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The value that the branded pharmaceutical industry adds to the US economy is growing slower than US GDP (Snyder, 2012). Rivalry has intensified while the rate of blockbuster drug development has slowed due to an increase in regulation from the government and the industry trade association, PhRMA. The number of new entrants is fairly low and some are exiting or consolidating through mergers and acquisitions. Downstream and upstream factors are crucial to the specialty pharmaceutical sector of this industry since supply and distribution are different than in traditional branded pharmaceuticals.
Complementors such as antiemetics and substitutes such as marijuana and acupuncture exist but currently do not play a large enough role to affect rivalry.
In the pharmaceutical market, the degree of market concentration changes as one looks more narrowly at specific therapeutic areas (Schweitzer, 2006). For this analysis, that area will be the targeted therapies class of oncology pharmaceuticals. The RiDUCES analysis will focus on three of the main five companies that compete in this class.
An analytical framework for understanding the competitive environment in which Pfizer competes will be outlined by describing the industry/market structure and analyzing the accompanying competitive dynamics, tactics, and strategies.
The analysis shows the factors that significantly impact competition in the branded pharmaceutical industry include rivalry, upstream and downstream trade channels, and entry barriers. Rivalry is intense as the industry is in a mature life cycle. One competitive advantages belonging to Pfizer regarding trade channels is the ability to maintain control as the company shifts away from wholesaling and toward specialty pharmacy usage.
All companies benefit from the industry’s high barriers to entry which contains the threat of new companies entering and enables companies to focus on their existing strategic plans to gain advantage in the marketplace.
Of the six forces analyzed within the competitive analysis, the most important are the ability to conceive and design and the ability to finance. Pfizer’s position within the competitive matrix is strong, as it leads both of these categories. In regards to the ability to conceive and design, Pfizer’s high R&D funding and large sales force size give it the advantage. Ability to finance is measured as with the largest gross profit margin, where Pfizer also dominates. Additionally, Pfizer wins in the ability to adapt to changing conditions with the highest free cash flow and number of acquisitions. Competitors have the advantage in the ability to produce, led by Roche with the highest PPE and level of integration. GSK leads in the ability to market with a successful advertising campaign showcasing features and benefits. Finally, Roche wins in the ability to manage with the simplified structure of the business and impressive CEO and board of directors.
Pfizer, Inc: Branded Pharmaceutical Industry-Oncology Pharmaceuticals RiDUCES
Seven companies represent 80% of the market share for the overall branded pharmaceutical manufacturing industry. Overall, these companies compete in an industry with a profit of $19.0B. The industry is mature, with well-established, well-recognized companies dominating. Most of the larger companies have deep pockets and compete not only through mergers but aggressive branding and marketing campaigns. Revenue volatility and capital intensity is high in the industry (Snyder, 2012) This high level of competition is one of the negative factors affecting the industry because as it increases the rivalry it places downward pressure on pricing and profitability (Snyder, 2012).
The main U.S. trade association is the Pharmaceutical Research and Manufacturers of America, PhRMA, and all five companies represented in this analysis are members. PhRMA self-regulates due to increasing FDA pressure. Many PhRMA policies have been implemented, such as the early release of money spent on physicians to the public through the Sunshine Act and the banning of promotional items such as pens. This regulation tightens the scope in which these companies compete, intensifying rivalry.
While the eventual end users are the patients receiving the drug, most oncology pharmaceuticals are first sold to specialty and retail pharmacies, and a few are sold to dispensing in-house pharmacies. One way these downstream players impact rivalry is through the recent emergence of new specialty pharmacies, such as Raintree. Raintree and other specialty pharmacies negotiate set prices with pharmaceutical companies. In return, the specialty pharmacy sets rebates and guidelines incentivizing the physicians. As the number of players entering the specialty market has increased, consolidation has become the next step (Pfizer Inc, 2010). Payers, realizing the benefits of consolidation, are beginning to develop preferred networks of providers. This network offers payer and patients options for purchasing specialty products, increasing the leverage of the specialty pharmacy. Thus, rivalries intensify for the pharmaceutical companies.
Most manufacturers use McKesson, one of the largest suppliers of oncology and specialty pharmaceutical products. OnMark, a group purchasing organization with a focus on oncologics, is provided through McKesson and enables products to reach pharmacies nationwide with their contract portfolio (McKesson, 2012). Through OnMark’s contracting, suppliers could force price increases. In such a scenario, suppliers would have the power. To avoid this, as new products have entered the marketplace, manufacturers have begun to bypass suppliers such as McKesson. New products, such as Pfizer’s Inlyta (axitinib), have instead been supplied directly from the manufacturers to select specialty pharmacies. This gives the manufacturer, Pfizer, more control. Additionally, the downstream specialty pharmacies benefit from this situation.
Many complementors exist for chemotherapies. One complementor is the family of antiemetics, which control the nausea that often accompanies cancer treatment. Another are the crèmes and ointments to manage side-effects such as hand-foot syndrome. Since side-effect management products, tools and techniques are a huge focus when discussing therapy selection and duration, complementors play an important role. Even though chemo may be effectively shrinking a patient’s tumor, if side effects are too great the physician will switch or take them off therapy.
Complementor products help to lessen this threat. This can be highly valuable since a switch or discontinuation results in a loss of revenue for the pharmaceutical company. Therefore, many competitor products focus on how to provide starter kits with side-effect management techniques for the patient. Many of these kits will include a crème or ointment sample as well. Still, while complementors enhance the total approach to therapy, they do not largely affect rivalry.
Consolidation has been occurring through mergers and acquisitions for more than five years, with a marked increase in recent years. Two of the three biggest headlines in 2009 were Pfizer-Wyeth and Roche-Genentech mergers. Mergers and acquisitions have become more common as a result of rising costs of R&D, shorter exclusivity times, and additional need for protection against patent losses. This has increased rivalry in the industry and led to a smaller number of new entrants. Another reason the brand name pharmaceutical manufacturing industry has relatively high barriers to entry is patent strategy and governmental regulations that require testing new drugs for up to a decade prior to their marketing (Snyder, 2012).
Time is an obstacle, as it can take up to 15 years to take a drug from conception to regulatory approval. Even then, less than 20% of products that make it to market recoup R&D costs (Snyder, 2012). High costs and knowledge barriers are the main deterrents for new entrants since a high level of proprietary knowledge is required. Exit barriers are also high, as companies have invested large sums in the plants and scientists required to develop new drugs. Again, the time factor makes exiting difficult since it can be a 20-year process to discover if a molecule has the potential to be the next blockbuster. Pfizer’s torceptrapib cost over $800M to bring into Phase III development and never went to market. These cases demonstrate the high exit barriers in the industry.
Substitute products for pharmaceuticals include illegal drugs such as marijuana and alternative therapies such as herbal remedies or acupuncture. Oftentimes these are substitutes for those in favor of more holistic approaches. Prescription drugs see a very small impact from the uses of these substitutes, as they provide little direct competition and therefore do not affect rivalry at this time.
This analysis shows the factors that significantly impact competition in the branded pharmaceutical industry include rivalry, upstream and downstream channels, and entry barriers. Rivalry is intense as the industry is in a mature life cycle. Pfizer holds an advantage as the largest pharmaceutical company. As mentioned regarding trade channels, the distribution changes Pfizer has initiated have been in the area of improving contracts with specialty pharmacies instead of working with downstream suppliers such as McKesson. In exchange, Pfizer seeks services from these specialty pharmacies, such as sales data and distribution patterns (Snyder, 2012).
This data can provide greater visibility into product demand and movement in the market. As new products have entered the marketplace, this strategy has been increasingly utilized and Pfizer could enjoy a competitive advantage over companies not employing this strategy. Advantages enjoyed by all competitors include the barriers to entry for this industry, containing the threat of new companies entering and enabling companies to focus on the existing strategic plans to gain advantage in the marketplace.
The brand name pharmaceutical encompasses 804 companies with $98.9B in revenue. Pfizer is the largest by revenues and is the market share leader with 15.2% of the business. As mentioned, within the pharmaceutical industry are specialty markets, one being oncology pharmaceuticals. Appendix A shows the newest class within the oncology sector, “targeted therapies.” Pfizer’s oncology portfolio is currently heavy on targeted therapies for renal cell carcinoma (RCC). Since 2005, seven targeted agents have been approved by the FDA for RCC: Pfizer’s three are sunitinib (Sutent), temsirolimus (Torisel), and axitinib (Inlyta). Competitor products include everolimus (Afinitor) by Novartis, bevacizumab (Avastin) by Genentech, pazopanib (Votrient) by GSK and sorafenib (Nexavar) copromoted by Bayer and Onyx (American, 2012).
Of these five companies, the three representing the biggest threat to Pfizer will be discussed: Novartis, Roche, and GlaxoSmithKline. Bayer and Onyx are included in the competitor matrix (Appendix B) but will not be discussed at length. These companies represent minimal market share penetration and the business models do not align with Pfizer. Onyx is not a main competitor due to a large competitive difference: they are demonstrative in seeking strategic alliances, which creates a competitive disadvantage. Additionally, Bayer is not a main competitor due to the differences in its portfolio. Bayer is a global enterprise divided into several highly diversified groups including health care (pharmaceutical and over-the-counter), nutrition, crop science and high-tech materials.
The technical resources-concepts and developments in the R&D pipeline-are the most important factor influencing the ability to conceive and design in this industry. Novartis has the industry’s leading pipeline with 56 new approvals in the US, Europe, Japan and China since 2007 (Novartis, 2012). The number of ongoing trials per drug also provides a good metric of activity, and shows Novartis (at 1.65) more aggressively developing its R&D products than its peers, with Roche at 1.08, GSK at 0.81, and Pfizer at 0.71. When limiting to oncology, Novartis also leads with 3.25 trials per drug (DeGregorio, 2012). R&D funding is another critical factor to the ability to conceive and design. All have comparable investments with Pfizer leading at $9.4B, followed closely by Roche and Novartis, with GSK lagging at $6.4B.
Although Pfizer has spent the most, they have actually decreased the amount spent on R&D for the last five years, and the 2011 annual report aims for a further 20% reduction in 2012 (Seeking Alpha, 2012). In a collaborative strategy to combine R&D efforts, GSK, Novartis and Pfizer have recently joined the Structural Genomics Consortium, a public-private partnership supporting new medicine discovery through open access research (Batelle, 2011). Lastly, headquarter location is of paramount importance to the ability to conceive and design in this industry. All of Pfizer’s top three competitors are headquartered outside of the U.S. Since U.S. healthcare reform has been of critical importance recently, this is an area in which Pfizer definitely loses to the competition. Increased scrutiny, uncertainty, and regulations all impede Pfizer’s competitive abilities in this realm.
The ability to produce is largely influenced by the physical resources a company has: their plants, property and equipment (PPE). Roche has the largest at $17,461M, but Pfizer, Novartis and GSK all fall closely in this range as well. Another influencer in the ability to produce is the degree of integration. Roche has the clear advantage here with five business areas, three of which are diagnostic. Novartis also has a diagnostic area. This integration gives an advantage to these companies through the synergy this combination creates in the marketplace.
Advertising campaigns can give a slight edge in this intensely competitive industry. The overall branded pharmaceutical industry uses direct-to-consumer advertising while the oncology sector only advertises to prescribers. Product differentiation is done through various advertising techniques. Currently GSK has the competitive advantage here as they have undergone widespread branding with their product, Votrient, through sponsorship of several patient-centered studies, such as the patient preference trial PISCES. Because the product cannot claim superior efficacy, the marketing campaign focuses on a features/benefits profile, suggesting enhanced tolerability of the product. Pricing is not a competitive factor as all products in the oncology niche are similarly priced. Also, all have comparable patient assistance programs and insurance coverage. In medicine, the means to differentiate occurs predominantly through clinical data.
Pfizer has the advantage as its product Sutent has the most compelling efficacy data. This explains why Sutent is the market leader with 70% of the market share. Human resources, including a company’s sales force, demonstrate a company’s ability to penetrate the market with share of voice. Pfizer leads with 110,000 employees followed by Novartis and GSK with 97,000 employees. Roche has 80,000 employees. As the largest, it is not surprising that Pfizer has steadily cut its work force in recent years in response to patent expirations for top-selling drugs, generic competition and other challenges. Pfizer has eliminated nearly 50,000 jobs since 2005 (Loftus, 2012). Other companies have announced employee layoffs this year, though none in this analysis.
Pfizer leads in regards to financial performance, with the highest gross profit margin at 81.19%. GSK follows with 71.33%, above the industry average of 70.63% Novartis falls below this average with 66.82%. Federal fines negatively impact the ability to compete in this industry. High scrutiny and well-publicized whistleblower cases have intensified competition due to financing of some of the largest criminal fines in history.
One example occurred in July 2012, when GSK pleaded guilty to criminal charges and agreed to a $3 billion settlement of the largest health-care fraud case in the U.S. and the largest payment by a drug company in the US. The settlement was related to the company’s illegal promotion of best-selling anti-depressants and its failure to report safety data about a top diabetes drug (Schmidt, 2012). Off label promotions carry steep penalties in this industry, decreasing a company’s ability to finance other areas of business and compete in the market.
In regards to the ability to manage, Novartis recently split the roles of CEO and chairman. This was partly in response to a push from corporate-governance activists who favor the split (Goldstein, 2010). The decision put Joe Jimenez as the new CEO of the Swiss drug company and Dan Vasella, who had been CEO for 14 years and chairman for 11 years, as chairman. Other key personnel for the industry leaders include Pfizer’s CEO, Ian Read, who has been with Pfizer since 1978. Read was elected as CEO in December of 2010 after Jeff Kindler, who had little pharmaceutical experience, resigned. Naming Read CEO shows Pfizer’s strategy of promoting someone from within the company and industry. Similarly, Severin Schwan, CEO of Roche, has been with the company since 1993. He has experience in economics and law and previously led the diagnostics division of the company. The company board of directors also influences the ability to manage.
Roche’s Board of Directors includes six doctors and four professors, similar to Novartis, GSK and Pfizer. However, Roche’s board is the most distinguished and diverse. Pfizer’s ability to manage has been influenced through organizational changes, including the decision to develop nine different health care businesses; each led by its own executive. GSK has a similar structure with 17 executives, each over a particular sector.
This structure was created in order to compete more effectively with companies such as Roche, with Genentech as a fully operating subsidiary dealing with pharmaceuticals. Smaller silos within a larger umbrella company as in this example enhance the ability for a company to compete. This is because the company can rapidly capitalize on opportunities to advance the business by increasing support for successful new medicines, forging partnerships with key customers, entering into co-promotion and licensing agreements, investing in new technologies, and acquiring new products and services from outside the company (Pfizer, 2012). Roche leads in this ability.
The cliché “the only constant is change” is true for the last decade in the pharmaceutical industry. All the companies have a strong ability to adapt to changing conditions, intensifying competition. Change has taken place since 1715, when the oldest of these companies, Glaxo, was trademarked. Executive turnover and organizational changes are frequent with all the companies, therefore not playing a role in the competitive dynamics. Diversification strengthens a company’s agility in changing environments. GSK’s portfolio includes pharmaceuticals, vaccines, oral healthcare products, nutritional products, and over-the-counter medicines. The company makes 28,000 different products, including tablets, creams inhalers and injections and has a vaccines campaign in 182 countries. Similarly, Novartis portfolio lists pharmaceuticals, oncology, vaccines, diagnostic, a generic company Sandoz, over-the-counter products, animal health, and eye care.
Roche is the least diversified with two divisions: pharmaceuticals and diagnostics. Money, namely free cash flow, gives strength in changing climates. Pfizer leads the competitors with financial resources represented by a free cash flow of $21,900M. Novartis and Roche follow with $16M and GSK with $12M. Lastly, acquisitions enable a company to adapt when other factors are lacking. All the main competitors in the industry utilize acquisitions to remain competitive, none more than Pfizer. In addition to the headline acquisitions of King Pharmaceuticals in 2011 and Wyeth in 2009, Pfizer has been active in acquiring smaller companies. In 2011 Pfizer acquired Excaliard Pharmaceuticals, Ferrosan Holding A/S; 70% of the shares of Icagen, and entered an agreement with GlycoMimetics, Inc. to receive drug licensing rights. Novartis itself was created in 1996 by the merger of the Swiss companies Ciba-Geigy and Sandoz.
In 2011, Novartis merged with eye care giant Alcon. Roche CEO Schwan outlined their 2011 acquisition strategy, with an appetite for new drugs and diagnostic technologies. Three out of four of the company’s acquisitions in 2011 took place to grow the diagnostics unit, which brings in about a fifth of Roche’s sales (Megget, 2011). Pfizer’s current strategy includes using its free cash flow to continue to focus on acquisitions in lieu of increasing R&D spending. Just this year Pfizer closed its Sandwich facility in the United Kingdom, the site where blockbuster Viagra was developed, as well as sites in Catania, Italy, Aberdeen, U.K., and Gosport, U.K. These closures are emblematic of Pfizer’s recent corporate strategy to shift from making all its own drugs, which makes sense in this intensely competitive industry. To cut costs, Pfizer has had layoffs in research and development (Seeking Alpha, 2012).
Overall, the branded pharmaceutical industry remains attractive with a 2012 profit margin expected to be 19.2% of sales, even while other strong-performing industries undergo slow or no growth (Snyder, 2012). Pfizer’s position within the competitive matrix is strong, with advantages in the ability to conceive and design through high R&D funding and a large sales force size, ability to finance with the largest gross profit margin, and the ability to adapt to changing conditions with the highest free cash flow, and number of acquisitions. The ability to produce is led by Roche, with the highest PPE and level of integration. GSK leads in the ability to market with a successful advertising campaign showcasing features and benefits. Finally, Roche wins in the ability to manage with the simplified structure of the business and diverse board of directors.
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