2. CASE BACKGROUND
ď˘ The case describes how the prescription pharmaceutical
industry has changed since its modern beginnings in the
early 1950s.
ď˘ The various forces affecting the competitive environment
of the industry are discussed in terms of
origins, immediate past and immediate future (2004
onwards).
ď˘ Provides insights into the evolution of barriers to enter
and exit the industry for prescription pharmaceuticals
ď˘ Detailed industry note on the âethicalâ pharmaceutical
industry which provides an opportunity to analyse key
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success factors of major players.
3. CASE BACKGROUND
ď˘ Descriptive overview of the predominant issues in the
three major Triad market areas: the US, Europe and
Japan .
ď˘ Covers the overall industry environment with indepth
discussion of the driving forces in the industry such as
globalisation (in particular global regulatory
issues, changing world demographics and worldwide
pricing disparities).
ď˘ Development of new technology; the importance of time
to market; and amalgamations.
ď˘ The case also examines issues around corporate social
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responsibility
4. BRIEF HISTORY
ď˘ Post WWII, the pharmaceutical industry operated within a
quite stable & highly profitable environment as compared
to other industries
ď˘ The industry saw the development of many new drugs
during the 1960s due to technological success.
ď˘ However as legislation was introduced in the 70s the
number of âgenericsâ increased & consequentially time to
market of drugs also increased
ď˘ Emergence of biotechnology firms, limited buying ability of
consumers leading to reliance on blockbuster drugs for
income resulted in the instability in the industry
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5. Patents introduced
BRIEF HISTORY 60
50
40
o Simple infections that were easy 30 Patents
drug targets had been addressed 20 introduce
10 d
0
o Advances over existing treatments
1999
1980
2001
2002
& research for therapy of
previously untreated diseases
started proving expensive & risky
R&D Expenditure
60
o Consumers started demanding 50
value for money products as their 40
buying power became increasingly 30 R&D
Expendit
limited 20
10 ure
0 5
In Billion $
1981 2000
6. ENVIRONMENT ANALYSIS
External Internal
Scenario
Environment Environment
Favorable, moderate
PESTEL Five forces Model
and unfavorable
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7. PESTEL ANALYSIS
Political Factors
⢠Highly fragmented industry in 80âs. Mergers
led to concentration of jobs in select
countries
⢠More control thereby exercised by
Governments
⢠Easy Targets â To control rising healthcare
costs when medicines amount to 15% of
healthcare expenditure
⢠Multi country pricing due to Govt regulations.
⢠Patent on drugs â India patents the process
while US and EU patent the drug 7
8. PESTEL ANALYSIS
Economic Factors
⢠Demand side
⢠Doctors tend to favor branded drugs which are high
margin.
⢠Globalization has made it possible for big
companies to mass market the drugs.
⢠Supply side
⢠Global supply is fragmented. Pfizer has largest
market share of 11%
⢠Regional players and the generic drugs which are
relatively cheaper are popular in developing world
⢠Need for blockbuster products as R&D investments 8
do not justify the number of new drugs
9. PESTEL ANALYSIS
Social Factors â
⢠Advancement in medicine has raised the life
expectancy to 75 and aged population increases
the consumption. This adds strain on insurance
companies and govts
⢠Socially aware and demanding consumers
Technological and Environmental
factors
⢠Human Genome and genetics are new ways to
discover drugs
⢠Rising aged population in west and middle class in
developing countries makes the long term 9
prospective good.
10. PESTEL ANALYSIS
Legal factors
⢠Varied patent laws in different countries
⢠Many best selling drugs are replicated
as generic medicine in developing
countries with full government backing.
⢠Clinical trials have become more
rigorous thereby testing more than
20,000 people in the complete run of
10-14 years
10
11. ENVIRONMENT ANALYSIS
External Internal
Scenario
Environment Environment
Favorable, moderate
PESTEL Five forces Model
and unfavorable
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12. Factors Past Future
Threat of ⢠The industry has already high entry ⢠Firms specializing in moving
potential barriers which are increasing. specific molecules along the value
entrants ⢠lead times for new drugs to be chain could be tomorrow's main
marketed increasing from 3 to competitors.
5years in the 1960s to 12 years by ⢠Emphasis on high-priced niche
the mid-1990s. drugs for high unmet need diseases
⢠Need for global return on costly R&D likely to support market entry by bio
favors large firms only techs.
Power ⢠Governments (EU) and managed ⢠Controls on pricing , reimbursement
of buyers health organizations (US)imposing and market access continue to
systems to control tighten(âvalue for moneyâ is atop
prices/reimbursement and demand . concern on both sides of the
⢠Growth of parallel trade. Atlantic).
⢠Harmonization of regulatory approval ⢠Growth of managed care continues
systems. Rising patient expectations. deteriorating the profitability of big
pharmaceuticals regardless of the
outcome of regulation.
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13. Factors Past Future
Power of ⢠Cheap generics. ⢠Biological generics appear.
substitutes ⢠Reduced lead times for âme-tooâ ⢠Diversification into generics
drugs from 6to 7 years to 18months; protects volume share (but not the
⢠Consumer suspicion of drugs leads profit) of big pharmaceutical
to increasing use of alternative companies.
remedies ⢠Functional foods preferred as
safer alternative to drugs
Power of ⢠Global sourcing leads to further ⢠Emergence of China and India as
suppliers reductions in the costs of raw key out-sourcing locations.
materials. ⢠Cost of licensing deals drives
⢠Major pharma companies come companies towards more
increasingly to rely on in-licensing for acquisitions
new products, raising prices on such
deals
Competitie ⢠Profitable, cash-rich industry but ⢠Continued industry consolidation in
rivalry margins declining. static market results in fewer larger
⢠Mergers and acquisitions are global companies, focused on
expected to continue as they could specific franchises , with intense
lead to economies of scale, global rivalry within therapeutic franchises.
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sales and marketing and more
efficient R&D efforts.
⢠Intense rivalry within product
14. ENVIRONMENT ANALYSIS
External Internal
Scenario
Environment Environment
Favorable, moderate
PESTEL Five forces Model
and unfavorable
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15. INDUSTRY TRENDS
o The pharmaceutical industry is facing a rapidly changing
environment.
o The need for global presence to achieve adequate return on
escalating marketing and R&D costs
o A strong focus on health care cost containment, such that new
treatments must be justified on costâbenefit grounds, adding to
development costs
o To command price premiums, new products must offer unique
benefits, yet information leakage means that most products are
imitated rapidly
o IT developments provide greater access to detailed health care
information for both providers and patients, also pushing
forward cost-effective treatments
o Educated consumers demanding advances in therapy
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o There are opportunities to change organizational models but
no-one has yet found a feasible alternative
16. Scenario 1: Favorable
ď˘ Increased opportunities for pharmaceutical sales
developing in emerging markets.
ď˘ Little substitution from biotech products
ď˘ No entry of new participants and a decrease in mergers
and acquisition activity
ď˘ Time to market remains critical but genomics helps to fine-
tune NCE selection and reduce time in clinical trials.
ď˘ Organisational changes result in a number of very
promising âblockbuster drugsâ advancing through the
pipeline
ď˘ There will be greater harmonisation amongst international
markets.
â˘
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17. Scenario 2: Moderate
ď˘ Substitution from biotech products, some advances to
reduce R&D expenditure.
ď˘ Outsourcing (i.e. licensing of products) continues to
develop but without challenging established players.
ď˘ Entry of new participants and/or consumers opting for
some forms of alternative medicine
ď˘ Slow but consistent steps towards greater industry
concentration continue.
ď˘ There will be increasing sales opportunities in emerging
and recently industrialised countries.
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18. Scenario 3: Unfavorable
ď˘ Most income generation is associated to licensing agreements
and profits will thereby get squeezed.
ď˘ There is a recruitment crisis as a whole generation of new
scientists is lost to mid-sized players and biotechs.
ď˘ Results in dying of blockbuster drugs.
ď˘ All investments in genomics prove futile at present as it will be
one or two more generations before any practical result is
evident.
ď˘ Emergence of new alternative forms of non-drug-based
therapeutic treatments and widespread adoption of alternative
medicine practices.
ď˘ Entry of new global participants such as Japanese, Korean or
Indian laboratories will intensify the competition.
ď˘ Increased mergers and acquisition activity puts substantial
short-term pressure on profit margins. 18
19. ETHICAL CONSIDERATION
ď˘ There are thus key issues around the
ethical stance of pharmaceuticals, their
stakeholders and society at large including:
ď Property rights
ď R&D, budget constrains and the pursuit of
ailments in emerging markets
ď Being in the public eye (as a consumer goods
manufacturer and a provider of health products)
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20. BUSINESS IMPLICATIONS-GOING FORWARD
ď˘ Innovation will be the most important thing, more
important than the size of the organization.
ď˘ The main reason behind this is that there has to be
points of difference with every new product so as to
charge a premium price to it.
ď˘ With more of information leakage, most of the products
are copied quickly.
ď˘ With more of R&D costs, it becomes extremely
necessary to achieve adequate returns on the pipeline
as this will pave the way for the success of
manufacturers.
ď˘ New drugs need to be developed with respect to
diseases which are ignored.
ď˘ A firm has to be more consistent in its approach with
having constant innovation of new drugs. 20