Case Study: The Global Pharmaceutical Industry

Presented by: Naseem uz Zaman Asif Rasool Nafizul Azim Group # 03 MBA 45D, Sec: A Roll Roll Roll 12 19 28

Background

Problem Identification and Key Role Players

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

and

Key Player The Big 10 Companies Governments

Supporting Player Worldwide Health Insurance Companies Health Development organizations e.g. WHO, Unicef and so on Individual buyers

Analysis Decision Context

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

Weaknesses

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

Opportunities

Biotechnology gives scope for new drug lines

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

S W O T

Analyze Decision Context (Cont.)

Share within Global Retail
Pfizer, 10.30% GlaxoSmithKline, 7.00% Pfizer GlaxoSmithKline Merck, 5.00% Johnson & Johnson, 4.60% All Others*, 54.20% AstraZeneca, 4.50% Novartis, 4.10% Aventis, 3.60%
*individual shares negligible

Merck Johnson & Johnson AstraZeneca Novartis Aventis Bristol-Myers Squibb Roche All Others*

D o u b l e

H e l i x

Bristol-Myers Squibb, 3.60% Roche, 3.10%

Analyze Decision Context (Cont.)

2011 Mkt Share (%)
Pfizer Pfizer6.6% , Novartis6.0% , Merck & Co, 4.7% Sanofi, 4.6% All Others*, 46.2% Astrazeneca4.3% , Roche, 4.0% G laxoSmithKline, 4.0% Johnson & Johnson, 3.2% Abbott3.0% , A mgen, 1.9% Bayer Schering Pharma, 1.9% Teva2.8% , Lilly, 2.8% Takeda, 2.1%
*individual shares negligible

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

D o u b l e

H e l i x

Bristol-Myers Squibb, 1.9%

Analyze Decision Context (Cont.) Porters Five Forces Model and Global Pharmaceutical Industry

The First Force: Threat of New Competition

1950-1985 High cost of R&D and clinical testing 1985-1995 Existing high entry barriers were increasing 1995-2005 Firms specializing in moving specific molecules along the value chain could be tomorrows main competitors.

Threat of Potential Entrants

Large and Lead times for new drugs expensive sales to force required be marketed increasing from 35 years in the 1960s to 12 years in the mid-1990s
Long lead times Already high costs of R&D for new drugs, and clinical testing increasing Low Low

Emphases on disease prevention and early detection begin to shift R&D priorities; and could favor pharmacogenomics providers.

Moderate

The Second Force: Bargaining Power of Buyers

1950-1985 1985-1995 1995-2005

The decision to buy was imposed by doctors on patients (final consumers). Doctors had no responsibility to contain costs. Bargaining In the US, a mail-order Power of Buyers channel starts to develop to help highly price sensitive patients.

Loss of brand loyalty as medical practitioners are forced to become cost conscious and consider prescribing generic rather than brand drugs.
Patients expectations are rising Government policy to increase competition. Governments (EU) and managed health organizations (US) imposing systems to control prices.

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

Growth of managed care is expected to continue deteriorating the profitability of big pharmaceuticals regardless of the outcome of regulation.

Low

High

High

The Third Force: Bargaining Power of Suppliers

1950-1985 1985-1995 1995-2005

Cost of drug ingredients Global sourcing by drug companies Lack of profitability of outsourcing are very low percentage hassled to further reductions in markets for R&D, clinical trials and of total costs. the costs of raw materials managing the approval processes may result in a shakeout with fewer suppliers able to put upward pressure 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 outsourcing and in-licensing for new products, enabling supplying companies to place a high price on such deals. However, counteracted by global over-capacity in outsourcing and R&D Low Low

Low

The Fourth Force: Threat of Substitutes

1950-1985 1985-1995 1995-2005 Biotechnology and combinational chemistry further reduce lead times to market Diversification into generics protects the market share (but not the profit) of big pharmaceutical companies. Few substitutes. High Cheap generics (from not profits associated very reputable with introducing manufacturers) products that greatly Consumer suspicion of drugs improved the quality leads to increasing use of of healthcare for many alternative remedies patients

Lead times of 67 years over competitors (time for rivals to produce me-too drugs)
Low

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
High

Moderate

The Fifth Force: Intensity of Competitive Rivalry

Low concentration (lots of producers in several therapeutic applications, hence low price competition) High cost of R&D expenditure is effectively an exit barrier Continued industry consolidation results in fewer larger global companies, focused on specific franchises, with intense rivalry within therapeutic franchises

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

Profitable, cash rich industry but margins are declining.

Moderate

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

High

Analyze Decision Context (Cont.) PESTEL Analysis on Global Pharmaceutical Industry

Political Factors
Governments are the biggest buyer of the industry In 1980s and 90s governments used Pharmaceutical Industry to control healthcare budget. As the industry globalizes and ownership and employment become concentrated in fewer countries

P
E S T E L

Economic Factors
Patients (the ultimate) users have very little influence over price due two reasons:
Doctors is the person who decides the drugs Consumption and price have been controlled by institutions like health insurance company and governments.

E
S T E L

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).

P E

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.

S
T E L

Technological Factors
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.

P E S

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.

T
E L

Environmental Factors
The introduction of cradle to grave policies in the EU should result in greater need for green (i.e. environmentally-friendly) management.

P E S T

E
L

Legal Factors
Pharmaceutical companies often find problems in enforcing patent protection in developing countries (particularly in Asia). Clinical trials still remain as the stage that demands the greatest share of resources to develop a drug.

P E S T E

Identify and Evaluate Alternative Courses of Action

Four alternative courses of action:
Do Nothing Replace in Volume Outsource R&D Differential Pricing

Implementation of Action Plans

Improve Public Perception through Societal Marketing Target Untapped Markets Diversification Develop Favorable Legal Environment through Lobbying

Recommendations
1. The big pharmaceutical companies need create more and more drugs through their R&D. Because the lifecycle of drugs are shortened significantly. Newer products will give the respective company competitive advantages. 2. Time to market is critical. R&D and the trials had to more quicker and well-targeted. 3. Finding out the large buyers and maintaining good relationship with them is the key hold a sustainable cash flow. 4. Bringing more diseases in the treatable category by development newer medicines. 5. Maintaining a larger sales force is important but cost considerations may force some companies to look for alternatives. 6. There should be more franchises to capture the market share in the emerging economies.

Thank You Very Much