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 2 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

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

5 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis A search by keywords for overlapping topics in the

annual reports 2011 of 6 large multinational pharmaceutical companies

domicile of (Pfizer differing [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 checked as substantiated double by well as taking reference from the

Pharma 2020 series

, a respected series of analytical reports published by

PriceWaterhouseCoopers

in 2007.

Methodology

Angwin, D.; Cummings, S.; Smith, C. (2007):

Blackwell Publishing Ltd. The Strategy Pathfinder: Core Concepts and Micro Case. 1st eds, Malden:

6 | 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 strategic point for analysis.

further 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 Micro Cases”)

. 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 scenarios.

states into There which two are are immediately infected with the debt crisis and others which have cut down on drug prices in an ongoing process in a more intention.

preventive UBS Quotes (2012): Union Bank of Switzerland, Zurich. 7 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

Macro Shocks

– Generic Competition

In an environment underfunded health systems incentives or even obligations to prescribe generics implemented have in of care been many national legislations.

Sales of the original product can be expected to decline rapidly by 70%-90% within 3 12 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) 8 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

Macro Shocks

- Demographics

Cancer Research UK. Cancer incidence by age - UK statistics 2012, London. 9 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis 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 products. The emerging growth countries will undergo pharmaceutical demographic a similar 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.

Macro Shocks

- Demographics

Diabetes Atlas. (2011):

Diabetes Map. 5th edition, Brussels, International Diabetes Federation.

10 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis When considering example type II, of a the diabetes 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 world India wide creating a epidemy.

With wealth the creation and of the emergence classes emerging in of middle these growth countries millions people adapt of “western” life styles and become prone typical to acquiring “western” diseases.

Movers and Shakers

- Health Technology Assessment

      

A new set of requirements to be met has come into play hurdle” (behind efficacy, safety and quality) commonly referred to as the “4 th

For drug development the 4 th 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 12 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

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 companies (37%) (45%), pharmaceuticals (45%), banks (38%), and cable were among those industries to be perceived as do a bad job”.

“likely to

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 with a in countries strong pharmaceutical industry.

Industry Terrain

- Strong Balance Streets

Overall, situation the of financial big pharmaceutical companies is strong up until now and continues strength in to represent challenging times.

profitability In terms ranking, of 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 13 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

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 productivity.

its R&D Angwin, D.; Cummings, S.; Smith, C. (2007):

Blackwell Publishing Ltd. The Strategy Pathfinder: Core Concepts and Micro Case. 1st eds, Malden:

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The Big Picture

Orientation - An Evolution towards Marketing

Adcock, D.;Halborg, A.; Ross, D. (2001):

Marketing: Principles and Practice. 4th eds, Essex CM20 2JE: Pearson Education ltd.

During the period mono-dimensional of 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 market oriented business model where the needs of the market, being the medical patients or needs of being the needs of constitute the payers, 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

Integration - Vertical and Horizontal

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. 16 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

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 Additionally, multi after billion businesses.

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 “innovation steadily is called gap”: increasing the annually 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.

productivity The companies will not be able to provide these.

R&D productivity sooner than later.

20 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis current of needs bolstered drastically R&D many to be – rather

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.

21 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis Hofmann La-Roche 2011

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 pharmaceutical how the company wants to be perceived, its corporate identity, and how it is actually perceived, its corporate image, resides huge gap.

a Angwin, D.; Cummings, S.; Smith, C. (2007):

Blackwell Publishing Ltd. The Strategy Pathfinder: Core Concepts and Micro Case. 1st eds, Malden:

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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 23 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

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 multi billion business and represents a major threat to public health as well to the pharmaceutical industry.

fostered The illegal business is by increasingly international diverging connectivity, definitions, non existance of a uniforme database, conflict of interest between developing industrialized and nations, corruption, weak sanctions and law enforcement and by the inaccessibility of medications.

In 2010, sales medications are of illegal 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 25 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

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 subject to change.

which is now 26 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

Sustain Ability

Mangement – Patient Adherence/Disease

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 marketing hype?

offering win buyers without any

Angwin, D.; Cummings, S.; Smith, C. (2007):

Blackwell Publishing Ltd. The Strategy Pathfinder: Core Concepts and Micro Case. 1st eds, Malden:

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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

because their benefit is immediately obvious to the customer? that sell by themselves 29 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

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!

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