Macro Shocks

Report
The Pharmaceutical Industry 2012.
A comprehensive Trend Analysis
Master’s Thesis Defense
Christian Gruber MD
Stein, July 20th 2012
Abstract
Introduction The pharmaceutical industry will face unprecedented challenges in
2012 and the forthcoming years due to macro shocks and changes in external
stakeholders. Methods A search in annual reports of big pharmaceutical
companies and the PriceWaterhouseCoopers’ “Pharma 2020” series yielded
common strengths, weaknesses, opportunities and threats. These were
incorporated into the strategic pathway framework (Angwin D et al.) to establish
a narrative trend analysis. Results Macro shocks, movers and shakers have
been described and the industry terrain shaped. Corporate strategies have been
adapted. Within the inner layers of the strategic pathway, however, more and
more gaps become apparent with respect to future positioning, dynamic
adaptive abilities, change management or corporate sustainability. Conclusion
The pharmaceutical industry in 2012 is blocked early in the strategic pathway. A
de-maturation through innovation has not yet been achieved.
Keywords Pharmaceutical Industry, Strategic Pathway, Business Environment
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Background
Will the years 2012 and 2013 turn out to be what is
expected for the pharmaceutical industry by many
insiders as well as observers – two anni horribiles?
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Objectives
The objectives of the present Master’s Thesis include
1) identifying current external influences and internal
prerequisites of big pharmaceutical companies,
2) pointing out their impact on corporate strategy and
3) highlighting strategic options for pharmaceutical firms
and their forms or options of implementation.
4) Primary objective of this work, however, is to analyze
where exactly the pharmaceutical industry stands in this
strategic change adaption process.
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Methodology
A search by keywords for
overlapping topics in the
annual reports 2011 of 6
large
multinational
pharmaceutical
companies
of
differing
domicile
(Pfizer
[US],
Novartis [SUI], Roche [SUI],
Merck, Sharp & Dome [US],
Takeda [JP], Sanofi Aventis
[FR]) yielded 21 themes of
interest which have been
grouped within the SWOT
analysis
and
double
checked
as
well
as
substantiated
by
taking
reference from the Pharma
2020 series, a respected
series of analytical reports
published
by
PriceWaterhouseCoopers
in 2007.
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Methodology
Angwin, D.; Cummings, S.; Smith, C. (2007): The Strategy
Pathfinder: Core Concepts and Micro Case. 1st eds, Malden:
Blackwell Publishing Ltd.
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| Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis
The
resulting
SWOT
analysis has been used as a
starting point for further
strategic
analysis.
The
different factors considered
in this primary analysis have
then been transferred into
the
strategic
pathway
framework as proposed and
published by Angwin D,
Cummings S and Smith C
(“The Strategy Pathfinder:
Core Concepts and MicroCases”). Although this is a
general
framework
applicable
to
various
businesses, in the present
work, is has been entirely
applied to and filled with
pharmaceutical
industry
specific content. The trend
analysis presented here is
primarily applicable to large
multinational pharmaceutical
companies (“Big Pharma”).
Macro Shocks – the Federal Debt Crisis
In the near future,
there will be sustained
and
unprecedented
pressure
on
drug
prices in almost all of
the major markets.
For the time being the
situation needs to be
divided
into
two
scenarios. There are
states
which
are
immediately
infected
with the debt crisis and
others which have cut
down on drug prices in
an ongoing process in a
more
preventive
intention.
UBS Quotes (2012): Union Bank of Switzerland, Zurich.
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Macro Shocks – Generic Competition
In
an
environment
of
underfunded health care
systems incentives or even
obligations
to
prescribe
generics
have
been
implemented
in
many
national legislations.
Sales of the original product
can be expected to decline
rapidly by 70%-90% within 312 months.
Even before patent expiry sales
tend to decline because
companies would cut back on
marketing
measures
(e.g.
withdraw sales force support).
Upon expiration of the patent
companies usually decrease
the price of the original to
generic
level
voluntarily.
Certain measures can be taken
to soften the declining curve at
the end of the life cycle.
Hoffmann-La Roche (2011)
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Macro Shocks - Demographics
Most industrial nations
are aging societies. The
baby boomer generation
retires
now.
The
consequences
of
longevity are increased
morbidity
which
generally increases the
pool of end consumers
for
pharmaceutical
products. The emerging
growth countries will
undergo
a
similar
demographic
development as the
industrialized nations in
40-50
years
time.
Basically,
in
all
developed and emerging
countries life expectancy
at birth is on the rise and
has
surpassed
an
average of 80 years in
many countries.
Cancer Research UK. Cancer incidence by age - UK statistics 2012, London.
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Macro Shocks - Demographics
Diabetes Atlas. (2011): Diabetes Map. 5th edition, Brussels, International Diabetes Federation.
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When considering the
example of diabetes
type II, a disease
classically
linked
to
aging, over nutrition and
life style, an important
global phenomenon can
be observed. Although
western nations still lead
the list of highest
prevalence it is obvious
that
the
emerging
growth nations catch up.
If
this
development
continues as projected
millions of new diabetics
will be added from China
and India creating a
world wide epidemy.
With the creation of
wealth
and
the
emergence of middle
classes
in
these
emerging
growth
countries millions of
people adapt “western”
life styles and become
prone
to
acquiring
typical
“western”
diseases.
Movers and Shakers - Health Technology
Assessment
A new set of requirements to be met has come into play - commonly referred to as the “4th
hurdle” (behind efficacy, safety and quality)
 For drug development the 4th hurdle means that additional data need to be generated to satisfy the payers’ needs.
 The new product should be differentiated and have unique features (addresses an “unmet medical need”).
 More active comparisons against standard of care are required (placebo-controlled trials not sufficient any more).
 More health economic data (cost-effectiveness analyses, cost-utility analyses) are required.
 More outcome research is demanded.
 More patient reported outcome measurements (quality of life measure etc.) need to be taken into account.
 Data to demonstrate an added value to the system overall (e.g. reduction of length of hospital stay, shorter time of
disability etc) are helpful.
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Movers and Shakers - Public Perpception
The Boston Globe 2010
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In spite of successes
public perception of the
pharmaceutical industry
remains a weakness at
levels close to the
energy/utilities industry.
In a recent U.S. poll from
2009,
investment
and
brokerage firms (46%), car
manufacturers
(45%),
pharmaceuticals
(45%),
banks (38%), and cable
companies (37%) were
among those industries to
be perceived as “likely to
do a bad job”.
The need for efficacious
and effective high quality
medicines is obvious to
almost
everyone.
Therefore, it is sometimes
paradox to see such a low
degree of support for the
industry
among
the
general
population,
especially in countries
with
a
strong
pharmaceutical industry.
Industry Terrain - Strong Balance Streets
Overall,
the
financial
situation
of
big
pharmaceutical companies
is strong up until now and
continues to represent
strength in challenging
times.
In
terms
of
profitability ranking, the
pharmaceutical
industry
used to be placed among
the top 5 industries.
Although profit margins
have recently declined for
most
pharmaceutical
companies they could on
average hold a satisfactory
level and even outperform
other sectors. Of note, the
major patent losses ahead
are only partially reflected
in the financial numbers
currently available.
Fortune 500 Report 2009, 2012
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Industry Terrain - Industry Life Cycle in 2012
Similar to a specific
product the industry at
whole undergoes a life
cycle.
The
different
stages of this life cycle
range from introduction,
growth and maturity to
decline and point out
what companies need to
focus on to perform
successfully. Like most
industries of today, the
pharmaceutical industry
finds itself in the stage of
maturity and risk future
decline
unless
it
manages to de-mature
through innovation by
increasing
its
R&D
productivity.
Angwin, D.; Cummings, S.; Smith, C. (2007): The Strategy
Pathfinder: Core Concepts and Micro Case. 1st eds, Malden:
Blackwell Publishing Ltd.
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The Big Picture - An Evolution towards Marketing
Orientation
Adcock, D.;Halborg, A.; Ross, D. (2001): Marketing: Principles and Practice. 4th eds, Essex
CM20 2JE: Pearson Education ltd.
During the period of
mono-dimensional
sales- orientation the
pharmaceutical industry
has grown in size but
also
suffered
reputational damages. It
is only until a couple of
years ago that the
industry had to adopt a
much more marketoriented business model
where the needs of the
market,
being
the
medical
needs
of
patients or being the
needs of the payers,
constitute
the
first
strategic priority. At this
stage, the job of the
classical
sales
representative gradually
loses
importance
whereas key account
managing
becomes
more and more critical to
business success.
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The Big Picture - Vertical and Horizontal
Integration
On the basis of its history and scientific expertise large
pharmaceutical companies have taken over differently
integrated corporate structures. Novartis, for instance, has
adopted a horizontally integrated model which is diversified over
different business areas and is designed to provide uncorrelated
sources of revenue. Hoffmann-La Roche, in contrast, has build a
vertically integrated structure. The company is thus able to
generate revenues on any step of the value chain of operations.
Novartis AG. (2011): Annual report.
Hoffmann-La Roche. (2011): Annual report.
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Perfect Positioning - Scientific Progress
 Pathways – the Promise of Translational Medicine
 Stratified Medicine
 Personalized Medicine
 Stem Cells
 High Throughput Biology
 Systems Biology
 Small Interfering RNA
 Gene Therapy
 Reverse Vaccinology
 Modelling & Simulation
 Biomarker Research
 Clinical Research Progress
Giot, L.; et al. (2003): A protein interaction map of drosophila melanogaster, in: Science, 302,
1728-1736.
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Perfect Positioning - Orphan Diseases
EMA, Committee on Orphan Medicinal Products 2009
6.000 to 7.000 diseases are known which
– seen separately - only affect a small
number of patients each. In total,
however, the number of people affected
by a rare disease is huge (30 million
Europeans estimated). 80% of these rare
diseases are of genetic origin and many of
them are chronic, severely debilitating or
fatal. A while ago, this problem has been
noted by regulatory bodies worldwide and
specific orphan drug regulations put in
place, e.g. in the US (1983), in Japan
(1993), in the EU (2000) or in Switzerland
(2006). Orphan drug regulations are
designed to provide stimuli, economic
incentives, to the pharmaceutical industry
to conduct research and develop
medicines
for
orphan
diseases.
Companies such as Genentech, Amgen,
Celgene, or Genzyme are examples that
have managed to bring orphan drugs to
the markets and have by now grown into
international multi billion businesses.
Additionally, after development of an
orphan drug, the possibility exists to
develop the product into other indications.
Therefore, it is sometimes possible to
expand the market of the drug into other,
non-orphan disease areas.
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Living Strategy - the Patent Cliff
The effective patent protection
for a pharmaceutical is a
maximum 15 years in Europe
and 14 years in the US, thus
limiting the life cycle of a
medicine. Patents are filed early
in dug discovery, i.e. 6-10 years
before market entry, preferably
before the first chemical data is
published.
Fried, S., Arlington, S. (2007a): Pharma 2020 - The Vision. PriceWaterHouseCoopers.
Fried, S., Arlington, S. (2007b): Pharma 2020 - The Marketing of the Future.
PricewaterhouseCoopers.
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Living Strategy - the Innovation Gap
Sukkar, E. (2011): Lack of investment in regulatory science is part of "innovation gap," believes
FDA commissioner, in: British Med J, 343/8, 8017.
Fried, S., Arlington, S. (2007a): Pharma 2020 - The Vision. PriceWaterHouseCoopers.
Fried, S., Arlington, S. (2007b): Pharma 2020 - The Marketing of the Future.
PricewaterhouseCoopers.
Low R&D productivity results
in
what
is
called
the
“innovation gap”: annually
steadily
increasing
drug
development expenditure with
declining numbers of new
molecules entering the market.
In the face of the innovation
gap the above mentioned end
of the age of blockbusters
seems even more challenging.
As little differentiated mass
market drugs will not provide
sufficient profit margins any
more the industry will have to
come up with many more
compounds simultaneously on
the market – each of which
targeting a smaller subset of
patients. The current R&D
productivity
of
many
companies will not be able to
provide
these.
R&D
productivity needs to be
bolstered drastically – rather
sooner than later.
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Living Strategy - the Innovation Gap
Tufts (2009): Large pharma success rate for
drugs entering clinical trials in 1993-04: 16%.
Impact Report 11/4, Boston, Tufts Center for the
Study of Drug Development.
Another main cost driver in drug development
(and one that stubbornly resists eradication) is
the high attrition rate.
The attrition rate is the proportion of compounds in
development which fail to achieve market
authorization thus representing sunk costs. The later
a compound fails during the development period the
more costly the failure becomes to the stockholder.
Hofmann La-Roche 2011
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Corporate Character - Reputation
In here lies a problem for the
industry as already discussed
with respect to the media
being a mover & shaker to the
industry. The pharmaceutical
industry has about the same
image problem as the oil
industry which is constantly not
perceived as environmentally
sustainable despite desired by
oil companies and in spite of
sharp
marketing
efforts.
Between
how
the
pharmaceutical
company
wants to be perceived, its
corporate identity, and how it is
actually
perceived,
its
corporate image, resides a
huge gap.
Angwin, D.; Cummings, S.; Smith, C. (2007): The Strategy
Pathfinder: Core Concepts and Micro Case. 1st eds, Malden:
Blackwell Publishing Ltd.
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Crossing Borders - Emerging Growth Markets
As a result of economic
growth in these emerging
economies, hundreds of
millions of people belong to
new middle classes and
gradually gain access to
health care which has
traditionally
been
a
privilege of the small elite.
The number of customers
in countries such as China,
India or Brazil is forecasted
to exceed the number of
customers in established
markets. Major players
have established large
scale research facilities in
China or Russia (and
others) and have partnered
with local corporations to
gain better market access
locally.
Most
big
pharmaceutical companies
have
achieved
above
average revenue growth
rates in emerging markets.
Campell/Chui 2010: www.imshealth.com/pharmerging
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Crossing Borders - Weakening IP rights &
Counterfeits/Falsified Medicines
Pharmaceutical Security Institute 2011
The production and marketing of
counterfeit or falsified medicines
has become an illegal multibillion business and represents a
major threat to public health as
well to the pharmaceutical
industry. The illegal business is
fostered
by
increasingly
international
connectivity,
diverging definitions, nonexistance of a uniforme
database, conflict of interest
between industrialized and
developing
nations,
corruption, weak sanctions
and law enforcement and by
the
inaccessibility
of
medications.
In 2010, sales of illegal
medications are estimated to
having surpassed USD 75 billion.
The organized crime behind the
business reckons with profit
margins of up to 2.000% and
comparatively little threat of legal
punishment.
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Crossing Borders - Weakening IP rights &
Counterfeits/Falsified Medicines
Interpharma 2012
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Guiding Change – Position of the Pharmaceutical
Industry in the Change Process
Kotter, JP. (1995): Leading change: why transformation efforts fail, in: Harvard Business Review,
2/73, 59-67.
Kotter has published a series of 8
individual steps that he claimed to be
necessary to be addressed when guiding
change successfully. It is necessary, if a
company’s vision needs to be changed, to
change the corporate culture first. This is
clearly happening with much delay.
Instead, big pharmaceutical companies, in
urgent need to de-mature by innovation,
focus heavily on internal processes thus
inhibiting the creativeness of its otherwise
talented work force. On the other hand a
certain “sense of urgency” is doubtlessly
there but it is less clear if many
companies do have a vision for the future
- or, if yes, if it is properly communicated.
Taken together, it seems that big
pharmaceutical companies have not yet
made a lot of progress and are still stuck
at the very first steps of the change
process. Part the reason is that senior
management is not yet constituted of a
new generation of managers. Rather,
current senior managers have passed the
last two decades of their career in a
business environment which is now
subject to change.
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Sustain Ability – Patient Adherence/Disease
Mangement
Osterberg, L.; Blaschke T. (2005): Adherence to medication, in: New England Journal of
Medicine, 5/353, 487-497.
Overall, disease management intends to
improve patient adherence and outcomes
and decrease costs. This has worked in
several countries and several disease
areas such as diabetes and heart failure.,
Treating a chronic condition with drugs is
tricky. After one year about 50% of the
patients will have ceased taking the
medication and an overwhelming majority
will have taken the medication only
irregularily. The question of disease
management offers opportunities to the
industry beyond selling medicines and
improving compliance. Through disease
management schemes, pharmaceutical
companies can become true partners to
the health care system over all, for
instance through providing non-traditional
services to patients. This concerns the
questions of motivating the right subset of
patients for the right treatment, of
bypassing logistical hurdles, of offering
platforms
for
integrated
treatment
approaches and of engaging in follow up
measures and secondary prevention.
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Maverick Strategies – the Questions
 What factors could be eliminated that an industry has
taken for granted?
 What products/service elements could be reduced
below the industry standard?
 What elements could be lifted above the standard?
 What should be introduced that the industry has
never offered the customer?
 Could a new offering win buyers without any
marketing hype?
Angwin, D.; Cummings, S.; Smith, C. (2007): The Strategy
Pathfinder: Core Concepts and Micro Case. 1st eds, Malden:
Blackwell Publishing Ltd.
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Maverick Strategies – Provocative Answers
 Only few major pharmaceutical markets of today are entirely “share-of-voice” driven. In
almost all markets, physicians are not completely free any more to prescribe what they want.
Should we finally abolish the profession of sales representative, rather sooner than later,
even in the last share-of-voice driven markets and rather succeed through offering unique
products?
 Pharmaceutical marketing in mass markets is tricky. Differentiation has to be constructed
where, in reality, there is none. Statistical significance is perverted into clinical relevance.
Should we really utilize these measures which are more suitable for selling vacuum cleaners
or should we restrict pharmaceutical marketing to a minimum?
 Can the pharmaceutical industry become a more respected partner in health care, more
than sellers of pills? What other services beyond medication could be offered (and sold) to
stakeholders, e.g. within the framework of disease management schemes?
 Reimbursement becomes more and more difficult and physicians in their daily practice
become increasingly dependent on reimbursement questions. The pharmaceutical industry
has always provided medication but should it go one step further and offer health
insurance solutions?
 Should we develop medication with mediocre potential of benefit for the patient (with low
probability of getting a good price for it) and then heavily invest in marketing or should we
rather attempt to develop medications with unique features that sell by themselves
because their benefit is immediately obvious to the customer?
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Summary
Angwin, D.; Cummings, S.; Smith, C. (2007): The Strategy
Pathfinder: Core Concepts and Micro Case. 1st eds, Malden:
Blackwell Publishing Ltd.
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Conclusion
 It is without doubt that a number of opportunities exist for the future
and we have discussed a number of them. We have also pointed out
a number of options for companies to react or reactions already taken.
 Coming back to the primary objective of this work, in conclusion, we
need to note that the pharmaceutical industry in 2012 is stuck early
after one third of the strategic pathway and major questions such as
positioning, characterization, lively adaption to a changed
environment, change management, sustainability of business model
and de-maturation remain unaddressed so far.
 The adoption of maverick strategies as depicted above may hint at
ways out for the future.
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Thank you for your attention!
32 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

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