Top Dogs of Big Pharma

 Top Dogs of the Pharmaceutical Industry

Summary

The pharmaceutical industry is comprised of over 40 pharmaceutical firms and biotech companies.  Many are international and global firms.  In total the industry represents billions of dollars in sales and employees hundreds of thousands of people worldwide.  Some of the largest members of the industry are as follows: Johnson and Johnson, Pfizer, Merck, GlaxoSmithKline, Novartis, Bristol Meyers Squibb, Astra Zeneca, Sanofi-Aventis, Abbot, Bayer, Hoffman-La Roche, Eli Lilly and for the biotech sector Amgen and Genentech.  In recent months there has been a number of consolidations and mergers.  Pfizer acquired Wyeth and Merck and Schering Plough merged in 2009 as well.  To battle the issues facing the industry it is likely other mergers and acquisitions will take place in coming years.  The top three in terms of product sales and size are Pfizer, Johnson and Johnson and now Merck.

Over the last 5 years, the pricing and other competitive strategies of pharmaceutical companies have been altered by revolutionary developments in information technology, new state drug substitution laws, federal legislation, and the emergence of market institutions that include health maintenance organizations (HMOs) and pharmacy benefit managers (PBMs). The industry has also undergone significant structural changes that include growth of the generic drug segment and substantial horizontal and vertical consolidation (e.g., acquisitions of PBMs by drug companies) by drug companies. There has been considerable industry consolidation within the past 5 years resulting in fewer but larger pharmaceutical firms innovating and developing new drug products.

The strategy of the industry as a whole has had to undergo a significant shift due to external forces like government regulation, worldwide economy, corporate social responsibility, as well as competition from developing nations. The market growth for new drugs is vast as numerous baby boomers enter their older years and will become the primary consumers of new drugs.  Combined buying power of many firms, insurances and groups like AARP also have forced the industry to react.

Key success factors like drug innovation, product quality, fostering trust and partnerships and alliances are all contributing the new strategy of the industry.

           

Overview of Business Strategy & Industry Attractiveness & Competitive Strength

The pharmaceutical industry is characterized by a number to top firms with eleven major multinational companies dominating the industry. As few as 3 years ago there were 15 major firms with earnings in the billions. Table 1.1 contains information about these major pharmaceutical companies that are sorted in the order of their 2009 revenues.

Table 1.1. Major pharmaceutical companies.

Company	HQ location	Total Revenues in US $ (in millions)	Employees	Fortune 500 Ranking
Johnson & Johnson	NJ, U.S.	61,897	118,700	103
Pfizer	NY, U.S.	50,009	81,800	152
Roche	Switzerland	45,304	80,080	171
GlaxoSmithKline	UK	44,491	99,003	168
Novartis	Switzerland	44,267	96,717	183
Sanofi-Aventis	France	40,870	98,213	181
Merck	NJ, U.S.	33,478	101,530	378
AstraZeneca	UK	32,804	65,000	268
Abbott	IL, U.S.	30,765	68,838	294
Bayer Health Care	Germany	22,297	108,600	154
Eli Lilly	IN, US	21,836	40,500	435
Source: 2009 Annual Reports of the companies

The pharmaceutical industry is currently undergoing a period of very significant transformation. The majority of top pharmaceutical companies generate high returns, thus providing them with excess cash for further rapid growth – whether internal, or through mergers and acquisitions. Although size of the company on its own does not guarantee success, it gives a significant advantage, especially in pharmaceutical industry. Besides economies of scale in manufacturing, clinical trials and marketing, bigger companies can allow investments in more research and development (R&D) projects that diversify their future drugs portfolio and make them much more stable in the long term. As the result, top-companies in the industry were active participants of mergers and acquisitions, new joint ventures and spin-offs of non-core businesses.

The largest acquisitions in the industry during last years were the acquisition of Wyeth by Pfizer and acquisition of Schering Plough by Merck. Both acquisitions allowed these two U.S.-based companies to solidify their places among the elite of the pharmaceutical industry. In the past ten years, Pfizer also purchased Pharmacia and Johnson & Johnson purchased numerous biotech firms. In the past decade, European companies were even more aggressive in M&A activity than their American competitors – 3 out of 6 major European companies underwent mergers during the last several years: GlaxoSmithKline AstraZeneca and Sanofi-Aventis. In the past three years Schering Plough purchased, Organon, only to be purchased itself by Merck.  This rapid consolidation within the industry shows the strategy of innovation through acquisition employed by these top firms. 

Another form of structural change in the industry was establishing of new strategic alliances and joint ventures. So far as the research and development process for each drug take many years and requires significant investments, and the outcome of these investments of time and financial resources remains unclear until the final approval of the drug, “Big Pharma” companies are constantly looking for synergies that they can get from cooperation with their competitors. Last years gave multiple examples of such initiatives. For example, the alliances of Genetech and Roche, Vertext and Novartis, Amylin and Eli Lilly all show how the industry is working on strategic alliances. 

Finally, pharmaceutical companies in order to maintain strong sales growth and meet profitability expectations of their shareholders were actively selling low-profitability or non-core businesses. Quality is another key success actor for the industry.  In the past decade firms like Schering Plough and more recently Johnson and Johnson have had serious issues with quality control that have impaired their trust and respect with their stakeholders.  Fostering trust and further developing quality programs are part of the big pharmaceutical strategy.

Overview of Driving Forces

 The pharmaceutical industry showed high sales growth rates in the recent past, and a number of factors suggest that this trend will continue in the future if the industry chooses its strategy wisely, however the pharmaceutical industry faces some challenges from a number of forces and the industry must move to counter these forces.

First, due to numerous advancements in science and technology, including those in the health care industry, life expectancy in the developed countries has been steadily growing. As the result, growing proportion of elderly people promises further growth of demand for healthcare products. Moreover, according to various studies, a significant portion of elderly population in the United States and other countries does not receive proper treatment. For example, only about one third of the U.S. population who requires medical therapy for high cholesterol is actually receiving adequate treatment. As the population ages, groups like AARP, the government will have buying power to limit pricing options for the firms.

Although developing countries at the moment have a small portion of world pharmaceutical sales, these countries also have a significant potential for the pharmaceutical industry in the future. Fast growing economies in Asia, South America and Central & Eastern Europe suggest an increasing solvency of population and make these markets more and more attractive for pharmaceutical companies. Further reforms of legislation systems in the countries of these regions, especially regarding patent protection issues, will inevitably result in growing pharmaceutical sales. Generic drugs and illegal drugs made and marketed in developing nations threaten to impact sales of major blockbusters going off patent, or in the case of the illegal drugs, mimic drugs under present US patent protection. This threat of substitute products could have a significant impact on profitability.  There is a growing movement to limit the patent protection of pharmaceutical chemical entities.  The 20-year patent begins when the new chemical entity is first described.  A drug faces up to a decade in continued R&D before launch and must have an opportunity to recuperate the heavy R&D expenses and earn profits for the parent firm. According to industry statistics, only about one in ten thousand chemical compounds discovered by pharmaceutical industry researchers proves to be both medically effective and safe enough to become an approved medicine, and about half of all new medicines fail in the late stages of clinical trials.  If these laws change in an unfavorable manner, this would impact innovation and profitability of big pharma.   

Industry Attractiveness

The top firms for attractiveness are Merck and Roche.

		Market Attractiveness
		High	Medium	Low
Competitive Strength	High	Merck & Roche	Johnson & Johnson	Pfizer
	Medium	Astra Zeneca	Sanofi-Adventis	Eli Lilly
	Low	Abbot	Bayer	Glaxo Smith Kline

Looking at company size, pipeline, profit, and innovation as factors for attractiveness, and sales, quality, trust, and brand for competitive strength the top eleven firms show a wide distribution.  Of the major firms most posed for growth with the best strategy is Merck. Today, the new Merck has about 100,000 employees in 120 countries and 31 factories worldwide. Products include medications to treat cardiovascular disease, diabetes, cancer, allergies, hepatitis, HIV as well as vaccines, animal health products and consumer health products.

Merck has recently completed many acquisitions to enhance its value to shareholders.  In November 2009 it merged with Schering Plough to enhance its pipeline of future drugs and augment its current product line. The pharmaceutical industry is evolving. Over the past ten years the industry has been attacked by societal, legislative, structural, competitive and technological changes. Technological advances, threats of increased regulation, government interference, and business and public cost containment pressures have caused firms in the pharmaceutical industry to actively seek new strategic responses and joint ventures.  Merck, amongst it peers has a strong drug pipeline, and has a strategy ta address the looming pitfalls the industry faces.

Another way Merck drives innovation is its human capital.  Its scientists and staff are the driving force to its success.  Having top talent is directly correlated with a high discovery of New Chemical Entities, which are the foundation for new drugs. Merck manages the staff by challenging them to achieve stretch goals and building their knowledge base through conferences and scientific conference participation.

Merck also innovates through applied science.  Merck will focus on a breakthrough product and try to find better ways to deliver the end result to the consumer in a way that lowers costs and maximizes profits.

Merck and Roche are at the top of the matrix for their superior earnings, drug pipeline and potential for growth in a variety of markets.  Pharmaceutical firms like GSK and Bayer have had disappointing earning, and have a minimal pipeline of new products thus impairing their attractiveness and competitiveness.

 

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