Pfizer: Strategic Management Case Study Assignment Solutions

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Introduction

Pfizer chief executive officer (CEO), Ian Read announced in the fiscal year 2017, that Pfizer had successfully maintained its position as the leading global pharmaceutical corporation in terms of its revenue from pharmaceutical products of US$52.8 billion. Nevertheless, in the last few years, Pfizer had many setbacks. For example, a comprehensively planned merger with Allergan Plc (Allergan) had to be stopped, and competitors were closing in on Pfizer’s leading position. In addition, drug patents were about to expire, and the company’s entrance into new emerging markets was creating many problems. However, the entire pharmaceutical industry, not just Pfizer, was being challenged by various issues. While corporations were recording decreasing global average returns on investment (10.1 % in 2010 and 3.2 % in 2018), they were also experiencing increased research and development (R&D) costs ($1.2 billion in 2010 and $2.0 billion in 2017). Furthermore, companies from other industries – such as the electronic device producer, Philips – were entering the market, and some emerging-market companies were becoming unexpectedly strong.

Pharmaceutical Industry

The pharmaceutical industry was complex, with some important trends. Globally, in 2018, pharmaceuticals represented more than 16 % of health expenditures. In 2017, global sales were recorded at $1.2 trillion and the demand for pharmaceuticals was rising. Historically, the United States has been the country with the highest spending on pharmaceuticals, with an average per- person spend of $1,162 in 2017. Viewed with respect to global pharmaceutical sales in 2018, the United States was the biggest market with a share of 48 %. Europe (including Russia and Turkey) accounted for 22 %; Japan accounted for 8 %; Latin America accounted for 5 %; and the regions of Africa, Asia (excluding Japan), and Australia accounted for 17 %.

Health-care spending was known to be increasing for a variety of reasons, and this increase suggested that demand for pharmaceuticals was likely also to be rising. First, an ageing population led to increased demand. Second, the supply of biologics had increased substantially, amounting to 25 % of the total pharmaceutical market in 2017. Biologics were highly effective drugs for certain classes of disease such as cancers, rheumatism, infectious diseases such as HIV and hepatitis, diabetes, and neurological disorders. They represented a very expensive form of treatment, usually lasting around a year and with costs averaging $25,000 per patient. Biologic drugs were produced using animal cells or micro-organisms, and the molecule sizes were many times those of conventionally synthesized drugs. A study by the consultancy company McKinsey concluded that the development and production costs for biologics, as well as the complexity of a biologic drug, equated with those of building a business jet. Due to their efficacy, biologics were in high demand. Third, globally increasing awareness of the importance of early health checks, the use of prophylactic drugs (e.g., vaccinations), and better information availability had all further increased demand. Finally, favorable growth rates in pharmaceutical product purchases had been predicted several years ago for developing markets. However, the road to success in developing countries had in fact been bumpy for Western pharmaceutical companies. Local producers (mainly generics producers) often retained a higher market share and more power in these developing markets than Western pharmaceutical companies. Furthermore, relatively weak patent law, slowing economic growth, intense local competition, and government efforts to reduce health-care costs (or at least to prevent their growth) had reduced company expectations of rapid success.

Industry Competition

In general, the pharmaceuticals market could be divided into two main categories: prescription drugs, which could only be prescribed by doctors; and over-the-counter (OTC) drugs, which could be purchased without prescription because they were considered comparatively safe in terms of self-diagnosis and self-medication. The latter included products such as painkillers, nasal sprays, food supplements, and vitamins. Under some jurisdictions, these could also be sold in supermarkets and drugstores. In the United States, OTCs made up 16 % of the total market in 2013, similar to the percentage in other major markets.

Within the prescription drug market, a further distinction was usually made between “innovative” drugs (also called “branded” drugs) and “generics.” Innovative drugs underwent extensive R&D processes and clinical trials using humans and animals. In the United States, once they were approved by the Federal Drug Agency (FDA), innovative drugs were patent protected, giving the developer firm the exclusive right to market the product for several years (20 years in the United States). In rare cases, extensions were requested; for instance, if a molecule had been substantially modified. Patents protected the particular chemical structure only. Other innovative pharmaceutical companies that had developed a different drug treating the same disease could thus apply for a distinct patent, and this resulted in “between-patent competition.”

As soon as a firm lost patent protection for a drug (i.e., for the active ingredient), other firms could market a product based on the same active ingredient, as long as FDA approval and bio- equivalence standards were met. Such drugs were called generics, and they resulted in “within- patent competition.” Generics were marketed under different names from those of the original branded products. Generic copies of biologics were called bio-similar; due to the specifics of biologic manufacture, it was not possible to copy them precisely (as could be done relatively easily in the case of conventional or synthetic drugs). Copying biologics could only result in similar, but not identical, drugs.

 

The Roles of Doctors and Patients

Because self-medication with prescription drugs was illegal, patients needed to go to doctors or hospitals to obtain them. In most health-care systems, doctors were relatively free to decide on treatment and medication. They normally had the choice between different substances and would suggest a particular drug depending on availability. To save on costs, many countries encouraged the prescription of generics. In 2017, these made up only 10 % of total prescription sales (in $), but generics had been outgrowing branded drugs for many years.

In general, doctors tended to choose products that they feel provided the best treatment for a given patient. The market power of expensive innovative drugs was sustained by the fact that, in most countries, there were no regulations concerning cost cutting or a preference for generics. Moreover, depending on country and disease, patients were frequently not required to pay for drugs because the state or private insurance schemes covered this expense.

As doctors had a large influence on which brand was purchased, pharmaceutical firms’ marketing activities tended to be targeted at doctors. Moreover, depending on the law, the extent to which direct customer marketing of prescription drugs was permitted varied. Sales representatives had always been the main communication channel between pharmaceutical firms and doctors, and firms invested in sales to such a considerable extent that doctors from time to time complained about over-marketing. Many firms, however, were not prepared to reduce the size of their sales forces unless the competition did the same: they were trapped in a “marketing-and-sales arms race.” As a result, pharmaceutical firms had in recent years spent significantly more on prescription sales activities (including expenditure on sales, marketing, and administrative costs) than on R&D. For instance, in 2017, Pfizer spent $7.6 billion on R&D but an enormous $45.4 billion on prescription sales.

In 2010, the US Congress demanded greater transparency in marketing activities in order to reduce the number of corruption allegations. In response to the demands of Congress, Pfizer cut down on payments to US health-care professionals by 11 % in 2012, and reduced spending on company sponsored dinners by more than half. Since 2014, firms in the United States had been required to enter payments to doctors into a public database. In addition to these tighter regulations, doctors had become less welcoming towards sales representatives; they said they did not feel well informed by them and so the doctors instead tended to favor online information. A recent study revealed that 65 % of physicians were interested in getting clinical information online. Doctors also generally lacked the time to meet with sales representatives because they were under pressure to see increasing numbers of patients.

In Europe, such marketing activities were also limited by governments. For example, in Switzerland, each pharmaceutical company could only target a given doctor once a year. In Slovakia, the government introduced a law that stated that doctors were required to pay a 19 % tax on both financial and in-kind benefits (e.g., meals, events, hotels) received from pharmaceutical companies. Yet the need for marketing activities became more important, in particular as the trend of self-medication was increasing. This was also related to the growing amount of information available online a source frequently used by patients in addition to, or even in preference to, their doctors’ advice. This was a delicate issue for pharmaceutical firms because, in Europe, direct marketing could not be targeted at patients. Pharmaceutical companies could avoid such regulations by using new digital tools such as patient and physician portals and by promoting social-media posts. Extensive information about specific drugs was offered online, and pharmaceutical companies also provided information during discussions on various online health platforms. Nevertheless, when compared to some other industries, by 2018, pharmaceutical companies had not yet taken full advantage of social and other online media.

The Development of Drugs and The Patenting Process

In 2018, most pharmaceutical companies were highly vertically integrated compared to other industries and so were carrying out R&D, drug production, and marketing and sales activities themselves. In terms of its R&D, the innovative sector of the pharmaceutical industry was, like the oil industry, a “self-liquidating” industry: both had to continually develop new products, and both experienced long product lead times.

In 2015, the pharmaceutical industry dedicated 15 % of its net sales to R&D). In the United States alone, more than $48 billion was spent in 2015 on pharmaceutical R&D, a long and resource intensive process involving several phases. In 2016, the European Federation of Pharmaceutical Industries and Associations (EFPIA) estimated that it took, on average, 12 years for a product to reach the market.

In general, the process started with the identification of a target (e.g., a protein) in the human body upon which the drug would be required to act and the development of an initial formulation (preparation). These preparations were then repeatedly tested and modified (up to 10,000 times) in order to achieve the desired effect and minimize side effects. If preliminary results were promising, a patent was registered in order to avoid potential competition. These new chemical entities (NCEs) were subject to pre-clinical testing, often on animals. The objective was to investigate the drug’s effectiveness and any possible side effects. This process of laboratory testing would take about three and a half years. The pre-clinical test results would subsequently be evaluated by the relevant health authority and if appropriate, permission would be given for further (clinical) tests. In the United States, the regulatory agency was the FDA, comparable to the European Drug Agency (EDA).

On average, only five out of every 10,000 NCEs would make it to the clinical testing stage, from which point on they would be designated “investigational new drugs.” In 2016, the average cost of finding and developing a new drug amounted to approximately $1.9 billion.

If Phases I to III of clinical testing (duration about 6 years) showed positive results in terms of effectiveness and side effects, a new drug would be approved for marketing; this last stage could take up to two and a half further years. However, reaching this stage did not necessarily mean that the drug would stay on the market in its current form. It continued to be subject to further tests, the results of which might require the drug to be modified or, in some cases, taken off the market completely. The new-product success rate was one or two per 10,000. The lengthy launch period for new drugs was the subject of an ongoing debate, and in 2017, the US president announced the government’s intention to speed up the FDA approval process.

In the past, patent law had made it possible for many pharmaceutical firms to earn high revenues from just a few popular products. The development of these so-called “blockbuster” drugs (drugs with more than $1 billion in yearly revenues) had long been considered essential for the success of global pharmaceutical firms. Firms would naturally try to make maximum use of patent protection, and new, globally standardized products tended to be patented and brought to market simultaneously worldwide. In exceptional situations, governments would use a patent without the consent of the patent holder in order to produce a drug and make it available to patients (a process known as “compulsory licensing”).

An innovative branded drug in a new therapeutic area was known as a “breakthrough” or “first-in- class” drug. New drugs in existing therapeutic areas were known as “follow-ons” or “me-too” drugs. Pfizer’s Viagra, for example, was a breakthrough drug when it was launched in 1998, and the company profited substantially from it until 2003, when Bayer introduced a similar product, Levitra (an example of between-patent competition). When patent protection ended, other firms were free to start selling generic copies of the same chemical. Usually, patent expiry led to a dramatic drop in revenue, referred to as the “patent cliff.” Within-patent competition was initiated

when generics producers started selling the generic copy at much lower prices. Patent expiry could have devastating effects.

Between 2003 and 2011, Pfizer’s blockbuster Lipitor yielded annual revenues of $10–12 billion, but when Pfizer lost Lipitor’s patent protection in 2010, sales dropped to $4 billion in 2012 and reached a low of $1.7 billion in 2016. In 2017 alone, Pfizer lost patents for several key products, including Lyrica and Viagra. Global-pharmaceuticals forecasts anticipated that, in 2023, across all companies, $67 billion of sales would be at risk due to patent expires. In 2017, the figure was $32 billion.

The biggest generics producer was Teva Pharmaceutical Industries Ltd. (Teva), and other big players were Mylan NV (Mylan), Cipla Ltd. (Cipla), Sun Pharmaceutical Industries Ltd. (Sun), and Sandoz International GmbH (Sandoz). Often, generics manufacturers tried to make use of any scientific progress that had taken place since the development of the original patented drug. Consequently, generics could sometimes be substantially superior to the originally branded products in terms of effectiveness and side effects. In contrast to branded products, generics were profitable despite lower price levels because their manufacture sidestepped a large proportion of the expensive development and test phases. Due to their lower prices, many governments had taken steps to improve the market position of generics, resulting in a rising proportion of generics in the global drugs market.

Recent patent disputes in emerging markets such as Brazil and India were considered a threat to the traditional patent system. In 2018, India was the biggest global generics market in terms of the export of, and demand for, generics. Although India adopted new patent law after its accession to the World Trade Organization (WTO) in 1995, the way in which the new ruling was interpreted made it unfavorable to innovative (international) pharmaceutical companies. In 2012, for example, the Indian national court upheld the position of the Indian government and refused requests from Novartis International AG (Novartis) and Bayer AG (Bayer) for patent exclusivity for two drugs, stating that these could not be classified as “new inventions” under Indian patent law. Under compulsory licensing, Indian generics producers were then allowed to produce generics for these products by paying a license fee of about 6–8 % of the annual revenue to the innovator firm. In 2013, the Indian Patent Office granted the generics drugs producer Cipla the right to produce Pfizer’s patent-expiring cancer drug Sutent. These cases were decisive to the future of Indian patent law, and pharmaceutical firms feared spillover effects into other markets. Because many important patents had expired, sales of Indian generics surged. But problems, such as poor hygiene and defective processes in many Indian plants, hampered the country’s generics export.

 

The Supply Chain

From manufacturing through to use by the patient, drugs in development went through a number of steps.

Production

The production base for most drugs consisted of fine chemicals. For branded products, fine chemicals accounted for 10–15 % of the final price; for generics, it accounted for up to 30 %. On average, half of all pharmaceutical products globally were manufactured by the pharmaceutical firms themselves; the other half were produced by firms in the fine-chemicals industry.

The chemicals consisted of standardized or customized molecules plus active agents that were processed into the final drug in tablet or fluid form. Fine chemicals were essentially raw materials or mass-produced products, generally made to a high standard by a variety of firms. As such, there were many potential suppliers. No single chemical firm had achieved a dominant market position. The pharmaceuticals industry was by far the largest buyer of fine chemicals, and frequently, a substantial percentage of a chemical company’s revenue depended on just a few pharmaceutical customers. Drugs manufacturers, for their part, had to be able to guarantee high product quality. A given drug required every factory to have precisely defined processes and permissions that were checked regularly. If a given health authority judged that there were variations in quality, safety, or effectiveness, product authorization was immediately withdrawn.

Distribution and Pricing

Wholesalers and pharmacies ensured that products reached patients. However, there were considerable differences between the United States’ and European markets. In most European markets, the health authorities set maximum mark-ups for pharmacies and wholesalers, whereas in the United States, there was more flexibility. On average, the drug manufacturer received around 66 % of the sale price, the wholesaler around 5 %, the pharmacy about 20 %, and the state around 9 % (in value-added tax and other taxes). The wholesalers would buy directly from the drug manufacturers and distribute the products to hospitals and pharmacies. To carry out this function, the wholesalers needed a license, and had to conform to certain criteria – such as keeping a safety stock so that they would be able to deliver within a short time frame.

Wholesalers, who organized the logistics of delivering drugs to pharmacies, hospitals, and health centers, delivered the majority of drugs. Europe was dominated by a multichannel system, in which multiple wholesalers would sell a given product. Large pharmacy chains, specialized pharmacies, and mail-order pharmacies were also able, to some extent, to buy drugs directly from the manufacturer. The growing importance of chains and mail-order houses in Europe, however, was leading to an increasing trend towards bypassing the distributor.

Wholesalers had been experiencing increased price pressure, resulting in tighter competition. In Europe in 2014, the average wholesale margin was around 5–10 %, but this varied greatly between countries, (e.g., in Sweden, it was 3 %, and in the Netherlands, it was 23 %). This pressure was to some extent due to rising packaging, delivery, and transportation costs. Increased competition had also resulted from the tendency for drug manufacturers to establish just-in-time production systems, which had caused the industry both in the United States and Europe to undergo substantial consolidation over the last few decades.

Pricing was more critical for generics manufacturers than for innovative pharmaceutical companies. The competitive generics environment played a major role in pricing. An example was the effect exerted by wholesalers and parallel imports: the wholesaler could promote the distribution of higher volumes of drugs. Some wholesalers added service activities, such as market data gathering, processing, and packaging, to their core business; some even integrated vertically, both downstream and upstream, and had taken over production and pharmacy functions. This strategy, however, was disliked by national health authorities and was therefore highly restricted in some countries.

The preclusion of parallel imports also had an impact on prices and revenue. The fragmentation of the European Union (EU) pharmaceutical market (and with this its pricing levels) led to parallel trading, where firms could buy drugs in a country with lower price levels and resell them in countries with higher price levels. Parallel trading was estimated to amount to $4.5 billion in 2016. The sale of parallel imports in the pharmacy market amounted to 1.6 % in Belgium, 25.5 % in Denmark, 8.5 % in Germany, and 1.9 % in Poland.

The role of the pharmacy varied from country to country. Prescription drugs were generally available only through pharmacies, but the degree of influence of the pharmacist on the choice of drug or brand depended on the particular legal environment. Generally, only doctors could decide on the drug prescribed, but in many countries, the pharmacist was allowed to replace a branded product with an unbranded one containing the same active ingredients.

Regional Differences

In 2013, state-supported compulsory health insurance existed in the majority of Organization for Economic Co-operation and Development (OECD) countries. On average, 58 % of medication expenses in OECD countries were financed publicly (e.g., in Germany, 77 %; in the United States, 48 %). Patients and/or private health insurance funded the other 42 %.

Health systems in Europe and the United States were different. In the United States, the great majority of the population was privately insured, as there was no or little public health insurance. Moreover, until 2017 the US government had rarely commented on drug price regulation. In 2018, however, the US president announced, when meeting with US-based CEOs of pharmaceutical giants, “We have to get prices down for a lot of reasons.”

Traditionally, the US market had always been the most important market for the pharmaceutical industry worldwide, yielding high prices and margins. In Europe, state health systems were the principal purchasers of drugs, but this was becoming less of a positive for the pharmaceutical industry than it used to be. Due to increasing public health-care spending and tight national budgets, European governments had in recent years become active in the areas of price regulation and negotiation. For the pharmaceutical industry, these measures had taken on vast proportions. Tom McKillop, the CEO of AstraZeneca Plc (Astra Zeneca) from 1999 to 2006, spoke of an “extortion-like” situation. Felix Raeber, at the time head of European media relations for Novartis, described the situation as one where the pharmaceutical companies were “without control” over pricing.

One regulation method involved the state and manufacturer agreeing to set fixed prices. This meant lengthy price and reimbursement negotiations, which could delay product launch significantly. The German government in 2005, for example, became involved in price regulation and demanded sweeping price reductions. For example, Lipitor patients would in future receive reimbursement up to a certain amount only. The government also asserted, however, that if the price of Lipitor were to be reduced by a further 38 %, patients would receive full reimbursement. Pfizer implemented the price reduction, which had a drastic effect on its profits. It did mean, though, that the product could be kept on the market.

Governments in Europe set prices by what was known as “referencing.” Products with similar therapeutic effects were grouped together, and a lower all-in price separately determined for each group. The reimbursement system was then aligned such that the patients paid for the drugs if the price was higher than the reference price. Another measure taken by governments was known as an “all-in price markdown” that limited a product’s profit margins – one such was the Pharmaceutical Price Regulation Scheme system developed in the United Kingdom.

In 2012, an average price range of 30 % over or under the EU average price existed. Each country set different prices; hence price control within the EU resulted in parallel imports and lost profits for pharmaceuticals corporations. Governments, via their respective health-care reimbursement systems, influenced not only prices but also product demand. Usually, patients would get drugs expenses paid for only if the drug was classified as reimbursable by their national health-care system. Many countries established so-called “positive lists,” where all products on the list were normally reimbursed, and/or “negative lists,” where all products on the list would not be reimbursed. When a prescription drug was not reimbursed, the demand for this drug was thereby automatically limited – as patients would shy away from drugs they had to finance out of their own pockets.

CASE QUESTIONS:

1. Examine the global market and pharmaceutical industry, and explain the industry- specific challenges, trends and complexities.
2. Examine Pfizer value chain, and competencies to Identify the source of its competitive advantage
3. Conduct a SWOT analysis to identify Pfizer critical success
4. Explain the corporate strategic choices of Pfizer?
5. Discuss Pfizer primary value discipline and how it affects its competitive strategies choices?
6. Evaluate the performance of Pfizer its competitors and give your recommendations.