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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