THE GLOBAL PHARMACEUTICAL INDUSTRY

1. Identify the main environmental forces currently affecting the global pharmaceutical
industry.

2. Use scenario planning techniques to consider the various environmental influences that
may affect the global pharmaceutical industry in the future.

3. How relevant is the Five Forces Framework map to identify environmental forces affecting
the global pharmaceutical industry?

4. Identify the strategic groups within the global pharmaceutical industry.

5. How has the ‘strategic customer’ evolved over time for global pharmaceutical companies?

6. What is the impact on the industry’s critical success factors?

THE GLOBAL PHARMACEUTICAL INDUSTRY

The case describes the evolution of the pharmaceutical industry and itsunusual strategic
environment. Atention si drawn ot environmental pressures from regulators and payers. yKe
forces driving the industry are discussed, including addressing unmet medical needs, hte
importance oifnnovation and time ot market, and globalisation. The case illustrates how an
increasingly hostile environment, combined with a decline ni R&D productivity, led ot waves
ofjob losses, and sparked a fresh round of consolidation in the industry. On the global level,
the historical supremacy ofthe US was being chalengedwith the highest market growht
ratesrecordedni emergingmarkets. The case is designed to facilitate teaching of analysis
frameworks including PESTEL, Porter's five forces, the concept of the strategic customer'
and industry critical success factors. It may also be used for stakeholder analysis and as a
basis for discussion of social responsibility.

A CEOS DILEMA
On 23 September 2008, Pfizer CBO Jeff Kindler took to the stage at the World Business
Forum to be interviewed by Fox News anchor Liz Clayman. Pfizer was the world's number 1
pharmaceutical company with $13 billion' (€9.5bn or £8.6bn) in annual revenues from its
blockbuster cholesterol-lowering drug Lipitor. Contributing almost a third of company
turnover, Lipitor faced patent expiry with dramatic loss of sales value in 2011. A key drug
intended to replace it had failed in late-stage clinical testing and investors were losing
confidence. Clayman wanted to know how Kindler planned to keep Plizer afloat.
Acknowledging that no one drug could replace Lipitor.
Kindler described Pfizer's broad pipeline of new drugs and
'very strong balance sheet and significant amount of cash'
Kindler faced the legacy of the blockbuster business model. and his company was focused
on conventional medicines at a time of increased regulatory scrutiny and declining
R&D productivity. Something needed to change, but what?

INDUSTRY EVOLUTION
As described in Box 1, the pharmaceutical industry is characterised by a highly risky and
lengthy research and
development (R&D) process. intense competition for intellectual property,? stringent
government regulation and powerful purchaser pressures. How has this unusual picture
come about?
The origins of the modern pharmaceutical industry can be traced to the late nineteenth
century, when dyestuffs were found to have antiseptic properties. Penicillin was a major
discovery, and R&D became firmly established within the sector. The market developed
some unusual charac-teristics. Decision making was in the hands of medical practitioners
whereas patients (the final consumers) and payers (governments or insurance companies)
had little knowledge or influence. Consequently, medical practitioners were insensitive to
price but susceptible to the efforts of sales representatives.
Two important developments occurred in the 1970s.
Firstly, the thalidomide tragedy (an anti-emetic for morning sickness that caused birth
defects) led to much tighter regulatory controls on clinical trials. Secondly, legislation was
enacted to set a fixed period on patent protection
- typically 20 years from initial filing. On patent expiry. rivals could launch generic medicines
with exactly the same active ingredients as the original brand, at a lower price. The dramatic
impact of generic entry is illustrated by

The drug development process

The pharmaceutical industry has long new product lead times, with discovery to marketing
authorisa-tion typically taking almost 12 years (Figure 1). New product development can be
divided into distinct research and development phases. The research phase produces a new
chemical entity INCE) with the desired characteristics to be an effective drug.
Development encompasses all of the formulation, toxicology and clinical trial work necessary
to meet stringent regulatory requirements for marketing approval.
During all of these phases attrition' occurs, as promising agents fail particular hurdles, so
most R&D projects never result in a marketed drug.
Late-stage failures are particularly costly and not uncommon - in 2005-06 AstraZeneca lost
three Phase 3 drugs, Pfizer and BMS one each. Of those that reach the market, 80 per cent
fail to recoup their R&D investment. The cost of developing a new drug is estimated at over
$1 billion. When the costs of all the projects that do not reach fruition are considered, it
becomes clear that pharmaceutical R&D is a very high stakes game.
Given the enormous risks and considerable investment involved, it is not surprising that
pharmaceutical companies compete fiercely to establish and retain intellectual property
rights. Only by securing a patent that can be defended against imitators can the value of all
this R&D be recouped.

The industry is subjected to rigorous regulatory scrutiny. Government agencies such as the
Food and Drug Administration (FDA) in the USA thoroughly examine all of the data to
support the purity, stability. safety, efficacy and tolerability of a new agent. The time taken is
governed by legislation and typically averages 12 months. Obtaining marketing approval is
no longer the end of the road in many countries, as further hurdles must be overcome in
demonstrating the value of the new drug to justify price and/or reimbursement to
cost-conscious payers.
Allegra, a treatment for hay fever, which lost 84 per cent of US sales in just 12 weeks
following patent expiry. Generics had a major impact on the industry, driving innovation and a
race to market, since the time during which R&D costs could be recouped was drastically
curtailed.
The pharmaceutical industry is unusual since in many countries it is subject to a
'monopsony' - there is effectively only one powerful purchaser. the government.
From the 1980s on, governments around the world focused on pharmaceuticals as a
poltically easy target in efforts to control rising healtheare expenditure. Many introduced
price or reimbursement controls. The indusiry lacked the public or political support to resist
these changes.

BUSINESS ENVIROMENT

Agate populations stente pressure on healthcare systems, Ands wver-65s' consume four
limes as much healthcare per head as younger people. Combined with an epidemic of
hironie disease linked to obesity. this created an unsustain-gite situation. Universal coverage
systems (such as in Spain id the UK) were slow or unable to introduce the latest reatments,
while the insurance-funded system in the US could afford the latest innovations but were
unable to share the benefits with an increasing part of the population. 12008 report
estimated that 46 million Americans, over
15 per cent of the population. lacked health insurance.' in response to these pressures,
payers used a variety of methods to control pharmaceutical spending (see Table 1).
Some put the emphasis on the manufacturer and distribu-for. others on the prescriber and
patient. Controls were designed to reward genuine advances - price and /or reim. bursement
levels were based on perceived innovation and superior effectiveness.
In countries with supply-side controls, negotiating price or reimbursement could take up to a
year. In those with demand-side controls, market penetration was delayed while negotiating
with bodies such as the National Institute for Clinical Excellence (NICE) in the UK. NICE
typified a general trend towards evidence-based medicine. where payers expected objective
evidence of effectiveness to justify funding new therapies, often in comparison to existing
drugs. The impact of NICE decisions reverberated well beyond the UK, as countries
collaborated internationally on value assessments. Where new drugs were approved for
funding, this was increasingly in the context of formal patient selection and treatment
guidelines, so their use was carefully controlled and individual prescribers had limited
decision-making power.
Switching to generics is one way to cut drug expenditure.
Many countries experimented with 'e-prescribing' where physicians were presented with
recommended options, influencing their decisions. Payers were increasingly effective in
establishing generic drugs as first-line treatment for common ailments such as osteoporosis,
asthma, dyslipi-demia and depression, with patented drugs only used if those failed. In
volume terms, generic drugs were growing and patented drugs were in decline - so sales
growth for patented drugs relied on securing ever higher prices for innovation.
The industry adopted a number of strategic responses to these challenges. A common
response was to conduct pharmacoeconomic evaluations to demonstrate the added value
offered by a new drug from improved efficacy, safety, tolerability or ease of use. For
example, a study of the cost of diabetes - the fastest-growing chronic disease in the world -
found that 60 per cent was driven by hospitalisations. 27 per cent was medicines, and
correct outpatient treatment could avoid much of the hospital costs. Some companies
introduced disease management initiatives. which involved understanding the goals of the
healtheare system in addressing a specific disease.
The firm offered a broad-based service to improve disease outcomes, positioning its
products as one part of the solution. A later innovation was the 'pay for performance' deal,
for example UK reimbursement of the cancer drug Velcade was linked to disease response.
Government price controls created another challenge for the industry in the form of 'parallel
trade'. The principle of free movement of goods across the Single European Market meant
that distributors were free to source drugs in low-price markets and ship them to high-price
markets. pocketing the difference. BU parallel trade was estimated at €4.7 billion by 2008,
with the highest penetration in Denmark where it accounted for 15 per cent of pharmacy
sales.
Parallel trade was prevalent in Asia and raised concern in the US due to price differentials
with Canada. Canada had stringent and inflexible pricing and reimbursement criteria. In
contrast, historically the US had no formal price controls and price increases were
customary. Over time. this led to a wide disparity in prices (Lipitor was nearly twice the price
in the US), which exposed the industry to sensationalist newspaper headlines and consumer
backlash.

Methods used to control pharmaceutical spending

Controls on suppliers
• Negotiated prices
• Average pricing
• Reference pricing
• Positive and negative lists
• Constraints on wholesalers and
pharmacists
• Imposed price cuts
*Where the patient pays some of the drug cost.
Mixed effect
• Partial reimbursement at price negotiated with manufacturer
• Generic substitution
Controls to influence demand
• Patient co-payments*
• Treatment guidelines
• Indicative or fixed budgets
• Incentives to prescribe or dispense generics or parallel imports
• Transfer from prescription-only to OTC

BIOLIGICS, THE FUTURE OR PAST?

Biopharmaceuticals or 'biologics' are large molecules that behave like natural substances,
such as therapeutic proteins and monoclonal antibodies. The discovery and design of
biologics entails optimising specificity, affinity, and making the molecules as close to human
substances as possible to avoid provoking an immune response. Biologics are produced
through large scale fermentation in very costly plants. It is not yet possible to deliver
biologics orally, so they are given by injection and used to treat specialist conditions such as
cancer and rheumatoid arthritis. Biologics are much more specific in their action than small
molecules, avoiding unexpected off-target side effects, and reducing failures in late-stage
development.
Because of their benefits and use in high unmet need diseases, biologics generally secure
much higher prices than small molecules.
Initially associated with small biotech start-ups, biologics became mainstream - contributing
$80bn in 2008 with projected sales growth three times that of small molecules. Companies
that invested early in biologics benefited from this rapid growth. Other companies noted this
success and many acquired

In addition to lower attrition and superior pricing. biologics were thought to be at less risk
from generic threat. The sophisticated capabilities required to develop and manufacture a
complex biosimilar product took substantial investment, acting as a barrier to entry.
Furthermore, regulators were slow to clarity the requirements for approval of biosimilars.
However top generics companies clearly saw the potential.
Sandoz led the way with human growth hormone and erythropoietin in the EU, while Dr
Reddy's launched cancer drug Reditux in India. Chinese companies piled into the field with
20 versions of G-CS on the Chinese market. In a remarkable shift, even Merck planned to
launch biosimilars.
Perhaps the research-based industry should instead focus on the next major patient-focused
innovation. For example, stem cell therapies appear to offer significant potential in tissue
regeneration, with remarkable claims being made in fields such as multiple sclerosis,
diabetes and heart disease.
Many issues and challenges remain and completely new capabilities are needed, but this
type of complex multifaceted approach might better exploit industry capabilities and deliver
real advances for patients.

INDUSTRY SECTORS
Prescription-only or ethical drugs contribute about 85 per cent of the $750b global
pharmaceutical market by value and 50 per cent by volume. Ethical products divide into
conventional pharmaceuticals and more complex biopharmaceutical agents and vaccines
(see Box 2). The other 15 per cent of the market comprises over the counter (OTC)
medicines, which may be purchased without pre-scription. Both ethical and OTC medicines
may be patented or generic.
The typical cost structure at ethical pharmaceutical companies comprises manufacturing of
goods (25 per cent). research and development (16-24 per cent), administration (10 per
cent), and sales and marketing (25 per cent).
The key strategic capabilities at these companies are R&D and sales and marketing.
Pressure on margins created an incentive to restructure manufacturing, rationalising the
number of production sites and often outsourcing to China or India.
Manufacturing and distribution efficiency was key for generics manufacturers. In the 1990s.
US generics prices collapsed, accompanied by a shakeout to determine cost leadership. The
speed and aggression of generic attacks or branded products increased sharply. Economies
of scale. including finance to support complex patent disputes. proved decisive and the
sector consolidated. The top 10 generics companies soon accounted for nearly half the
global market. Acquisition remained a preferred strategy to increase geographical footprint,
gain economies of scale and access new technologies. with 62 M&d transactions from 2006
to 2008. Given the number of blockbusters facing patent expiry and markets with untapped
potential (e.g. Italy, Spain. France, Japan), not surprisingly growth in generics outstripped
the overall market. Future growth will be driven by growth in biosimilars (see Box 2).
A new type of industry player appeared in the 19805 small biotechnology start-ups backed
by venture capilal to exploit the myriad opportunitles created by molecular.

biology and genetic engineering. Initially. biotechs were associated with biopharmaceutical
agents, e.g. recombinant insulin. the industry's first product. launched in 1982.
Biotechs now pursue a huge variety of core capabilities creating a global, extraordinarily
diverse and innovative sector. clustered together in locations such as San Francisco and
Boston. Because of the very long product development cycle, most biotechs take years to
reach profitability. if at all. and in 2008 revenues of $95b were concentrated in a tiny
subgroup of highly profitable firms. The global credit squeeze had a dramatic effect on the
sector: biotech IPOs became very rare, and access to venture and debt funding dried up. By
2009, over half of public biotechs had less than a year's cash left. To conserve cash.
companies restructured to cut jobs and programmes, sought grant funding and chased deals
with cash-rich pharma companies. Many were set to disappear through merger or
acquisition.
Over the counter (OTC) medicines are bought by the consumer without a prescription. The
global OTC market was estimated at $104 billion in 2008 with the top 10 manufacturers
accounting for more than half of volume.
Switching medicines from prescription-only to OTC was costly for pharma companies both to
secure approval and to undertake consumer-oriented marketing. However, consumer brand
loyalty then provided defence against generic competition and prolonged the product life
cycle.
A final important category of medicine is vaccines. which were re-emerging as a key revenue
generator.
Prophylactic vaccines often provide lifelong protection against serious diseases, preventing
at least 3 million deaths annually worldwide and saving an estimated $7-20 healtheare
dollars for every dollar spent on vaccines. This nearly $20 billion market is highly
concentrated: just five global players account for over 85 per cent market share.
Their vaccine sales grew at 32 per cent per year between 2004 and 2007 as they launched
high priced vaccines for new applications such as human papilloma virus (HPV).
Entry barriers are high. with specialised skills required in manufacturing, conducting large
and complex clinical trials and managing surveillance programmes. Vaccines have higher
development success rates and lower risk of generic entry than conventional medicines, and
offer blockbuster sales potential. Novartis. AstraZeneca and Pfizer all entered the sector
through acquisitions in 2006-09.

US DOMINANCE UNDER THREAT

A number of factors have contributed to industry globalisation. Chief is the international

convergence of medical science and practice under the influence of modern communications
technology and increased travel and information exchange. Well-funded US universities and
hospitals generally lead their fields, while US scientific congresses provide the most
prestigious platforms for new discoveries.
Leading corporations have globalised, and are present in all significant markets. Production
sites have a global mandate and are selected by worldwide screening. R&D is sourced from
the best place worldwide, which often means the US. Between 1990 and 2008, R&D
investment in the US grew 5.6 times, in Europe only 3.5 times. In 2008, leading industry
players originated predominantly from the US and Europe, with only Teva from Israel and
Takeda from Japan in the top rank. Strong US market growth gave US companies a
springboard in achieving global ambitions, and in 2008 they occupied 5 of the top 10 slots
(Table 2).
from small domestic beginnings. Here once again the US dominates: publicly traded
biotechs employ over four times more people in the US than the EU, with a similar ratio for
R&D spend.
In the longer term, US scientific and medical dominance may be under threat from Asia. The
Chinese government has declared its intention to become a leader in the field and is pouring
money into new universities and science parks. Routine chemistry and toxicology are
already often outsourced to Chinese start-ups, but as US returnees seek more innovative
projects this will extend up the value chain. India accounts for about 30 per cent of global
generics, but has similar ambitions to become a major source of R&D and is already an
important location for cost-effective clinical trials.
From 2001 to 2008 the number of US clinical trials dropped 30 per cent, while in India the
number registered with the FDA jumped from 46 to 493.
Companies are also establishing R&D sites - from 2001 to 2006, 18 sites closed in the EU
while 14 new.

The majority of global pharmaceutical sales originate in the US, Japan, EU, China and
Brazil, with 10 key countries contributing over 80 per cent of the global market.
Pharmaceutical market growth is strongly aligned with GDP growth. The US is by far the
largest market by volume and value: $291 billion in 2008 - nearly 40 per cent of global sales.
Historically the fastest growing key market, the US contribution to global growth fell from
over 50 per cent to 9 per cent in just two years from 2006 to 2008, the consequence of
generic impact, fewer new products and reduced consumer demand. Nevertheless, the US
remained critical to success: for drugs launched after 2004. two-thirds of sales were from the
US compared with just a quarter from the EU.

Following regulatory changes in 1997, direct-to-consumer (DTC) advertising transformed the

US marketplace and fuelled rapid growth. However, companies' costs for providing drug
benefits to employees were increasing up to 20 per cent annually, causing the CEO of
General Motors to declare that 'the cost of health care in the U.S. is making American
businesses extremely uncompetitive versus our global counterparts'." Managed Care
Organisations (MCOs) asked consumers for increasing co-pays and implemented other
cost-control measures. Medicare reforms extended drug coverage for the elderly, but also
made the government overnight the largest direct purchaser of medicines, creating new
pricing leverage.
All these pressures combined with recession caused unprecedented market contraction in
2009. Further turmoil was predicted in the US operating environment due to the uncertain
impact of President Obama's proposed healthcare reforms. If successful, they would at last
extend healthcare coverage to all Americans, potentially expanding the market. The industry
was set to contribute around $80bn to the cost of the reforms and anticipated continued
pricing pressures.

Japan has the second largest market for pharmaceuticals, with sales of $77 billion in 2008.
The Japanese operating environment was historically very different from the US and BU.
This divergence occurred at all levels, from medical practice, healthcare delivery and
funding, to regulatory requirements, the lack of generics, distribution, and the accepted
approach to sales and marketing. Not surpris-ingly, domestic companies dominated the
market. The industry experienced significant turbulence in the 1990s.
Economic recession caused tax revenues to fall, while the cost of treating the world's most
rapidly ageing population rose. This resulted in unprecedented price cuts, changes to
healthcare funding and the introduction of stringent price controls, limiting market growth to
an average below 3 per cent from 1994 to 2008.

The European pharmaceutical market, which contributed 32 per cent of global sales in 2008,
was highly fragmented and driven by governments' forever changing cost containment plans,
resulting in a lack of predictability for companies' operational planning. The UK market was
projected to fall out of the top 10 by 2013, illustrating the strong impact of NICE decisions on
reimbursement and access. The annual growth rate of the European market was expected
to be constrained to 3-6 per cent per year from 2008 to 2013. BU expansion provided
opportunities for growth, but also new challenges from generics and low-priced parallel
imports.

For industry players to maintain growth they had to either capture a disproportionate share of
established markets, or focus on accessing those still in their growth phase. A new world
order was apparent, with Brazil, Russia, India, China, Mexico, South Korea and Turkey
predicted to contribute almost half of market growth from 2009 to 2013.
By 2013 these markets were expected to overtake the EU, with China positioned as the third
largest market globally. In addition to the high net worth individuals who could afford the
most innovative treatments, their middle class populations were growing more rapidly than at
any time in history. 'We should be finding ways of innovating down that pyramid' commented
Abbas Hussein, GSK's president of emerging markets."' Indeed, this offered a lifeline to com.
panies focused on primary care, if they could adapt to the countries' varied needs and
environments. Success seemed most probable for generics offering the reassurance of a
known brand and reliable manufacturer, so-called branded generics. GlaxoSmithKline
experimented with differential pricing within and across countries, acquired branded generics
businesses from BristolMyersSquibb (BMS) and AstraZeneca, and established a strategic
alliance to com-mercialise Dr Reddy's portfolio of generics.

Innovation

Pharmaceutical companies' key contribution to medical progress is the crucial ability to turn
fundamental research findings into proven innovative treatments that are widely available
and accessible." Companies with consistently high levels of R&D spending and productivity
became industry leaders. For this reason, stock market valuations place as much
importance on the R8D pipeline (i.e. the products in development) as on the currently
marketed products.
The holy grail of pharmaceutical R&D used to be the blockbuster. Blockbuster drugs were
genuine advances that achieved rapid, deep market penetration. Because of their
superlative market performance. blockbusters determined the fortunes of individual
companies. Glaxo went from being a small player to a top tier global company on the
strength of a single drug - Zantac for stomach ulcers. A blockbuster was typically a long term
therapy for a common disease that offered a step change in efficacy or tolerability, marketed
globally with annual sales exceeding 1 billion.

While blockbusters made immense contributions to company fortunes, they were few and far
between. Andrew witty, the CEO of GlaxoSmithKline. likened the hunt-for them to 'finding a
needle in a haystack right when you need it. Focusing on blockbusters exposed an already
high-stakes industry to even greater levels of risk. This was dramatically brought home in
September 2004 when the cardiovascular safety risks of Vioxx emerged, and Merck
withdrew the brand from the market. Merck lost S2.5bn in sales, a quarter of its stock market
value. and faced the prospect of numerous liability suits. Blockbusters also exacerbated the
impact of patent expiries. The top 15 companies were projected to lose $70 billion in sales
from 2009 to 2013 due to generic erosion. with $17 billion to be borne by Pfizer alone.

Unfortunately, R&D productivity was in decline and development times were lengthening.
The number of trials and number of patients required for each new drug application
increased enormously. The average cost to develop a new drug exceeded S1 billion and had
grown at double the rate of inflation for 20 years. Despite increasing R&D spend from 11 per
cent of annual sales to 20 per cent or more, the industry was struggling to replace the value
lost through patent expiries. Attrition rates across all phases of development increased as
regulators became ever more safety conscious, mirrored by a steady decline in annual
numbers of new chemical entities (NCEs) launched each year from 1998 to 2008. By 2009
spiralling R&D investment had become unsustainable and the brakes were being applied
hard, with projected growth down to 2 per cent per year.

Lilly CEO John Lechleiter expressed a need to 'reinvent innovation ... at a time when the
world desperately needs more new medicines, we're taking too long. spending too much and
producing far too little'. In response to these challenges, companies endeavoured to be both
creative and efficient. They narrowed their areas of therapeutic focus. exiting whole areas,
seeing depth of expertise as key to success. Lilly created a special unit to do rapid, small
clinical lests that would quickly and cheaply shake out molecules that were not going to
make it. Recognising that the fastest growing brands were biopharmaceuticals. many
companies acquired biologics capabilities. All sought external innovation through licensing
deals and acquisitions, although with few real 'jewels' available the cost of deals spiralled.
Some reorganised their R&D to create smaller and more nimble units: GlaxoSmithKline's
research centres Competed for funding like internal biotechs.

To better manage some of the tremendous risks involved, companies started moving
towards a more network-based approach to innovation. Merck. Plizer.
Lilly. Johnson & Johnson and PureTech Ventures created Enlight Biosciences to support
new technologies to reduce the risk of drug development. Companies, foundations and
regulators working on Alzheimer's disease pooled data and resources to create a shared
understanding of the disease and how best to monitor it. AstraZeneca and BMS collaborated
to develop late-stage diabetes drugs together. sharing cost, risk and reward.

Sales and marketing

Sales and marketing capability became an important source of competitive advantage. A

company that developed a strong global franchise with its customers could maximise return
on its in-house products and was in a good position to attract the best in-licensing
candidates.

The traditional focus of drug marketing was the personal detail in which a sales
representative (rep) discussed the merits of a drug in a face-to-face meeting with a doctor
and often handed over free samples. Promotion was subiect to industry self-regulation. For
example, in the UK, reps had to pass an examination testing medical knowledge. In some
countries, government regulatory agencies checked that promotional claims were consistent
with the data.

There were important differences in the marketing of 'primary care' and 'specialist' products.
Oftice-based practitioners generally prescribed primary care products, whereas treatment
with specialist products was typically initiated in hospitals. Sales volume, marketing spend
and skills required differed for the two segments. Product-led muscle marketing was the
name of the game in the primary care sector, while specialist products involved more
cost-effective targeted relationship marketing.

The term 'high compression marketing' was coined to describe global launches of primary
care brands. This involved near-simultaneous worldwide launches. global branding and
heavy investment in promotion. The aim was to create a rapid take-off curve that maximised
return by creating higher peak year sales earlier in the product lifecycle. The archetype was
the launch of Celebrex in 1999. which netted $1 billion sales in the first nine months.

In the US an important marketing tool was DTC advertising. where spending reached $4.8
billion by
2008. DTC was costly because of the vast target audience and expensive television
advertising. but profitable.
Well-informed patients asked for drugs by brand name, creating a powerful 'pull' strategy. It
also required new marketing skills - both Pfizer and Novartis employed consumer marketers.
Drug advertising became much more visible and, combined with high profile safety alerts,
helped fuel a backlash against the industry.

Sales-force size, or 'share of voice', was historically a key competitive attribute. The more
sales reps companies deployed. the bigher their sales. Numbers in the US tripled from 1995
to 2002, reaching around 90,000. However. doctors had less time to see reps, with calls
averaging less than five minutes. More reps selling fewer drugs meant productivity declined
sharply. Eventually, Pfizer called a halt to the 'arms race, downsizing in 2005. Over 500.000
sales reps were let go across the industry between 2006 and 2008.

With pipelines shifting to high unmet need diseases treated by specialists, the era of lavish
launches and massive sales forces was over. Selling was becoming a more complex
process with multiple stakeholders interested in cost-electiveness as well as clinical
arguments, requiring new skills. A few companies built strategies around specific customer
groups, aiming to satisfy their needs on multiple dimensions. In other words, they developed
a franchise. The broad-based approach of Baxter in renal dialysis and Novo Nordisk in
diabetes care, utilising a web of alliances to address multiple customer needs, made them
formidable competitors. Some commentators foresaw a more collaborative, network-based
approach in sales and marketing as well as R&D.

Corporate social responsibility

During the twentieth century average life expectancy in developed countries increased by
over 20 years. Much of this improvement can be attributed to pharmaceutical innovation.
Few other industries have done as much for the well-being of mankind. So how did an
industry that has delivered such benefits acquire such a tarnished image and become an
easy target for unpredictable government intervention?

One problem is that pharmaceuticals have one of the characteristics of what economists
describe as a 'public good' - i.e. expensive to produce but inexpensive to reproduce. The
manufacturing cost of drugs is often tiny compared with the amortised cost of R&D that led
to the discovery. Setting prices that attempt to recoup R&D therefore looks like corporate
greed in comparison with the very low prices that can be charged for generics.

Some companies damaged the industry's overall reputation. In January 2009. Eli Lilly paid a
record $1.4bn fine for off-label promotion of the antipsychotic drug
'Zyprexa, the largest amount paid by a single defendant in the history of the United States
Department of Justice.
Even more seriously, companies were accused of putting profits before patient safety. After
the withdrawal of Vioxx, Merck was accused of ignoring problems during product
development, and publishing misleading scientific results.
The lack of trust from patients and politicians spilled over onto the FDA, which was
perceived as too closely aligned with the industry. Renewed legislation defining the role and
funding of the FDA emphasised safety. The FDA was empowered to demand Risk
Evaluation and Mitigation Strategies (REMS) - costly additional programmes implemented
after product approval to monitor and ensure drug safety. By the end of 2008, one-third of
new drug approvals involved REMS.

The industry also faced condemnation of its response to the enormous unmet need in
developing countries.
Although effective drugs and vaccines existed for many diseases affecting millions, often
their cost was beyond the means of the people who needed them. It was argued that
companies could reallocate some R&D efforts in favour of tropical diseases, sell low-priced
essential drugs and provide technology transfer. Inept responses to these demands did not
help the industry's public image.

Industry consolidation

The pharmaceutical industry remains relatively frag-mented, with very large numbers of
domestic and regional players. By contrast, it has consolidated at the global level, with the
top 10 companies holding 43 per cent of the market by 2008. Table 2 shows how the
industry response to slowing revenues and declining productivity was a wave of mergers and
acquisitions. Mergers resulted in the formation of Novartis, Sanofi-Aventis, AstraZeneca and
GlaxoSmithKline, while Pfizer acquired Monsanto (Warner-Lambert), then Pharmacia. Even
Merck, which had doggedly followed an organic growth strategy, finally announced a merger
with Schering-Plough in March 2009.

One rationale for mergers and acquisitions was to combine a company with a strong pipeline
but weak sales and marketing with its converse. The acquisition of Warner-Lambert gave
Pfizer full marketing rights to Lipitor, which Pfizer built into the world's best-selling drug.
Another rationale was to acquire global commercial reach.
Plizer's acquisition of Pharmacia took the company from number 4 in Europe and number 3
in Japan to number I globally. More recent moves were precipitated by falling revenue and
the attraction of eliminating duplicated costs. Turning necessity into opportunity, companies
seized the chance to access growth segments. Returning to lil Kindler's dilemma. his
solution was to merge with Wyetle.
Within a month of closing the deal on 16 October 2009. prizer announced a 35 per cent
reduction in RED square footage With six sile closures. Importantly. Wyeth oilers capabilities
in biologics and vaccines - both of which Plizer lacked.

Another key argument for critical mass was to leverage investment in 'technology platforms'.
With a larger R&D programme, more projects could benefit from the new capability and help
amortise its cost. But there was little evidence that mergers enhanced R&D productivity.
Some argued that mergers actually reduced productivity - more management layers resulted
in greater bureaucracy, less freedom to innovate and reduced research output, supported by
analyses showing lower output from merged companies." The success of biotechs in drug
discovery suggested creativity was greater in small R&D organisations.
Although individually a much less reliable source of new drugs than large companies,
collectively they produced more, for less.

Where next?

At the start of 2010, global pharmaceutical companies were pursuing a variety of strategies.
A few were well positioned to benefit from the growth in generics, e.g.
Novartis (Sandoz) - but was this the right focus for a high-margin, innovation-based
industry? A few owned vaccine businesses (GSK, Merck, Sanofi-Aventis, Novartis) or had
just acquired them (Pfizer, AstraZeneca). Others had made belated moves into
biopharmaceuticals (AstraZeneca, Merck). A few players such as J&J emphasised
consumer health and OTC products. Others were busy acquiring greater presence in key
emerging markets. Most retained unaffordable cost bases."'

An intriguing response to environmental change was adopted by Roche, which positioned

itself as operating a 'personalised healthcare' business model. Roche was the global leader
in diagnostics and the strategic vision was to ofler value through targeting treatments to
patients that would benefit most.* This concept appealed to regulators and payers, who
endorsed the linkage of high-priced cancer drugs such as Amgen's Vectibix with diagnostic
tests to identify patients who would not respond. Investing in discovery and development of
tests added further to cost and complexity, but offered the chance to build unique
competencies.

A small minority questioned the whole business model. Observing the higher multiples
earned by Roche and Abbott, some companies were considering diversification into medical
devices. veterinary products or nutraceuticals.
Procter & Gamble actually closed internal discovery efforts in 2006. The company argued
that in-house efforts could not hope to keep pace with, nor offer the choice and impact of
external innovation. By February 2009 P&G was reportedly trying to sell its pharmaceutical
business altogether. Chief Executive AG Lafley commented that
'today, Pharma companies trade at multiples at or below consumer products'

Summary

The industry was facing its toughest outlook yet with both big pharma and biotech sectors
starting to shrink. The industry had made a tremendous contribution to human well-being.
yet was vilified in the media and targeted by governments in their efforts to curb spiralling
healthcare costs. R&D costs had risen sharply, but productivity was down and the product
life cycle had shortened. Product approval, pricing/reimbursement and promotion were
subject to increasingly onerous regulation. yet free trade allowed wholesalers to extract a
large chunk from the value chain. Exciting opportunities remained - large emerging markets,
scientific advances, personalised healthcare, more educated consumers and of course
unmet medical need.
However, the blockbuster paradigm had failed and industry consolidation was driven by the
need to cut costs to survive.
The industry more than ever needed to get a handle on the slippery business of scientific
creativity and provide its critics with indisputable evidence of its value by offering a true step
change in outcomes for patients.