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GLOBAL PHARMACEUTICAL INDUSTRY

Submitted by-Chandan Kumar Singh 11DCP-071

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CASE BACKGROUND

The case describes how the prescription pharmaceutical industry has changed since its modern beginnings in the early 1950s.

The various forces affecting the competitive environment of the industry are discussed in terms of origins, immediate past and immediate future (2004 onwards).

Provides insights into the evolution of barriers to enter and exit the industry for prescription pharmaceuticals

Detailed industry note on the “ethical” pharmaceutical industry which provides an opportunity to analyse key success factors of major players.

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Descriptive overview of the predominant issues in the three major Triad market areas: the US, Europe and Japan .

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).

Development of new technology; the importance of time to market; and amalgamations.

The case also examines issues around corporate social responsibility

CASE BACKGROUND

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BRIEF HISTORY

Post WWII, the pharmaceutical industry operated within a quite stable & highly profitable environment as compared to other industries

The industry saw the development of many new drugs during the 1960s due to technological success.

However as legislation was introduced in the 70s the number of ‘generics’ increased & consequentially time to market of drugs also increased

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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BRIEF HISTORY

1980

2001

0

20

40

60

Patents introduced

Patents intro-duced

1981 20000

20

40

60R&D Expenditure

R&D Ex-penditure

In Billion $

o Simple infections that were easy drug targets had been addressed

o Advances over existing treatments & research for therapy of previously untreated diseases started proving expensive & risky

o Consumers started demanding value for money products as their buying power became increasingly limited

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ENVIRONMENT ANALYSIS

Scenario

Favorable, moderate

and unfavorable

Internal Environmen

t

Five forces Model

External Environmen

t

PESTEL

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PESTEL ANALYSIS

• Highly fragmented industry in 80’s. Mergers led to concentration of jobs in select countries

• More control thereby exercised by Governments

• Easy Targets – To control rising healthcare costs when medicines amount to 15% of healthcare expenditure

• Multi country pricing due to Govt regulations.

• Patent on drugs – India patents the process while US and EU patent the drug

Political Factors

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PESTEL ANALYSIS

• 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 do not justify the number of new drugs

Economic Factors

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PESTEL ANALYSIS

Social Factors –

• 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 prospective good.

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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

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ENVIRONMENT ANALYSIS

Scenario

Favorable, moderate and unfavorable

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Factors Past Future

Threat of potential entrants

• The industry has already high entry barriers which are increasing.

• lead times for new drugs to be marketed increasing from 3 to 5years in the 1960s to 12 years by the mid-1990s.

• Need for global return on costly R&D favors large firms only

• Firms specializing in moving specific molecules along the value chain could be tomorrow's main competitors.

• Emphasis on high-priced niche drugs for high unmet need diseases likely to support market entry by bio techs.

Power of buyers

• Governments (EU) and managed health organizations (US)imposing systems to control prices/reimbursement and demand .

• Growth of parallel trade. • Harmonization of regulatory

approval systems. Rising patient expectations.

• Controls on pricing , reimbursement and market access continue to tighten(‘value for money’ is atop concern on both sides of the Atlantic).

• Growth of managed care continues deteriorating the profitability of big pharmaceuticals regardless of the outcome of regulation.

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Factors Past Future

Power of substitutes

• Cheap generics.• Reduced lead times for ‘me-too’

drugs from 6to 7 years to 18months;

• Consumer suspicion of drugs leads to increasing use of alternative remedies

• Biological generics appear.• Diversification into generics

protects volume share (but not the profit) of big pharmaceutical companies.

• Functional foods preferred as safer alternative to drugs

Power of suppliers

• Global sourcing leads to further reductions in the costs of raw materials.

• Major pharma companies come increasingly to rely on in-licensing for new products, raising prices on such deals

• Emergence of China and India as key out-sourcing locations.

• Cost of licensing deals drives companies towards more acquisitions

Competitie rivalry

• Profitable, cash-rich industry but margins declining.

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

• Intense rivalry within product classes.

• Continued industry consolidation in static market results in fewer larger global companies, focused on specific franchises , with intense rivalry within therapeutic franchises.

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ENVIRONMENT ANALYSIS

Scenario

Favorable, moderate and unfavorable

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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 cost–benefit 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 therapyo There are opportunities to change organizational models

but no-one has yet found a feasible alternative

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Scenario 1: Favorable Increased opportunities for pharmaceutical sales

developing in emerging markets. Little substitution from biotech products No entry of new participants and a decrease in

mergers and acquisition activity Time to market remains critical but genomics helps

to fine-tune NCE selection and reduce time in clinical trials.

Organisational changes result in a number of very promising “blockbuster drugs” advancing through the pipeline

There will be greater harmonisation amongst international markets.

•

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Scenario 2: Moderate Substitution from biotech products, some advances

to reduce R&D expenditure. Outsourcing (i.e. licensing of products) continues to

develop but without challenging established players.

Entry of new participants and/or consumers opting for some forms of alternative medicine

Slow but consistent steps towards greater industry concentration continue.

There will be increasing sales opportunities in emerging and recently industrialised countries.

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Scenario 3: Unfavorable Most income generation is associated to licensing

agreements and profits will thereby get squeezed. There is a recruitment crisis as a whole generation of new

scientists is lost to mid-sized players and biotechs. Results in dying of blockbuster drugs. All investments in genomics prove futile at present as it

will be one or two more generations before any practical result is evident.

Emergence of new alternative forms of non-drug-based therapeutic treatments and widespread adoption of alternative medicine practices.

Entry of new global participants such as Japanese, Korean or Indian laboratories will intensify the competition.

Increased mergers and acquisition activity puts substantial short-term pressure on profit margins.

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ETHICAL CONSIDERATION

There are thus key issues around the ethical stance of pharmaceuticals, their stakeholders and society at large including:Property rights R&D, budget constrains and the pursuit of

ailments in emerging marketsBeing in the public eye (as a consumer

goods manufacturer and a provider of health products)

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BUSINESS IMPLICATIONS-GOING FORWARD Innovation will be the most important thing, more

important than the size of the organization. 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.

With more of information leakage, most of the products are copied quickly.

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.

New drugs need to be developed with respect to diseases which are ignored.

A firm has to be more consistent in its approach with having constant innovation of new drugs.

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THANKS FOR YOUR TIME AND CONSIDERATION