demand • Patient co-payments* • Treatment guidelines • Indicative or fixed budgets • Incentives to prescribe or dispense generics or parallel imports • Transfer from prescription-only to OTC Industry sectors Prescription-only or ethical drugs contribute about 85 per cent of the $750bn global pharmaceutical market by value and 50 per cent by volume. Ethical products divide into conventional pharmaceuticals and more complex biopharmaceutical agents and vaccines (see Box 2). The other 15 per cent of the market comprises over the counter (OTC) medicines, which may be purchased without prescription. Both ethical and OTC medicines may be patented or generic. The typical cost structure at ethical pharmaceutical companies comprises manufacturing of goods (25 per cent), research and development (16–24 per cent), administration (10 per cent), and sales and marketing (25 per cent). The key strategic capabilities at these companies are R&D and sales and marketing. Pressure on margins created an incentive to restructure manufacturing, rationalising the number of production sites and often outsourcing to China or India. Manufacturing and distribution ef?ciency was key for generics manufacturers. In the 1990s, US generics prices collapsed, accompanied by a shakeout to determine cost leadership. The speed and aggression of generic attacks on branded products increased sharply. Economies of scale, including ?nance to support complex patent disputes, proved decisive and the sector consolidated. The top 10 generics companies soon accounted for nearly half the global market. Acquisition remained a preferred strategy to increase geographical footprint, gain economies of scale and access new technologies, with 62 M&A transactions from 2006 to 2008. Given the number of blockbusters facing patent expiry and markets with untapped potential (e.g. Italy, Spain, France, Japan), not surprisingly growth in generics outstripped the overall market. Future growth will be driven by growth in biosimilars (see Box 2). A new type of industry player appeared in the 1980s – small biotechnology start-ups backed by venture capital to exploit the myriad opportunities created by molecular 550 THE GLOBAL PHARMACEUTICAL INDUSTRY Biologics – the future or the past?BOX 2 Biopharmaceuticals or ‘biologics’ are large molecules that behave like natural substances, such as therapeutic proteins and monoclonal antibodies. The discovery and design of biologics entails optimising specificity, affinity, and making the molecules as close to human substances as possible to avoid provoking an immune response. Biologics are produced through large scale fermentation in very costly plants. It is not yet possible to deliver biologics orally, so they are given by injection and used to treat specialist conditions such as cancer and rheumatoid arthritis. Biologics are much more specific in their action than small molecules, avoiding unexpected ‘off-target’ side effects, and reducing failures in late-stage development. Because of their benefits and use in high unmet need diseases, biologics generally secure much higher prices than small molecules. Initially associated with small biotech start-ups, biologics became mainstream – contributing $80bn in 2008 with projected sales growth three times that of small molecules. Companies that invested early in biologics benefited from this rapid growth. Other companies noted this success and many acquired biologics capabilities. In addition to lower attrition and superior pricing, biologics were thought to be at less risk from generic threat. The sophisticated capabilities required to develop and manufacture a complex biosimilar product took substantial investment, acting as a barrier to entry. Furthermore, regulators were slow to clarify the requirements for approval of biosimilars. However top generics companies clearly saw the potential. Sandoz led the way with human growth hormone and erythropoietin in the EU, while Dr Reddy’s launched cancer drug Reditux in India. Chinese companies piled into the field with 20 versions of G-CSF3 on the Chinese market. In a remarkable shift, even Merck planned to launch biosimilars. Perhaps the research-based industry should instead focus on the next major patient-focused innovation. For example, stem cell therapies appear to offer significant potential in tissue regeneration, with remarkable claims being made in fields such as multiple sclerosis, diabetes and heart disease. Many issues and challenges remain and completely new capabilities are needed, but this type of complex multifaceted approach might better exploit industry capabilities and deliver real advances for patients. 3 Granulocyte colony stimulating factor, used to boost white blood cell count during cancer chemotherapy. biology and genetic engineering. Initially, biotechs were associated with biopharmaceutical agents, e.g. recombinant insulin, the industry’s ?rst product, launched in 1982. Biotechs now pursue a huge variety of core capabilities creating a global, extraordinarily diverse and innovative sector, clustered together in locations such as San Francisco and Boston. Because of the very long product development cycle, most biotechs take years to reach pro?tability, if at all, and in 2008 revenues of $95bn were concentrated in a tiny subgroup of highly pro?table ?rms. The global credit squeeze had a dramatic effect on the sector: biotech IPOs became very rare, and access to venture and debt funding dried up. By 2009, over half of public biotechs had less than a year’s cash left. To conserve cash, companies restructured to cut jobs and programmes, sought grant funding and chased deals with cash-rich pharma companies. Many were set to disappear through merger or acquisition. Over the counter (OTC) medicines are bought by the consumer without a prescription. The global OTC market was estimated at $104 billion in 2008 with the top 10 manufacturers accounting for more than half of volume. Switching medicines from prescription-only to OTC was costly for pharma companies both to secure approval and to undertake consumer-oriented marketing. However, consumer brand loyalty then provided defence against generic competition and prolonged the product life cycle. A ?nal important category of medicine is vaccines, which were re-emerging as a key revenue generator. Prophylactic vaccines often provide lifelong protection against serious diseases, preventing at least 3 million deaths annually worldwide and saving an estimated $7–20 healthcare dollars for every dollar spent on vaccines. This nearly $20 billion market is highly concentrated: just ?ve global players account for over 85 per cent market share. Their vaccine sales grew at 32 per cent per year between 2004 and 2007 as they launched high priced vaccines for new applications such as human papilloma virus (HPV). Entry barriers are high, with specialised skills required in manufacturing, conducting large and complex clinical trials and managing surveillance programmes. Vaccines have higher development success rates and lower risk of generic entry than conventional medicines, and offer blockbuster sales potential. Novartis, AstraZeneca and P?zer all entered the sector through acquisitions in 2006–09. THE GLOBAL PHARMACEUTICAL INDUSTRY 551 US dominance under threat?BOX 3 A number of factors have contributed to industry globalisation. Chief is the international convergence of medical science and practice under the influence of modern communications technology and increased travel and information exchange. Well-funded US universities and hospitals generally lead their fields, while US scientific congresses provide the most prestigious platforms for new discoveries. Leading corporations have globalised, and are present in all significant markets. Production sites have a global mandate and are selected by worldwide screening. R&D is sourced from the best place worldwide, which often means the US. Between 1990 and 2008, R&D investment in the US grew 5.6 times, in Europe only 3.5 times. In 2008, leading industry players originated predominantly from the US and Europe, with only Teva from Israel and Takeda from Japan in the top rank. Strong US market growth gave US companies a springboard in achieving global ambitions, and in 2008 they occupied 5 of the top 10 slots (Table 2). Biotechnology companies are ‘born global’ – from their inception they draw upon a global pool of collaborators and investors, rather than growing from small domestic beginnings. Here once again the US dominates: publicly traded biotechs employ over four times more people in the US than the EU, with a similar ratio for R&D spend. In the longer term, US scientific and medical dominance may be under threat from Asia. The Chinese government has declared its intention to become a leader in the field and is pouring money into new universities and science parks. Routine chemistry and toxicology are already often outsourced to Chinese start-ups, but as US returnees seek more innovative projects this will extend up the value chain. India accounts for about 30 per cent of global generics, but has similar ambitions to become a major source of R&D and is already an important location for cost-effective clinical trials. From 2001 to 2008 the number of US clinical trials dropped 30 per cent, while in India the number registered with the FDA jumped from 46 to 493. Companies are also establishing R&D sites – from 2001 to 2006, 18 sites closed in the EU while 14 new sites opened in Asia. Key markets The majority of global pharmaceutical sales originate in the US, Japan, EU, China and Brazil, with 10 key countries contributing over 80 per cent of the global market. Pharmaceutical market growth is strongly aligned with GDP growth. The US is by far the largest market by volume and value: $291 billion in 2008 – nearly 40 per cent of global sales. Historically the fastest growing key market, the US contribution to global growth fell from over 50 per cent to 9 per cent in just two years from 2006 to 2008, the consequence of generic impact, fewer new products and reduced consumer demand. Nevertheless, the US remained critical to success: for drugs launched after 2004, two-thirds of sales were from the US compared with just a quarter from the EU. Following regulatory changes in 1997, direct-toconsumer (DTC) advertising transformed the US marketplace and fuelled rapid growth. However, companies’ costs for providing drug bene?ts to employees were increasing up to 20 per cent annually, causing the CEO of General Motors to declare that ‘the cost of health care in the U.S. is making American businesses extremely uncompetitive versus our global counterparts’.ii Managed Care Organisations (MCOs) asked consumers for increasing co-pays and implemented other cost-control measures. Medicare reforms extended drug coverage for the elderly, but also made the government overnight the largest direct purchaser of medicines, creating new pricing leverage. All these pressures combined with recession caused unprecedented market contraction in 2009. Further turmoil was predicted in the US operating environment due to the uncertain impact of President Obama’s proposed healthcare reforms. If successful, they would at last extend healthcare coverage to all Americans, potentially expanding the market. The industry was set to contribute around $80bn to the cost of the reforms and anticipated continued pricing pressures. Japan has the second largest market for pharmaceuticals, with sales of $77 billion in 2008. The Japanese operating environment was historically very different from the US and EU. This divergence occurred at all levels, from medical practice, healthcare delivery and funding, to regulatory requirements, the lack of generics, distribution, and the accepted approach to sales and marketing. Not surprisingly, domestic companies dominated the market. The industry experienced signi?cant turbulence in the 1990s. Economic recession caused tax revenues to fall, while the cost of treating the world’s most rapidly ageing population rose. This resulted in unprecedented price cuts, changes to healthcare funding and the introduction of stringent price controls, limiting market growth to an average below 3 per cent from 1994 to 2008. The European pharmaceutical market, which contributed 32 per cent of global sales in 2008, was highly fragmented and driven by governments’ forever changing cost containment plans, resulting in a lack of predictability for companies’ operational planning. The UK market was projected to fall out of the top 10 by 2013, illustrating the strong impact of NICE decisions on reimbursement and access. The annual growth rate of the European market was expected to be constrained to 3–6 per cent per year from 2008 to 2013. EU expansion provided opportunities for growth, but also new challenges from generics and low-priced parallel imports. For industry players to maintain growth they had to either capture a disproportionate share of established markets, or focus on accessing those still in their growth phase. A new world order was apparent, with Brazil, Russia, India, China, Mexico, South Korea and Turkey predicted to contribute almost half of market growth from 2009 to 2013. By 2013 these markets were expected to overtake the EU, with China positioned as the third largest market globally. In addition to the high net worth individuals who could afford the most innovative treatments, their middle class populations were growing more rapidly than at any time in history. ‘We should be ?nding ways of innovating down that pyramid’ commented Abbas Hussein, GSK’s president of emerging markets.iii Indeed, this offered a lifeline to companies focused on primary care, if they could adapt to the countries’ varied needs and environments. Success seemed most probable for generics offering the reassurance of a known brand and reliable manufacturer, so-called branded generics. GlaxoSmithKline experimented with differential pricing within and across countries, acquired branded generics businesses from BristolMyersSquibb (BMS) and AstraZeneca, and established a strategic alliance to commercialise Dr Reddy’s portfolio of generics. Innovation Pharmaceutical companies’ key contribution to medical progress is the crucial ability to turn fundamental research ?ndings into proven innovative treatments that are widely available and accessible.iv Companies with consistently high levels of R&D spending and productivity became industry leaders. For this reason, stock market valuations place as much importance on the R&D pipeline (i.e. the products in development) as on the currently marketed products. The holy grail of pharmaceutical R&D used to be the blockbuster. Blockbuster drugs were genuine advances that achieved rapid, deep market penetration. Because of their superlative market performance, blockbusters determined the fortunes of individual companies. Glaxo went from being a small player to a top tier global company on 552 THE GLOBAL PHARMACEUTICAL INDUSTRY the strength of a single drug – Zantac for stomach ulcers. A blockbuster was typically a long term therapy for a common disease that offered a step change in ef?cacy or tolerability, marketed globally with annual sales exceeding $1 billion. While blockbusters made immense contributions to company fortunes, they were few and far between. Andrew Witty, the CEO of GlaxoSmithKline, likened the hunt for them to ‘?nding a needle in a haystack right when you need it’.v Focusing on blockbusters exposed an already high-stakes industry to even greater levels of risk. This was dramatically brought home in September 2004 when the cardiovascular safety risks of Vioxx emerged, and Merck withdrew the brand from the market. Merck lost $2.5bn in sales, a quarter of its stock market value, and faced the prospect of numerous liability suits. Blockbusters also exacerbated the impact of patent expiries. The top 15 companies were projected to lose $70 billion in sales from 2009 to 2013 due to generic erosion, with $17 billion to be borne by P?zer alone. Unfortunately, R&D productivity was in decline and development times were lengthening. The number of trials and number of patients required for each new drug application increased enormously. The average cost to develop a new drug exceeded $1 billion and had grown at double the rate of in?ation for 20 years. Despite increasing R&D spend from 11 per cent of annual sales to 20 per cent or more, the industry was struggling to replace the value lost through patent expiries. Attrition rates across all phases of development increased as regulators became ever more safety conscious, mirrored by a steady decline in annual numbers of new chemical entities (NCEs) launched each year from 1998 to 2008. By 2009 spiralling R&D investment had become unsustainable and the brakes were being applied hard, with projected growth down to 2 per cent per year. Lilly CEO John Lechleiter expressed a need to ‘reinvent innovation . . . at a time when the world desperately needs more new medicines, we’re taking too long, spending too much and producing far too little’. In response to these challenges, companies endeavoured to be both creative and ef?cient. They narrowed their areas of therapeutic focus, exiting whole areas, seeing depth of expertise as key to success. Lilly created a special unit to do rapid, small clinical tests that would quickly and cheaply shake out molecules that were not going to make it. Recognising that the fastest growing brands were biopharmaceuticals, many companies acquired biologics capabilities. All sought external innovation through licensing deals and acquisitions, although with few real ‘jewels’ available the cost of deals spiralled. Some reorganised their R&D to create smaller and more nimble units: GlaxoSmithKline’s research centres competed for funding like internal biotechs. To better manage some of the tremendous risks involved, companies started moving towards a more network-based approach to innovation. Merck, P?zer, Lilly, Johnson & Johnson and PureTech Ventures created Enlight Biosciences to support new technologies to reduce the risk of drug development. Companies, foundations and regulators working on Alzheimer’s disease pooled data and resources to create a shared understanding of the disease and how best to monitor it. AstraZeneca and BMS collaborated to develop late-stage diabetes drugs together, sharing cost, risk and reward. Sales and marketing Sales and marketing capability became an important source of competitive advantage. A company that developed a strong global franchise with its customers could maximise return on its in-house products and was in a good position to attract the best in-licensing candidates. The traditional focus of drug marketing was the personal detail in which a sales representative (rep) discussed the merits of a drug in a face-to-face meeting with a doctor and often handed over free samples. Promotion was subject to industry self-regulation. For example, in the UK, reps had to pass an examination testing medical knowledge. In some countries, government regulatory agencies checked that promotional claims were consistent with the data. There were important differences in the marketing of ‘primary care’ and ‘specialist’ products. Of?ce-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 more costeffective targeted relationship marketing. The term ‘high compression marketing’ was coined to describe global launches of primary care brands. This involved near-simultaneous worldwide launches, global branding and heavy investment in promotion. The aim was to create a rapid take-off curve that maximised return by creating higher peak year sales earlier in the product lifecycle. The archetype was the launch of Celebrex in 1999, which netted $1 billion sales in the ?rst nine months. In the US an important marketing tool was DTC advertising, where spending reached $4.8 billion by 2008. DTC was costly because of the vast target audience and expensive television advertising, but pro?table. Well-informed patients asked for drugs by brand name, creating a powerful ‘pull’ strategy. It also required new marketing skills – both P?zer and Novartis employed consumer marketers. Drug advertising became much more THE GLOBAL PHARMACEUTICAL INDUSTRY 553 visible and, combined with high pro?le safety alerts, helped fuel a backlash against the industry. Sales-force size, or ‘share of voice’, was historically a key competitive attribute. The more sales reps companies deployed, the higher their sales. Numbers in the US tripled from 1995 to 2002, reaching around 90,000. However, doctors had less time to see reps, with calls averaging less than ?ve minutes. More reps selling fewer drugs meant productivity declined sharply. Eventually, P?zer called a halt to the ‘arms race’, downsizing in 2005. Over 500,000 sales reps were let go across the industry between 2006 and 2008. With pipelines shifting to high unmet need diseases treated by specialists, the era of lavish launches and massive sales forces was over. Selling was becoming a more complex process with multiple stakeholders interested in cost-effectiveness as well as clinical arguments, requiring new skills. A few companies built strategies around speci?c customer groups, aiming to satisfy their needs on multiple dimensions. In other words, they developed a franchise. The broad-based approach of Baxter in renal dialysis and Novo Nordisk in diabetes care, utilising a web of alliances to address multiple customer needs, made them formidable competitors. Some commentators foresaw a more collaborative, network-based approach in sales and marketing as well as R&D. Corporate social responsibility During the twentieth century average life expectancy in developed countries increased by over 20 years. Much of this improvement can be attributed to pharmaceutical innovation. Few other industries have done as much for the well-being of mankind. So how did an industry that has delivered such bene?ts acquire such a tarnished image and become an easy target for unpredictable government intervention? One problem is that pharmaceuticals have one of 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 often tiny compared with the amortised cost of R&D that led to the discovery. Setting prices that attempt to recoup R&D therefore looks like corporate greed in comparison with the very low prices that can be charged for generics. Some companies damaged the industry’s overall reputation. In January 2009, Eli Lilly paid a record $1.4bn ?ne for off-label promotion of the antipsychotic drug Zyprexa, the largest amount paid by a single defendant in the history of the United States Department of Justice. Even more seriously, companies were accused of putting pro?ts before patient safety. After the withdrawal of Vioxx, Merck was accused of ignoring problems during product development, and publishing misleading scienti?c results. The lack of trust from patients and politicians spilled over onto the FDA, which was perceived as too closely aligned with the industry. Renewed legislation de?ning the role and funding of the FDA emphasised safety. The FDA was empowered to demand Risk Evaluation and Mitigation Strategies (REMS) – costly additional programmes implemented after product approval to monitor and ensure drug safety. By the end of 2008, one-third of new drug approvals involved REMS. The industry also faced condemnation of its response to the enormous unmet need in developing countries. Although effective drugs and vaccines existed for many diseases affecting millions, often their cost was beyond the means of the people who needed them. It was argued that companies could reallocate some R&D efforts in favour of tropical diseases, sell low-priced essential drugs and provide technology transfer. Inept responses to these demands did not help the industry’s public image. Industry consolidation The pharmaceutical industry remains relatively fragmented, with very large numbers of domestic and regional players. By contrast, it has consolidated at the global level, with the top 10 companies holding 43 per cent of the market by 2008. Table 2 shows how the industry response to slowing revenues and declining productivity was a wave of mergers and acquisitions. Mergers resulted in the formation of Novartis, Sano?-Aventis, AstraZeneca and GlaxoSmithKline, while P?zer acquired Monsanto (Warner-Lambert), then Pharmacia. Even Merck, which had doggedly followed an organic growth strategy, ?nally announced a merger with Schering-Plough in March 2009. One rationale for mergers and acquisitions was to combine a company with a strong pipeline but weak sales and marketing with its converse. The acquisition of Warner-Lambert gave P?zer full marketing rights to Lipitor, which P?zer built into the world’s best-selling drug. Another rationale was to acquire global commercial reach. P?zer’s acquisition of Pharmacia took the company from number 4 in Europe and number 3 in Japan to number 1 globally. More recent moves were precipitated by falling revenue and the attraction of eliminating duplicated costs. Turning necessity into opportunity, companies seized the chance to access growth segments. Returning to Jeff Kindler’s dilemma, his solution was to merge with Wyeth. Within a month of closing the deal on 16 October 2009, P?zer announced a 35 per cent reduction in R&D square footage with six site closures. Importantly, Wyeth offered capabilities in biologics and vaccines – both of which P?zer lacked. 554 THE GLOBAL PHARMACEUTICAL INDUSTRY Another key argument for critical mass was to leverage investment in ‘technology platforms’. With a larger R&D programme, more projects could bene?t from the new capability and help amortise its cost. But there was little evidence that mergers enhanced R&D productivity. Some argued that mergers actually reduced productivity – more management layers resulted in greater bureaucracy, less freedom to innovate and reduced research output, supported by analyses showing lower output from merged The success of biotechs in drug discovery suggested creativity was greater in small R&D organisations. Although individually a much less reliable source of new drugs than large companies, collectively they produced more, for less. Where next? At the start of 2010, global pharmaceutical companies were pursuing a variety of strategies. A few were well positioned to bene?t from the growth in generics, e.g. Novartis (Sandoz) – but was this the right focus for a highmargin, innovation-based industry? A few owned vaccine businesses (GSK, Merck, Sano?-Aventis, Novartis) or had just acquired them (P?zer, AstraZeneca). Others had made belated moves into biopharmaceuticals (AstraZeneca, Merck). A few players such as J&J emphasised consumer health and OTC products. Others were busy acquiring greater presence in key emerging markets. Most retained unaffordable cost bases.vii An intriguing response to environmental change was adopted by Roche, which positioned itself as operating a ‘personalised healthcare’ business model. Roche was the global leader in diagnostics and the strategic vision was to Table 2 Leading global pharmaceutical companies, 2005 and 2008 2005 2008 Company Total sales Company Total sales Share of global Sales growth ($bn) ($bn) market (%) (2007–08, %) Pfizer1,3 (US) 45.9 Pfizer (US) 43.4 6.0 -2.7 GlaxoSmithKline2 (UK) 35.3 GlaxoSmithKline (UK) 36.5 5.0 -3.7 Sanofi-Aventis4 (Fr) 30.9 Novartis (CH) 36.2 5.0 5.2 Novartis (CH) 29.6 Sanofi-Aventis(Fr) 35.6 4.9 5.3 Johnson & Johnson (US) 27.2 AstraZeneca (UK) 32.5 4.5 8.0 AstraZeneca (UK) 24.7 Roche (CH) 30.3 4.2 9.8 Merck & Co (US) 23.9 Johnson & Johnson (US) 29.4 4.1 1.0 Roche (CH) 20.1 Merck & Co (US) 26.2 3.6 -4.0 Abbott (US) 14.8 Abbott (US) 19.5 2.7 10.8 Bristol-Myers Squibb (US) 14.7 Lilly (US) 19.1 2.7 10.3 Notes: Created Originating companies 1 2000 Warner-Lambert (US) Pfizer (US) 2 2000 Glaxo Wellcome (UK) SmithKline Beecham (UK) 3 2003 Pfizer (US) Pharmacia (US) 4 2004 Sanofi (France) Aventis (France) offer value through targeting treatments to patients that would bene?t most.viii This concept appealed to regulators and payers, who endorsed the linkage of high-priced cancer drugs such as Amgen’s Vectibix with diagnostic tests to identify patients who would not respond. Investing in discovery and development of tests added further to cost and complexity, but offered the chance to build unique competencies. A small minority questioned the whole business model. Observing the higher multiples earned by Roche and Abbott, some companies were considering diversi?cation into medical devices, veterinary products or nutraceuticals. Procter & Gamble actually closed internal discovery efforts in 2006. The company argued that in-house efforts could not hope to keep pace with, nor offer the choice and impact of external innovation. By February 2009 P&G was reportedly trying to sell its pharmaceutical business altogether. Chief Executive AG La?ey commented that ‘today, Pharma companies trade at multiples at or below consumer products’. Summary The industry was facing its toughest outlook yet with both big pharma and biotech sectors starting to shrink. The industry had made a tremendous contribution to human well-being, yet was vili?ed in the media and targeted by governments in their efforts to curb spiralling healthcare costs. R&D costs had risen sharply, but productivity was down and the product life cycle had shortened. Product approval, pricing/reimbursement and promotion were subject to increasingly onerous regulation, yet free trade allowed wholesalers to extract a large chunk from the value THE GLOBAL PHARMACEUTICAL INDUSTRY 555 chain. Exciting opportunities remained – large emerging markets, scienti?c advances, personalised healthcare, more educated consumers and of course unmet medical need. However, the blockbuster paradigm had failed and industry consolidation was driven by the need to cut costs to survive. The industry more than ever needed to get a handle on the slippery business of scienti?c creativity and provide its critics with indisputable evidence of its value by offering a true step change in outcomes for patients. References: i ‘Income, Poverty, and Health Insurance Coverage in the United States: 2007’, US Census Bureau (August 2008). ii The Washington Post, 11 February 2005. iii Scrip News, 25 November 2009. iv ‘The Truth about Drug Innovation: Thirty-five Summary Case Histories on Private Sector contributions to pharmaceutical science’, Manhattan Institute for Policy Research, June 2008, v ‘Andrew Witty’s prescription for GlaxoSmithKline’, The Economist, 14 August 2008. vi ‘Lessons from 60 years of pharmaceutical innovation’, Nature Reviews Drug Discovery, 8 (December 2009), pp. 959–68; doi:10.1038/nrd2961. vii From the analyst’s couch: Pharmaceutical industry financial performance, Nature Reviews Drug Discovery, 8 (December 2009), pp. 927–8 | doi:10.1038/nrd3049. viii ‘Are we approaching the post-blockbuster era? Pharmacodiagnostics and rational drug development’, Expert Reviews Molecular Diagnostics, 8(6) (2008), pp. 689–95. is there a way how I can attach the case in pdf style please? This is what I have to discuss Please read this session’s case study from the core text and post your thoughts on the questions raised in the forum below before proceeding. Exploring Strategy: 9th edition, 2010: Johnson, Scholes and Whittington: Prentice Hall Publishing The Global Pharmaceutical Industry: Swallowing a Bitter Pill – pages 547 – 556. Discussion Questions To complete this task please answer the questions below: 1. Identify the main environmental forces currently affecting the global pharmaceutical industry. 2. How relevant do you think the Five-Forces Framework map is to identify environmental forces affecting the global pharmaceutical industry? 3. Do these forces differ by industry sector and where would you place the different sectors in the industry life-cycle? 4. Describe the strategic choices made by Pfizer from 2008 onwards and comment on what may have been the drivers behind these choices.