The Global Pharmaceutical Industry
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The Global Pharmaceutical Industry.
10 March 2012
Question 1 Identify the main environmental forces currently affecting the global pharmaceutical industry? PESTEL analysis of the global pharmaceutical industry:
Governments set stringent regulation and is a powerful purchaser.
Governments around the world focus on pharmaceuticals as a politically easy target in their efforts to control rising health care expenditure.
Inter-country pricing disparities.
European free trade agreements.
Deregulation of market to allow foreign drugs to compete.
Ageing population puts pressure on healthcare systems.
Epidemic of chronic diseases.
Rising consumer expectations.
Payers choosing generic drugs for first-line treatment of common ailments.
Increase productivity, decrease costs and develop new treatment modalities to enhance profitability.
Impact of Internet on traditional business models.
Impact of genetic research on industry.
Industry operations are becoming more stringent with increasing standards and requirements for environmental protection.
Rigorous regulatory scrutiny governed by legislation.
Legislation enacted to set a fixed period on patent expiry.
Question 2 Use scenario planning techniques to consider the various environmental influences which may affect the global pharmaceutical industry in the future?
Key drivers for change:
Scientific advances leading to new drug discovery processes and greater targeting of treatments.
Continued mergers and acquisitions leading to more rapid concentration in the industry or vertical integration.
Transformation of traditional distribution or business models (including greater use of the Internet for DTC marketing).
Threat to intellectual property resulting from a combination of generic competition and the HIV/AIDS crisis in Africa.
More informed consumers.
Opposing key drivers:
The pharmaceutical industry facing a rapidly changing environment, which offers both opportunities (such as harmonisation of regulatory requirements) but also threats (more discriminating purchasers);
The need for global presence to achieve adequate return on escalating marketing capabilities and R&D costs;
A strong focus on healthcare cost containment, such that new treatments must be justified on cost-benefit grounds, adding to development costs;
To command price premiums, new products must offer unique benefits, yet information leakage means that most products are imitated rapidly;
IT developments provide greater access to detailed healthcare information for both providers and patients, also pushing forward cost-effective treatments;
Educated consumers demanding advances in therapy;
There are opportunities to change organisational models but no-one has yet found a feasible alternative;
Continued industry consolidation.
Scenarios Big positive change (i)
No change (II)
Big negative change (III)
1. Improved diagnosis and Time to market remains Patent protection shrinks more
clinical key dimension.
as clinical trials become
ever more cumbersome and costly.
2. Genomics provides cost- Emerging markets remain R&D priorities radically effective ways to detect the
disease and develop new antibiotics and generics. drugs. 3. Enhanced
and Mergers and acquisition Big
capabilities activity stops and/or poor become
pay off by bringing more performance of vertical company blockbuster drugs faster integration.
to market. 4. Internal biotechs become New marketing channel. the
5. Harmonization approval
of Intellectual property rights The processes are
within the EU (i.e. single strengthened across the markets are opened up to submission) and between world, the EU and the US.
being made only in cases from countries such as of true emergency such India, and effectively lost as AIDS.
pharms. 6. More and better quality Direct
consumer Angry consumers force
information creates better communication continues governments
informed and educated to be outlawed in most direct to consumer (DTC) consumers. practitioners and
Medical countries outside the US communication
welcome and informed consumers they are not „kept in the
the dark‟ about
then politicized in election campaigns.
(Pearson Education Limited 2005).
Question 3. How relevant do you think the Five-Forces map is to identify environmental forces affecting the global pharmaceutical industry? Do these forces differ by industry sector, and where would you place the different sectors in the industry life-cycle?
(Part 1) There is clear evidence of the five forces framework within the pharmaceutical industry. Although initially developed with business in mind, the five forces framework is relevant to most organizations. It can provide a useful starting point for strategic analysis, even were profit criteria may not apply (Johnson, Whittington and Scholes 2011:54).
(a) Threat of entry (Barriers to entry).
> Scale & experience: In the global pharmaceutical industry, research & development (R&D) is key to success. The pharmaceutical industry is characterized by a highly risky and lengthy R&D process, intense competition for intellectual property, stringent government regulation and powerful purchaser pressures (Johnson, Whittington and Scholes 2011:547).
> Legislation on government action: The pharmaceutical industry in many countries is subject to a „monopsony‟ – there is effectively only one powerful purchaser, the government. From the 1980‟s on, governments around the world focused on pharmaceuticals, as a politically easy target in efforts to control rising healthcare expenditure (Johnson, Whittington and Scholes 2011:548).
(b) The threat of substitutes. The biggest threat to the pharmaceutical industry is the dramatic impact of generic medicines with exactly the same active ingredients as the original brand, at a lower price. Leading pharmaceutical companies are faced with great difficulties to recover the cost of their R&D investments.
(c) The power of Buyers. Governments and insurance companies may be categorized as buyers in the pharmaceutical industry.
A 2008 report estimated that 46 million Americans, over 15 percent of the population, lacked insurance. In response to these pressures, payers used a variety of methods to control pharmaceutical spending. Controls were designed to reward genuine advances based on perceived innovation and superior effectiveness (Johnson, Whittington and Scholes 2011:549).
(d) Power of Suppliers This environmental force is relatively smaller with respect to other forces, as the pharmaceutical industry does not require major natural resources to manufacture their products.
(e) Competitive rivalry > Competitor balance: Companies with consistently high levels of R&D spending and productivity became industry leaders (Johnson, Whittington and Scholes, 2011). To be a good competitor, is not based on what drugs a company has in the current market, but what drugs is in their pipelines.
> Industry growth rate: Individual companies are dependent on its R&D capabilities, which is proportional to the rate of new drugs available in the pipeline (Johnson, Whittington and Scholes, 2011).
The environmental forces will differ by industry sector. Evidence states that, the majority of global pharmaceutical sales originates in the US, Japan, China and Brazil, with 10 key countries contributing over 80 per cent of the global market (Johnson, Whittington and Scholes 2011:552).
Question 4. Try to identify the strategic groups within the global ethical pharmaceutical industry? Describe the strategic choices made by Pfizer from 2008 onwards and comment on what may have been the drivers behind these choices?
There are four broad types of players in the global pharmaceutical industry: ethical, over-the-counter (OTC), generic and biotech (Holland and Batiz-Lazo 2004), each requires very different strategic capabilities. Ethical products divide into conventional pharmaceuticals and more complex “biological” agents and vaccines. Both ethical and OTC medicines may be patented or generic. (Johnson, Whittington and Scholes 2011:550).
In 2008 Pfizer took a dramatic step to reshape the company into a more flexible, entrepreneurial and accountable organization. They reorganized their global marketleading pharmaceutical segment into customer- focused business units devoted to Primary Care, Specialty Care, Oncology, Emerging Markets and Established Products.
Strategic choices by Pfizer from 2008 onwards was as follows (Pfizer 2007):
Refocus and optimize the patent-protected portfolio.
Find new opportunities for established products.
Grow in emerging markets.
Invest in Complementary businesses.
Instill a culture of innovation and continuous improvement.
Drivers behind these choices: Many large pharmaceutical companies were facing their toughest outlook in a decade. The industry had made a tremendous contribution to human well-being, yet was vilified in the media and targeted by governments in their efforts to curb spiralling healthcare costs. R&D costs had risen sharply, while the product life cycle had shortened. Product approval, pricing and promotion were subject to increasingly onerous regulation, yet free trade allowed wholesalers to extract a large chunk of value from the chain without adding anything back. Companies had to balance shareholder return against the huge unmet need of developing nations. Exciting opportunities still existed – more educated consumers, advances in genomics, regulatory harmonisation and of course unmet medical need. Industry consolidation was driven by the dominant belief that size was critical, although a few players preferred to build focused franchises or to offer integrated healthcare solutions. Ultimately, meaningful innovation was what mattered most, but it was not clear that a business formula based on inventing and selling blockbuster drugs could continue to sustain double-digit growth rates (Pearson 2005:204).
Reference List a.) Johnson, G, Whittington, R, and Scholes, K. 2011. Exploring strategy: Text & Cases. 9th ed. London: Financial Times Prentice Hall. b.) Holland, K, S. and Bernado, B. 2004. The global pharmaceutical industry. c.) Pearson Education Limited. 2005. Instructors Manual, Case teaching notes, The Global Pharmaceutical Industry. d.) Pfizer. Our path forward. (Online). 2007. Available WWW: http://www.pfizer.com/files/investors/presentations/cowen_presentation_0317 08.pdf (Accessed 08 March 2012).