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The Global Pharmaceutical Industry - Term Paper Example

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This paper demonstrates Lonza's success, one of the world's leading suppliers to the pharmaceutical, healthcare, and life science industries. Also, the paper concentrates on the application of information technology in customer relationship management to enhance its customer base…
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The Global Pharmaceutical Industry
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 «The Global Pharmaceutical Industry» Table of Contents 1. Background 1 1.1 Introduction – strategic management 1 1.2 Lonza – current situation 1 1.3 Resources at Lonza 2 2. Overview of the global pharmaceutical industry 2 2.1 External environment analysis 3 2.1.1 New market entrants 4 2.1.2 Supplier power 6 2.1.3 Competitive rivalry 6 2.1.4 Buyer power 7 2.1.5 Product and technology development 8 3. Analysis of the external environment 9 4. Strategic options 10 4. Conclusion 10 4.1 Strategy route forward – corporate strategy 10 References 12 Appendix 1. Background 1.1 Introduction – strategic management With most sectors under pressure in the face of intense competition, strategic decisions have become vital to survival. Changes in the macro-environment in the pharmaceutical industry have been characterized by highly risky and lengthy R&D process, intense competition and lengthy and stringent government regulations. The global pharmaceutical industry is also in the decline or the contraction phase and this occurs if the demand shrinks persistently or when a superior substitute is available (Dinlersoz & MacDonald, 2008). Growth is shifting from mature markets to emerging markets primarily because alternatives are available to the consumers. This makes it crucial for an organization to constantly study its external and internal environment. 1.2 Lonza – current situation Lonza, one of the world's leading suppliers to the pharmaceutical, healthcare and life science industries, is at a turning point as it is has slid into financial and market related crisis. It has been facing tough competition in the exclusive synthesis markets for intermediates and active ingredients. With declining shares and profits for several years, Lonza requires radical changes in its corporate strategy which can bring above average returns. Lonza has committed itself to the life sciences sector and has entered into long-term agreements with other partners in the industry. This report, after the analysis of the external environment, concentrates on the application of information technology in customer relationship management to enhance its customer base. 1.3 Resources at Lonza Lonza has versatile relations with external and internal partners. It uses technology to enhance the value provided to customers and to improve the competitiveness through improving the business processes (Borgas, 2004). They have invested in the IT infrastructure and cover as many functions and processes as possible. Sophisticated supply chain management solutions ranging from freight transportation and materials management to integrated value-added services in the pharmaceutical industry (Biomed, 2007). Lonza also has access to huge capital investments that has encouraged its competitors to favor less risky strategies that focus on technology licensing and development services (Miller, 2007). Lonza has entered into a long term strategic partnership for the joint development and manufacture of the Novartis biological pipeline (Bionity, 2008). This is its strategy of Contract Manufacturing Business model where it develops a pipeline of its products with its customers. Lonza has already leveraged these to its strategic advantage as it realizes that business skills are as important as technical skills in achieving success. 2. Overview of the global pharmaceutical industry The pharmaceutical companies have come under pressure due to the cost cutting measures being applied in the seven major markets (Bionaturis, 2008). Apart from the credit crunch, novel products have entered the market contributing to the declining return on investment in the pharmaceutical sector. Pharma companies thus have to come out with innovative products but this ability is determined by the external environment. Streamlining research and development and making strategic pipeline decisions has become vital to survival. It has become vital for pharma companies to differentiate themselves from their competitors and secure their financial future (Bionaturis, 2008). Health care costs and the quality of patient care are the two primary concerns in the industry today. Physicians try to substitute branded versions with the generic alternatives and thus bring about significant cost savings with minimum therapeutic impact (Gonzalez, Sismeiro, Dutta & Stern, 2008). Introduction of generics could present an opportunity for managers of competing brands that are still under patent protection. Managers could base their resource allocation decisions on the outcome of the generic entry and the incumbent responses. Physicians’ characteristics and prescribing decision impact the sale of generic versions, research suggests. Industry is in the declining stage and attrition rate is high. This is the cause of failure of all research and development activities. Firms cannot afford to eliminate investment, generate cash and divest in this stage (Harrigan & Porter, n.d.). Most organizations concentrate on brand building only when they are prospering but do not bother about it when the sales and profits are threatened (Tregert & Westerlund, 2003). 2.1 External environment analysis A firm in any industry must be able to exploit information horizontally and vertically. The drivers have to be identified and the needs recognized. Strategic priorities have to be identified and constraints evaluated. Technology has to be integrated into the business process while retaining the intellectual property rights. Innovation and research are the supporting factors in the pharma industry. External environmental analysis helps to differentiate between threats and oppurtunities. Valuable data thus collected helps to understand the environment through the application of different strategic models. Organizations are open systems and hence its resources have to be assessed in comparison to the competition in the industry. It is then possible to change or influence the environment. The external analysis through Porter’s five forces of competitive advantage (Appendix I) helps to analyze the environment specific to the industry. Porter’s five forces are static and have to be made dynamic. It is essential to understand how the generic and specific factors affect Lonza. This would include the bargaining power of the buyers and suppliers including the potential entrants into the market. 2.1.1 New market entrants Oppurtunities arise when there are few competitors, industry sales are growing, low inventory costs, minimal exit barriers. For potential entrants there are economies of scale, significant switching costs and they have controlled access to distribution channels. There is strong product differentiation for new entrants but in the global pharmaceutical industry mergers, acquisitions, consolidation and escalating research and development costs play a significant role in deterring the new entrants (UPS, 2005). Pharma companies can no longer rely on their subcontractors to do the research and resting of their products. This has been enforced as a prominent doctor has been convicted of research fraud apart from another who pled guilty to making false statements (Nolan, 2004). The law can be enforced even if the companies have no knowledge of their subcontractors’ falsifications. This has become a major deterrent to the new entrants in the field as this requires intense capital involvement in research and development. Because of the numerous advantages that it offers, Singapore has become the hub in Asia for global pharmaceutical and biotechnology companies (Xinhua, 2008). The Tuas Biomedical Park (TBP) has sophisticated infrastructure and presents an environment conducive for pharmaceutical and biologics manufacturing. One of the key reasons for having a manufacturing presence in Singapore is a strong local supporting industry comprising of a base of electronics and precision engineering industry. The new entrants are thus able to get contract manufacturing services and reverse logistics services (Biomed, 2007). The industry players work together to expand the talent pool to support growth of the industry. The companies take initiatives to attract workforce from other sectors. Nevertheless, there is low product differentiation for potential entrants, minimal switching costs and they have open access to distribution channels. Exit barriers are few as many contract manufacturers of active pharmaceutical ingredients are exiting the industry. 2.1.2 Supplier power The increase in the raw material prices and unfavorable exchange rates has increased the supplier power in the industry (Nutraingredients, 2003). Most firms in the global pharma industry enjoy global reputation and have a wide geographical coverage. They are trying to enhance the relationship with their customers in a bid to be closer to real time demand. The supplying industry is fragmented and their products are not differentiated. There are minimal switching costs and they offer substitute products. Innovation has been introduced in the way businesses operate and the value chain is being restructured in the pharmaceutical industry. This has been induced by excessive competition in the industry leading to a dramatic growth in the mail order channel (UPS, 2005). Through the use of technology the drug manufacturers can remain closer to the consumers and have better control over inventory levels. These factors demand efficient planning. 2.1.3 Competitive rivalry Most of the players in the pharmaceutical industry have the same problems and concerns. It involves formal and quality agreements and requires a transparent technology shift (Swichtenberg, 2007). Most are trying to balance between innovation and efficiency and they have to operate from multiple sites. Most firms engage in assessing risk in evaluating inventory and this requires the use of global systems and tools. In the face of competition, the market shares are eroding but the companies that are able to address the cost and efficiency structures within the supply chain will be able to yield expected returns (UPS, 2005). In Europe there are government barriers to pharma innovation and there is a push for use of generic drugs (Bionaturis, 2008). Parallel imports from low cost countries and growing competition from generic drug manufacturers is eroding margins. 2.1.4 Buyer power Consumers today globally are more knowledgeable due to mass media and websites giving detailed information but they are unable to turn this knowledge into power. This is because there is increased usage of closed formularies by managed care organizations. The power rests with the pharmacists who choose how they will the prescriptions. There is a shift in the attitude – from drug efficacy to cost efficiency (UPS, 2005). This requires tiered marketing and more agile marketing. Merely building awareness is insufficient and mass marketing is essential. The focus of control is changing and this requires the needs of various decisions makers to be addressed successfully while profitably launching new products. Well-informed patients, direct sale of prescription drugs, cost reduction measures undertaken by government and insurance providers as well as the new internet-based initiatives have strongly impacted the industry (Alt & Puschmann, 2005). The buyer power has increased and it is no longer sufficient to sell high volume products to physicians, wholesalers and hospitals. It has thus become vital to systematically manage customer relationships. The number of sales reps in the pharma companies has doubled while prescriptions have grown only by 15 percent. This indicates that pharma companies need more efficiency in their sales force and must also exploit new interaction channel with their customer segment. Physicians are the most important customers for the pharma companies although the end patients are the final buyers (Alt & Puschmann, 2005). Pharma companies have to provide information that may influence the choice of drugs. The internet has led to the availability of websites, portals and marketplaces which personalize and integrate information on products and services from vendors and applications. 2.1.5 Product and technology development The pharma industry has been using information technology in their ordering systems of in their administrative procedures including telemedicine. Hospitals have been operating their internal systems to improve the healthcare process (Alt & Puschmann, 2005). Internet has played a vital role in making the customers informed about the diseases and the possible remedies. Customer relationship management (CRM) has helped to integrate traditional sales force and internet-based channels. It helps in customer segmentation based on needs of the customers – physicians or patients. This helps companies to offer value-added services that go beyond the selling of drugs. Pharma companies are using technology like Systems for Territory Management (TMS) or Sales Force Automation (SFA) which support the sales force in visiting physicians on a regular basis. Pharmacies too make use of the website as a communication and presentation vehicle. They introduce additional service features like allergy information, beauty advisory services, and care is also taken to entertain through flash animation, advice features, newsletters and discussions groups (Schmidt & Piuoch, 2003). The pharmacy websites do not compete on price but focus on the merchandise and the advisory function. Teleshopping facilities are also available where visual images of the products are available. 3. Analysis of the external environment The external environment is impacting the pharmaceutical industry in several ways. The sales and marketing is affected as there is generic competition and step-care therapy has been introduced (UPS, 2005). Because of disease management programs and the use of wholesaler disintermediation, the channel management is affected. New product development is affected due to rising roll-out costs and frequent failures. It is also intensified as specialist companies are entering into generic competition. Research suggests that doctors’ characteristics influence the choice of generic drugs. All of these factors suggests that phrama companies like Lonza have to strive to remain closer to their customers. They have to apply technology to segment their customers and focus on providing vital and timely information. They have to be in a position to assess the real time demand and needs of the customers or patients. 4. Strategic options Price pressures and lower margins are forcing the time frames have reduced and price pressures have increased which means the sales channels have to continuously evolve. Proper marketing to such sales channels have to be effective and with the use of latest technology. The use of CRM architecture has become vital to remain in close contact with the end patients who have the final authority in the drug choice. Internet is the latest sales and marketing channel but this cannot be applicable to all products in the pharmaceutical industry. The information that is disseminated through the media and the websites has to differ for different audience. The consumers need a different set of information from the managed care and provider organizations. This requires the implementation of CRM and customer support. Technology would help Lonza to get closer to real time demand and understand the customer needs better. 4. Conclusion 4.1 Strategy route forward – corporate strategy The most important issue that Lonza needs to address is being close to the end customer although its customer base comprises of the physicians, wholesalers, hospitals, retailers and the end users. This requires maintaining and interactive web portal giving details of the drugs. Distribution of samples and literature are vital to creating awareness. Retail relationships have to be strengthened to gather more accurate demand information. This could lead to cost savings, more reliable distribution and improved demand visibility. The global pharmaceutical industry has access to e-marketplaces and for this the right integration of technology and information needs could help to attain fulfillment, customer management and financial process. Information sharing and process integration will be critical to lowering costs and optimizing intellectual property. Lonza should create an interactive web portal where generic and specific information is provided to the customers and who have access to prior records of illness and drug purchase. The portal should have a reputed and trained physician at service for answering the queries of the customers. Competition in the pharma sector will keep intensifying but it can be combated with the application f the right technology. Reference Alt, R & Puschmann, T 2005, 'Developing customer process orientation: the case of Pharma Corp.', Business Process Management Journal, vol. 11, no. 4, pp. 297-315. Biomed, 2007, 'Manufacturing', Retrieved online 03 December 2008, from http://www.biomed-singapore.com/bms/sg/en_uk/index/about_biomedical_sciences/manufacturing.html Bionaturis, 2008, 'Is-cost-containment-impacting-pharmaceutical-innovation? Retrieved online 03 December 2008, from http://uk.bionaturis.es/20080929-Is-cost-containment-impacting-pharmaceutical-innovation-g-8737.htm Bionity, 2008, 'New strategic partnership strengthens Lonza's position as leading supplier to the life science industry', Retrieved online 03 December 2008, from http://www.bionity.com/news/e/84746/ Borgas, S 2004, 'IT Policy', Retrieved online 03 December 2008, from http://www.lonza.com/group/en/company/about/governance/policies.-ParSys-0001-ParSysdownloadlist-0013-DownloadFile.pdf/Policy_IT_9_04.pdf Gonzalez, J Sismeiro, C Dutta, S & Stern, P 2008, 'Can branded drugs benefit from generic entry? The role of detailing and price in switching to non-bioequivalent molecules', Intern. J. of Research in Marketing, vol. 25, pp. 247-260. Harrigan, KR & Porter, ME n.d, 'End-Game Strategies for Declining Industries. Harvard Business Review', Retrieved online 03 December 2008, from http://www.hbsp.harvard.edu/hbsp/hbr/articles/article.jsp?articleID=83409&ml_action=get-article&print=true Miller, J 2007, 'Lonza uses creative deal making and other people's money to climb to top position', Retrieved online 03 December 2008, from http://biopharminternational.findpharma.com/biopharm/Article/Outstourcing-Insights-Lonza-Commits-to-Life-Scienc/ArticleStandard/Article/detail/395608 Nogan, KJ, 2004, 'Pharmaceutical Companies Liable For Subcontractors' Fraudulent Research', Retrieved online 03 December 2008, from http://www.whistleblowerfirm.com/article_research_fraud_DT.html Nutraingredients, 2003, 'Lonza reacts to market conditions', retrieved online 03 December 2008, from http://www.nutraingredients.com/Industry/Lonza-reacts-to-market-conditions Schmidt, RA & Pioch, EK 2003, 'Pills by Post? German retail pharmacies and the internet', British Food Journal, vol. 105, no. 9, pp. 618-633. Swichtenberg, B 2007, 'Global Concerns Discussed at BIO', Retrieved online 03 December 2008, from http://www.pharmamanufacturing.com/articles/2007/114.html Tregert, M & Westerlund, F 2003, 'Managing a Brand', Retrieved online 03 December 2008, from http://epubl.luth.se/1404-5508/2003/134/LTU-SHU-EX-03134-SE.pdf UPS, 2005, 'Building Supply Chain Capabilities in the Pharmaceutical Industry', Retrieved online 03 December 2008, from http://www.ups-scs.com/solutions/white_papers/wp_pharma1.pdf Xinhua, 2008, 'Singapore Reinforces Position as a Global Site for Pharma & Biotech', Retrieved online 03 December 2008, from http://www.prlog.org/10081638-singapore-reinforces-position-as-global-site-for-pharma-biotech.pdf Appendix I Read More
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