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pharma industry rabbi
Transcript of pharma industry rabbi
The enormous needs of the developing world
Drive for globalization in specialized sector
The drug companies have patent-protected monopolies on substances people may be literally dying for. Threats Healthcare costs have consistently risen faster than GDP and this has created an unsustainable situation in healthcare systems
Customers are increasingly demanding evidence of “value for money"
The period during which R&D costs can be recouped has been shortened
Governments are much more inclined to introduce draconian methods to control spending on pharmaceuticals on account of globalization as jobs are going overseas.
Intellectual property rights under threat. Environmental Analysis Key drivers for Pharma industry Transference of marketing
Cost advantages and economies of scale
Interdependence encouraging the globalization of competitors.
Factors reducing possibilities for convergence.
Shift in consumer behavior and attitudes of governments towards healthcare costs emphasizing “value for money”
Parallel trade Impact of the key factors The pharmaceutical industry operated within a relatively stable environment.
Formidable barrier to enter the industry
Profitability was far in excess of other industries and
Competition was mild. Post
War II 2002 1981 1960 Technological success, in the development and marketing of new products, characterized the industry 1970 1980 •The emergence of biotechnology firms and the potential transformation of the drug- discovery process
•The greater power of buyers (as the cost of healthcare exceeds the ability to pay for it)
•Greater reliance on blockbuster drugs as the main source of income. It is estimated to exceed $50 billion in the year 2000 Global R&D expenditure was around $5.4 billion 51 new chemical entities (NCE)
were introduced in 1980 Only 32 in 1999, 24 in 2001 and 17 in 2002 Companies are focusing on global sales and marketing competences and using their global presence and marketing skill .
Manufacturers of generics thus faced a classic “stalemate” type environment where economies of scale prove decisive.
Developing competences in alliance management.
A key feature of branded over-the-counter (OTC) drugs has been the development of direct-to-consumer marketing capabilities PESTEL analysis Political forces Social Forces Technological and Environmental forces In many geographic markets there is effectively only one powerful purchaser, the government.
Many governments starts demanding grreater value for money. As the industry globalizes and ownership and employment become concentrated in fewer countries, this may result in less benign intervention. Regulators have been challenged not to overburden new growth areas in biotechnology research. Growing pressures arising from
inter-country pricing disparities
and parallel trade. Economic forces Demand Supply Medical practitioners tended to favor branded products
Incentives to shop were diminished as costs were assumed or reimbursed by insurers, employers (in the US) or healthcare authorities (in Europe). No company holding more than an 11% market share in 2003
Some companies have over 80% market share in some therapy classes – hence the importance of blockbuster drugs.
The industry still features relatively strong non-internationalized players
Spending on R&D has grown while the number of new products reaching the market has fallen. Final consumers are now better informed, have higher expectations and want greater say in their treatment. As the “baby boom” generation approaches retirement, there have been new efforts to develop drugs for the treatment of the elderly This could open new marketing opportunities but, at the same time, educated consumers have become more demanding of advances in therapy. There has been growing investor activism in both Europe and the US, suggesting shareholders could be increasingly susceptible to ethical, social and corporate governance issues Given the aging profile of the Western population and the growing number of middle- class consumers in developing countries, the long-term prospects for the industry look good with the advent of genomics, potential new ways to discover drugs, to better target their use and to conduct medical trials suggest there could be a major reorganization of the industry. After the mapping of the human genome there was much hype about the possibilities for genetic research in pharma. Genetic research has yet to have an impact on drug discovery or clinical trials. The Internet could reinforce a trend to switch from prescription to OTC drugs and in the process disintermediate retail chemists. If successful, these innovations will challenge both regulators and the competences of established providers. Legal forces Length of patent protection
Approval of new products to be marketed
International harmonization of regulatory controls could bring significant benefits in terms of reduced costs and accelerated time to market for pharmaceutical companies.
Taking a drug through the trial-and-approval process still requires from 10 to 12 years because
Pharmaceutical companies often find problems in enforcing patent protection in developing countries (particularly in Asia). Porter’s Five Forces Analysis Threat of Potential Entrants 1950 -1985 : Low
Industry has high entry barriers because of:
•Long lead times for new drugs
•High cost of R&D and clinical testing
•Large and expensive sales force required 1985 -1995 : Low
The industry has already high entry barriers which are increasing. They associate with lead times for new drugs to be marketed increasing from 3–5 years in the 1960s to 12 years in the mid 1990s.
There was high cost of R&D and clinical testing was increasing. Only 1 to 4% of new drugs reach the market. Of these 60% fail to achieve sales that justify R&D costs. 1995 -2005 : Moderate
Firms specializing in moving specific molecules along the value chain could be tomorrow’s main competitors.
Emphases on disease prevention and early detection begin to shift R&D priorities; and could favor pharmacogenomics providers. 2 4 5 Power of Buyers 1950 -1985 : Low
The decision to buy was imposed by doctors on patients (i.e. final consumers). Doctors had no responsibility to contain costs. In the US, a mail-order channel starts to develop to help highly price sensitive patients 1985 -1995 : High
Loss of brand loyalty
Patients’ expectations are rising
Government policy to increase competition (internal market).
Governments (EU) and managed health organizations (US) imposing systems to control prices
Growth of distributors of drugs
Harmonization of government approaches to healthcare and drug approval amongst EU countries and between the EU and the US. 1995 -2005 : High
Controls on pricing, reimbursement and market access continue to tighten (“value for money” is a top concern on both sides of the Atlantic). Growth of managed care (and the information it provides) is expected to continue deteriorating the profitability of big pharmaceuticals regardless of the outcome of regulation. 2 4 5 1950 -1985 : Low 1995 -2005 : High 1985 -1995 : Moderate Few substitutes were available. High profits associated with introducing products that greatly improved the quality of healthcare for many patients.
Lead times of 6–7 years over competitors (time for rivals to produce “me-too” drugs) Cheap generics (from not very reputable manufacturers) were available.
Improved chemistry and computer generation of analogues (biotechnology) have reduced lead times drugs from 6–7 years to 18 months.
Consumer suspicion of drugs leads to increasing use of alternative remedies. Biotechnology and combinational chemistry further reduce lead times to market.
Biotechs may become more successful at bringing successful products to market as genomics allows targeted application so that clinical trial size and length can be shortened.
Diversification into generics protects the market share (but not the profit) of big pharmaceutical companies.
Physicians develop independent systems to compare therapies and non-integrated rivals search for information databases comparable to those of the big pharmaceuticals. Power of Suppliers 1950 -1985 : Low 1995 -2005 : Low 1985 -1995 : Low
Global sourcing by drug companies has led to further reductions in the costs of raw materials.
Major pharmaceutical companies come increasingly to rely on out-sourcing and in- licensing for new products, enabling supplying companies to place a high price on such deals. However, counteracted by global over-capacity in outsourcing and R&D. 1950 -1985 : Low
Cost of drug ingredients are very low percentage of total costs.
Pharmaceuticals tend to be fully vertically integrated (from molecule search to mass marketing). Lack of profitability of outsourcing markets for R&D, clinical trials and managing the approval processes may result in a shake- out with fewer suppliers able to put upward pressure on out-sourcing costs. Competitive Rivalry 1950 -1985 : Moderate 1995 -2005 : High 1985 -1995 : High Low concentration (lots of producers in several therapeutic applications, hence low price competition).Large and expensive sales forces were developed on the back of brand recognition to target doctors. High cost of R&D expenditure is effectively an exit barrier.
Profitable, cash rich industry but margins are declining.
Mergers and acquisitions are expected to continue as they could lead to economies of scale, better sales and marketing and more efficient R&D efforts. Continued industry consolidation results in fewer larger global companies, focused on specific franchises, with intense rivalry within therapeutic franchises. Decision A more customer oriented marketing strategy
Merger and consolidation
Doubt over maintaining the double digit growth Implementation or Action Plan Monitoring and Result Measurement For consolidation pharmaceutical companies can do mergers, acquisitions, hostile acquisitions etc. Previously diversified conglomerates can divest their non-healthcare businesses (e. g. agrochemicals), to focus purely on high- margin pharmaceuticals A strong global marketing capability was also vital in attracting the best in-licensing candidates and co-marketing deals, to strengthen the product pipeline. Franchises can sell off non-core activities and focusing on R and D and sales and marketing efforts R & D and commercial functions would operate autonomously. The commercial organization would develop a product portfolio based on therapeutic franchises, using clearly defined business relationships with external R and D partners In turn, this would free in-house R & D to discover and to develop innovations beyond the commercial portfolio strategy.A new business model called integrated healthcare can also be followed. The operational data has to be collected to identify the reasons for success or failure. The companies have to monitor their operations.
Research is needed to find out the true reasons in this case.
In the process they can identify the reasons for failures and take actions.
Market data will be collected and market performance will be expressed in quantification. Strategic Adjustment Pursuing blockbuster drug through investing in R&D.
selling generics to earn quick revenues.
Forming alliances with biotechs and genomic companies.
Clinical development can be outsourced to Contract Research Organizations (CROs) so that capacity can be switched on or off at will.
DTC or direct-to-consumer can be used as a marketing strategy. A key rationale for mergers and acquisitions was to combine a company with a strong pipeline but weak sales and marketing with its converse, which to some extent reduced R&D activity.
Having none core activities sold off, few thinks the industry is more manageable that way in which many disagree. According to them, more layers of management actually brings in more bureaucracy.
According to many analyst, the way global pharmaceutical industry is being operated is not sustainable, rather this industry requires more consolidation. Problem Identification