Problems facing the pharmaceutical industry by Giovanna Hsu, Kelly To, Ei May Htaik, Jonathan Lloyds and Kristina Rocha Mello (2013)

1. Multi-Vision
Consultancy
Kristina Rocha Mello
Giovanna Hsu
Ei May Htaik
Kelly To
Jonathan Lloyd

2. Negative Implied Value of Growth
Pharma 1.0: The Blockbuster Model
• Blockbuster drug: Revenue>$1 billion per year
• Traditional Blockbuster model:
 High sunk cost i.e. Research & Development
 Charge a high premium, as a reward
 Patents provide a crucial period of exclusivity and protection
J, Gordon et al, JP Morgan

3. Weakening Patent Protection

4. Weakening Patent protection Challenges
• Widespread availability and issuance of generics
Cheaper, due to absence of R&D costs
• Increase in patents being challenged by
1. generic manufacturers
Due to increase in demand for generics from cost
constrained healthcare providers.
2. developing countries
Struggle to afford the prices, and therefore exert pressure
on pharmaceutical companies
• There isn’t an inexhaustible supply of potential
blockbusters to sustain revenue streams once
existing patents expire.

5. GSK’s Patent strategy
• Diversifying risk:
Moving from blockbusters to markets with quicker,
more certain revenue streams:
Healthcare and biopharmaceutical:
Oral care products (Sensodyne) UK energy drink (Lucosade)
Nutritional Supplements (Horlicks)
GSK Annual Report, 2011

6. • Entering new markets:
Countering the impact of loss of patent by making
their products more available in the less developed
countries
 flexible pricing model providing GSK patented
drugs according to the countries ability to pay.
 Kept at no more than 25% of original price

7. • Taking a closer interest in generic firms:
Acquiring generic brands
 establishing their own generic drugs
• GSK:
2008- acquired 16% stake of South Africa – based
Aspen
2009-licensing and selling agreement of
Dr.Reddys generics
2009- acquisition of Bristol Myers Squibb (BMS)
in Lebanon, Jordan, Syria, Libya and Yemen

8. • Licensing patent drugs to generic firms before its
patent expire
 Get royalties in exchange for know-hows
-2002- GSK licensed Augmentin to three generic
firms 6 months before it expired.
• Using an open innovation strategy:
Give access to patents they have no interest in
researching on in exchange for royalties.

9. • Increasing efficiency and the in the time taken
to develop a new innovation.
GSK introduced in 2008 a restructuring
program- Operational Excellence
• Focus on brand alliance & heritage for existing
medicines

10. Regulatory Challenges

11. Regulatory Challenges
• Different Environments
Have to satisfy a different set of regulations in
each market
Need for harmonization of regulatory
requirements

12. • Changing Regulations
 Stricter rules in US & EU
 Patient Protection and Affordable Care
Act (2010):
Impacts:
1.Annual Fee
2.Generic Drug Approval
3.Advertisement
Global Warming & Animal Rights Groups

13. Restructuring & Cost Savings
• Operational Excellence restructuring
program (2008)
Aimed at delivering £2.8 bn in annual savings
by end of 2014.
Main focus areas: R&D, manufacturing and
support functions
Key points:
1. Redirect savings to expansions in emerging markets, vaccines
and consumer healthcare.
2. Cover loss in sales to generics
GSK Annual Report, 2011

14. • Core Business Services (2011)
Standardization of support functions aimed at
maximization of economies of scale and
increased productivity.

15. Challenges Beyond the US Market

16. Group turnover by Geographic Regions
USA
50%
Europe
28%
Rest of
the
World
22%
2001
USA
32%
Europe
30%
Emerging
Markets
19%
Asia
Pacific,
Japan
and
Others
19%
2011

17. Europe
• Introduction of cost-benefit analysing stage to new drug
approval process: NICE
• Complexities in the approval and pricing procedures in
individual countries
125 drugs approved by EMA (2009-2012):
 50-60% available in Germany and the UK
 30-40% available in Spain, France and Italy
10 sample drugs:
• Impact of Eurozone crisis on sales and supply chain: €7 billion
in 2010 and 2011
Country Price Highest Price Lowest
Germany 7 0
Italy 2 3
UK 1 4
F. Reinaud, 2012

18. Emerging Markets
• Diversity of the market –
The wealth pyramid
Differences due to existing structures
 patient biology,
 medical infrastructure,
 patient access,
 insurance coverage,
 drug approval processes,
 the presence of local competitors
• Serious challenges to patent rights
• Growth is not enough to offset the negative growth from
the European region.

19. GSK’s strategy
• Asia Pacific, Japan, and Emerging Markets (APJEM) R&D group (2009).
 Branded generics – Dividing the R&D process between GSK and Dr
Reddy’s Laboratories in India
 Intra-regional business development – partnership with Amgen to take
over the complete process of development of denosumab in emerging
markets
 And local regional development – medical need or commercial
opportunity
• Contribution of emerging markets to overall sales and growth
• Expansion of Japanese business:
 Sales in GSK grew by 14% to 2 billion
 4 new compounds approved

20. Challenges in Research & Development

21. Challenges in Research & Development
• Pipeline
Patients expiring
Insufficient drugs to fill current pipeline
Pressure for scientist developed
• Shifting R&D towards new innovation
Change in focus to developing new drugs
Exhausted incrementally modified drugs (IME)
• Time lag to an output gap
Average of 10-15 years to develop new drugs from
discovery to approval
Increase in average R&D cost $800m - $1bn due to
many failure of drugs during clinical trials
Rigorous testing for safety and effectiveness

22. • Drug Discovery: From molecules that can become a drug to core
diseases or illnesses
• Preclinical Trials: Lab and animal testing to determine if drug is safe
enough for humans
• Clinical Trials
 Phase 1: Perform human testing on small group of volunteers
 Phase 2: Test on small group of patients
 Phase 3: Test on large group of patience for safety and efficiency
http://www.innovation.org/drug_discovery/objects/pdf/RD_Brochure.pdf

23. NumberofApplicationfiledandApproveddrugsFor
NMEs
Year 2001-2010
http://www.fda.gov/downloads/AboutFDA/Transparency/Basics/UCM247
465.pdf
• Application is not
increasing
 Finding drugs for
chronic disease is
complex
 insufficient
Knowledge or
understanding new
diseases
Lack of Innovation
0
5
10
15
20
25
30
35
40
1 2 3 4 5 6 7 8 9 10
Application Filed
Approved Drugs

24. • Focus on delivering product of value and best
science to the R&D organisation
• Collaboration with Academia and external
organisation that support GSK strategies
• Deliver new drugs in current pipeline and
maintain productivity
• Maintaining investors appetite through positive
IRR
GSK’s Strategy

25. GSK’s Strategy
•Collaboration with academies
Increasing GSK knowledge base enhancing the ability to
discover
Bringing in the best minds to stimulate innovation and
entrepreneurship and speed drug discovery
collaborated with University of Cambridge to develop
treatment for liver diseases

26. GSK’s strategy
• Externalisation
GSK acquires Cellzome to enhance science capabilities and
bring medicines into patient faster
Cellzome technology provided GSK with screening
capability: Identify compounds with drug targets
Reduce attrition rate in early phases of development
Cutting cost of failures

27. New Entrants: Changing The Market

28. New Entrants: Changing the Market
• Biotech companies provide the scientific breakthroughs.
• Venture Capitalists provide the financial backing
• Rational Drug Design.
• They make the medical ‘keys’ to fit the biological ‘locks.’
• Amgen, shares appreciated 16,000% since 1983 IPO
• They are increasingly holding the rights to the most marketable
drugs.
• Challenge for existing pharmaceutical firms is how to benefit from
these advances and accrue a share of the revenue.

29. Strategy: Collaboration and Control
• Amgen: worlds largest independent Biotech company
• Collaboration with GSK on commercializing antibody
denosumab.
Amgen: USA and Canada
Joint commercialization: Europe, Australia, New
Zealand and Mexico
GSK: China, Brazil, India, South Korea
• $120m + royalties to Amgen in return for shared profits in
Europe and full sales rights in emerging markets.
• “Bring denosumab to patients ... more effectively than if we
commercialized the drug globally on our own” – Amgen
• “A strong addition to our biopharmaceuticals portfolio” -
GSK

30. New Entrants: Healthcare Technology
• Investments by non-pharmaceutical companies in healthcare
technology (apps, internet) are massively outpacing those of
pharmaceutical companies.
 Patient empowerment
 Data driven
 Outcome focused approach
• Pharmaceutical companies should be indispensable in providing
content with their unique knowledge.
• But e-companies are quick growers and quick learners.
• Challenge for pharmaceutical companies is in staying relevant
and ensuring their products and knowledge are being shared.

31. • Strategy: Collaborate as a third party (2010).
• 1 of 137 oncology apps on iTunes.
• MedTrust Online, with GSK input.
• Locates clinical trials close to the
patients location.
• “Capture, organize, analyse, integrate
and present the most up to date
medical facts from a vast array of
sources.” – MedTrust
• “Provide simple yet highly effective
information-based solutions to the
cancer community” – GSK

32. • Control: First party technological products (2011) .
• Pharmaceutical companies investment
in healthcare technology rose 78% in
2011.
• Leading iTunes Pollen app is produced
by GSK.
• Offers pollen information, forecasts,
and medical routines to end users.
• Directs users to Piriton, GSK’s allergy
relief medicine.
• This strategy provides revenue streams
and ensures no other firm claims this
segment.

33. The Changing Market
• Pharma 1.0 - Blockbuster Industry was a ‘rewarding place to play.’
 High barriers to entry; the reward of high revenue streams.
• Pharma 2.0 - Changed the industry from within
 Age of weakening patent protection, regulation, the need to enter
emerging markets, and challenges in research and development.
• Pharma 3.0 – The digital environment
 GSK need to ensure they remain relevant and secure a prime place
in these new product and information channels.

34. References
Patent Protection:
•Ehrhardt, M (spring 2012), Five steps towards a revitalized pharmaceutical supply
chain, http://www.strategy-business.com/media/file/00094-Five-Steps-Revitalized-Pharma-Supply-
Chain.pdf
Pinset Mansons (October, 2001),Threat to international patent protection: the pharmaceutical industry's
perspective,http://www.out-law.com/page-382
•GlaxoSmithLine (2011), Horlicks http://www.horlicks.co.uk/health/
•The Pharmaletter (October 16, 2006) GSK to buy CNS Inc for $566
million, http://www.thepharmaletter.com/file/20671/gsk-to-buy-cns-inc-for-566-million.html
•My news desk (Nov 07, 2012)UK energy drinks market dominated by GSK's Lucozade
brand, http://www.mynewsdesk.com/uk/view/pressrelease/uk-energy-drinks-market-dominated-by-
gsk-s-lucozade-brand-810651
•Industry week (Dec. 13, 2010) Drugmaker GSK Buys Sports Specialist Maxinutrition, Company is
expanding its consumer healthcare businesshttp://www.industryweek.com/industry-
clusters/drugmaker-gsk-buys-sports-specialist-maxinutrition
•Pilmmer,G (June15, 2009) GSK in generic drug alliance Glaxosmithkline (July 02, 2009) GSK further
extends its product portfolio in the Middle East and North
Africa,http://www.ft.com/cms/s/0/b228c9d8-59df-11de-b687-00144feabdc0.html#axzz2D8zkuskw
•GlaxoSmithKleine (July 02, 2009) GSK further extends its product portfolio in the Middle East and North
Africa (http://www.gsk.com/media/press-releases/2009/gsk-further-extends-its-product-portfolio-in-
the-middle-east-and-north-africa.html
•Chandon,P.(2003) Innovative marketing strategies after patent expiry: The case of GSK’s antibiotic
Clamoxyl in France 7th August. International journal of medical marketing vol 4 174-177 pg 75
•http://www.strategy-business.com/media/file/00094-Five-Steps-Revitalized-Pharma-
Supply-Chain.pdf

35. Introduction:
J.Gordon et al, (November 5, 2012), GlaxoSmithKline Plc, JP Morgan.
Regulation:
•Baines, Donald.A, Problems Facing the Pharmaceutical Industry and Approaches to Ensure Long
Term Viability, at
http://repository.upenn.edu/cgi/viewcontent.cgi?article=1032&context=od_theses_msod&sei-
redir=1&referer=http%3A%2F%2Fwww.google.com%2Furl%3Fsa%3Dt&rct=j&q=pharmaceutical+in
dustry+challenges&source=web&cd=2&ved=0CDYQFjAB&url=http%3A%2F%2Frepository.upenn.e
du%2Fcgi%2Fviewcontent.cgi%3Farticle%3D1032%26context%3Dod_theses_msod&ei=96WnUNu
RO-W00QXKwoHgAw&usg=AFQjCNFqI7pkpnhSgOh3zpNfLPiAztvfzQ#search
•Morgan Lewis (April 15, 2010), Healthcare Reform Law: Impact on Pharmaceutical Manufacturers,
http://www.morganlewis.com/pubs/WashGRPP_ImpactOnPharmaManufacturers_LF_15apr10.pdf
•Joice Tait, Pressures for Changes in the Pharmaceutical Industry, available at:
http://www.genomicsnetwork.ac.uk/media/Innogen%20Review%20Making%20New%20Medicines.
pdf
Karim, Nicha (June 20, 2012) Challenges and Opportunities for Pharma Industries, available at
http://pharmabiz.com/ArticleDetails.aspx?aid=69654&sid=9
•http://repository.upenn.edu/cgi/viewcontent.cgi?article=1032&context=od_theses_m
sod&sei-redir=1&refe
•repository.upenn.edu

36. Beyond the US:
•Evolving R&D for Emerging Markets, June 2010, Nature Reviews Drug Discovery 9, 417-420, Box 1.
•F. Reinaud, June 2012, Time to Market for New Pharmaceuticals Increasing in Europe While Prices
Continue Downward Pressure, http://healthcare.blogs.ihs.com/2012/06/19/time-to-market-for-new-
pharmaceuticals-increasing-in-europe-while-prices-continue-downward-pressure-2/
•J Whalen and S. Stovall, June 2012, Drug Firms Urge Price Action, The Wall Street Journal Online,
http://online.wsj.com/article/SB10001424052702304870304577488041346373860.html
•Cancer Research UK, http://www.cancerresearchuk.org/cancer-help/about-cancer/cancer-
questions/how-are-drugs-licensed-in-the-uk
•H. Parmar, Pharmaceutical direct-to-consumer advertising in Europe, Pharmacerutical Field,
http://www.pharmafield.co.uk/features/2005/12/Pharmaceutical-direct-to-consumer-advertising-in-
Europe
Research and Development:
•http://www.ungs.edu.ar/globelics/wp-content/uploads/2011/12/ID-246-Correa-Privatization-of-
knowledge-Intellectual-Property-Right.pdf
•http://www.fda.gov/downloads/AboutFDA/Transparency/Basics/UCM247465.pdf
•http://www.fda.gov/Drugs/DevelopmentApprovalProcess/default.htm
•http://www.innovation.org/drug_discovery/objects/pdf/RD_Brochure.pdf
•http://www.telegraph.co.uk/finance/newsbysector/pharmaceuticalsandchemicals/9266958/GlaxoSmi
thKline-to-buy-Cellzome-for-61m.html
•http://www.bmj.com/content/345/bmj.e4348

37. New Entrants: Changing the Market:
•Pharmaceutical industry rapidly expanding partnerships with new entrants in
health care space, Ernst & Young, 15th Feb 2011,
http://www.ey.com/GL/en/Newsroom/News-releases/Pharmaceutical-industry-
rapidly-expanding-partnerships-with-new-entrants-in-health-care-space
•A Recent History Of The Pharmaceutical Industry - Based On All Five Forces,
Venture Navigator, August 2007, http://www.venturenavigator.co.uk/content/154
•Roche seals $47bn Genentech deal, BBC, March 2009,
http://news.bbc.co.uk/1/hi/business/7938938.stm
•Amgen to Collaborate With GlaxoSmithKline to Commercialize Denosumab in
Europe for Postmenopausal Osteoporosis (PMO), Amgen, July 2009,
http://www.amgen.com/media/media_pr_detail.jsp?releaseID=1312524
•MedTrust Online app, available at https://itunes.apple.com/gb/app/cancer-
trials/id376117391?mt=8
•GlaxoSmithKline and MedTrust Online Team to Provide Cancer Doctors Better
Mobile Access to Clinical Cancer Trials, MedTrust Online, http://medtrust-
online.com/about-medtrust-online/mtol-in-the-news/53-gsk-pressrelease
•GSK Piri Pollen app, available at https://itunes.apple.com/gb/app/piri-
pollen/id433740845?mt=8