G LOBAL P HARMACEUTICAL I NDUSTRY : O VERVIEW & S UCCESS F ACTORS

A closer look at the factors affecting growth and development

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Global Pharmaceutical Market: Overview

1. Indust ry Overview The pharmaceutical industry of the world develops and markets medicines prescribed for patients by medical practitioners. The U.S., U.K and European pharmaceutical companies are the major ones of the industry. The total number of major pharmaceutical companies (annual revenues USD 1,000 million and above) worldwide The global pharmaceutical industry is estimated to be about 50. This report gives a brief end of 2010 with a growth rate of description on the global pharmaceutical markets size, around 5 to 6 percent. trends, issues, challenges and critical success factors etc. The report also elaborates on the profile of the major players in the global pharmaceutical market. The global pharmaceutical industry is expected to reach $830 billion by 2010 with a growth rate of around 5 to 6 percent. While the pharmaceutical industry in regions like Latin America, Europe and Japan is growing at a steady rate which is more are less equal to that of the overall industry, the developing regions like China and India are recording corresponding growth in double figures. Industry analysts predict that the pharmaceutical market would reach $1.1 trillion by 2015 with the average growth rate of around 7 percent. United States is still the largest pharmaceuticals market in the world with a market size of around $300 billion and it is expected to reach $370 to $390 billion by 2015. The developing countries like China, India and Brazil still need to go a long way to reach the level of operations of the developed countries. As the developing countries are growing at the rate of 15 to 16 percent, there is a huge scope for the development of generic drugs there.

is expected to reach $830 billion by

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Global Pharmaceutical Market: Overview Pharmaceutical companies like Pfizer, GSK and Novartis are spending more than $5 billion towards research and development. Pfizer takes first place in the race as it spent around $6 billion on R&D in the year 2009 mainly on preclinical testing, lab testing and clinical trials. Introducing an innovative drug is not an easy task in the pharmaceutical sector if spending money on lab testing and clinical trials is not on prolific. Most of the major companies spend around $1 billion for more than eight years to research the drug. So, R & D investment is a prime cost-factor for pharmaceutical companies. Five-Year Growth Rate Chart The growth rate from here on will be interesting given that while the industry fears loss of revenue owing to patent expiries beginning 2011, the healthcare industry is projecting increased drug consumption because of the healthcare reform laws made by the U.S. government. There are bound to be questions on the profitability of pharmaceuticals notwithstanding the higher number of consumers, as the new laws impose discounts and rebates while also providing for increase in industry fees.

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Global Pharmaceutical Market: Overview

2. Critical Success Factors

2.1. Major Facto rs Affecting G rowth The growth of the market is expected to be largely driven by new product launches; especially those of branded drugs. The growth rate is expected to reach its peak by 2014, after which it is expected to stagnate with fewer new product launches. R&D is among the foremost major factors that decides the magnitude and effectiveness of the growth of the industry. Research is a multimillion dollar exercise that is typically spread out over a decade, if not longer. Although many new medical and chemical substances might be discovered from time to time, only a minute fraction of them proves U.S. industries have al ways sp ent to be commercially and between 15-22% of thei r sales rev enues therapeutically viable. Further, towards R&D ventures. many medicines might not show sustained performance in medical trials. Therefore, R&D must focus on improvement in output quantity and quality. It must be driven by the most knowledgeable and experienced human resources in organizations. Given the fundamental importance of R&D in the pharmaceutical sector, it is hardly surprising to note that the U.S. drug industry spent between $ 30-40 billion each year in the period 1999-2005 towards funding their respective research operations. Since the early eighties, U. S. industries have always spent between 15-22% of their sales revenues towards R&D activities. Pfizer spends around $6 billion on R&D every year. Successful new drugs (once approved, their manufacturing costs are usually a small fraction of their price) generate a profuse cash flow which can readily recover costs of past R&D ventures as well as finance fresh ones. Alternative sources of investment capital from the bond and stock markets are not perfect substitutes for cash-flow financing. Competition is a force that all players of the industry need to contend with and overcome in order to thrive and develop. With easier access to cutting edge knowledge, capital and other production factors, all companies are capable of developing some drugs which meet todays peoples medicinal demands in the context of lifestyle diseases, neurological disorders and unknown diseases breaking out on a global scale. Generic drug manufacturers have no R&D costs to recover and they eat into the market shares of their major/branded industrial counterparts (by introducing non-proprietary equivalents of branded drugs), once the latters products enter the open market. Price control has a direct effect on the profits possible. The degree of control depends on the regime in question and in any environment of regulation, it is the policy of the regulatory agency and the kind of the drug that decides the degree and nature of

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Global Pharmaceutical Market: Overview regulation. While drugs that act against diseases like obesity and impotence might be priced high, life-saving and long-term therapy drugs could be sold at affordable prices. Patent protection is indispensable for a pharmaceutical manufacturer to gain maximum returns on R&D investment. Of late, there have been some instances of one pharmaceutical company claiming the formula rights to the products of another, leading to intransigence within the industry. Patent infringement prosecution needs to be diligent and damages must be claimed to the maximum extent possible under the law so that it acts as a deterrent to covert and nefarious drug cartels. Drugs portfolio management is as vital as the R&D function because the range of drugs that might be launched by a company today will affect its revenues and reputation many years later too. There are instances on the international level wherein pharmaceutical companies which could not develop new products experienced continuing losses. 2.1.1. Operationa l Efficiency There is a growing demand worldwide for medicines that cost lesser, have little or no side effects and have more efficacy and longer lasting potency. As high costs of research and development are inevitable, the processes of production and delivery must be so streamlined that throughput costs are minimized. The industry standard prescribed by the USFDA which can boost operational efficiency is the Process Analytical Technology (PAT). It is a regulatory framework that encourages proactive development in the areas of research, production and quality control in the pharmaceutical industry. PAT calls for: Adoption of scientific principles and methodologies that aid pharmaceutical innovation

Following a plan that makes room for innovative implementation of regulatory guidelines. Also involved is the formation of a team that reviews the CMC (chemistry, manufacture, control) and inspects the CGMP (current good manufacturing practice) in addition to conducting joint certification and training of the PAT staff. The FDA recommends PAT as a system for the design, analysis and controlled manufacture by means of time-bound measurements of all attributes affecting the quality and the performance of every raw material and process so that quality persists up to the ultimate stage of product manufacture. PAT is aimed at an enhanced understanding along with a controlled manufacture process which is consistent with the latest quality standards for drugs. PAT requires quality to invariably be present in products by design, rather than have it as a parameter for testing. Quality should be resulting strictly from a thorough understanding of the objectives of therapy-medications, patient numbers, scheme of administration and the various physical, chemical and other characteristics of drugs as well as from knowledge-based design for continuing quality and consistent performance.

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Global Pharmaceutical Market: Overview The benefits foreseen from PAT are quicker-moving production cycles, minimized cases of rejected batches, lesser need of reprocessing, higher automation levels, improvements in use of energy, better production capacity and cutting down on human errors. Although the adage Time is money is a true motivator for a pharmaceutical R & D team to deliver within deadlines so that its company can capture a market for a particular therapy before a competitor can, companies frequently encounter inefficiencies in their R&D processes that lead to their development endeavors being stalemated. In such a PAT requi res quality to invariably be situation, industry leaders have present in produ cts by design, rather sought the assistance of than have it as a p aramet er for testing. consultancy firms to frame a coherent research methodology, have in place some initial short trial-and-error sequences that determine the outcome of other later major research ventures and the use of IT to create solutions that improve communication and knowledge-sharing among various points in the enterprise. For every successful new drug, a firm will have had many failed drug projects that could not survive clinical Trials or that never obtained approval from the Food and Drug Administration. Estimates of average R&D costs per drug should include the costs of those failures. 2.1.2. Emerging Ma rket s The importance of investing in emerging markets (markets in countries, which have, of late, removed restrictions on foreign investment) arises from the fact that these countries have a sizeable population that is steadily growing. The incidence of diseases like diabetes, cancer and cardiovascular diseases in these countries is also on the rise. It is also of interest for pharmaceutical companies that decades-old formulae sell very well every year in emerging markets. The opportunity for launching a spectrum of new products is therefore bound to be a profitable venture. As globalization comes of age, it becomes imperative for pharmaceutical companies to have a global footprint by having product ranges that gain wide patronage in all sections of the population. If the emerging markets present attractive shores for pharmaceutical-investment, then their rising income levels and an abundance of human capital (that is a strong knowledge factor that can be capitalized by businesses) as well as the availability of extensive labor employable at low-cost wages make an equally strong case for outsourcing to them. The need for outsourcing is all the more spurred by a looming spate of patent expirations likely before 2020. Whether to spend the next decade in research that might yield fresh patents or to prepare facilities for manufacture of generic drugs is a question that pharmaceutical companies looking to expand might well consider right now than later. In countries like India, the manufacture and sale of generic drugs is as profitable as costeffective as was illustrated in 2007, when Thailand purchased millions of doses of a made-in-India generic version of Plavix for 3 cents per dose (a pill of Plavix would have cost $2). For all those companies

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Global Pharmaceutical Market: Overview interested in continuing the sale of previously patent-protected drugs, they have to move the manufacture to the emerging markets in order to stay competitive. Rising costs of production and research as well as declining approvals in newly developed products by the government only add to the need for shifting the production base. Research The chall eng e in these em erging market s shows that conducting is that there isnt an ad equ ate sy st em of clinical trials in developing IP protecti on. countries significantly reduces drug development costs. The challenge in these emerging markets is that there isnt an adequate system of IP protection. The approval process for newly developed drugs is protracted and there is an indifference to ethical standards in case local agencies are appointed for business or clinical trials purpose. 3. Resou rce Sharing In the context of new product launches, resource sharing involves creation of a team of professionals who coordinate the various launch preparedness activities and closely supervise all aspects of the launch. An action plan that is based on a timeline for each task leading to the launch must be drawn up well in advance and the team must be made of competent individuals that can act as a common resource to train, guide and assist the human resources that are at the frontline of the efforts being invested for the launch. The timeline must identify key activities to be satisfactorily completed within a certain period and must charge the team of pros with adherence to the specified periods. Owing to the increase in the growth rate of the range of pharmaceutical products available, there is a whole new choice of batch and bulk packaging options for the drug industry to choose from. But the pharmaceutical companies need to properly understand the technical aspects such as biochemical reactions, computational fluid dynamics and finite element analysis that distinguish these machines from the conventional ones. To understand and use the knowledge so that the right machinery solution results, there must be an inter-functional panel of experts to report on possibilities and estimates of how the design and dynamics of the new machinery might affect the production/delivery of the tobe developed medicines as well as the tried and tested ones. Unmet medical needs that demand high-quality therapy solutions require brainstorming from different knowledge groups within the company. In order to develop a suitable product, high quality investigation and concerted efforts must be in place. In order to make a major advancement, there might not be a need for eminently qualified principal investigators as the trend is to harness technology-intensive solutions. For instance, mobile technology is being successfully used in streamlining clinical trials and for a better system of patient monitoring therein.

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Global Pharmaceutical Market: Overview Another way of resource sharing is to have an extended association with small and medium companies in emerging economies like India where skilled as well as unskilled labor is available at an attractive cost-benefit. 4. Efficient Supply Chain Management As per the definition provided by APICS Dictionary Supply Chain is the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally." If pharmaceutical companies do not look at adopting a cost effective and an efficient, process-oriented supply chain model, the survival in the long run is always a question mark. We analyzed that the pharmaceutical companies should build best-in-market capabilities in the following areas. Forecasting and planning Procurement Production Customer Management

4.1. Forecasting and Planning If one were to look at the pharmaceutical market 5 to 10 years back, it would be surprising to know that companies targeted production was almost double of the actual market demand. Probably, it was a good idea at that time as there were no price pressures and that helped the companies to make money big time with ample stock in the distribution channels. In todays environment of high price and margin pressures, it is advisable for the companies to work on the demand driven supply chain management by reducing the stock in inventories. 4.1.1. Demand Driven Practices As per the AMR list, the top 25 companies in the world are demand driven. Practicing the demand driven principles in the supply chain is a key measure to achieve the top position of In demand d riven supply chain the AMR list. It is highly manag ement, comp anies only man age recommended to the pharmaceutical companies to demand in stead of resp onding to it. have a look at the demand driven principles or practices so as to benefit from the supply chain system.

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Global Pharmaceutical Market: Overview In demand driven supply chain management, companies only manage demand instead of responding to it. Though, it is a known fact, most of the companies across the world are still in a quandary while taking a decision on forecasting and planning. The other factors leading to pathetic forecasting are perhaps a lack of demand visibility, multifaceted sales channels with well known wholesalers, global operations and FDA compliance. The forecasting plan should be very clear and the planning should be in such a way that minimizes the inventory by reaching or exceeding the customer demands or needs. 4.2. Procurement Minimizing the expenses is the key. Yes, a dollar saved in operating expenses is the same as the profit gained on a $10 sale. Companies can not only achieve profitability by selling more but also by spending less in terms of operating expenses. E-procurement has become extremely popular in this advanced technology-driven market to make possible lower transaction costs and in-time procurement. There are some good e-procurement applications designed for the pharmaceutical industry available in the market and these applications would definitely help in managing supplier relations. As per our research, we found that companies can save nearly 10 to 15 percent on procurement and additionally year-over-year savings would be around 4 to 5 percent with the help of strategic supplier management. As pharmaceutical companies need to abide by the FDA compliances, it is emphasized that they get into a compliance-focused supplier management model. The focus of procurement should shift from price reduction on a single purchase to healthy relationships and lowering total cost of procurement and management. 4.3. Production Pharmaceutical industry is known for its specialized equipment, long lead times and regulatory requirements. The long lead time is the utmost worry for the top management of the companies. The long lead times put companies in a situation wherein they are unable to react to changes quickly. Moreover, the increased competition between the generic drug manufacturers demands shorter batch manufacturing processes. All these factors indicate that there is a significant scope for the improvements in the production environment.

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Global Pharmaceutical Market: Overview As most of the pharmaceutical companies spread their wings globally, production and other related capabilities have become weaker. The global environment brings up some questions which need accurate answers: Which production sites need more investments and which among them need to be divested? Which production site is to be chosen for which product? Where are reliable suppliers and cheap labor best available? How about saving on transaction costs when trying to subcontract? How to evaluate the tactical factors such as profitability, cheap labor, age of equipment and compliances of production sites?

The right answers to these questions would definitely improve the return on investment of a pharmaceutical company. 4.3.1. Shift Towards Smaller Batch Production and Profile-Specific Drugs Shifting towards smaller batches would be an ideal practice for pharmaceutical companies in todays environment. The demand for profile-specific drugs is getting increased day-by-day. We can clearly say by looking at the present environment that customers would expect that companies do drug tailoring for custom batches of one. 4.3.2. Change Management When the production process is shifted to the smaller batches, it is obvious that the forecasting & planning and configurations of production equipment would take time. Probably, it may take two to three years to bring about a consistent production process. 4.4. Customer Management As discussed, the following two crucial trends would sharply affect the pharmaceutical industry in the coming decade. Shorter batch production Retailers and end customers would be added to the direct customer base of the manufacturing companies.

Shifting towards sm aller bat ches woul d Pharmaceutical companies need to quickly adapt to the change be an id eal p racti ce f or ph arm aceutical that is bound to happen in the compani es in today s envi ronm ent. future. Perhaps, the above mentioned two inevitable trends would demand resizing the distribution perspective. Yes, it is predicted that the companies need to transform themselves from large palette distribution to small package distribution to enjoy the

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Global Pharmaceutical Market: Overview success in the market in the coming decade. The advanced technologies available to the end-users while searching for the cost effective and best service channels create more demand from the retailers and direct end customers. It is just a matter of serving the real time demand by accessing the end users in the market. Getting into the mode of accessing the real time demand is not so easy and companies need to pull up their socks to look at the right business model that can fit take impending change into stride. 5. Staying Competitive Through Technological Innovation Successful production in pharmaceutical industries depends on assiduous performance powered by knowledge, skills and techniques to tide over problems of particles and matters of molecules. Super-fines, milling methods, yield and purity are all factors that determine whether a particular drug will result in profits according to projections. Apart from core production processes, there are administrative and logistical tasks which, if automated by harnessing the right technology, will result in simpler and better managed processes. Speaking of technology, RFID (Radio Frequency Identification) is being used by major drug companies in many countries to prevent counterfeiting. Spurious drugs affect health and lives of public in general and any one can become a victim; given the rampant growth of spurious drugs. The worldwide spurious drugs market is worth several billion dollars and this necessitates urgent deployment of high-technology measures that prevent such frauds from taking place. A reputed pharmaceutical companys share prices fell by about 30% in July 2002 when it became known that a spurious manufacturer was passing off ersatz drugs under a brand name of that company. RFID prevents spurious activity by mandating a pedigree (comprehensive record of every transaction, creating a chain of inter-linked transactions) to every instance of drug sale. There is however, reluctance in the pharmaceutical industry to implement RFID solutions as there is no confidence about the efficiency of the technology in real-time. RFID performance in open-loop systems needs to be demonstrated so that these reservations are cast off. Well designed and amply illustrated case-studies (that bring into the forefront strong proof-of-concept of the effectiveness of RFID) can do the needful for the industry to incorporate it into their logistics. Nanotechnology, stem cells and genome discovery are the latest scientific concepts that can bring about quantum changes in drug development and possibilities. These new frontiers of knowledge can

RFID (Radi o Frequ ency Identifi cation) is being used by m ajor drug comp anies in many countri es to prevent counterfeiting.

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Global Pharmaceutical Market: Overview be especially promising in the field of combination drugs. Not only can new molecules be conceived but also those molecular structures hitherto thought too complex or unfeasible can be re-essayed. 6. Conclusion The best in pharmaceuticals is yet to come. The very nature of the industry offers seemingly endless opportunities to improve state of the art in medicines and better still, to establish new paradigms of drug development and distribution. The best vehicle to be driven on the road ahead is that of promising scientific possibilities on the wheels of novel technology but at a velocity regulated by ethics and proactive compliance. Striking win-win partnerships in the industry is one way to identify rewarding prospects and pursue them so that mutual benefits are possible for all stakeholders. Markets have to be permeated with products that hold the promise of healing high above the hazard of habit formation and side effects. This, at through-and-across the market levels at lower costs so that profits result from higher volumes and better trust in the medicine. Overcoming this challenge is easier said than done, but that is exactly what needs to be cured! Roping in improved technology and information management resources so that process are better streamlined and interlinked is another objective that needs to be achieved. Technologies methods that resolve specific pharmaceutical problems need to be considered and changed over to so that work techniques are on standby for the future. Collaborating with biotechnology firms could lead to new perspectives of drug possibilities. The high innovative and discovery quotient of biotech firms makes them an ideal platform for being delegated sub-processes of drug development. The insightful domain knowledge that these new companies are gaining makes them apposite avantgarde associates for the pharmaceutical industry.

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Global Pharmaceutical Market: Overview 7. Bibliography

1. T he Phar m Ex ec 50 2. T he Phar maceut ical industr y in t he G lobal E conomy (Su mmer 2005); Lar r y Davids on and G enna diy Gr eb lov, I ndia na Univer s it y, K elley School of Bus iness, Bloomingt on, I ndia na. 3. Guida nce f or I ndustr y P AT A Fr amewor k f or Innovat ive Phar maceut ica l D evelop ment, Manufactur ing, and Qua lit y Assur a nce; USFD A. 4. How P har maceut ical Compa nies Can Succeed In E mer ging Mar kets; Abbas Hussain, Apr . 28 t h 2010, Har var d Bus iness Review 5. E mer ging Clinical Sit es : I ndia & China; Patr ycja Doba, Clinica l R es ear ch Coor dinat or , Nutr aceut ica l M edica l Res ear ch LLC. 6. RFID in Phar maceut icals - Supp ly Chain S ecur ity C oncer ns Pr ovide I mp etus f or RFID Adopt ion; GBI R es ear ch, R ef : G BIHC013MR 7. Res ear ch and D ev elop ment in t he P har maceut ica l I ndustr y; T he Congr ess of t he Unit ed Stat es Congr ess iona l Bu dget Off ice, (Oct ob er 2006 ).

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