Analysing Companies: Business Models, Narrative and Numbers about Pfizer - Essay Example

Analyzing Companies: Business Models, Narrative and Numbers about a Pharmaceutical Company Table of Contents Introduction 3 2. Business Model Concepts 3 3. Business Model Analysis of Pfizer 4 3.1Current Business Model Analysis of Pfizer 5 3.2Pfizer Financials 7 3.3 Sustainability of the Business Model 8 3.4 Intellectual Property Right Disputes 9 4. Convergence with the Global Pharmaceutical Industry 10 5. Conclusion 11 6. References 12 1. Introduction This study has been undertaken with the motive of examining the current business model of Pfizer and the cause and effect of its evolution from the traditional business model which it followed. While studying the business model, prominent issues like intellectual property right disputes and financial data of Pfizer would also be taken into account so that every dimension of the business model can be presented. Before presenting the business model, the theoretical concepts of business model is explained, so that the readers have an idea regarding the strategies that are incorporated to develop an effective and sustainable business model. The sustainability of Pfizer’s business model would be analysed and a global comparison would be drawn to conclude the study. 2. Business Model Concepts Business models are the foundations on which an organization is created, its values, mission, vision and objectives are set. The process by which these business models are developed is called business strategy. With new strategic frameworks coming up, the business models of organizations have evolved too. In the early 20th century the concept of developing business model for companies were seen. In 1950s, McDonalds, the restaurant and Toyota introduced their business models. Similarly Wal-Mart introduced the business model of hypermarkets in 1960s (Bozheva, 2005). The actual motive behind integrating a business model is to generate revenue and earn high profits from the business operations. Business model of the company is considered to be a formula for sustainable success, which is not the actual case. Business model of a firm can be understood through the individuals they hire, their performance, target customers, budget standards and way of creating them, competitors, etc. It must provide an opportunity to the firm to execute its resources in generating not only revenue but goodwill too. Shafer et al (2005) recommended that the business model activities can be alienated in four groups such as value network, creating value, strategic choice, and capturing value. Business model is the illustration of the firm’s fundamental core logic and planned choices for generating and capturing the value. Osterwalder (2005) in his research study has stated that business model is based on nine building blocks. It is actually a conceptual tool which has sets of rudiments which allows the firm to express their business logic. It can be also regarded as the value that the company offers to its customers. It also includes the architecture of the company, partner’s network and other segment such as marketing, relationship building, and sustainable streams of revenue generation. In the next section the current business model of Pfizer would be discussed which would also include the financials and the issues of intellectual property rights associated with the company and its products. 3. Business Model Analysis of Pfizer The business climate of the pharmaceutical companies is changing dramatically. The traditional business model was based on research and development of new drugs. However, the current business models are not similar to the traditional one. They focus mainly on the commercialization of the product rather than high budget research and development. There are four major components in the current business models, namely the major partners, activities, resources and cost structure. Second is the value proposition, third are the customers, and fourth is the financials (Osterwalder 2005). 3.1 Current Business Model Analysis of Pfizer The new model focused mainly on strengthening the scientific and the commercial potential of the country. This strengthening initiative of the company would also include the acquisition, and cost reduction. The merger with Wyeth Pharmaceuticals in the year 2009 was an initiative taken to respond to the pressure that was built on the company due to the patent expiration of Lipitor. The current business model of Pfizer can be better explained by drawing reference from the Osterwalder (2005) business model pillar. According to this model, the business was developed on four pillars, such as infrastructure or framework, which consisted of business activities, partners, intellectual property rights, and resources, second was the product or value proposition offered, third was the customers, channels of distribution and four were the financials which consisted of cost structures, budgeting, and revenue generation. The new model focused mainly on strengthening the scientific and the commercial potential of the company. However, it must be noted that reducing the research budget and shifting focus on commercialization has also reduced the scope of innovation considerably in the new business model. The key resources of Pfizer based on the new business model include expertise, funds, employees and skills. With these resources the company aims to accelerate its entrepreneurial qualities and also accountability. In order to become world’s largest biopharmaceutical company Pfizer is diversifying, adding flexibility to its processes and utilising its skill, funds, people, and expertise to achieve its goal. As the traditional model was research focused, this is the reason why such wonder drugs were produced. This strengthening initiative of the company would also include the acquisition, and cost reduction. The merger with Wyeth Pharmaceuticals in the year 2009 (Narayanan, Tribbitt, and Douglas, 2011) was an initiative taken to respond to the pressure that was built on the company due to the patent expiration of Lipitor (Mogul, 2011). Apart from this the duplicative facilities such as the sales offices, manufacturing plants and the facilities for research and development were shut down. The bestselling Cholesterol drug, Lipitor was the patented product of Pfizer (Mogul, 2011). The patent right was till November 2011, and after than Pfizer no longer controlled the rights. It was expected that after November, the patients who were in need of the medicine would go for cheaper alternatives that Lipitor. So after the loss of Lipitor and different setbacks that Pfizer faced in its clinical trial for Alzheimer medicines, The Company re-engineered their business model by redefining the financial and the strategic planning. Pfizer modified its productivity initiatives and cost reduction techniques keeping in mind the future post Lipitor. With its focus on the new strategies, Pfizer EPS for the second quarter of 2012 was 62 cents. The volume growth in countries like China and Russia were estimated to be 14 percent (Stock Market Today, 2012). Business Models are developed to suit the changing needs of the organisation and the industry. The financial position of the company and the economic environment are also the probable reasons for the change in the business model of the company. However business model is not a strategy which can be transformed easily, rather it is the foundation on which the pillars of the business is laid, so a gradual change is viable to maintain a sustainable growth. Traditionally, Pfizer used to screen various compounds to check the most suited one, and for this huge spending were done on this. Chantix was the result of such an approach of the company (Wilson, 2010). However, after 2006, research failures started coming up with Trocetrapic, the cholesterol reducing medicine. More recently, the experimentation of an Alzheimer drug also failed. So seeing these occurrences the company has decided to reduce its spending on research and developments by 30 percent and focus specifically on Cancer and Alzheimer medicines (Jardines, and Linowes, 2010). Each drug comes with a patent expiration period such as Celebrex’s patent would expire in 2014, Zyvox in 2015, Lyrica in 2018, and so on. (Fernando, and Purkayastha, 2007). 3.2 Pfizer Financials Table 1: Financial Results (2009-11) in US $ Year Sales Profit after Tax Return on Capital Employed (ROCE) % Dividend/Share           2009 50,009 8,635 7.96 0.66 2010 67,809 8,257 5.57 0.74 2011 67,425 10,009 7.26 0.82 Source: (NASDAQ, 2012) Table 1 reveals the financial result of Pfizer for the last three years from 2009 to 2011. The sales or revenue figure shows that in 2009 the sales was $50,009, but it has gradually increased to $67,809 and $67,425 in 2010 and 2011 respectively. The revenue of Pfizer had increased considerable because of the performance and sales of its most popular pharmaceutical products. However due to patent expiration of Lipitor the sales had reduced considerably, which revived after the merger of Pfizer with Warner and Lambert Company. By seeing this scenario, the company decided to sell off its children nutritional division to Nestle at $11.85 billion (The Economist, 2012). The company also decided to divest in the animal health division till 2013. Apart from this expenses on research and development were slashed by 30 percent. Pfizer is soon going to face the expiration of the patents of about 19 drugs soon, which would result in a loss of $38.5 billion for the company, according to Barclays (DeGiulio, 2011). The nutrition unit of Pfizer increased by 15 percent in 2011, while the pharmaceutical sales reduced by 1 percent due to the failures which the company has to face. The stock prices of Pfizer have risen in 2012, as can be seen in Figure 1. Figure 1: Stock Prices of Pfizer Source: (Bloomberg, 2012). Table 1 also reveals the percentage of return on the capital employed and the divided paid per share. The current size of the market of Pfizer is $200 billion. Pfizer projects its growth in the Chinese market by 43 percent and other priority markets by 29 percent. In the financial year 2009 and 2010, the company experienced an operational growth of 8 percent and 6 percent respectively (Pfizer, 2012). 3.3 Sustainability of the Business Model After studying the business model of Pfizer and analyzing its intellectual property right issues and financials, the position of Pfizer in the industry is clear. It is certain that after the merger of Pfizer with Warner and Lambert Company, it became a significant pharmaceutical company in the world. The company is also generating revenue and earning profit after surviving from several legal proceedings regarding patent issues of its products, patent expirations and research failures. However, sustainability is a different issue altogether because sustainability signifies stability of not only the financials of the company, but the overall business model on which the whole company is standing. By this we mean the strategic framework, the operational functions and the business activities of the company (Baum, 2012). Since the inception the business model of Pfizer had been product based. The pharmaceutical products were strong enough to earn revenue for the company. So Pfizer has always protected the authenticity of its products through patents. However with the changing scenario, expansion of the company, patent expiration and research failures, Pfizer became unsustainable as the sales dropped considerably. Apart from this the company also had to face legal cases due to the patent rights in countries like India and China. So Pfizer had to face unsustainable condition between 2009 and 2011. However, after 2011, the portfolios are being prioritized and additional resources are being provided to the important portfolios. The unnecessary programs are being discontinued and focus research and developments on diseases like Cancer and Alzheimer is being conducted. It can be said Pfizer is moving towards a strong and sustainable growth (Rockoff, 2011). 3.4 Intellectual Property Right Disputes As far as intellectual property right (IPR) cases are concerned, Pfizer have been always strict in terms of patents of its products. However, several IPR cases of Pfizer in China due to its blockbuster medicine called Viagra were heard of. Viagra failed to market its potential in China because of two major causes. The first reason was that it faced stiff competition from much cheaper fake products in China, which was similar to that of Viagra. Secondly, the litigation process which took place in China for restoring the patent of Viagra was long and tedious and finally though Pfizer was successful but it could not market the product well in the country. Pfizer notices that in few countries the IPR were not strict and domestic companies can copy and manufacture similar products and sell them at cheaper prices. In order to combat these problems, Pfizer supported Trade Related Aspects of Intellectual property Rights (TRIPS). This was the property right mainly to protect the privileges of the pharmaceutical and chemical companies. Pfizer felt the threat of the international market, so they wanted this agreement to be included in the General Agreement on Tariff and Trade (GATT) (Draho, 2003). Pfizer appeal for the patent of the liver and kidney cancer drug called Sutent failed in India because of the opposition of Cipla, another major player in the pharmaceutical industry in India. According to the Indian patent act, the patent on a drug could not be granted unless and until a specific and significant change has been done which is innovative. So in this context, Pfizer was not granted the patent right for the drug. To this decision Pfizer has nothing left, but to blame the Indian Intellectual property laws (Loftus, 2012). 4. Convergence with the Global Pharmaceutical Industry Global pharmaceutical industry is esteemed of 484,151million €, but more than 47% of market share is subjugated by USA alone. 370 diverse drugs have been discovered by USA pharmaceutical industry in the last few decade and 50% of drugs in the area of heart disease or hypertension, Alzheimer’s disease, arthritis, Parkinson’s, cancer are manufactured by USA pharmaceutical industry alone. Top pharmaceutical companies like Eli Lily, Pfizer, Bristol-Myers Squibb, Genzyme, Amgen, Genentech, Biogen and Johnson & Johnson are the market leader. Pfizer Inc. generated global revenue of about $51.3 billion in 2005, though this declined by 2.3 percent from the year 2004, still Pfizer is considered to be one of the largest pharmaceutical company in terms of its research and development. The company has given many successful pharmaceutical products to the world, like Lipitor, and Viagra. The major pharmaceutical companies are mainly focusing on the mainly researched based combination of pharmaceutical products, which has the capability to boost sales and have a significant impact on the society. Divestments are being done in order to compensate the patent expirations, and the dysfunctional units of the company (Beder, 2009). 5. Conclusion This study has aimed to analyse the business model of Pfizer and also evaluated its significance and applicability in the strategic functions of the company. Pfizer’s shift in the business model was for meeting the changing requirements of the present pharmaceutical market. The focus was shifted from research, development and products to commercialization because in the coming years, the patent rights of many revenue generating products of Pfizer is going to expire. The company will have to face huge losses in such cases. This is the reason why attention is paid to merger rather than heavy spending on research. The financials of Pfizer also revealed that profitability is getting affected by the frequent patent expirations, intellectual property right disputes, such as in China due to its popular product called Viagra. So Pfizer new business strategy is to go for small gradual mergers to fill these loop holes. Apart from this, it was also learnt that steps have been taken by global regulatory bodies to protect the intellectual property rights of the pharmaceutical companies and their products, so that in countries where intellectual property right norms are not so strict, the multinational company can protect their patent rights. Pfizer has become one of the largest pharmaceutical companies in the world due to its merger with Warner and Lambert Company, but because of subsequent patent expiration the position of Pfizer cannot be considered sustainable. 6. References Baum, S., 2012. Pfizer coping well with loss of Lipitor patent, so what’s the outlook for blockbuster replacements? 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