Viagra in China - Strategy Assessment FINAL.pdf

Managing Knowledge and Innovation

Pfizer’s patent and market strategy in China: developing an effective solution to exploit Viagra’s expiring patent rights and to yield significant returns on investments

Basten, Marc; Gutierrez, Veronika; Luft, Lukas; Ringer, Sebastian & Widmann, Maximilian

University of Innsbruck School of Management, Karl-Rahner-Platz 3, 6020 Innsbruck, Austria

Abstract Pfizer is one of the leading pharmaceutical companies worldwide, albeit it has faced severe issues in terms of intellectual property rights with its blockbuster product Viagra in China. The “Weige” trademark that is closely associated with Viagra is held by a local competitor and additionally cheap black market counterfeits flood the Chinese market, making it extremely difficult to generate substantial revenues through exploitation of the expiring Viagra patent.

To turn momentum and realize significant sales long-term, we suggest an approach that is characterized by setting up a defensive patent portfolio as protective measure against competitors and to alter Pfizer’s brand reputation and image to “well-tested and secure” in order to exploit the trend of growing health concerns in China. This strategy would along the way help understanding and learning how to deal with the Chinese patent system effectively while in unison licensing unharmful patents to competitors could yield additional revenues. 1

Table of Content

1. Introduction ................................................................................................................ 3

2. Status Quo Analysis ................................................................................................... 4

3. Patent Strategy Options Analysis & Assessment ....................................................

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4. Solution Selection ....................................................................................................... 13

5. Implementation ..................................................................................................…...

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6. Conclusion .................................................................................................................. 16

References ....................................................................................................................... 18

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1. Introduction

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The pharmaceutical industry in China has experienced a burgeoning development over the past decades and belongs to the largest pharmaceutical markets in the world. The aging population of China increases demand for medicine, additionally the fast-growing economy is expected to enhance the social insurance level and alter the population's consumption behavior.

The “Chinese Pharmaceutical Market Report” predicts revenues of US $ 116.8 billion in 2015 and persistent increase until 2022, thus creating attractive opportunity for global pharmaceutical companies (Manufacturing Chemist, 2011). Nevertheless China represents a challenge for foreign companies as it is well known for counterfeiting and a weak protection of intellectual property rights. Therefore the right market strategy plays a major role while entering China.

One of the biggest multinational pharmaceutical corporations Pfizer Inc. was challenged by local Chinese companies through counterfeit drugs while expanding its product Viagra to China. Viagra, a drug for erectile dysfunction, was successfully introduced in Europe and the USA in 1998, whereas the launch in China in 2000 was accompanied by counterfeits. This problem caused a vast reduction in sales - hence the question if Pfizer had the right market entry strategy for China must be analyzed in order to predict a potential alternative.

In this paper we formulate potential strategic solutions for entering the Chinese market. We start by analyzing the pharmaceutical market situation as well as Pfizer’s market entry strategy in the past. We further outline major implications and risks that it faces. Building on this assessment we suggest suitable innovation strategies to deal with these challenges accordingly and eventually propose an implementation process for the most competitive and sustainable alternative. 4

2. Status quo Analysis Pfizer Inc. was founded by Charles Pfizer and Charles Erhart in 1849 (Pfizer, 2012) and is headquartered in New York. The company is one of the biggest multinational pharmaceutical corporations renowned for its product Viagra. In the beginning of the 1990’s Pfizer experimented with a chemical called sildenafil to treat cardiovascular diseases. The result of the research was a chemical that by accident helped men with erectile dysfunction.

In 1993 Pfizer requested a patent for sildenafil in the UK which was accepted as a second-use pharmaceutical patent since the compound itself was not a new innovation. Two years later Pfizer applied for a patent in China where two aspects had to be fulfilled. Firstly the right request form and secondly the laboratory data on the chemical ingredient. Pfizer did not meet the second aspect as there was no laboratory data about the ingredient yet. In 2000 China accepted the patent for a period of four years.

Viagra was successfully introduced in the European as well as in the US market in 1998. Chinese Newspapers reported about the huge success starting to use a different name for the product - “Weige” - thus creating a large hype before Viagra’s launch. Local companies immediately registered the “Weige” trademark and started to introduce their own impotence drugs. In the first year Pfizer generated sales of US $ 9.7 million whereas its counterfeiters achieved sales of US $ 48.3 million. About 70-80% of impotence drugs that were consumed by the Chinese population represented counterfeits. One can see that Pfizer was challenged from the very beginning by local companies.

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Further problems appeared as their patent was accepted in July 2000. The company Guangzhou Viamen which used the “Weige” trademark and generated the highest sales, started to fight the patent, as there was a lack of laboratory data and therefore an insufficient aspect for the Chinese patent law. In 2004 the patent became officially invalid.

Besides these facts, two large competitors entered the market: Bayer and Eli Lilly. The following years were accompanied by Pfizer’s defense of the Viagra patent as well as the fight against the utilization of their trademark. Diplomatic channels started to support Pfizer and blamed China as a risky market for innovation and intellectual property rights. Nonetheless Viagra lost their fight in the trademark case.

As the figure shows, Pfizer is confronted with three main problems: The big rivals Bayer end Eli Lilly as well as the local companies, especially Guangzhou Viamen, that sell cheap competitive products. The counterfeits that flood the Chinese pharmaceutical market and have a negative influence on all the involved companies and the industry.

As a result Pfizer was not able to introduce the Viagra trademark properly and failed to build up a potential brand recognition.

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3. Patent Strategy Options Analysis & Assessment

Patent Strategy Option 1: “Buying the 'Weige' trademark & licensing of patents”

To harvest the maximum of its patent, one option that Pfizer could pursue is to buy the “Weige” name rights from Guangzhou Viamen and exploit the popularity of this well established label. As “Weige” became popular among newspapers as a more suitable Chinese name for Viagra when being introduced in the United States, Chinese's desires would be addressed by using their preferred identifier. With the purchase of the name rights, Pfizer might then license the name to other Chinese pharmaceutical companies to recoup the investment made. The objective would then be to market Viagra as the “original Weige” in advertising and promote the secureness, reputation and history of the prescription drug. This way it could be possible that sales rise.

There are, however, several drawbacks to this patent strategy. First of all Guangzhou Viamen is demanding an astonishingly high price for the trademark rights of “Weige”. It is unclear if the investment is going to be worthwhile on the long run and it remains at limbo if sales would increase just simply by using the well-known Chinese identifier for the drug. This risk becomes evident when looking at the main rivals of Pfizer: counterfeits on the black market. It seems that the name of the product is not the issue on the Chinese market but the availability of cheap copy-cat products on the black market. Thus licensing the patent and the trademark would solely generate minor revenues.

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Patent Strategy Option 2: “Aggressively defend patents”

From the long litigation processes that Pfizer had to go through in order to be acknowledged as original developer of the drug to treat erectile dysfunction using sildenafil as active ingredient, the U.S. Corporation is aware of the difficult legal setting they have to operate in and know that Intellectual Property Rights do not reach the same security level of Westernized nations. Pfizer could therefore adapt an aggressive litigation stance and sue competitors to block their access to the market, keep them being frustrated and to obtain compensations. The litigations would be very costly for rivals and might especially force the local Chinese producers into cash flow problems. Through licensing and cross-licensing agreements further revenues could be yielded.

Disadvantages of this patent strategy are numerous. Clearly the Chinese government would not allow Western companies to take advantage of weaker Chinese enterprises. Compensations from legal judgments are most likely to be rather low as Chinese courts still tend to prioritize and protect Chinese firms. Politicians might even introduce policies that harm Western pharmaceutical companies to fully protect the status of local enterprises. Additionally local consumers are not going accept that Chinese companies are persistently being sued and might feel that their pride is being attacked, thus avoiding to buy Pfizer's Viagra product. This strategy could then have a diametrically opposite effect and lead local consumers to buy more Chinese drugs instead.

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Patent Strategy Option 3: “Setting up a defensive patent portfolio as protection & using licensing”

Pfizer also has the chance to adapt to the Chinese mindset and to capitalize on it through the set-up of a defensive patent portfolio to defend itself at every possible encounter. Just as Chinese corporations Pfizer could file for every possible patent that somehow could be useful in the future both to develop own products and to sue rivals that infringe against the patent rights hold by Pfizer. Consequently Pfizer can prevent direct competition in its operating area and even in unrelated fields. This strategy requires a constant effort to file patents as well as keep them updated and sustained. So far the American pharmaceutical giant has lacked a clear understanding of China's legal requirements. It is absolutely necessary to enhance the expertise in this eminent sphere, fully comprehend the legal system and procedures to file patents. Data collection within China has to be improved to provide detailed information and local studies for the authorities. This patent-wall can ensure protection of large-scale investments that pharmaceutical corporations like Pfizer have to make constantly to yield a considerable return on their investments. China is a huge and fast growing market that cannot be neglected. The aggressive stance of local opponents is tough to ward off as a Western company. Foreigners always have to operate on the edge of legal or governmental sanctions, restrictions and negative Public Relations. The obvious upside of this passive strategy is its discreetness and its adaption to Chinese behaviors. It would be difficult to criticize a pattern that is pursued by a vast amount of local enterprises.

With this patent portfolio licensing is likely to assist in realizing substantial turnovers. As Pfizer would then hold patents that have no or little utilization benefits for them, licensing 9

these patents not solely tap into new revenue streams but simultaneously give power over competitors. Eventually this might lead to co-operation or cross-licensing. Taking into account that Pfizer's firm size and resources are significantly higher than all of the Chinese pharmaceutical corporations it is evident that there is currently only little real interest in Chinese patents. Albeit, to play it safe and prevent further costly and wasting litigation processes, using this negotiation power to have mutual agreements and cross-licensing arrangements enables Pfizer to sit on stable grounds in terms of patent law. To fully capture the potential of this strategy, vast resources and legal expertise are required. Pfizer has these resources but needs to develop the expertise in the patent procedures.

These measures, however, would have no direct influence on Viagra sales in China. They would instead ensure long-term stability in the drug market and assist Pfizer in introducing new drugs.

Patent Strategy Option 4: “Establishing the Pfizer brand as differentiator”

It is evident that Viagra is in a very tough spot on the Chinese market. It is lacking the Chinese identifier name of “Weige” that is associated with positive emotions from consumers and it is battling cheap erectile dysfunction drugs from both local Chinese manufacturers as well as black market counterfeits. Both have numerous negative side effects and have not gone through stringent drug testing. Some contain hidden active ingredients and are considered a health threat to consumers with certain medical conditions. Many rather 10

traditional men are more prone to take traditional Chinese medicines and do not trust foreign companies. Moreover prices of Viagra are very high compared with other products on the market.

Realizing large sales numbers of Viagra in the near future is unlikely for all of these reasons. Yet there lies a great opportunity to differentiate not only Viagra but the whole Pfizer brand from its local and Western rivals. Viagra itself is the pioneer on this particular market and has undergone considerable drug testing and research all over the world. This heritage is unique within the drug market to treat erectile dysfunction. Promoting Viagra as a safe and trustworthy product could help to carve out both black market products and other products of rivals and fertilizes the ground for further and upcoming drugs by Pfizer. Via the establishment of a distinct brand identity and image within the Chinese market, brand awareness increases and could channel sustaining market share growth and build future success.

Aiding to this brand image, Pfizer might enforce co-operation with health institutes and Chinese authorities to help increase health awareness. This sets in motion a twofold and could alter consumers' perceptions of traditional Chinese medicine and harmful black market counterfeits. As Chinese government is at present being pressured by its citizens to attain higher levels of air purity and to increase health care, applying this brand strategy might turn out to directly address this movement of the middle-class. It would allow Pfizer to demand a price premium for its product despite products of Western opponents like Bayer's Levitra or Eli Lilly's Cialis. A well implemented approach would not only be able to establish Pfizer as a respected and well-known foreign-owned trademark in China that would provide long-term 11

competitive advantage, it would in addition take advantage of the only logical differentiation factor to the major players in both the black and the legal market of drugs in general.

This approach can exploit Viagra's patent for the remaining period until generics enter the market and simultaneously assist in building a long-term brand reputation that Chinese customers will value as time progresses.

Patent Strategy Option 5: “Differentiation & setting-up a defensive patent portfolio”

Patent Strategy 3 and 4 can be both applied independently and have notable benefits and drawbacks each. However, they can be combined as well to reap the benefits of both approaches and limit the risks.

On one hand differentiating the Pfizer brand as a whole and using Viagra as the frontrunner of the “secure and well-tested drugs campaign” definitely has a great chance of addressing the growing health demands of Chinese citizens. Erecting a wall of patents to protect Pfizer from direct competition on the other hand safeguards the large investments made along the road. It enables an industry power structure in which Pfizer would have things firmly under control. It would along the way understand and learn how to deal with the Chinese patent system effectively while in unison license unharmful patents to competitors to yield additional revenues.

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4. Solution Selection In a fast changing and highly competitive environment and a fast growing market as it is the case in China, Pfizer finds itself constrained to continuously adapt its strategy concerning intellectual property rights. All related protection efforts like patents, trademarks and copyright issues have to be taken into consideration over the long-term in order to sustain competitive advantage and over average returns.

However, we recommend sticking to Patent Strategy Option 5: “Differentiation & setting-up a defensive patent portfolio” in order to combine major advantages of brand differentiation and a superior brand equity with a “firewall of patents” in order to establish a strong competitive position in the long run.

To keep a premium pricing of $11,80 per 50mg Pill (price quotation of 2005) – compared to a minimum price of $2,10 at the low-end of the market served by the Chinese Pharmaceutical Company Li Zhu, it is inevitable to preserve a strong brand image of Viagra as well as the Pfizer brand as a whole. Viagra's premium price should reflect premium high-end value to the fast-growing Chinese middle-class, which gives undue preference to health and security. It has to be pointed out in marketing campaigns that counterfeits of the black market do not provide this health secureness guarantee. In addition, a main differentiator to the Western competitors Bayer and Eli Lilly is that Pfizer exhibits the most experience and drug testing processes, which is contributing to the overall premium brand image.

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5. Implementation

Western competitors (Bayer's Levitra and Eli Lilly's Cialis) have grown rapidly and are more and more able to cope with competitive threats from Pfizer. In addition, local competitors as well as counterfeiters capture big parts of market share in the Chinese pharmaceutical market for erectile dysfunction.

Because every patent strategy has its benefits as well as drawbacks, it's crucial to Pfizer’s success to patent continuously as well as to improve upon its current IP to ensure its sustainability. Large-scale investments are needed to build up a defensive patent-wall, which protects Pfizer against competitive threats. As the world's biggest pharmaceutical company it should not be a problem for Pfizer to reallocate its financial resources adequately to support IP strategies in China.

Pfizer should file for every possible patent that contributes to own product development and which helps to sue rivals that infringe Pfizer's patent rights. As a consequence, Pfizer can prevent direct competition in its operating area and even in unrelated fields. This strategy requires a constant effort to file patents as well as keep them updated and sustained. Since Viagra is one of the billion-dollar blockbusters in Pfizer's overall brand-portfolio and China one of the most promising and fastest growing markets, the organization should set its strategic priorities towards a strong Viagra brand positioning in China.

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As estimated sales of Viagra's counterfeits are permanently increasing (almost 5 times more in 2004 than in 2002), it is of high importance to invest heavily in building a superior brand image. The Chinese black market will always offer cheaper copycat products. Therefore it is necessary to embed superior quality and security in the target customer's memory. The main focus in doing so should be on middle-class Chinese, which have the required financial resources to be able to afford Viagra pills and who are valuing the mentioned differentiators.

In the course of this, it will be crucial to build up brand awareness and brand attachment also for all major customer segments that are hit by erectile dysfunction in China. Like in western markets the 60+ age group should remain the main target group (74% of them with erectile dysfunction), whereas male age groups from 40 to 60 years should not be neglected (around one third with erectile dysfunction), because there are 190 million men between the age of 40 and 60. Not even half of the amount is represented by people of the age 60+, which means that the amount of potential customers is quite homogeneously distributed over the age groups of the Chinese male population (over 40 years old). As a consequence, when targeting the different segments, they should be prioritized equally.

To stop Bayer and Eli Lilly from eroding market share of Viagra it's crucial to follow the defensive IP strategy in combination with the differentiation consistently and most of all persistently, since one-time effort is not enough in such a dynamic market environment. Moreover, to leverage competitive moves from local companies, building up a licensing network or even cross-licensing with Western competitors best allows the firm to maximize upon its objectives.

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Consequently, this could lead to a form of “Co-opetition” in the pharmaceutical market, where the big players in the industry compete in some areas, but also cooperate in others simultaneously or subsequently. Sharing patents or trademarks in a network or partnership with another company for instance could be an interesting option for Pfizer in addition or complementation to the suggested solution.

6. Conclusion Due to the expiry of Pfizer's patent for sildenafil in 2015 it's of high importance to exploit and leverage it efficiently. Pfizer should continuously exploit Viagra's patent for the remaining period until generics enter the market and simultaneously assist in building a long-term brand reputation that Chinese customer will value as time progresses.

In order to enhance their competitive position and to be aligned to market needs, Pfizer has to focus on patent strategy and keep on pursuing major investments in that field in order to stay competitive and maximize returns. Pfizer's Top Management in China has to be aware of the fact, that the battle over patent rights and trademarks will be a permanent and long-lasting one, which won't get over in the future, since competition is wide awake. Therefore it's essential to continuously manage the issue of Intellectual Property and sustain its protection. Patent-walls can ensure protection of large-scale investments to yield a considerable return on their investments in a sustainable way.

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Our solution of “Differentiation & setting-up a defensive patent portfolio” addresses Pfizer's long-term needs and problems in a sustainable way. It will facilitate Pfizer to protect market share and to stay ahead of competition in the long-term and guarantees Pfizer a promising future – even in China.

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References

Manufacturingchemist (2012) “Pharmaceutical industry”, (accessed 17.03.2013) http://www.manufacturingchemist.com/news/article_page/Chinese_pharma_market_will_reach_US11 68bn_by_2015/65985 Pfizer (2013) “Homepage”,( accessed 17.03.2013) http://www.pfizer.com/home Yahong et al. (2010) “Viagra in China: a pronloged battle over intellectual property rights”, The Asia Research Centre, pp.1-32.

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