Pharmaceutical

Instructor’s Manual
CASE TEACHING NOTES
The Global Pharmaceutical Industry
Sarah Holland (Manchester Business School) and

Bernardo Bátiz-Lazo (London South Bank University)
1. Introduction
The case describes how the prescription pharmaceutical industry has changed since its
modern beginnings in the early 1950s. The various forces affecting the competitive
environment of the industry are discussed in terms of origins, immediate past and
immediate future (2004 onwards). As a result, the note provides insights into the
evolution of barriers to enter and exit the industry for prescription pharmaceuticals,
while aiming to help students to recognise how to set boundaries for an industry.
This is a detailed industry note on the “ethical” pharmaceutical industry which provides
an opportunity to analyse key success factors of major players. The note centres on a
descriptive overview of the predominant issues in the three major Triad market areas:
the US, Europe and Japan (although major issues in emerging markets are also
mentioned). The note covers the overall industry environment with in-depth discussion
of the driving forces in the industry such as globalisation (in particular global regulatory
issues, changing world demographics and worldwide pricing disparities); development
of new technology; the importance of time to market; and amalgamations. The case also
examines issues around corporate social responsibility.
2. Position of the Case
The pharmaceutical industry case study lends itself to:
• assessing an organisation’s competitive environment, using the following analysis

frameworks:
– PESTEL,
– Porter’s five forces,
– Scenario planning;
• discussing issues around co-operation and alliance;
• establishing the role of critical (winner) products for big drug companies;
• assessing the role of ethics in corporate strategy; and
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• relating features in the GSK case to trends within the pharmaceutical sector. It is
expected that this case is used prior to examining that of the GlaxoSmithKline
merger.
3. Learning Objectives
The pharmaceutical industry case study develops students’ understanding of how to

assess the competitive environment of an industry. The case provides an opportunity for
students to combine industry analysis with scenario planning. Specific goals include
allowing students to:
• develop a sensibility for the business environment;
• develop an appreciation of the fact that forces of change evolve over time and that in
this process, new threats and/or opportunities for competitive advantage develop;
• identify key success factors in the pharmaceutical industry (including strategic

issues);
• understand drivers towards globalisation of an industry and the opportunities and

threats involved;
• understand that public opinion, legislators, regulators, lawyers and powerful public
sector customers may have significant influence on an industry.
• developing an understanding of the purpose of scenario planning and applying

scenario planning techniques to the industry of ethical pharmaceuticals. This
application will aim to design strategies for profitable growth of pharmaceutical
companies.
4. Teaching Process
The topic of environmental analysis is discussed in Chapter 2 of Exploring Corporate

Strategy, in particular sections 2.2 (The Macro Environment) and 2.3 (Industries and
Sectors). These should be viewed as essential reading for students prior to using this
case. Tutors could use the final section to illustrate issues in Chapter 4 (Expectations
and Purposes).
Students, individually or in groups, should engage in one of the following activities

prior to the session:
• Undertake a PESTEL analysis (focus on current industry trends).
• Undertake a five–forces analysis (origins, past and future of the industry) and
consider the questions raised in Illustration 2.5 (identifying the most important
threats).
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• Consider issues of corporate social responsibility raised by the case.
The tutor can then lead a class discussion around the competitive environment. The
tutor can introduce the session by reinforcing learning through slides showing a
PESTEL analysis and then facilitate a discussion on the importance of how to conduct
the analysis of the competitive environment around five-forces maps of past and future
industry trends.
During the discussion, tutors should point out the relevance/limitations of

environmental analysis to assess forces of change that cross national boundaries.
Tutors will find a glossary of terms as Appendix 1 to this note. This glossary has been
drafted for the benefit of undergraduate students.
5. Questions for Discussion
1. Identify the main environmental forces currently affecting the pharmaceutical

industry.
2. How relevant do you think the five-forces framework map is to identify

environmental forces affecting the pharmaceutical industry (in its origins, recent
past and immediate future)?
3. Use scenario planning techniques to consider the various environmental influences

which may affect the pharmaceutical industry in the future.
4. What is the prevalent ‘ethical stance’ in the pharmaceutical industry?
5. What are the likely implications of the changing business environment on

pharmaceutical firms?
An alternative to using Question 1 above can be found in Illustration 2.1 and Exhibit
2.2 of Exploring Corporate Strategy, which provide a list of key questions about
PESTEL analysis, namely:
a) Using Illustration 2.1 and Exhibit 2.2 as a guide, draw up an audit for an ‘industry’
environment of ethical pharmaceuticals.
b) What environmental factors are affecting big pharmaceutical companies?
c) Which of these is the most important at the present time?
d) Which of the influences you identified are likely to be the main ‘drivers for change’
in the future of pharmaceuticals? Why?
An alternative to using Question 2 above can be found in Illustration 2.5 which

provides a list of key questions about five-forces analysis, namely:
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e) Which would you regard as the three most important threats to a big pharmaceutical
company?
f) How could you respond to each of those to lessen their impact?
g) What are the main benefits and limitations of the five-forces framework?
An alternative to using Question 4 above can be found in Illustration 4.4, Exhibit 4.7
and Exhibit 4.8 which provide a list of key questions about corporate social
responsibility, namely:
h) Who do pharmaceutical companies serve?
i) Describe the internal and external aspects of what are they responsible for.
j) What would be the practical implications if most pharmaceuticals ran their business
according to each of the different ethical stances shown in Exhibit 5.7?
k) What would be the implications for government, regulators and the medical
establishment If most pharmaceutical companies followed each of these stances?
l) How would these actions by pharmaceuticals, the medical establishment and

governments affect citizens, patients and consumers?
6. Case Analysis
6.1 Items for General Discussion
Industry origins can be traced to the late 19th century. However, the case will focus
primarily on the way the industry has operated since the 1950s with an emphasis on
developments in the early years of the new Millennium. The following opportunities
and threats characterise this industry:
Ageing populations and rising consumer expectations will continue to create unmet
medical needs, in addition to the enormous needs of the developing world. This is
the fundamental driver behind continued R&D investment to create novel drugs.
However, healthcare costs have consistently risen faster than GDP and this has
created an unsustainable situation in healthcare systems, whether publicly or
privately funded. As a result, new barriers to market entry have been erected,
pressure has increased on pricing and reimbursement and customers are increasingly
demanding evidence of “value for money”.
R&D costs have risen much more sharply than the rate of inflation, while the
number of drugs reaching the market has steadily fallen. Increasingly, drugs divide
into successful “blockbusters”, high-priced niche specialist products (e.g.
biologicals) and also-rans.
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The industry relies on a fixed period of patent protection to provide a monopoly on

profits as a reward for costly R&D investment. However, the period during which
these costs can be recouped has been shortened by longer time to market as a result
of increased regulatory controls and barriers to market entry around price and
reimbursement.
There has been a drive for the globalisation of product markets, alongside R&D and
manufacturing amalgamating in specialised centres. A downside to globalisation is
that, once employment has moved overseas, governments are much more inclined to
introduce draconian methods to control spending on pharmaceuticals.
Normative Issues – pharmaceutical companies benefit from human suffering: the

drug companies have patent-protected monopolies on substances people may be
literally dying for. For this reason alone they have to be perceived as “ethical”, that
is, avoid actions that might be perceived as putting short-term profits ahead of the
well being of the patient(s). Recent developments over the AIDS crisis in Africa
have put intellectual property rights under threat and have the potential to undermine
the industry business model.
One important thing to bear in mind during the discussion is that the dynamics of the
industry for pharmaceuticals can, at times, be driven by normative issues (local or
international politics, environment, ethics, etc.) and leave little influence for market
forces. Tutors should address normative concerns while guiding students to concentrate
on a) how the economics of the industry have changed over time and b) differences
amongst international trading blocks.
6.2 Brief History
During the recovery years after WW II, the pharmaceutical industry operated within a
relatively stable environment. Achieving critical mass in R&D to compete for patent
protection resulted in a formidable barrier to enter the industry. Profitability was far in
excess of other industries and competition was mild.
Technological success, in the development and marketing of new products, characterised

the industry during the 1960s, whereas the 1970s were marked by the introduction of
legislation that fuelled the growth of generics and increased time to market.
Since the mid-1980s the environment has changed and could be viewed as being far
from stable. Slowly but steadily, the ability to generate superior returns began to be
eroded as reflected by:
• the emergence of biotechnology firms and the potential transformation of the drug-
discovery process;
• the greater power of buyers (as the cost of healthcare exceeds the ability to pay for it);
• greater reliance on blockbuster drugs as the main source of income.
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These factors suggested participants’ diminishing expectations of future profitability as

well as mirroring changes in the balance of competition and the process of value
creation, including:
• Spending on R&D has grown while the number of new products reaching the
market has fallen. In 1981, global R&D expenditure was around $5.4 billion while it
is estimated to exceed $50 billion in the year 2000. Conversely, 51 new chemical
entities (NCE) were introduced in 1980 but only 32 in 1999, 24 in 2001 and 17 in
2002.
• Easy drug targets, such as simple infections, have been addressed. New research
leading to therapy for previously untreated diseases or significant advances over
existing treatments is both expensive and risky. Meanwhile, regulators, payers and
prescribers are demanding much larger data packages, offering increased evidence
of efficacy, safety and value for money.
• Threats to the viability of patent protection. This threat emerged from various
corners: on the one hand, manufacturers of generics successfully entered the market
before patents had expired (and legal battles through the judiciary proved ineffective
to defend exclusivity rights). On the other hand, social considerations were also
infringing on pharmaceuticals. Most notably the effective campaign to supply
HIV/AIDS drugs free or at reduced prices raised issues as to which drug or which
country would be next.
Hence, at the beginning of the new Millennium, the main concerns for industry
participants evolved around global pricing disparities destabilising the key US market,
threats to patents from the ramifications of the AIDS crisis, upcoming patent expiries on
blockbuster drugs and shares being perceived as “old economy stocks”.
6.3 Industry Boundaries
There is a risk of students’ discussion entering other healthcare markets such as

alternative medicines, farm products (ag-biotech), and toiletries. Although to some extent
these markets are all related, tutors should not allow the discussion to expand away from
“ethical” pharmaceuticals (including hospital treatment) as this may not be helpful.
The analysis should focus on the process of synthesis, development, testing, approval
and marketing of drugs for the medical treatment of human illness. As such, the analysis
will explore a “rational” or targeted method of drug discovery. Pharmaceutical
companies pursue a “rational” method of drug discovery because this process focuses
on creating specific molecules to attack specific molecular targets, which are then tested
to assess patient response against intended use. The substance is then approved for mass
marketing by health authorities provided that it has proven efficacy and acceptable
safety and side effects. Marketing of approved substances will then focus on medical
practitioners because they, rather than the patient, are the ones who make the purchasing
decision. However, there seem to be opportunities to change the organisational model at
least in the US with the emergence of direct-to-consumer communication.
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6.4 Environmental Analysis
PESTEL Analysis
A PESTEL analysis could be used to answer Question 1 (Identify the main

environmental forces currently affecting the pharmaceutical industry). When
considering environmental factors, slides could be prepared to help students focus
attention. PESTEL analysis is a useful starting point for environmental analysis but
tutors should proceed with care. For pharmaceutical companies all categories of a
PESTEL analysis are of equal importance. Limiting the time devoted to drafting a
PESTEL analysis, however, will avoid having students make long lists of forces or
influences affecting the industry.
The list in Appendix 2 is not exhaustive and might be superseded by student research
going beyond material in the case. The list mainly focuses on industry issues in Western
economies. Tutors should make students reflect on how each of the forces/trends could
change when accounting for differences in geography.
Students’ returns on the assignment will be successful to the extent that their
assessment reflects key drivers for the industry, including the fact that the
pharmaceutical industry is facing a changing environment and undergoing
globalisation. Drivers should include:
• There is evidence of transference of marketing across countries. Marketing health

products directly to consumers includes leveraging established distribution channels
as well as creating new ones through the Internet.
• There is evidence of cost advantages and economies of scale. The recent trend of
mergers exploited potential cost advantages to be found in R&D facilities serving
global operations. This reflects the fact that R&D capabilities have been and will
continue to be critical in determining the structure of the industry. (Tutors should
consider expanding on this point later as successful innovation can prove to be more
important than size, because new products must offer unique benefits to command
price premiums.) Cost savings were also realised in head office and local company
infrastructures.
• There is evidence of interdependence encouraging the globalisation of competitors.

For instance, big pharmaceuticals are investors in the biggest biotechnology
companies. Firms also make their marketing skills and capacity available to smaller
players including those from abroad (particularly to enter the US and Japanese
markets). Another example involves firms specialising in offering multi-country
clinical trials.
• At the same time, there are factors reducing possibilities for convergence. For
instance, political, economic and legal considerations prevent globalisation
extending to all therapy classes and geographic markets. At face value, most major
companies appear to be truly global as are major therapy classes. Indeed, big
pharmaceuticals have manufacturing and distribution capabilities across the globe.
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However, their profitability (and R&D efforts) are contingent on developments (and
ailments) in the US, Western European countries and Japan. As a result smaller
domestic and regional players do still exist, diseases common to Third World
countries are under-researched and overall market share remains low (Pfizer only
had 11% of total sales in 2003). But again low concentration disguises that, through
patent protection, big pharmaceuticals dominate the most profitable market
segments.
• There has been a shift in consumer behaviour and attitudes of governments towards
healthcare costs in general and pharmaceuticals in particular. This shift emphasises
“value for money” and is very much rooted on country specific methods to manage
competition in health care provision.
• Parallel trade will continue to be a significant issue because of the role of

governments in setting prices and reimbursement policies, resulting in significant
pricing disparities that are likely to remain entrenched.
• Harmonisation of regulation and supervision has the potential to accelerate

globalisation.
As a summary, students should realise that global competition in pharmaceuticals has

become evident. Moreover, the differential impact of key environmental influences on
ethical pharmaceuticals has raised the question of what is the optimal size for a
pharmaceutical company, particularly in marketing and research terms.
Segmenting by the type of producer that manufactures the medicine would result in
identifying the research-based sector, over-the-counter and generic manufacturers and
biotechnology companies. Here tutors might point out the following:
• The entry of biotechnology companies and the trend to contract out clinical research
suggests that some research-based companies are focusing on global sales and
marketing competences and using their global presence and marketing skill to attract
products from biotechnology or University research sectors.
• For the generic manufacturer size has become critical because during the late 1990s
there was a collapse of generics prices in the US, resulting in a shake-out to identify
cost leadership. Manufacturers of generics thus faced a classic “stalemate” type
environment where economies of scale prove decisive.
• Outsourcing of manufacturing together with the contracting of R&D to biotechs and

licensing agreements resulted in most major companies developing competences in
alliance management.
• A key feature of branded over-the-counter (OTC) drugs has been the development
of direct-to-consumer marketing capabilities. Students should thus be able to
recognise OTC manufacturers as a “classic” mass-marketing type player. For
instance, in some countries such as the US big pharma (who operate their OTC
subsidiaries under different names to avoid brand conflicts) have tried to move some
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drugs’ prescription-only status to OTC and encourage patients to recognise and buy
familiar brands. Since OTC drugs are not reimbursed prices have fallen sharply, but
that fall may be compensated for by increased volume as consumer brand loyalty
can then be used as a defence against generic competition
Whether rational or otherwise, participants in the industry consider a firm’s

capabilities in R&D, distribution and global marketing as the key to success. You
could then prompt students to discuss whether the wave of mergers and acquisitions
has resulted in enhanced capabilities on all three fronts. Students then should rapidly
realise developing R&D capabilities has been the “Achilles heel” (more below). You
can then question them as to whether the wave of M&A has made sense or is “herd
behaviour”.
Five-Forces Analysis
This second part of the assignment is more challenging because it requires students to
identify forces of change at specific time intervals and also assess which of these forces
will be more significant in the future.
Using the five-forces framework to map out environmental forces affecting the
pharmaceutical industry in the immediate future would result in something similar to
the analysis in Appendix 2. This analysis should help answer Question 2 (How
relevant do you think the five-forces framework map is to identify environmental
forces affecting the pharmaceutical industry (in its origins, recent past and immediate
future)?)
When considering the environmental factors that affected the pharmaceutical industry in
its origins, students are likely to mention points shown in the first column (left to
right).
When considering the environmental factors that affected the pharmaceutical industry
in its immediate past, students are likely to mention points shown in the second
column.
When considering the environmental factors that affected the pharmaceutical industry in
its future, students are likely to mention points shown in the third column.
The tutor may then facilitate a class discussion on what can be learned from a five-
forces analysis. These points are summarised in Table I.
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Table I Learning Points of a Five-Forces Analysis
Learning As applied to ethical pharmaceuticals
The importance of identifying the key forces in • Growing influence of payers on the
the competitive environment rather than just purchasing decision-making process
listing all the forces at work.
• Continued amalgamation of biggest players
(rivalry)
• Changes to product life-cycle (more rapid
generic substitution)
Whether there are underlying forces behind • Ageing populations, increased consumer
these key forces of change. expectations, the resulting rising cost of
healthcare and payer concern about this
• Technological advances such as genomics
The identification of changes in industry forces • A move from a situation of relatively low
and the implications of these for the role of competitive rivalry to one of intense rivalry
business (SBU) level versus corporate in a relatively short period of time.
strategy.
The net result of all the external pressures on the sector has been a more difficult
environment for pharmaceutical companies as illustrated in Exhibit 1 and Exhibit 2.
Exhibit 1 shows how, historically, sales growth came both through volume and price,
with peak sales at patent expiry. The decline in sales after patent expiry took years.
Exhibit 2 shows a shorter, flatter product life cycle. Prudent purchasing by powerful
players limits initial growth and holds down prices. The expiration of the first patent in
the same drug class could result in the whole class being priced as commodities, even
before the patents expire. Generic substitution speeds up the sales decline.
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Exhibit 1: Effects of legislation on ethical drug’s product life cycle
The product life cycle of the past

Peak Sales at Patent
Expiration Slow Decline
$m
Growth Through
Volume and Price
Launch Patent Expiration
Exhibit 2: Effects of legislation on ethical drug’s product life cycle
Reduced by future healthcare changes

Class Treated as
Commodities Prior
to Patent Expiration
$m
Price Pressure
Limits Growth
Generic Substitution
Prudent Purchasing Minimises Post-Patent
Limits Growth Cash Flow
Launch Patent Expiration
6.5 Industry Trends and Scenario Planning
Students should be able to recognise that industry analysis does not end with a PESTEL
analysis or the construction of a five-forces map. Students should be able to build the
business implications of the main forces of change based on scenario planning. This
will in fact answer Question 3 (Use scenario planning techniques to consider the
various environmental influences which may affect the pharmaceutical industry in the
future).
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Tutors should ensure that students understand the purpose of scenario planning. The
topic is covered in Chapter 2 of Exploring Corporate Strategy (Section 2.2.4 The Use of
Scenarios).
Students should be expected to identify the key factors and underlying forces which act
upon the industry, focusing in particular on those that will have a high impact and are
uncertain in nature.
Items that might arise during the discussion of key trends should include:
• the pharmaceutical industry facing a rapidly changing environment, which offers

both opportunities (such as harmonisation of regulatory requirements) but also
threats (more discriminating purchasers);
• the need for global presence to achieve adequate return on escalating marketing
capabilities and R&D costs;
• a strong focus on healthcare cost containment, such that new treatments must be
justified on cost-benefit grounds, adding to development costs;
• to command price premiums, new products must offer unique benefits, yet
information leakage means that most products are imitated rapidly;
• IT developments provide greater access to detailed healthcare information for both

providers and patients, also pushing forward cost-effective treatments;
• educated consumers demanding advances in therapy;
• there are opportunities to change organisational models but no-one has yet found a
feasible alternative;
• continued industry consolidation.
Students may then identify the following forces that are likely to have a high impact on
the industry:
a) Increasing concentration of buyers
b) Increasing power of distributors (parallel trade)
c) Generic substitutes
d) Scientific advances leading to new drug discovery processes and greater targeting of
treatments
e) Government pressure on costs and intervention
f) Harmonisation of healthcare practice
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g) Globalisation, greater harmonisation and entry into Japanese markets by European

and North American firms
h) Growth of pharmaceutical sales in developing markets
i) Continued mergers and acquisitions leading to more rapid concentration in the

industry or vertical integration
j) Transformation of traditional distribution or business models by DTC marketing and

the Internet
k) Threat to intellectual property resulting from the HIV/AIDS crisis in Africa
l) More informed consumers
Tutors may then ask students to map the extent to which they believe these are certain
or uncertain. The scale below is one possible view on the industry:
Certain a,b,c,e,f,g
Uncertain d,h,i,j,k,l
It’s the factors with high impact and greatest uncertainty that should be used to develop
scenarios, namely
• Scientific advances leading to new drug discovery processes and greater targeting of
treatments
• Continued mergers and acquisitions leading to more rapid concentration in the

industry or vertical integration
• Transformation of traditional distribution or business models (including greater use

of the Internet for DTC marketing)
• Threat to intellectual property resulting from a combination of generic competition

and the HIV/AIDS crisis in Africa
• More informed consumers
Next, students should be encouraged to identify different possible futures by each

factor:
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Big positive change No change Big negative change

(I) (II) (III)
1. Improved diagnosis and Time to market remains Patent protection shrinks

more efficient clinical key dimension. as clinical trials become
testing. ever more cumbersome
and costly.
2. Genomics provides cost- Emerging markets remain R&D priorities radically

effective ways to detect the main areas for change.
disease and develop new antibiotics and generics.
drugs.
3. Enhanced R&D and Mergers and acquisition Big pharmaceuticals

marketing capabilities pay activity stops and/or poor become a holding
off by bringing more performance of vertical company of drug
blockbuster drugs faster to integration. discovery outfits.
market.
4. Internal biotechs become New marketing channel. Emergence of virtual

the solution to companies.
organisational problems.
5. Harmonisation of approval Intellectual property rights The world’s most

processes within the EU are retained and populous developing
(i.e. single submission) strengthened across the markets are opened up to
and between the EU and world, with exceptions cheap copy products from
the US. being made only in cases countries such as India,
of true emergency such as and effectively lost as
AIDS. markets for major
pharmas.
6. More and better quality Direct to consumer Angry consumers force

information creates better communication continues governments to permit
informed and educated to be outlawed in most direct to consumer (DTC)
consumers. Medical countries outside the US communication so that
practitioners welcome and and informed consumers they are not “kept in the
support the empowering continue to use the dark” about new drug
of final consumers. Internet. developments. DTC is
then politicised in election
campaigns.
Then the resulting scenarios are the extremes of the possible futures. Students should be
told that provided that their strategy is robust in all of them, then they will have
managed risk as well as possible. Thus, on the basis of those factors, three scenarios can
be built. These scenarios would include:
Benign Change
Increased opportunities for pharmaceutical sales developing in emerging
markets, with little substitution from biotech products, no entry of new
participants and a decrease in mergers and acquisition activity. Time to market
remains critical but genomics helps to fine-tune NCE selection and reduce time
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in clinical trials. Organisational changes result in a number of very promising

“blockbuster drugs” advancing through the pipeline. There is greater
harmonisation amongst EU regulators and between the EU and the US.
Moderate Change
Relatively little substitution from biotech products, some advances to reduce
R&D expenditure (moderate improvements in basic drug discovery research) or
some improvement to make expenditure in clinical trials more effective.
Outsourcing (i.e. licensing of products) continues to develop but without
challenging established players. Entry of new participants and/or consumers
opting for some forms of alternative medicine (i.e. non-drug based such as
herbolaria). Slow but consistent steps towards greater industry concentration
continue. However, there are increasing sales opportunities in emerging and
recently industrialised countries.
Hostile Environment
Death of blockbusters in the pipeline as most promising drugs fail the clinical
trial stage. Most income generation is associated to licensing agreements and
profitability thus plummets. There is a recruitment crisis as a whole generation
of new scientists is lost to mid-sized players and biotechs. All investments in
genomics prove futile at present as it will be one or two more generations before
any practical result is evident. Significant substitution from biotech and generic
products fulminates patent protection while courts are an ineffective way to
mount a challenge. Emergence of new alternative forms of non-drug-based
therapeutic treatments and widespread adoption of alternative medicine
practices. Entry of new global participants such as Japanese, Korean or Indian
laboratories. Biotechnology-based firms enter European and North American
markets en masse. Increased mergers and acquisition activity puts substantial
short-term pressure on profit margins. No significant opportunities in emerging
and recently industrialised countries are evident.
6.6 Corporate Social Responsibility
Stereotype category one – As mentioned above, pharmaceutical companies benefit

from human suffering: the drug companies have patent-protected monopolies on
substances people may be literally dying for. For this reason alone they have to be
perceived as “ethical”, that is, avoid actions that might be perceived as putting short-
term profits ahead of the well being of the patient(s). Hence this is unlikely to see a
pharmaceutical company acting only in short-term shareholder interest.
Stereotype category two – This is more likely to see a pharmaceutical acting in the
long-term interest of shareholders. Recent developments over the HIV/AIDS crisis in
Africa and the commitment are a case in point:
• In 2003 South Africa was demanding that patents be overthrown. Will it be Brazil
tomorrow? After HIV/AIDS which disease is next? A degree of sympathy with
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GSK must be taken given that it has tried harder to engage with the AIDS problem
in sub-Saharan Africa than most other pharmaceutical companies. Although Garnier
led other CEOs in coming to an agreement with the South African government, all
along GSK emphasised its concern with parallel trade.
Stereotype category three – Developments over the HIV/AIDS crisis in Africa are
again a good case to illustrate how pharmaceutical companies were responding to
multiple stakeholder obligations, as is the commitment of GSK to other social issues:
• In 2003 some small and large investors expressed concerns that companies such as
GSK risk becoming scapegoats for the AIDS epidemic in Africa if they failed to do
more to help poor countries. GSK was not alone as the rare move of major
institutional investors to write their concerns on the lack of response was addressed
to the top 20 pharmaceutical companies (including AstraZeneca and Novartis).
Investors were demanding the introduction of “differential pricing” (i.e. high prices
in rich countries and low prices in poor) while steps were to be taken to avoid
parallel trade. Investors feared that bad publicity related to global health crisis could
make it harder for drugs companies to justify charging higher prices in rich nations.
Also, that bad publicity would make it harder to recruit top staff – and as a result,
affect the quality of business. While all big investors supporting the initiative were
based in Europe, they were finding echoes to their ideas amongst some US
counterparts. The statement clearly showed the growing readiness of shareholders to
act together and tackle socially responsible investment issues. It followed similar
collaborative action on climate change, child labour and human rights abuses.
• GlaxoSmithKline (GSK). On the bright side the company had developed and met
very specific goals for global corporate environmental standards. Another positive
development came in 2003 when, for the second consecutive year, GSK was
recorded as giving the largest amount to global good causes of any FTSE 100
company. This, as GSK’s programme of involvement in the community, was worth
at least 2.4% of pre-tax profit in 2002.
Stereotype category four – This is highly unlikely to see a pharmaceutical as a shaper of

society.
There are thus key issues around the ethical stance of pharmaceuticals, their
stakeholders and society at large including:
• Property rights
• R&D, budget constrains and the pursuit of ailments in emerging markets
• Being in the public eye (as a consumer goods manufacturer and a provider of health
products)
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6.7 Business Implications
Questioned with the implications of changes identified above will allow students to
answer Question 4 (What are the likely implications of the changing business
environment in pharmaceutical firms?).
Students should realise that, on balance, internal and external innovation suggest the
pharmaceutical industry is facing a rapidly changing environment, which offers both
opportunities (such as harmonisation of regulatory requirements) but also threats (more
discriminating purchasers, low productivity of R&D expenditure). In the future, it
seems that the success of manufacturers will be linked to improving the pipeline to
achieve adequate return on escalating R&D costs. Moreover, to consider the long-term
viability of relying on a handful of drugs for their profitability. Hence, and in spite of
continued amalgamation within the industry, innovation will continue to prove to be
more important than size. This because new products must offer unique benefits to
command price premiums, yet information leakage means that most products are
imitated rapidly. In this sense, technological developments driven by genetic
discoveries might prove to be crucial as a way to improve targeting in the development
of NCEs but also to make clinical trials more effective (by moving away from random
samples to selecting at-risk patients).
Specifically, students should identify that:
• Risk/return equation has changed. The traditional route to success through

“blockbuster” drugs is still critical but is it sustainable as a model? The need for big
pharmaceuticals to improve the flow of new drugs is indisputable but so is the
dearth of the pipeline for most big players. Moreover, as drug life cycles have
flattened and shortened players are demanding true innovation. New drug
development has, therefore, turned from a source of competitive advantage to a
feature necessary to remain in the market.
• Time to market is critical. As R&D becomes quicker and cheaper, some clinical
trials become more effective (i.e. cheaper and better targeted). But new, more
precise and effective drugs and drug discovery processes could result in small,
single product firms producing the cash flow they need to finance future products.
• Access to big purchasers and the information some of them can provide is crucial
and could hold the key to future growth. Here pharmaceutical companies need to
help in increasing the ability to anticipate disease, rather than just react to it.
• Social trends call for developing drugs for illnesses we know little about (such as
Alzheimer’s) or areas long ignored (such as tropical diseases). This suggest an
increase in the range of diseases that are treatable.
• Large and expensive sale forces are important to maintain sales. However, cost
considerations might incentivise some companies to look for alternatives. There is
likely to be a greater emphasis on establishing therapeutic franchises as a means of
203
acquiring market share at a discount and also managing the complexity of very large
corporations.
In summary, many large pharmaceutical companies were facing their toughest outlook
in a decade. The industry had made a tremendous contribution to human well being,
yet was vilified in the media and targeted by governments in their efforts to curb
spiralling healthcare costs. R&D costs had risen sharply, while the product life cycle
had shortened. Product approval, pricing and promotion were subject to increasingly
onerous regulation, yet free trade allowed wholesalers to extract a large chunk of
value from the chain without adding anything back. Companies had to balance
shareholder return against the huge unmet need of developing nations. Exciting
opportunities still existed – more educated consumers, advances in genomics,
regulatory harmonisation and of course unmet medical need. Industry consolidation
was driven by the dominant belief that size was critical, although a few players
preferred to build focused franchises or to offer integrated healthcare solutions.
Ultimately, meaningful innovation was what mattered most, but it was not clear that a
business formula based on inventing and selling blockbuster drugs could continue to
sustain double-digit growth rates.
204
Appendix 1: Glossary
biotech Biotech companies typically discover and develop complex biological

products which may be diagnostics, therapeutics or vaccines.
blockbuster A drug that is marketed globally and has annual sales exceeding $1
billion.
Contract Research A CRO conducts clinical trials on behalf of a client pharmaceutical

Organisation (CRO) company.
detail/detailing Detailing refers to a sales call in which a pharmaceutical sales

representative (“rep”) discusses the merits of a drug in a face-to-face
meeting with a doctor and may hand over free samples.
direct-to-consumer DTC advertising involves communication of promotional messages

(DTC) directly to consumers via print, radio, television and the Internet.
“disease These involve understanding the goals of the healthcare system in

management” addressing a specific disease. The firm then aligns itself with the
initiatives healthcare providers, trying to offer an integrated service that improves
eventual disease outcomes, positioning its drugs as one part of the
solution.
ethical Ethical medicines can only be obtained with a prescription from a

qualified medical practitioner.
Federal Drug The FDA is responsible for approving drugs for marketing in the US and
Administration regulating the US pharmaceutical market.
(FDA)
generic medicine A generic medicine contains exactly the same active ingredients as the
original brand, but is typically launched at less than 60% of the price.
Generics manufacturers cannot use the original manufacturers brand
name. Drugs are known by both a brand and a “generic” name, for
example “Viagra” is a Pfizer brand name; the generic name is “sildenafil”.
Generic names refer to the active ingredients and are independent of
manufacturer.
genomics Genomics is the study of genes and their function. Genomics has the
potential to increase treatment effectiveness by identifying individuals
who are likely to respond to a specific medicine as well as those who
might experience unwanted side effects. Genomics also has the potential
to identify very large numbers of new drug “targets” – genes, enzymes,
receptors, etc., at which new drugs can be directed.
intellectual property Proprietary knowledge that can be defended against imitation using
patent law.
Managed Care MCOs operate within the US healthcare market and act as an interface
Organisation between patients and healthcare providers such as hospitals. MCOs
(MCO) provide defined healthcare benefits for client populations in return for
regular premiums, which may be paid by individuals or their employers.
205
market exclusivity Period during which a first-in-class drug is the only product of its type on
the market and faces no class competition
National Institute for A government-funded organisation in the UK that aims to provide

Clinical evidence-based guidelines on the optimal and most cost-effective use of
Effectiveness drugs and other medical interventions.
(NICE)
new chemical entity A completely new product launched as a medical treatment for the first
(NCE) time.
over-the-counter OTC medicines can be purchased by consumers without a prescription

(OTC) medicines
Pharmacy Benefit PBMs act as intermediaries between manufacturers and MCOs.

Managers (PBMs)
206
Appendix 2: PESTEL analysis
(Note the list is not exhaustive and could be supplemented by students.)
Political forces
The pharmaceutical industry is unusual, as in many geographic markets there is

effectively only one powerful purchaser, the government. In the 1980s and 1990s,
governments around the world began to focus upon pharmaceuticals as a politically
easy target in their efforts to control rising healthcare expenditure and demand greater
“value for money”.
On balance, the types of controls used by governments are a reflection of deep-rooted

cultural differences but the choice of strategy is also affected by the importance or
otherwise of the national pharmaceutical industry as a contributor to GDP, balance of
trade and employment. As the industry globalises and ownership and employment
become concentrated in fewer countries, this may result in less benign intervention.
Regulators have been challenged not to overburden new growth areas in biotechnology
research.
There are growing pressures arising from inter-country pricing disparities and parallel
trade. Notable examples include the dispute between US and Canada as well as
HIV/AIDS treatment in South Africa. The latter also points to the urgency of attending
to the needs of poor countries or risk a breakdown in the international system for patent
protection.
Economic forces
Demand
Patients (i.e. ultimate users) have traditionally had little influence on the choice and
price of pharmaceuticals. First, it is doctors who make the prescription and medical
practitioners tended to favour branded products instead of memorising complex
chemical names. Secondly, incentives to shop were diminished as costs were assumed
or reimbursed by insurers, employers (in the US) or healthcare authorities (in Europe).
During the 1990s funded systems found it hard to cope with rampant healthcare costs. It
was recognised that healthcare had none of the normal checks of a free market that
would balance supply and demand, and so free-market incentives were introduced to
control demand.
The high margin branded prescription market has globalised, reflecting world-wide
convergence in medical practice and regulatory harmonisation. Big pharmaceuticals
207
have proven expertise to mass-market products on a global scale. However, the market
appears set to become more US-centric, leaving the industry heavily exposed to
fluctuations there.
Supply
The global pharmaceutical market remains relatively fragmented, with no company

holding more than an 11% market share in 2003 (i.e. Pfizer). However, this disguises
the fact that some companies have over 80% market share in some therapy classes –
hence the importance of blockbuster drugs. At the same time, the industry still features
relatively strong non-internationalised players based in Japan, France and the
developing world (notably India). However, the imperative to achieve a global return on
R&D investment suggests that these companies will struggle to survive in the medium
term.
Spending on R&D has grown while the number of new products reaching the market
has fallen. In 1981, global R&D expenditure was around $5.4 billion dollars while it is
estimated to exceed $50 billion dollars in the year 2000. Conversely, 51 new chemical
entities (NCEs) were introduced in 1980 but only 32 in 1999, 24 in 2001 and 17 in
2002. Hence, there is an impending need for cost containment especially in the light of
resource-hungry R&D platforms.
Social forces
As the “baby boom” generation approaches retirement, there have been new efforts to
develop drugs for the treatment of the elderly (such as solutions for Alzheimer’s
disease).
Final consumers are now better informed, have higher expectations and want greater say
in their treatment. This could open new marketing opportunities but, at the same time,
educated consumers have become more demanding of advances in therapy. Here the
possibilities associated with information technology developments which grant greater
access to detailed healthcare information (for both providers and patients) could be
important to push forward cost-effective treatments.
Ethical issues relevant to corporate strategy should be emphasised side by side

with global competition issues (such as parallel imports, generics, biotechnology,
licensing or life-cycle management).
There are significant differences for R&D and marketing amongst international trading
blocs. R&D is primarily driven by European and North American needs while “satellite
economies” (such as Latin America, South East Asia or India) are major markets for
generic products and antibiotics.
Japan has the fastest ageing population and this plus a long economic recession risks
pushing its healthcare system into bankruptcy.
208
There has been growing investor activism in both Europe and the US, suggesting
shareholders could be increasingly susceptible to ethical, social and corporate
governance issues.
Pharmaceutical companies benefit from human suffering: the drug companies

have patent-protected monopolies on substances people may be literally dying for.
For this reason alone they have to be perceived as “ethical”, that is, avoid actions
that might be perceived as putting short-term profits ahead of the well being of the
patient(s). Recent developments over the AIDS crisis in Africa have put intellectual
property rights under threat and have the potential to undermine the industry
business model.
Technological and environmental forces
Since the early 1950s we can see a progression of drugs that have made or broken
companies over time.
Given the ageing profile of the Western population and the growing number of middle-
class consumers in developing countries, the long-term prospects for the industry look
good. However, with the advent of genomics, potential new ways to discover drugs, to
better target their use and to conduct medical trials suggest there could be a major
reorganisation of the industry.
The introduction of “cradle to grave” policies in the EU should result in greater need for
“green” (i.e. environmentally-friendly) management.
The impact of the Internet on traditional business models is as yet uncertain. The
Internet could reinforce a trend to switch from prescription to OTC drugs and in the
process disintermediate retail chemists. If successful, these innovations will challenge
both regulators and the competences of established providers.
After the mapping of the human genome there was much hype about the possibilities for
genetic research in pharma. Genetic research has yet to have an impact on drug
discovery or clinical trials.
Legal forces
The intervention of health authorities is key to determine the length of patent protection
as well as approving new products to be marketed. The move towards international
harmonisation of regulatory controls could bring significant benefits in terms of reduced
costs and accelerated time to market for pharmaceutical companies.
Clinical trials still remain as the stage that demands the greatest share of resources to
develop a drug. Big pharmaceuticals will point the finger at cumbersome regulation as
responsible for lengthy trial periods. This is partially true but taking a drug through the
trial-and-approval process still requires from 10 to 12 years because a) the trials
209
themselves are more and more difficult to conduct; and b) because of the trend to target
diseases that take a long time to manifest themselves (such as osteoporosis).
Pharmaceutical companies often find problems in enforcing patent protection in

developing countries (particularly in Asia). The threat of the South African and
Brazilian governments around the HIV/AIDS treatments is another case in point.
210
Appendix 3: Five-forces analysis
Factors Origins Immediate Past Future

(1950–1985) (1985–1995) (1995–2005)
Threat of Potential Industry has high entry barriers because The industry has already high entry Firms specialising in moving specific
Entrants of: barriers which are increasing. They molecules along the value chain could be
associate with lead times for new drugs to tomorrow’s main competitors.
long lead times for new drugs,
be marketed increasing from 3–5 years in
Emphases on disease prevention and
high cost of R&D and clinical testing, the 1960s to 12 years in the mid 1990s.
early detection begin to shift R&D
large and expensive sales force required. Already high costs of R&D and clinical priorities; and could favour
testing increasing. Only 1 to 4% of new pharmacogenomics providers.
drugs reach the market. Of these 60% fail
to achieve sales that justify R&D costs.
Low Low Moderate
Power of Buyers The decision to buy was imposed by Loss of brand loyalty as medical Controls on pricing, reimbursement and
doctors on patients (i.e. final consumers). practitioners are forced to become cost market access continue to tighten (“value
Doctors had no responsibility to contain conscious and consider prescribing for money” is a top concern on both sides
costs. generic rather than brand drugs. of the Atlantic).
Patients’ expectations are rising. Growth of managed care (and the
information it provides) is expected to
In the US, a mail-order channel starts to Government policy to increase
continue deteriorating the profitability of
develop to help highly price sensitive competition (internal market).
big pharmaceuticals regardless of the
patients (for instance, the elderly or the
Governments (EU) and managed health outcome of regulation.
chronically ill).
organisations (US) imposing systems to
control prices (black lists, price freezes,
formularies, etc.).
Growth of distributors of drugs who, acting
as middlemen, buy drugs in bulk to
achieve cost reductions.
Harmonisation of government approaches
to healthcare and drug approval amongst
EU countries and between the EU and the
US.
211
Low High High
Power of Substitutes Few substitutes. High profits associated Cheap generics (from not very reputable Biotechnology and combinational
with introducing products that greatly manufacturers). chemistry further reduce lead times to
improved the quality of healthcare for market.
many patients.
Biotechs may become more successful at
Improved chemistry and computer
Lead times of 6–7 years over competitors bringing successful products to market as
generation of analogues (biotechnology)
(time for rivals to produce “me-too” drugs). genomics allows targeted application so
have reduced lead times for “me-too”
that clinical trial size and length can be
drugs from 6–7 years to 18 months;
shortened.
CHECK MARKET EXCLUSIVITY DATA
IN CASE! Diversification into generics protects the
market share (but not the profit) of big
Consumer suspicion of drugs leads to
pharmaceutical companies.
increasing use of alternative remedies.
Physicians develop independent systems
to compare therapies and non-integrated
rivals search for information databases
comparable to those of the big
pharmaceuticals.
Low Moderate High
Power of Suppliers Cost of drug ingredients are very low Global sourcing by drug companies has Lack of profitability of outsourcing markets
percentage of total costs. led to further reductions in the costs of raw for R&D, clinical trials and managing the
materials. approval processes may result in a shake-
Pharmaceuticals tend to be fully vertically
out with fewer suppliers able to put
integrated (from molecule search to mass Major pharmaceutical companies come
upward pressure on out-sourcing costs.
marketing). increasingly to rely on out-sourcing and in-
licensing for new products, enabling
supplying companies to place a high price
on such deals. However, counteracted by
global over-capacity in outsourcing and
R&D.
212
Low Low Low
Competitive Rivalry Low concentration (lots of producers in High cost of R&D expenditure is .
several therapeutic applications, hence effectively an exit barrier.
low price competition).
Profitable, cash rich industry but margins
Large and expensive sales forces were are declining.
developed on the back of brand
Mergers and acquisitions are expected to
recognition to target doctors.
continue as they could lead to economies
of scale, better sales and marketing and
Continued industry consolidation results in
more efficient R&D efforts.
fewer larger global companies, focused on
specific franchises, with intense rivalry
within therapeutic franchises.
QUOTE INTENSE RIVLARY WITHIN
PRODUCT CLASS FROM CASE.
Moderate High High
213

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Instructor’s Manual

CASE TEACHING NOTES

The Global Pharmaceutical Industry

Sarah Holland (Manchester Business School) and

2. Position of the Case

The pharmaceutical industry case study lends itself to:

• assessing an organisation’s competitive environment, using the following analysis

• discussing issues around co-operation and alliance;

• assessing the role of ethics in corporate strategy; and

The pharmaceutical industry case study develops students’ understanding of how to

• develop a sensibility for the business environment;

• identify key success factors in the pharmaceutical industry (including strategic

• understand drivers towards globalisation of an industry and the opportunities and

• developing an understanding of the purpose of scenario planning and applying

The topic of environmental analysis is discussed in Chapter 2 of Exploring Corporate

Students, individually or in groups, should engage in one of the following activities

• Undertake a PESTEL analysis (focus on current industry trends).

• Consider issues of corporate social responsibility raised by the case.

During the discussion, tutors should point out the relevance/limitations of

5. Questions for Discussion

1. Identify the main environmental forces currently affecting the pharmaceutical

2. How relevant do you think the five-forces framework map is to identify

3. Use scenario planning techniques to consider the various environmental influences

4. What is the prevalent ‘ethical stance’ in the pharmaceutical industry?

5. What are the likely implications of the changing business environment on

b) What environmental factors are affecting big pharmaceutical companies?

c) Which of these is the most important at the present time?

An alternative to using Question 2 above can be found in Illustration 2.5 which

f) How could you respond to each of those to lessen their impact?

h) Who do pharmaceutical companies serve?

l) How would these actions by pharmaceuticals, the medical establishment and

6.1 Items for General Discussion

The industry relies on a fixed period of patent protection to provide a monopoly on

Normative Issues – pharmaceutical companies benefit from human suffering: the

6.2 Brief History

Technological success, in the development and marketing of new products, characterised

• greater reliance on blockbuster drugs as the main source of income.

These factors suggested participants’ diminishing expectations of future profitability as

6.3 Industry Boundaries

There is a risk of students’ discussion entering other healthcare markets such as

6.4 Environmental Analysis

A PESTEL analysis could be used to answer Question 1 (Identify the main

• There is evidence of transference of marketing across countries. Marketing health

• There is evidence of interdependence encouraging the globalisation of competitors.

• Parallel trade will continue to be a significant issue because of the role of

• Harmonisation of regulation and supervision has the potential to accelerate

As a summary, students should realise that global competition in pharmaceuticals has

• Outsourcing of manufacturing together with the contracting of R&D to biotechs and

Whether rational or otherwise, participants in the industry consider a firm’s

Table I Learning Points of a Five-Forces Analysis

Learning As applied to ethical pharmaceuticals

Exhibit 1: Effects of legislation on ethical drug’s product life cycle

The product life cycle of the past

Launch Patent Expiration

Exhibit 2: Effects of legislation on ethical drug’s product life cycle

Reduced by future healthcare changes

Launch Patent Expiration

6.5 Industry Trends and Scenario Planning

• the pharmaceutical industry facing a rapidly changing environment, which offers

• IT developments provide greater access to detailed healthcare information for both

• educated consumers demanding advances in therapy;

• continued industry consolidation.