Please see the attached article and only use this article to complete the case study.
This write-up needs to focus on strategic management, all strategic issues must be identified to
understand how they impact the
organization in the case study.
This write-up needs to be extremely specific. Do not repeat any of the case
detail.
The format of this case analysis should have the following headings: Problems/Issues;
Possible Solutions; Recommend Solutions; and Expected Outcomes.
The write-up needs to be an executive strategic decision. It should be written as it is addressing issues so the department manager of the organization can read, understand, and implement the strategic decision.
W19390
PFIZER AND THE CHALLENGES OF THE PHARMACEUTICAL INDUSTRY (A)1
Renate Kratochvil and Phillip C. Nell wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.
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Copyright © 2019, Ivey Business School Foundation Version: 2019-07-31
In July 2018, one of the US president?s tweets created turmoil among managers of pharmaceutical companies:
Pfizer & others should be ashamed that they have raised drug prices for no reason. They are merely taking advantage of the poor & others unable to defend themselves, while at the same time giving bargain basement prices to other countries in Europe & elsewhere. We will respond!2
This sounded like a threat, which it was presumably intended to be. However, only weeks before, the picture had looked rosier for Pfizer Inc. (Pfizer) and its chief executive officer (CEO), Ian Read. In the fiscal year 2017, Pfizer had successfully maintained its position as the leading global pharmaceutical corporation in terms of its revenue from pharmaceutical products of US$52.8 billion3 (see Exhibit 1).
Nevertheless, in the last few years, Pfizer had had many setbacks other than those generated by the president?s threat. For example, a comprehensively planned merger with Allergan Plc (Allergan) had to be stopped, and competitors were closing in on Pfizer?s leading position (see Exhibit 2). 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 per cent in 2010 and 3.2 per cent in 2018), they were also experiencing increased research and development (R&D) costs ($1.2 billion in 2010 and $2.0 billion in 2017).4 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.5 Given these challenges, Read needed answers to some key questions: Do these changes mark a turning point for the whole industry? Does Pfizer need to act, and if so, how?
THE PHARMACEUTICAL INDUSTRY
The pharmaceutical industry was complex, with some important trends. Globally, in 2018, pharmaceuticals represented more than 16 per cent of health expenditures.6 In 2017, global sales were recorded at $1.2 trillion (see Exhibits 3 and 4) and the demand for pharmaceuticals was rising.7 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
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with a share of 48 per cent. Europe (including Russia and Turkey) accounted for 22 per cent; Japan accounted for 8 per cent; Latin America accounted for 5 per cent; and the regions of Africa, Asia (excluding Japan), and Australia accounted for 17 per cent (see Exhibit 5).
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 (see Exhibit 6).
Second, the supply of biologics had increased substantially, amounting to 25 per cent of the total pharmaceutical market in 2017 (see Exhibit 7). 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 microorganisms, 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.8 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.9
Finally, favourable growth rates in pharmaceutical product purchases had been predicted several years ago for developing markets (see Exhibit 8). 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.10
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.11 In the United States, OTCs made up 16 per cent of the total market in 2013, similar to the percentage in other major markets (see Exhibit 9).
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.?
