Business Policy and Analysis: Global Pharmaceuticals - Term Paper Example

?Business Policy and Analysis Global Pharmaceuticals The global pharmaceutical industry is one of the most politicized and contentious industries in international commerce and trade. This is because it is closely related to the humanitarian challenge to preserve life and the quality of life to which all people are entitled to. While every person in this world is entitled to the means to sustain life and be free from infirmity, not everybody has access to it due to the dictates of politics, economics or technological development. The formulation and production of medications is not an easy task. It requires a large investment by big corporations that could afford to hire the most qualified and competent scientists and physicians, acquire highly sophisticated equipment and laboratories, and sustain the entire effort for years at a time. This type of activity can be undertaken only by large pharmaceutical companies in the rich, developed countries, and only on promise of financial gain. The business of Global pharmaceuticals cannot be sustained without earning a substantial profit on its investment. It must therefore be embarked upon with the proper strategic planning. This is the context upon which this report is based. In examining the global pharmaceutical industry, the report makes use of two environmental tools for analysis – the PESTLE model, and Porter’s five forces model. Both these tools supply information about the environment of an industry that would sound off potential threats and opportunities that corporations in the industry must address. The analyses are given based on the available academic and industry literature, with the corresponding conclusions for each part. Table of Contents Title page 1 Abstract 2 Table of Contents 3 1. Introduction 4 2. Part I – PESTLE Analysis 4 2.1 Political 4 2.2 Economic 4 2.3 Social 5 2.4 Technological 5 2.5 Legal 6 2.6 Environmental 6 2.7 Conclusion – PESTLE Analysis 7 3. Part II – Porter’s Five Forces Model 8 3.1 Threat of new entrants 8 3.2 Bargaining power of buyers 8 3.3 Bargaining power of suppliers 9 3.4 Threat of substitutes 10 3.5 Competitive rivalry 10 3.6 Conclusion – Porter’s five forces model 10 References 12 Appendices 13 1. Introduction This brief analysis aims to determine the opportunities and threats existing for the global pharmaceutical industry. It is based on the case study, “The global pharmaceutical industry” (Holland, 2007) in page 208 of Johnson, Scholes and Whittington (2008). The industry to be examined is the “ethical (research-based) sector of the industry” (Johnson, et al., p. 208). This industry is distinguished from the generic medications industry, which does not undertake its own original R&D, but relies on formulations of large companies the patents of which had already expired. 2. Part I – PESTLE Analysis 2.1 Political The market holds the pharmaceutical industry responsible for issues such as predatory pricing (i.e. charging too much when the cost of producing the medicine does not justify the price). An innate distrust in the pharmaceutical industry (Agres, 2007, p. 8) prompts governments in industrialized countries to impose price controls (Johnson, et al., p. 611) and to open up the industry to international competition. Since in many countries governments are the biggest purchasers of drugs for their healthcare programs (45% in the U.S., even higher in Europe where social benefits are provided the people), health policies favor lower cost alternative like generic drugs (Floyd, 2008). 2.2 Economic In developed countries, the spending on healthcare products, particularly pharmaceutical products, is as much as 16% of GDP, compared to only 6% in 1960 (Floyd, 2008). Furthermore, there are opportunities for growth in pharmaceutical sales in emerging economies, particularly China, India, and the other Asian economies (Agres, 2007). Overall, spending even in the mature economies are to expand by 4% to the year 2020 (Floyd, 2008). However, parallel trade threatens to undercut the legitimate market by sourcing cheaper drugs in emerging economies and selling them in high-priced economies (Johnson, et al., p. 611). 2.3 Social The general population is ageing in many countries as maturing baby boomer generation will create a demand for certain pharmaceuticals and related products. Furthermore, many progressing countries are experiencing shifts towards longer life expectancies as the population gains in wealth, better diet and exercise and increasing knowledge. China, in particular, may experience an ageing population due to the one-child policy, where there are disproportionately older than younger people. This will result in a greater demand for certain drugs particular to the aged (Johnson, et al., p. 610; Floyd, 2008). Another concern is that strong national identity is a competitive liability in global pharmaceuticals (Thomas, 2004). This is principally due to negative perceptions on developed countries as profiteering from poor nations in need of their medications. Large pharmaceutical firms therefore seek to be locally identified by merging or acquiring local firms. 2.4 Technological Technological advances are constantly being developed in this sector, since its business is dependent on high risk, long-term (about 10 to 15 years) R&D requiring considerable investment. Furthermore, not all promising drug research ends in breakthroughs because of a high rate of attrition (Johnson, et al., p. 609). Companies are using new breakthroughs to improve their understanding of the disease and help to reduce R&D costs (Agres, 2007). Aside from the bio-technical aspect of product development, the impact of e-commerce capabilities have allowed many companies to benefit in the form of increased revenues through direct-to-consumer sales to customers (Johnson, et al. p. 12); in the US alone, as many as 17 million make use of firms’ online ordering facility (Floyd, 2008). 2.5 Legal Generic drug production had generally been favored by local and international laws. Patent protection of more than 70 major branded drugs expired between 2002 and 2007, providing fertile ground for generic pharmacies to manufacture these drugs and offer them in the market at low cost (Pamela, 2002). In the U.S., based on a 1984 law, generics have enjoyed a clear approval path when patent protection ends (Sherrid, 2002). Internationally, the TRIPS (Trade Related Aspects of Intellectual Property Rights) supports the creation of generic drugs by allowing patent protection to pharmaceuticals to expire within 20 years (WTO, 2006). This has resulted in local patent protection typically spanning 20 years (Johnson, et al., p. 610). Furthermore, since the cyanide poisoning incident traced to a bottle of Tylenol, greater vigilance in safety and regulatory measures dominated in the pharmaceutical industry (Agres, 2007); tighter safety regulations impacted in the form of more costly packaging and supplies monitoring. 2.6 Environmental Earlier mention was made of the safety concerns that have prompted an improvement in standards for pharmaceutical packaging. The same concern for safety is behind a more careful design of the pharmaceutical supply chains, to ensure that the source, the supply and distribution systems are safe and to standard. More than that, however, is the imperative of using packaging and designing value and supply chains that are sustainable. (Logistics Manager, 2011) 2.7 Conclusion – PESTLE Analysis The most important factors brought to light by PESTLE are the political, economic, and technological considerations. Politically, the government’s policy on health care is always a sensitive issue, and its main determinant is the price of pharmaceuticals. Government policy will become more pronounced as the population ages and the social health care budget stretches more thinly. The state will always therefore tend towards measures to lower the price of medicines and encourage the development of the generics market. Economically, the global recovery from the recession is taking longer than expected. As people feel the prolonged effects of unemployment and the senior retirees feel the pinch of their dwindling savings and obliterated pensions, cheaper medicines, mainly in the form of generics, shall become increasingly important. This puts further pressure on the ethical pharmaceutical industry to come up with new drugs that shall be protected by patent. Technologically, the research and development efforts of large pharmaceutical firms are constrained to attain a higher degree of success, lower attrition, and shorten delivery time to market. A greater efficiency may lower the investment needed to develop new drugs, and the company may enjoy exclusive sales of their discoveries for the next 20 years. This must be done immediately since many patents of the best selling drugs had expired between the years 2002 to 2007, reducing revenues for the ethical pharmaceutical industry. 3. Part II - Porter’s Five Forces Model 3.1 Threat of new entrants In the industry for big pharmaceutical firms which develop new products through their own R&D, the threat of new entrants is relatively low as the costs and equipment for large-scale developmental research is high, and government licensing difficult to attain. There are, however, challenges from emerging economies where R&D capability is being enabled by greater wealth and better education (Agres, 2007; Johnson, et al., p. 608). On the whole, however, improved patent protection, particularly the TRIPS, seeks to provide a balance where the results of groundbreaking R&D are first rewarded for a period of at least 20 years, before the discovery is shared with the generics industry. 3.2 Bargaining power of buyers The largest sector of the global pharmaceuticals market is North America, which accounts for 40.3% of total market demand (Datamonitor, 2002). By 2020, market is expected to reach $1.3 trillion (Agres, 2007, p. 9). From the sheer growth in market demand and the protection offered to patents for at least 20 years, the bargaining power of buyers is inherently low due to the near-monopolistic control the patent holder has over the product. However, in most countries, the industry is subject to monopsony since the government is the largest purchaser of pharmaceuticals (Johnson, et al., p. 610). Legislation and policy measures that would tend to lower prices will generally be favored by the government. Futhermore, in global pharma, there is what is called the “payer landscape” (Agres, 2007, p. 8), which is characterized as “value for money” that is increasingly desired and defined by the consumers, the patients, insurance companies, and the public in general. It is critical to engage and collaborate with the key players in the payer community, including governments, insurance companies, patients and consumers. 3.3 Bargaining power of suppliers The imperative for safety, sustainability, and quality in the supply chain has already been earlier underscored. The requisite infrastructure for the timely delivery of quality materials is also enhanced by science clusters and technology parks that supply the necessary high-tech facilities and experience, with the government’s support (Floyd, 2008). There is also a trend for mergers and acquisitions that effect both horizontal and vertical integration of businesses, especially where large companies with excellent marketing facilities acquire or collaborate with smaller companies with a strong R&D capability, or possible discovery (Contractor, Beldona & Kim, 2005). Coupled with this are various options to direct licensing which involve inter-firm collaboration to lower licensing cost while sufficiently complying with regulations (Hemphill, 2010). Because of the wide choice of alternative combinations, the bargaining power of suppliers may be deemed to be moderate. 3.4 Threat of substitutes The principal substitute that poses the greatest threat for branded drugs produced by large pharmaceutical firms are the generic drugs (Johnson, et al., p. 610). Developing countries and generic pharmaceutical companies are providing drugs at a much lower price (Agres, 2007, p. 9). Generic drugs have the following advantages: they are promoted by insurers like Blue Cross Blue Shield; they are protected by the U.S. law passed in 1984 encouraging generics, and the TRIPS resolution in the UN; they account for nearly half of all prescriptions in the United States and the rest of the developed economies, and more for underdeveloped countries (Sherrid, 2002). For this reason, the threat of substitutes, upon lapse of patent protection, is high. 3.5 Competitive rivalry The industry is replete with alliance formation, partnership formation, networking and other similar collaborative arrangements. The reason is that pharmaceutical firms share costs and risks of research and development of new medicines if they collaborate with other pharmaceutical firms (Contractor, et al., 2005, p. N1). Typically, one firm, usually one of the small biotechnology start-ups (Johnson, et al. p. 611), spearheads the early research effort while the other, larger firm takes care of the downstream R&D in preparation for the market. Because of collaborative efforts, competitive rivalry will be strong between groups or networks of pharmaceutical firms delineated along alliances as the industry undergoes consolidation (Johnson, et al., p. 616). The appendices contain two tables showing the relative size and performance of the global pharmaceutical industry. The first table shows the regional performance in the Americas, while the second provides details of the top international pharmaceutical firms. It will be seen that the developed Western nations (US and Canada in particular) are still at the forefront of the “Big Pharma” or large pharmaceutical firms industry. 3.6 Conclusion – Porter’s 5 forces model Among the five forces assessed, the most important factors to consider are those that impact on the threat of substitutes, the threat of new entrants, and the bargaining power of buyers. By the “threat of substitutes,” this analysis refers to the threat posed by the much lower priced generics firms. Supported by government and international policy, free from the large and risky investments required for R&D, and patronized by the greater proportion of the general public, generics pose a real threat to the big pharmaceutical firms on those medications whose patents have, or are about to, lapse. Another “substitute” is the same mediation brought to developed markets from the lower-priced regions through parallel trading that diverts legitimate revenues from the ethical pharmaceutical companies. New entrants based in emerging countries likewise pose a threat to the ethical industry because of their lower costs and highly competitive value for money. Because of the developing technical capabilities in fast growing Asian countries, this trend is true in most industries, among which is the pharmaceutical industry. Finally, one more important factor is the bargaining power of buyers, which in this case is comprised principally of the government. The pharmaceutical market is governed by a monopsony with the government being the single largest buyer of medicines. Since the interest of the regulating and political power is the aligned with that of the buyer, there is no question that buyers have the power of controlling prices to favor the greater interest of society. References Agres, T 2007 “Big Pharma, Big Money.” Drug Discovery & Development, Aug 2007, Vol. 10 Issue 8, p8-10 Business Monitor International 2009 “Pharmaceuticals Business Environment.” US Pharma & Healthcare Report. Accessed 9 June 2011 from EBSCO. Contractor, F; Beldona, S; & Kim, C 2005 “Alliance Formation Propensity in the Global Chemical-Pharmaceutical Industry,” Academy of Management Best Conference Paper, IM “Expansion in global pharmaceutical market forecast.” PharmacoEconomics & Outcomes News, 10/31/2009, Issue 590, p10 Floyd, D 2008 “The Changing Dynamics of the Global Pharmaceutical Industry,” Management Services, Spring 2008, pp. 14-18 Hemphill, T A 2010 “Pharmaceutial patent expropriation and technology strategy: strategic options to compulsory licensing.” Technology Analysis and Strategic Management. Vol. 22, No. 1, January, pp. 19-41 Johnson G, Scholes K & Whittington R 2008 Exploring Corporate Strategy, 8th edition. Harlow; Person Education Limited. Logistics Manager 2011 “Pharmaceutical supply chains must change, warns PwC.” Logistics Manager, April 2011, p. 7 MedAdNews 2007 “Top 50 Pharmaceutical Companies Charts & Lists,” PharmaLive. Accessed 9 June 2011 from http://www.pharmalive.com/magazines/medad/?date=09%2F2007 Sherrid, P 2002 “The new drug war.” U.S. News & World Report, 12/2/2002, Vol. 133 Issue 21, p41 Thomas III, L.G. 2004 “Are We All Global Now? Local vs. Foreign Sources of Corporate Competence: The Case of the Japanese Pharmaceutical Industry,” Strategic Management Journal, Aug 1, 2004, Vol. 25, Issue 8/9 World Trade Organization (WTO) 2006 Pharmaceutical Patents and the TRIPS Agreement. Accessed 9 June 2011 from http://www.wto.org/english/tratop_e/trips_e/pharma_ato186_e.htm Appendices Source: Business Monitor International, 2009 Top Pharmaceutical Companies of 2006 Revenue Rank 2008 Company Country Total Revenues (USD millions) Healthcare R&D 2006 (USD millions) Net income/ (loss) 2006 (USD millions) Employees 2006 1 Pfizer USA 67,809 7,599 19,337 122,200 2 Novartis Switzerland 53,324 7,125 11,053 138,000 3 Merck & Co. USA 45,987 4,783 4,434 74,372 4 Bayer Germany 44,200 1,791 6,450 106,200 5 GlaxoSmithKline United Kingdom 42,813 6,373 10,135 106,000 6 Johnson and Johnson USA 37,020 5,349 7,202 102,695 7 Sanofi-Aventis France 35,645 5,565 5,033 100,735 8 Hoffmann–La Roche Switzerland 33,547 5,258 7,318 100,289 9 AstraZeneca United Kingdom 26,475 3,902 6,063 50,000+ 10 Abbott Laboratories USA 22,476 2,255 1,717 66,800 11 Bristol-Myers Squibb USA 17,914 3,067 1,585 60,000 12 Eli Lilly and Company USA 15,691 3,129 2,663 50,060 13 Amgen USA 14,268 3,366 2,950 48,000 14 Boehringer Ingelheim Germany 13,284 1,977 2,163 43,000 15 Schering-Plough USA 10,594 2,188 1,057 41,500 16 Baxter International USA 10,378 614 1,397 38,428 17 Takeda Pharmaceutical Co. Japan 10,284 1,620 2,870 15,000 18 Genentech USA 9,284 1,773 2,113 33,500 19 Procter & Gamble USA 8,964 n/a 10,340 29,258 SUM 497,519 70,843 110,077 1,342,700 AVERAGE 24876 3542 5504 67135 Source: Top 50 Pharmaceutical Companies Charts & Lists, Med Ad News, September 2007. . Read More