The Pharmaceutical Market Outlook To 2015 PDF

H E A LT H C A R E
The Pharmaceutical Market Outlook

to 2015
Implementing innovative, long-term strategies for sustainable
future growth
By Gayle Hamilton
Gayle Hamilton
Gayle Hamilton is an analyst within the healthcare function of Business Insights, and
has written previous titles on the Diabetes, Antivirals and Vaccines markets, as well as
Anti-Counterfeiting Strategies.
Gayle also has extensive R&D experience in the pharmaceutical and biotech industries,
holding positions at Celltech (now part of UCB), Genzyme Corporation in the US, and
Procter & Gamble. Previous to this Gayle graduated with a Masters degree in
Biochemical Engineering from University College London.
Copyright © 2005 Business Insights Ltd

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ii
Table of Contents
The Pharmaceutical Market Outlook to 2015
Executive summary 10
Challenges and resistors to growth 10
Failing short-term strategies 11
Future strategies to expand the customer base 12
Future product portfolio strategies 13
Future growth and alliance strategies 14
Competitive company strategy analysis 15
Chapter 1 Challenges and resistors to

growth 18
Summary 18
Introduction 19
New challenges faced by the industry in 2004 19
Full clinical trial data disclosure 19
Accusations of industry and FDA collusion 20
Major product recalls 20
Plummeting stock values 21
Continuing challenges 22
Weakening product pipelines 23
Soaring costs of R&D 25
Increasing generic competition and parallel trade 25
Increased cost containment 29
Opportunities in the pharmaceutical marketplace 31
Chapter 2 Failing short-term strategies 34

Summary 34
Introduction 35
iii
Reliance on US revenues 36
Long-term sustainability 38
Increasing sales & marketing spend 39
Reliance on blockbusters and me-too drugs 41
In-licensing of late-stage products 42
Mega-mergers 45
Focus on long-term sustainable growth 49
Conclusions 50
Future strategies to expand the customer base 50
Future product portfolio strategies 50
Future growth and alliance strategies 50
Chapter 3 Future strategies to expand the

customer base 52
Summary 52
Introduction 53
Expansion into emerging geographical markets 53
Global population demographics 53
Geographical pharmaceutical markets 54
Chinese market entry 55
Case Study: Pfizer expansion in China 56
Targeting growing patient populations 58
Aligning R&D with commercial business functions 58
The ageing population 59
Age demographic trends 59
Healthcare spending by age 60
Age-related diseases 61
The market for age-related diseases 62
The obese population 62
Obesity epidemiology 62
Obesity-related diseases 64
The market for obesity-related diseases 64
Chapter 4 Future product portfolio

strategies 66
Summary 66
iv
Introduction 67
Alternatives to a mega-blockbuster strategy 67
Small molecule drugs versus biological therapies 69
Sector performance 71
Sector growth to 2015 73
The biotech sector 74
Targeted biological therapeutics 75
Case study: Herceptin – a targeted therapeutic for breast cancer 76
Market growth to 2015 77
The generics sector 78
Case study: Sandoz (Novartis) focusing on biogenerics 81
Market growth to 2015 81
Big Pharma involvement in biotech and generics 82
Big Pharma involvement in biotech 82
Successful involvements 83
Investment in the biotech sector 84
Big Pharma involvement in generics 84
Unsuccessful involvements 84
Successful involvements 85
Competitive advantage in the generics sector 86
Investing in the generics sector 86
Chapter 5 Future growth and alliance

strategies 90
Summary 90
Introduction 91
Alliances between industry sectors 92
The issue of scale 93
Scale in R&D operations 94
Scale in sales and marketing operations 95
Strategies beyond mega-mergers 96
Re-organization of internal R&D 97
Exploiting external R&D resources 98
Alliance deals 99
Collaborative alliances 100
Technology licensing 100
Buyer-supplier relationships 101
Evaluations 101
Mergers and acquisitions (M&A) 101
Forecast to 2015 102
The move towards networked pharma 104
v
Chapter 6 Comparative company strategy
analysis 108
Summary 108
Introduction 109
Pfizer 110
Growth and alliance strategy 110
Geographic expansion 111
GlaxoSmithKline 111
Sanofi-Aventis 114
Geographic expansion 115
Investment in generics 115
Novartis 116
Investment in generics 117
Roche 119
Investment in biotech 121
UCB 122
Investment in biotech 122
Conclusions 125
Chapter 7 Appendix 128

Primary research methodology 128
Index 130
vi
List of Figures
Figure 1.1: Challenges for pharmaceutical sales and marketing 23
Figure 1.2: Number and time of NME approvals, 1995-2004 24
Figure 1.3: Total value of US drugs going off patent per year, and impact on revenues of generic
copies, 2004-2010 26
Figure 1.4: US patent expiries for top ten selling drugs, 2004 27
Figure 1.5: Pharmaceutical expenditure as a share of total healthcare expenditure in 2002 30
Figure 1.6: Pharmaceutical market drivers, 2004 31
Figure 2.7: Short-term strategies for delivery of revenue growth 35
Figure 2.8: Average branded drug prices in selected countries compared with the US, 2003 36
Figure 2.9: Pharmaceutical sales by region/country, 2004 37
Figure 2.10: Years of marketing exclusivity, 1968-1995 39
Figure 2.11: Breakdown of projects by clinical phase and source of drug, March 2004 44
Figure 2.12: M&A/restructuring activity, 1994-2004 46
Figure 2.13: Change in market shares of mega-merged & non-mega-merged companies, 1995-2002
48
Figure 3.14: Pharmaceutical sales and growth rates by region/country, 2004 55
Figure 3.15: Annual population growth rates by age group and region, 2000-50 59
Figure 3.16: Healthcare spend in the US by age group, 1985 & 2000 60
Figure 3.17: Prevalence of obese and overweight adults in US, 1976-2000 63
Figure 4.18: Product positioning in the healthcare marketplace 68
Figure 4.19: US approvals of small molecule drugs and biological therapies, 1994-2003 70
Figure 4.20: Growth rates in the US by sector, 2003-2004 72
Figure 4.21: Industry prediction of future sector annual growth rates to 2015 73
Figure 4.22: Comparative approval success rates of US biopharmaceutical products and drugs 78
Figure 4.23: US generic drug approvals, 2000-2005 80
Figure 4.24: Biotech sales of leading players, 2003 82
Figure 5.25: The rate of mega-mergers to 2015 91
Figure 5.26: Alliances between industry sectors, 2004-2015 92
Figure 5.27: R&D productivity of the top 39 pharma & biotech companies, 2002 94
Figure 5.28: Sales vs. S,G&A, 2004 96
Figure 5.29: Impact of alliances on future drug development 99
Figure 5.30: Growth and alliance strategies to increase R&D productivity, 2004-2015 103
Figure 5.31: Big Pharma should concentrate on core competencies 104
Figure 5.32: Vision of networked pharma in 2015 105
Figure 6.33: R&D, S,G&A and sales, 2004 109
Figure 6.34: GSK Centres of Excellence in Drug Development (CEDD) 112
Figure 6.35: GSK’s R&D network 114
Figure 6.36: Roche’s R&D network 120
Figure 6.37: Biologic medicine approvals by major indication, 2003 121
Figure 6.38: UCB R&D network 124
Figure 7.39: Survey respondents by type of company 128
Figure 7.40: Survey respondents by job function 129
vii
List of Tables
Table 1.1: Performance of US, Euro, UK and Japanese pharma stocks, 2002-2004 22
Table 1.2: Total pharmaceutical R&D expenditure ($bn), 1980-2004 25
Table 2.1: S,G&A expenditure of top 50 pharmaceutical companies, 1999-2003 40
Table 2.2: Cost savings achieved on past mergers 47
Table 3.3: Most common age-related diseases 61
Table 3.4: Global ageing diseases market, 2003 62
Table 3.5: Obesity-related diseases 64
Table 3.6: Global obesity-related diseases market, 2003 64
Table 4.7: Sales in the global and US markets by sector, 2004 72
Table 4.8: Top global biotech products, 2004 75
Table 6.9: Novartis sales by division, 2003-2004 116
viii
Executive summary
9
Executive summary
Challenges and resistors to growth

2004 was a particularly difficult year for the pharmaceutical industry. There were
demands for full clinical trial data disclosure, accusations of collusion between the
industry and the FDA to knowingly compromise drug safety, major product recalls
in Vioxx and Celebrex, and plummeting stock values.
As well as facing difficult challenges in 2004, the pharmaceutical industry

continues to experience problems in all aspects of the business. In research and
development companies have weakening product pipelines and soaring costs, while
in sales and marketing companies are facing increasing generic competition and
mounting price pressures.
The total number of new molecular entity (NME) approvals per annum has shown a
general decline since a 1996 peak of 53 NME approvals to just 17 in 2002.
However, 2003 and 2004 witnessed an upturn in NME approvals to 30 in 2004 (not
including the 6 biologic license applications (BLAs) for therapeutic products
transferred from the CBER to CDER), although as yet it is too early to say whether
this is a trend that will continue in the next 5 to 10 years.
An exclusive survey conducted for this report reveals that generic competition
(28% of respondents) and price containment (24% of respondents) are the biggest
challenges currently facing pharmaceutical sales and marketing teams.
Despite the recent problems that the pharmaceutical industry has faced, its
continued growth – although somewhat slower than in the past – is evidence of
underlying demand. This demand is driven by unmet needs for medications,
innovation in biotechnology, the increasing age demographic, and emerging
geographical markets such as China and India.
10
Failing short-term strategies
Favoring long-term strategies over short-term solutions designed to meet investor
expectations for near-term growth is one fundamental step that pharmaceutical
companies can take in order to improve R&D productivity.
Since pharmaceutical companies are subject to price constrictions in major markets

outside of the US, then drug prices in the US are maximized in order that high
levels of R&D expenditure can be recouped. This is unlikely to be sustainable in
the long-term with price disparity a key political issue in the US.
Lack of innovation, reduced marketing exclusivity and the resulting increased focus
on lifecycle management has meant sales, general and administrative (S,G&A)
expenditure has rocketed to an average of $140.5m (32.7% of sales) in 2003, with
leading pharmaceutical company, Pfizer, now employing approximately 37,000
sales reps worldwide.
The reliance of pharmaceutical companies on a small number of blockbuster drugs

is increasingly a risky strategy, as shown by the withdrawal of Merck’s Vioxx. In
addition, the reliance on blockbuster drugs causes a focus on a small number of
large disease areas that are overcrowded with too many ‘me-too’ drugs.
Despite the in-licensing of late-stage products having become a key strategy for
pharmaceutical companies in the last decade, this is not sustainable in the long-
term. It is precisely because of the increase in the number of late-stage licensing
deals that there is now a dearth of these products available to in-license.
Additionally, the cost of late-stage licensing has soared, meaning that it is not as
commercially attractive as it has been in the past.
Despite mega-mergers being one of the most frequent strategic moves seen in the
pharmaceutical industry during the past decade, it has not proved to be a valuable
long-term strategy. Indeed, there is little evidence of a positive correlation between
company size and productivity or innovation, despite the theoretical potential for
greater efficiency or more successful product development.
11
Future strategies to expand the customer base
The major opportunities that exist for pharmaceutical companies to expand their
customer base are in the emerging geographical markets of China, India and
Eastern Europe, and in growing ageing and obese populations.
The highest growth rates in 2004 occurred in the smaller revenue markets of China,
Latin America, and the Rest of Europe. China recorded the highest growth rate,
expanding by 28% from $7.4bn in 2003 to $9.5bn in 2004.
Although expansion into China represents a significant growth opportunity, it will

take pharmaceutical companies several years, and some investment, to see returns
to match the potential that the market holds. China is therefore a market requiring
long-term investment to achieve long-term profit, rather than a market that is going
to yield short-term gains.
Several companies in recent years have indeed identified China as an important

growth strategy and have begun to invest heavily in the region, for example Pfizer,
Novartis, AstraZeneca and Roche.
Successful companies in 2015 will be those that can accurately identify the disease
areas that will dominate the market in the future. Closer collaboration between
R&D and commercial functions will ensure that resources are used on the products
that have the best chance of success on the market, and return on investment is
maximized.
The global population of seniors and obese patients are rising rapidly and this
presents enormous growth opportunities for pharmaceutical companies as age and
obesity are risk factors for cardiovascular diseases, certain types of cancer, diabetes
and arthritis. The global market for age-related diseases is estimated at $143bn, and
for obesity-related diseases $154bn, however as age and obesity are not the only
risk factors for these diseases then not all of the sales from these diseases can be
attributed to age and obesity.
12
Future product portfolio strategies
The pharmaceutical industry has traditionally pursued the development of small
molecule drugs, and this approach has generated the “mega-blockbusters” that have
dominated the industry. However, in recent years, the decoding of the human
genome and the resulting plethora of targets for new drugs has created new
opportunities for growth for biological therapies.
In 2004 the global pharmaceutical market generated sales of $550bn, 8.1%

($44.3bn) of which comprised biotech products, and 11.3% ($62bn) of generic
products.
Biotech is currently the fastest growing sector in the drug industry. The US biotech
market experienced growth of 17% from 2003 to 2004, which was almost twice the
overall drug market growth rate for the second year running.
Pharma companies that are looking to move into the biotech sector need to take
steps designed to maintain the small-scale and entrepreneurial spirit of biotech
companies, as Roche has with its R&D spin-off companies and equity investments,
and as UCB has with its acquisition of biotech company Celltech, the R&D
function of which remains largely independent of the main UCB research
organization.
The generics industry has experienced significant growth over the last few years.
However 2004 was a difficult year for generics companies due to price erosion and
increased levels of competition.
The defining criterion for successful involvement of pharmaceutical companies in

the generics sector has been keeping distance between the branded pharmaceutical
parent company and the generic subsidiary because the two types of company
operate in such different ways.
13
Future growth and alliance strategies
Despite the lack of sustainability of mega-mergers, the majority of industry
respondents (83%) to a Business Insights survey exclusively conducted for this
report indicated that they expected the rate of mega-mergers would stay roughly the
same, or that there would be only a slight increase or decrease in the next 10 years.
The number of alliances formed between pharma and biotech companies are likely
to show the greatest increase to 2015, according to the survey. Respondents also
hinted at increased consolidation within the biotech industry.
In order to address the negative relationship of scale versus R&D productivity, Big
Pharma has two fundamental options: to restructure internal R&D operations to
overcome scale deficiencies; or to exploit external R&D resources through
alliances with companies not burdened with the deficiencies of scale.
In an analysis of 418 deals formed during a 19-month period (2002-3004)

collaborative alliances were the most common deal type for accessing drug
discovery technology and capability, accounting for 62% (259) of all deals.
With Big Pharma companies increasingly looking to external collaborations to

source new products to boost ailing pipelines, the reality of networked or ‘virtual’
pharmaceutical companies is moving closer, at least in terms of the R&D
organization.
Compared to the industry as it stands today, by 2015 the peripheral interests of

individual companies will be substantially reduced. Big Pharma will focus more on
its core competencies of sales and marketing which are enhanced by scale of
operation, and will likely grow these functions organically or through acquisitions.
This central core of key competencies will likely be supported by an R&D
organization consisting of multiple long-term relationships with small external
R&D companies.
14
Competitive company strategy analysis
The sheer size that Pfizer has grown to limits its growth potential, with Pfizer
needing to generate several billion dollars of added sales in 2005, or cut costs by
the same amount, to achieve double-digit growth. The geographic expansion of its
operations into emerging markets, particularly China, has been identified as one of
its major growth drivers.
GSK has sought to counter its poor R&D productivity in recent years by setting up
seven Centres of Excellence in Drug Development (CEDD) in an attempt to foster
the entrepreneurial culture of small biotech players within its R&D operations.
Each of the CEDDs is operated as an autonomous, accountable business with a
specific therapeutic focus.
One of the major strategic shifts for the newly merged Sanofi-Aventis was the
creation of a single generics business called Winthrop Pharmaceuticals in January
2005. Sanofi-Aventis has fairly ambitious plans for Winthrop to extend generics
operations to fifteen or more countries by the end of 2006, and become a major
player in the European generics market.
Like many of its competitors in the generics industry, Novartis’ generics business,
Sandoz, has shown slow growth in 2004 due to declining prices and increased
competition. As a result, Sandoz is aiming to readjust its focus to difficult-to-make
generics and biogenerics.
Roche encompasses many of the strategies cited in this report as being essential to
success in the next decade. The company is forecast to become one of the leaders in
the pharmaceutical industry by 2015.
During 2004 and 2005 UCB transformed from a global pharmaceutical and surface
specialties company to a focused biopharmaceutical company. This transformation
was achieved by the $2.5bn acquisition of leading UK biotechnology leader
Celltech in May 2004, followed in March 2005 by the $1.8bn sale of the surface
specialties business to Cytec Industries.
15
16
CHAPTER 1
Challenges and resistors to

growth
17
Chapter 1 Challenges and resistors to
growth
Summary
demands for full clinical trial data disclosure, accusations of collusion between
the industry and the FDA to knowingly compromise drug safety, major product
recalls in Vioxx and Celebrex, and plummeting stock values.
As well as facing difficult challenges in 2004, the pharmaceutical industry

continues to experience problems in all aspects of the business. In research and
development companies have weakening product pipelines and soaring costs,
while in sales and marketing companies are facing increasing generic competition
and mounting price pressures.
The total number of new molecular entity (NME) approvals per annum has shown
a general decline since a 1996 peak of 53 NME approvals to just 17 in 2002.
However, 2003 and 2004 witnessed an upturn in NME approvals to 30 in 2004
(not including the 6 biologic license applications (BLAs) for therapeutic products
transferred from the CBER to CDER), although as yet it is too early to say
whether this is a trend that will continue in the next 5 to 10 years.
An exclusive survey conducted for this report reveals that generic competition
(28% of respondents) and price containment (24% of respondents) are the biggest
challenges currently facing pharmaceutical sales and marketing teams.
Despite the recent problems that the pharmaceutical industry has faced, its
continued growth – although somewhat slower than in the past – is evidence of
underlying demand. This demand is driven by unmet needs for medications,
innovation in biotechnology, the increasing age demographic, and emerging
geographical markets such as China and India.
18
Introduction
Business Insight’s Pharmaceutical Market Outlook to 2015 report outlines, in Chapter

1, the challenging marketing conditions that have caused the slowdown of the double-
digit growth that the pharmaceutical industry experienced during the 1990s. During the
latter half of that decade and the first half of this decade, as R&D productivity levels
have dropped, the pharmaceutical industry has employed a series of short-term fixes in
an attempt to meet shareholders’ expectations of continued double-digit growth, as
outlined in Chapter 2 of the report. However, many of these measures are proving
unsustainable and as a result there are a number of fundamental changes in strategy that
are being undertaken (or still need to be undertaken) by companies to address the slow-
down in growth. These changes can be categorized in terms of the customer base,
product portfolio and growth strategy, which form Chapters 3, 4 and 5 of the report
respectively, as well as a comparative company strategy analysis in Chapter 6.
New challenges faced by the industry in 2004
demands for full clinical trial data disclosure, accusations of collusion between the
industry and the FDA to knowingly compromise drug safety, major product recalls in
Vioxx and Celebrex, and plummeting stock values.
Full clinical trial data disclosure
During 2004 there was rising concern over the lack of transparency of negative clinical
trial data, and as a result the public, government, and other industry stakeholders, have
been demanding that both positive and negative clinical trial data is made public.
In June 2004 New York State Attorney General Eliot Spitzer filed a lawsuit against
GlaxoSmithKline for repeated and persistent fraud in not releasing negative trial data
19
on its antidepressant paroxetine (Seroxat/Paxil), which indicated that the treatment
could be ineffective and unsafe in treating children and adolescents with depression.
This lawsuit was closely followed by the American Medical Association (AMA)
lobbying for a federal database that would be accessible to clinicians and patients, and
which would contain information on all clinical trials.
This concern over negative clinical trial data has caused further damage to the image
and reputation of the pharmaceutical industry, which was already suffering from the
fall-out of negative publicity surrounding the high price of drugs, availability of HIV
medicines, and parallel importation.
Accusations of industry and FDA collusion
The reputation of the industry was further damaged in 2004 following the October
2004 FDA warning of the increased risk of suicide amongst children prescribed
antidepressants. It emerged that the FDA had been made aware of concerns over GSK's
antidepressant Paxil over a year previously, and 10 months previously British
regulators warned physicians not to use the drugs for children. Furthermore, a scientist
within the FDA had warned the public about the drug’s risks eight months before an
official warning was issued.
Major product recalls
On September 30th 2004 Merck & Co. voluntarily withdrew Vioxx (rofecoxib), its
arthritis and acute pain medication initially launched in 1999. The company’s decision
was taken after a three-year trial was halted early because there was shown to be an
increased relative risk for confirmed cardiovascular events, such as heart attack and
stroke, beginning after 18 months of treatment in the patients taking Vioxx compared
to those taking placebo. Not only did this blockbuster withdrawal cause added damage
to the public image of the pharmaceutical industry and Merck & Co. in particular, but
also resulted in $2.5bn of lost revenue for Merck & Co, about 11% of the company’s
sales in 2003, and a loss of 26.2% of shareholder value.
20
Following the withdrawal, criticisms were raised of the FDA and the current regulatory
process as to why this increased risk of heart attacks was not uncovered prior to
approval. The safety of other drugs in the COX-2 inhibitor class, Celebrex and Bextra,
were also questioned, and Public Citizen claimed that safety data from a 1999 Celebrex
study in Alzheimer's patients that showed an increased cardiovascular risk were
“undisclosed”. Despite all the adverse publicity and cardiovascular risks, in February
2005 an FDA advisory panel voted that Celebrex and Bextra should remain on the
market, and that Merck & Co. could reintroduce Vioxx to the market, albeit with black
box warnings. However, in April 2005, after a request from the FDA, Pfizer withdrew
Bextra from the market because of an increased risk of rare but serious skin reactions.
In light of these questions regarding the safety of major drugs, the drug regulatory
process is likely to become even tighter, with drugs requiring more extensive trialing
and thus increased cost.
Plummeting stock values
The events of the 2003/4 have caused pharmaceutical stock values to plummet, as the
industry struggles against continual reports of serious problems with well-known
drugs, in particular antidepressants and COX-2 inhibitors. At the same time R&D
productivity is falling as the industry struggles to find new medicines.
Deutsche Bank reported that during 2004 US Pharma stocks declined 11.2% in absolute
terms, and 18.1% relative terms compared to the S&P 500, as shown in Table 1.1. UK
Pharma stocks showed a similarly poor performance with an absolute performance of -
13.2% and a relative performance versus the FT Index of -19.9%. Europharm stocks
faired better although still experienced a slight decline, while the Japanese Pharma
industry was the only one in the major markets to show growth, and it also performed
better than other industries listed in the Toppix.
21
Table 1.1: Performance of US, Euro, UK and Japanese pharma stocks, 2002-
2004
Region Relative Performance % Absolute Performance %

2004 2003 2002 2004 2003 2002
US Pharma to S&P 500 -18.1 -15.8 +1.6 -11.2 +6.4 -21.6

EuroPharm vs Eurotop300 -8.1 -6.1 +5.3 -0.5 +5.0 -29.5
UK Pharma to FT All Share -19.9 -3.2 -7.7 -13.2 +12.9 -31.2
Japan Pharma to Toppix +6.5 -18.3 -0.1 +17.3 +1.1 -19.8
Source: Deutsche Bank estimates and company data Business Insights Ltd
Continuing challenges
As well as facing difficult challenges in 2004, the pharmaceutical industry continues to

experience problems in all aspects of the business. In research and development
companies have weakening product pipelines and soaring costs, while in sales and
marketing companies are facing increasing generic competition and mounting price
pressures.
Figure 1.1 shows the results of a Business Insights survey of 300 senior industry
executives and external industry observers, where respondents were asked their opinion
on the factors that were most and least limiting to pharmaceutical sales and marketing
performance. Although there was relatively mixed opinion, the survey respondents
believed that generic competition (28%) and price containment (24%) where the
biggest challenges facing pharmaceutical sales and marketing teams.
The counterfeiting of drugs (3%) and parallel importation (4%) were clearly not
thought to be major issues affecting sales and marketing performance, and in fact 31%
of respondents surveyed believed counterfeiting to be the least restrictive issue
affecting performance, with 18% answering parallel importation. With regard to poor
product differentiation and increased competition from me-too drugs the opinion was
mixed as to the effect of these issues on sales and marketing.
22
Figure 1.1: Challenges for pharmaceutical sales and marketing
Increased competition
f rom "me-too" drugs Price containment
16%
24%
Most
Challenging Parallel importation
4%
Poor product 24% factor
diff erentiation
29%
3%
Generic competition
Counterf eiting of drugs
Increased competition Price containment

f rom "me-too" drugs
14% 12%
Poor product Parallel importation

diff erentiation 18%
18% Least
challenging
factor
7%
Generic competition
31%
Counterf eiting of drugs
Source: Business Insights Primary Research Survey Business Insights Ltd
Weakening product pipelines
R&D productivity continues to be a major issue for pharma companies. This is

illustrated in Figure 1.2, which clearly shows a decline in overall drug approvals over
the period 1995-2004. The total number of approvals per annum has shown a general
decline since a 1996 peak of 53 NME approvals to just 17 in 2002. However, 2003 and
2004 witnessed an upturn in NME approvals to 30 in 2004 (not including the 6 BLAs
23
for therapeutic products transferred from the Center for Biologics Evaluation and
Research (CBER) to Center of Drug Evaluation and Research (CDER)), although as
yet it is too early to say whether this is a trend that will continue in the next 5 to 10
years.
The upward trend since 2002 has primarily consisted of more priority approvals, which
take around 5-6 months to approve. However, as more products are given priority
approval, the time taken for standard approval appears to suffer. In 2004 a standard
approval took a median time of almost 25 months.
Figure 1.2: Number and time of NME approvals, 1995-2004
60 30
Median total approval time (months)

50 25
Number of approvals
40 20
30 15
20 10
10 5
0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
Priority: Number of approvals Standard: Number of approvals

Priority: Median total approval time Standard: Median total approval time
2004 figures do not include new BLAs for therapeutic biologic products transferred from CBER to
CDER
Source: FDA Business Insights Ltd
As product pipelines weaken and there are less products progressing through clinical
trials and onto the market, additional pressure has been put on the sales and marketing
function to generate improved sales from each approved product in order to make up
24
for the short fall in approvals. Thus, in recent years lifecycle management has become
a critical function for pharmaceutical companies.
Soaring costs of R&D
At the same time as R&D productivity levels have slowed, R&D expenditures in the
pharmaceutical industry have continued to increase. The R&D spend per new drug
approval increased from $611m in 1994 to $949m in 2003, equivalent to a compound
annual growth rate (CAGR) of 5.0%. According to the industry group Pharmaceutical
Research and Manufacturers of America (PhRMA), R&D expenditures have increased
significantly year-on-year for the last decade. Total R&D spend has increased from
$1,977m in 1980 to $38,794m in 2004 representing a CAGR of 13.2%. Table 1.2
shows trends in R&D expenditure within the US and abroad by PhRMA members
between 1980 and 2004.
Table 1.2: Total pharmaceutical R&D expenditure ($bn), 1980-2004
1980 1985 1990 1995 2000 2001 2002 2003 2004e
US 1.5 3.4 6.8 11.9 21.4 23.5 25.7 27.1 30.6

Non-US 0.4 0.7 1.6 3.3 4.7 6.3 5.3 7.4 8.2
Total 2.0 4.1 8.4 15.2 26.0 29.8 31.0 34.5 38.8
e = estimated
Source: PhRMA Annual Membership Survey 2005 Business Insights Ltd
Increasing generic competition and parallel trade
Generic substitution and parallel imports have become central policies in the drive for
healthcare cost containment. National reimbursement and insurance bodies are
increasingly providing physicians and pharmacists with incentives for prescribing
cheaper generic drugs. Incentives for prescribing and dispensing more expensive drugs,
such as the Japanese yakkasa system have been gradually phased out. Products with an
estimated $100bn worth of revenues will have lost patent protection between 2001 and
2005. This has led to increased competition from generic companies, putting pressure
25
on revenues both pre- and post-patent expiry. As a result, pharmaceutical companies
have focused on maximizing their sales force effectiveness and lifecycle management
in order to maintain market share.
Figure 1.3: Total value of US drugs going off patent per year, and impact on
revenues of generic copies, 2004-2010
Sales revenue based on 2003 sales ($bn)
20
18
16
14
12
10
8
6
4
2
0
2004 2005 2006 2007 2008 2009 2010
Year
No generic copies 1 generic copy 2+ generic copies
Source: Global Generic Drug Stocks, Citigroup –Smith Barney, September 21 2004; Business Insights
Business Insights Ltd
Figure 1.3 demonstrates the high value of branded products that will be exposed to
generic competition until 2010. In 2005 approximately $15bn (based on 2003 sales) of
products will lose patent protection. This value is significant since branded
pharmaceuticals lose between 15% and 30% of their market share after the first generic
version reaches the market, and then between 75% and 90% on subsequent generic
launches. Thus, in 2005 if one generic drug is launched for each branded product
coming off patent then the market will lose between $2.1bn and $4.2bn, and if two or
more generic copies are launched then the market will drop between $10.5bn and
$12.6bn.
26
The launch of generic copies forces the price of the branded pharmaceutical products to
be heavily discounted – up to 90% in some cases. With pharma companies increasingly
relying on lifecycle management of existing products to maintain revenues in light of
R&D productivity decline, then this shows the impact of generics to be significant,
having a direct and marked impact on company revenue, profit and value.
Figure 1.4: US patent expiries for top ten selling drugs, 2004
60
Effexor
2004 global sales ($bn)
50 Prevacid
40 Procrit
Seretide/Advair
30
Norvasc
20
Zyprexa
10 Nexium
0 Plavix
2005
2006
2007
2008
2009
2010
2011
Zocor
2004 Sales
Lipitor
Source: IMS; FDA Orange Book Business Insights Ltd
Figure 1.4 shows the impact of US patent expiries on the top ten selling drugs in 2004.
Procrit lost patent protection in 2004, with Prevacid and Nexium losing patent
protection in 2005. Second highest selling drug in 2004, Zocor, will lose patent
protection in 2006 with Norvasc losing patent protection in 2007. Effexor and
Seretide/Advair both lose patent protection in 2008. Leading selling drug 2004, Lipitor,
loses patent protection in 2010 with Plavix and Zyprexa losing patent protection in
2011. However, it should be noted that the US patent life for Plavix is currently being
challenged by generics companies and patent protection might be lost as early as 2005.
The pharmaceutical industry will experience a significant reduction in the revenues

associated with these blockbuster products as generic competition captures market
27
share. As a result, given that R&D productivity is low and the cost of developing new
drugs at an all time high, the pharmaceutical industry faces considerable hurdles with
respect to maintaining revenue and earnings growth in the future.
In addition to increasing productivity levels while maintaining efficiency of R&D

expenditure, pharmaceutical companies must also ensure that they maximize the return
on investment for those products that reach the market. However, according to PhRMA,
only 3 of every 10 marketed prescription drugs produce revenues that match or exceed
average R&D costs.
Parallel trade is another factor challenging pharmaceutical sales and marketing

performance, although not to the same extent as generics. Legislation promoting open
trade between EU member countries and more tacit regulations directly promoting
parallel trade in pharmaceuticals have resulted in revenue transfers between
pharmaceutical companies and healthcare payers and providers in high price markets.
The size of the parallel import market is increasing and in some countries, such as the
UK, the share of the total market is considerable (in 2002 UK parallel imports
amounted to €518mi). Legislation in Germany requires pharmacists to source at least
5.5% of the medicines they dispense from outside markets. While parallel imports tend
not to affect the unit sales for pharmaceuticals they do have a significant impact on
pricing and revenues. Better-targeted sales efforts and justified pricing promotions are
required to mitigate the effects of parallel trade.
i
The Economic Impact of Pharmaceutical Parallel Trade in European Union Member States: A
Stakeholder Analysis. Panos Kanavos, Joan Costa-I-Font, Sherry Merkur, Marin Gemmill. LSE Health
and Social Care, London School of Economics and Political Science (January 2004).
28
Increased cost containment
Rising cost containment measures have resulted from the increased demands on
national healthcare payers and providers brought about by an aging population and the
subsequent increase in those suffering from acute and chronic conditions. At the same
time national budget deficits in countries such as Japan have further enforced the need
to limit healthcare expenditure. A range of cost containment policies are used across
different national markets, including pricing regulations, strict reimbursement
formularies and a growth in both generic substitution and parallel importing. These
measures have resulted in increased pressure on pharmaceutical companies to reduce
their prices and consequently either drive unit sales or cut costs to maintain profit
margins.
At the same time as the pharmaceutical industry faces pressure to maintain revenue and
earnings growth, healthcare providers face cost containment pressures of their own.
Over the past decade, there has been significant growth in global healthcare
expenditure, with healthcare representing a growing share of gross domestic product
(GDP) in developed nations. In June 2004, the Organization for Economic Co-
operation and Development (OECD) published data demonstrating that the annual
increase in per capita spending on healthcare across OECD countries has outstripped
overall economic growth per capita by approximately 70% between 1997 and 2002.
The key levers of cost containment set the current price optimization climate, which
involves a proliferation of reimbursement regulations and the use of reference pricing
systems. Price optimization is also significantly affected by a number of related
disciplines, including the application of pharmacoeconomic evaluations, the impact of
parallel trade and reimportation and the pricing effects of generic substitution.
Alongside the key pricing issues of cost-containment, pharmacoeconomics, parallel

imports and generic substitution, a number of hot topics have also been widely debated
over the last few years. These include US reimportation, Medicare reform, EU
enlargement, price harmonization and pricing and reimbursement hurdles.
29
Advances in medical technologies, population ageing and rising public expectations
have been responsible for significant health spending growth, which was particularly
notable in the area of pharmaceuticals. Between 1992 and 2002, spending on
pharmaceuticals grew by an average of 1.3 times the rate of total health expenditure
growth. Pharmaceutical expenditure accounted for between 9% and 37% of total health
spending in OECD countries in 2002. Figure 1.5 shows the share of healthcare
expenditure generated by pharmaceutical expenditure in 2002 across the main markets.
Figure 1.5: Pharmaceutical expenditure as a share of total healthcare

expenditure in 2002
Italy 22.3%
Spain 21.5%
France 20.8%
Japan 18.8%
Germany 14.5%
US 12.8%
Average 17.2%
Source: OECD Health Data 2004 Business Insights Ltd
The key factors underlining pharmaceutical expenditure growth include:
The ageing population;
The emergence of “life-style” drugs;
A shift to newer and more expensive drugs;
An increase in therapeutic coverage (i.e. new drugs for diseases that previously
could not be treated).
30
Opportunities in the pharmaceutical marketplace
Despite the recent problems that the pharmaceutical industry has faced, its continued
growth – although somewhat slower than in the past – is evidence of underlying
demand. This demand is driven by unmet needs for medications, innovation in
biotechnology, the increasing age demographic, and emerging geographical markets
such as China and India (Figure 1.6).
Figure 1.6: Pharmaceutical market drivers, 2004
GROWTH DRIVERS
Innovation in biotechnology
Rising age demographic
Emerging geographical markets
Unmet needs for medications
Source: Author’s research & analysis Business Insights Ltd
In 2004, there were 82 blockbuster drugs – drugs with sales of $1bn annually – which
was 17 more than in 2003. Increasingly, blockbusters target specialist markets such as
oncology, and are fueled by a surge in new products derived from biotechnology. In
2004, 11 blockbuster drugs originated from biotech companies, and biotech products
accounted for 27% of the active research and development pipeline, and 8.1% of global
sales in 2004. Thus, over the next 5-10 years the growth of the biotech market is
31
expected to continue with products derived from biotechnology representing an
increasing share of the overall market.
32
CHAPTER 2
Failing short-term strategies
33
Chapter 2 Failing short-term strategies
Summary

expectations for near-term growth is one fundamental step that pharmaceutical
companies can take in order to improve R&D productivity.
Since pharmaceutical companies are subject to price constrictions in major

markets outside of the US, then drug prices in the US are maximized in order that
high levels of R&D expenditure can be recouped. This is unlikely to be
sustainable in the long-term with price disparity a key political issue in the US.
Lack of innovation, reduced marketing exclusivity and the resulting increased

focus on lifecycle management has meant sales, general and administrative
(S,G&A) expenditure has rocketed to an average of $140.5m (32.7% of sales) in
2003, with leading pharmaceutical company, Pfizer, now employing
approximately 37,000 sales reps worldwide.
The reliance of pharmaceutical companies on a small number of blockbuster

drugs is increasingly a risky strategy, as shown by the withdrawal of Merck’s
Vioxx. In addition, the reliance on blockbuster drugs causes a focus on a small
number of large disease areas that are overcrowded with too many ‘me-too’
drugs.
pharmaceutical companies in the last decade, this is not sustainable in the long-
term. It is precisely because of the increase in the number of late-stage licensing
deals that there is now a dearth of these products available to in-license.
Additionally, the cost of late-stage licensing has soared, meaning that it is not as
commercially attractive as it has been in the past.
pharmaceutical industry during the past decade, it has not proved to be a valuable
long-term strategy. Indeed, there is little evidence of a positive correlation
between company size and productivity or innovation, despite the theoretical
potential for greater efficiency or more successful product development.
34
Introduction
In order to combat the challenges that the pharmaceutical industry has faced in the last
few years, companies have employed a number of strategies in order to maintain
double-digit growth and satisfy investors. These tactics include (but are not restricted
to) a reliance on the US market for revenues, increasing sales and marketing spend, a
focus on blockbuster and “me-too” drugs, in-licensing of late-stage products, and
mega-mergers (Figure 2.7). Although these tactics have been relatively successful for a
short period, their long-term effectiveness has been questioned. Each of these strategies
is discussed in detail below.
Figure 2.7: Short-term strategies for delivery of revenue growth
SHORT-TERM STRATEGI ES
Reliance on US revenues
Increase in sales and marketing spend
Reliance on blockbuster and me-too drugs
In-licensing of late-stage products
Mega-mergers
35
Reliance on US revenues
Strategic pricing in the pharmaceutical industry is a critical mechanism through which

companies attempt to maximize profitability. However, obtaining high prices is
increasingly difficult as national governments in the major pharmaceutical markets,
with the exception of the US, directly influence the prices of pharmaceuticals by
putting in place legislative and regulatory requirements to restrain healthcare
expenditure. Examples include the UK’s profit control mechanisms, Germany’s
budgetary ceiling for general practitioners and reference price system, and France’s
price cuts and rebates to control the costs of health care.
In contrast, outside of the Medicare and Medicaid programs, the US government does
not fund a national health insurance scheme. As a result, the national government does
not directly influence the prices of pharmaceuticals, but allows drug prices to be
determined by the free market. Drug prices are influenced by competition between rival
products, the market size of the drug, the number of substitute products, and the costs
of R&D of new products.
Figure 2.8: Average branded drug prices in selected countries compared with
the US, 2003
140%
US prices as a percentage
increase of avergae prices
118%
120% 108%
100% 87%
75% 73%
80%
63% 58%
60%
40%
20%
0%
Italy France Sweden Canada Germany UK Switzerland
Source: Boston University’s School of Public Health Business Insights Ltd
36
A study published by Boston University’s School of Public Health in 2004 showed that
branded drug prices paid by Americans were around 81% higher, on average, than in
Canada and seven other western countries in 2003 (Figure 2.8). This price difference
had risen from an average of 60% in 2000. The study examined the prices of 1,000
patented drugs.
As a consequence of having the highest drug prescription prices in the developed

world, the industry is heavily reliant on the US market, which generated almost half of
pharmaceutical industry revenues in 2004, as shown in Figure 2.9. North American
sales (of which 95% were US sales) totaled $248bn in 2004, an increase of 8% from
2003. Sales in the European Union (EU) rose 6%, to $144bn, while sales in Japan grew
2%, to $58bn.
Figure 2.9: Pharmaceutical sales by region/country, 2004
Asia (excl. Japan &

China), Africa and
China Australia
2%
Japan 6%
11%
Latin America
3% North America
Global sales 45%

Rest of Europe 7%
$550bn
26%
European Union
Includes audited and unaudited markets
Source: IMS Business Insights Ltd
37
While sales in the developed regions of North America, the EU and Japan showed only
modest growth from 2003 to 2004, the emerging markets in the rest of Europe and
China in particular grew at a strong pace. Sales in the rest of Europe increased by 12%
in 2004, to $9bn, and the Chinese market was up 28% to $9.5bn. In the next 5 to 10
years China is likely to continue to be a strong global growth market in the
pharmaceutical industry.
Long-term sustainability
The heavy reliance of the pharmaceutical industry on the high price of US medicines is
unlikely to be sustainable in the long-term. Recently, drug prices have become a key
political issue in the US, as the price differentials within the US and between the US
and different countries have become increasingly highlighted in the public arena.
The disparity in drug prices between the US and Canada in particular, has resulted in
significant ‘unofficial’ parallel importing from Canada by patients without medical
insurance who have to pay for their own drugs. While parallel importation is not legal
in the US, regulations allow for a 90-day supply of pharmaceuticals for personal use to
be imported into the US. The issue of retired people crossing the border to buy drugs
generated considerable interest in the US national press in the run-up to the Presidential
election.
With the future of parallel importation legislation uncertain and the increasing
consumer dissatisfaction with high drug prices, it is unlikely that the pharmaceutical
industry can continue to rely on the US for half of its revenues in ten years time. These
factors will compel pharmaceutical companies to expand into emerging and growing
geographical markets, particularly China, which was the highest pharmaceutical growth
market in 2004.
38
Increasing sales & marketing spend
The decline in R&D productivity over the past decade has increased the pressure on
sales and marketing functions to maximize profits from existing products on the
market. The lack of innovative launches has also caused the competition within
therapeutic classes to become increasingly fierce and thus the length of time of
marketing exclusivity that a new product enjoys before follower medicines enter the
market has reduced, as illustrated in Figure 2.10.
Figure 2.10: Years of marketing exclusivity, 1968-1995
12
Number of years of marketing exclusivity
y = -0.3304x + 659.79
10 Inderal
R 2 = 0.9475
8
AZT &
6 Me vacor
Tagamet
Capoten Prozac
4
Seldane
Diflucan
2
Recombinate Invirase
0
1965 1970 1975 1980 1985 1990 1995 2000
Year
Source: CMR International & IMS Health Business Insights Ltd
In 1968 Inderal enjoyed 10 years of market exclusivity before follow-on medicine

Lepressor was launched in 1978. The 1977 launch of Tagamet was followed by just 6
years of market exclusivity before Zantac entered the market in 1983. However, by the
time Invirase was launched in 1995 it had less than one year of market exclusivity
before rival products Norvir and Crixivan were launched in 1996.
39
Pharmaceutical companies therefore face the pressure of maximizing profit from a
smaller number of new launches in months, rather than years of exclusivity. This is one
reason why lifecycle management has become a key strategic tool for pharmaceutical
companies, where added revenues are extracted from existing products within
competitive and stagnant markets.
Lack of innovation, reduced marketing exclusivity and the resulting increased focus on
lifecycle management has meant sales, general and administrative (S,G&A)
expenditure has rocketed to an average of $140.5m (32.7% of sales) in 2003, with
leading pharmaceutical company, Pfizer, now employing approximately 37,000 sales
reps worldwide. While the total sales recorded by the top 50 pharmaceutical companies
have risen from $352bn in 1999 to $430bn in 2003, a compound annual growth rate of
5.1%, S,G&A expenses have risen at a higher rate (CAGR of 6.6%). Thus, S,G&A
expenditure is taking up an increasing proportion of sales revenues, more than twice
that of R&D expenditure (Table 2.1).
Table 2.1: S,G&A expenditure of top 50 pharmaceutical companies, 1999-

2003
1999 2000 2001 2002 2003 CAGR

1999-2003
S,G&A expenditure ($bn) 108.8 117.3 122.8 127.7 140.5 6.6%

Total sales ($bn) 351.9 381.9 396.6 419.3 429.9 5.1%
S,G&A as % of sales 30.9 30.7 31.0 30.5 32.7
Source: Business Insights; Company Reports Business Insights Ltd
While increased spend on sales and marketing has helped to produce continued growth
in the industry, S,G&A expenditure is rising faster than total sales. S,G&A spend rose
by a CAGR (1999-2003) of 6.6% versus a CAGR of 5.1% for sales. This is because
increasing sales and marketing spend does not tackle the underlying issue causing
S,G&A expenditure to soar – the R&D productivity decline. If more innovative
40
products are launched sales and marketing teams will not be so reliant on extracting
maximum value from existing products through life-cycle management.
Reliance on blockbusters and me-too drugs
The pharmaceutical industry has traditionally been reliant on a small number of

blockbuster drugs that generate annual revenues in excess of $1bn. This means that Big
Pharma is constantly looking for new blockbusters to take the place of drugs that will
be coming off patent or exclusivity protection and become subject to generic
competition.
The withdrawal of Merck’s pain medication, Vioxx, is a good example of the risk of
the pharmaceutical industry’s over reliance on blockbuster drugs. Prior to the recall,
Vioxx had annual sales of more than $2.5bn, corresponding to about 11% of the
company’s sales in 2003. Thus its withdrawal had a major impact on company
revenues and profits, and as a result caused the loss of 26.2% of shareholder value.
Big Pharma companies can be seen as victims of their past successes. As company
revenues have grown, so has the need to satisfy investor and analyst expectations for
ongoing, steady growth. These expectations have put pressure on pharmaceutical
companies to implement short-term strategies to maintain revenue, such as mega-
mergers resulting in one-off cost savings and growth. However, the larger a company
becomes, the greater the dollar amount of new growth must be each year to maintain a
constant rate of growth. In 1989, Pfizer and Merck needed to generate $350m and
$200m, respectively, to grow by 10%. However, by 2003, to achieve the same growth
rate, Pfizer needed to generate almost $3bn and Merck $2bn.
As a result of this quest for ongoing growth Big Pharma has little incentive to produce
$250m drugs for smaller disease areas with inadequate treatment, because these
medicines are much less likely to reach blockbuster status. Instead, Big Pharma has
41
naturally focused its efforts on the biggest possible drug categories for chronic diseases
with high incidence and prevalence rates. However, the number of conditions that
could give rise to a blockbuster drug is limited and congested with competing drugs,
which is one contributory factor to the fall in R&D productivity and market exclusivity
period.
The development of ‘me-too’ blockbuster drugs by the pharmaceutical industry has

been viewed by some as ad hoc imitation and as wasteful. However a study by the
Tufts Center for the Study of Drug Development has shown that the vast majority of the
follow-on drugs for drug classes that were created in the last decade were in clinical
development prior to the approval of the class breakthrough drug. Thus, the increase in
number of follow-on drugs is the result of companies aiming for blockbusters in the
same large disease areas.
The reliance of pharmaceutical companies on a small number of blockbuster drugs is a

risky strategy, as shown by the withdrawal of Merck’s Vioxx. In addition, the reliance
on blockbuster drugs causes a focus on a small number of large disease areas that are
overcrowded with too many ‘me-too’ drugs.
With the continued progress of research in genomics and proteomics, the development
of personalized medicines may yet offer the opportunity for companies to differentiate
their products in terms of disease subgroup, and thus face less competition in smaller
disease markets.
In-licensing of late-stage products
As companies have struggled with internal productivity, pharmaceutical companies

have sought to boost their ailing pipelines by in-licensing products from other
companies. Indeed, licensing has become an integral business development tool that is
42
a critical source of pipeline strength. At the same time, the search for the right licensing
or co-promotion partner has grown increasingly competitive, while deal values have
spiraled upward, particularly for late stage products with blockbuster potential.
Deals for later stage products are more popular as they are post proof of concept and
thus attrition rates are considerably lower than in preclinical and clinical Phase I. Phase
II in-licensing deals are considerably cheaper than Phase III deals, and with similar
attrition rates to Phase III compounds, this makes Phase II compounds a sensible
lower-cost option. However, although the licensing deal itself is less expensive, the
cost of Phase III trials is extremely large and so this must also be taken into
consideration in the cost of the license deal.
Figure 2.11 shows the results of an analysis of 1,377 R&D projects across the pipelines
of more than 200 companies (pharmaceutical companies and 49 biotechnology
companies) in terms of the phase of clinical development and the source of the drug.
In terms of the source of drug, in-house drug development dominates all clinical
phases, accounting for 68.8% of all projects. However, its proportional share within
each phase differs: in-house development dominates the pre-clinical stage, accounting
for 91% of projects; the percentage of in-house sourced drugs falls to 68.5% in Phase I,
63.6% in Phase II and 57.4% in Phase III. Conversely, the proportion of in-licensed
drugs increases as development progresses. In-licensed drugs accounted for:
5.8% of preclinical projects;
16.1% of Phase I projects;
22.4% of Phase II projects;
27.9% of all Phase III projects.
Interestingly, the proportion of co-development drugs is not too dissimilar across the
three clinical stages of development accounting for approximately: 17.4% of Phase III
43
projects, 15.4% of Phase I and 14% of Phase II projects, while only accounting for
3.2% of pre-clinical projects. The lower share of co-development in the pre-clinical
stage indicates that companies mainly focus on early-stage in-house work before
seeking R&D collaborations later in the development process.
Figure 2.11: Breakdown of projects by clinical phase and source of drug,

March 2004
100%
Proportion of projects by source (%)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Preclinical Phase I Phase II Phase III Registration
Development phase
In-house Co-development Licensed
Source: Business Insights Company Comparator Tool, March 2004 Business Insights Ltd
pharmaceutical companies in the last decade, this is not sustainable in the long-term. It
is precisely because of the increase in the number of late-stage licensing deals that
there is now a dearth of these products available to in-license. Additionally, the cost of
late-stage licensing has soared meaning that it is less profitable as a growth strategy.
As a result, pharmaceutical companies are now forced to migrate up the pipeline to

Phase I and preclinical compounds, which means increasing risk and uncertainty.
Increasing numbers of larger deals are being made, earlier in development, due to
44
strong demand for licensing opportunities. As the deals have become larger, the risks
have become greater and more visible to the investment community. Consequently,
pharma companies need to nurture long-term relationships with licensor companies and
think more strategically in terms of trying to find partners that go beyond the simple
one-product deal. Examples of companies already engaging in long-term agreements
include AstraZeneca, who have a 5-year relationship with Cambridge Antibody
Technology (CAT) for the development of antibody drugs, and Roche who licensed
Antisoma’s entire oncology portfolio.
Mega-mergers
In recent years pharmaceutical and biotechnology companies have continued to use

mergers and acquisitions (M&A) as a key mechanism for delivering critical mass in
sales and R&D, in order to deliver improved productivity and ROI. While the bottom-
line results of major M&A deals are as yet unproven, the industry’s appetite for
continued M&A does not seem to have abated, with major deals between Pfizer and
Pharmacia, Biogen and Idec and most recently Sanofi-Synthélabo and Aventis.
In 2004 the transaction value of major deals totaled $96bn, dominated by Sanofi-
Synthelabo’s $61bn acquisition of Aventis (Figure 2.12). Although there were 70 other
M&A deals during 2004 these totaled $35bn so were primarily relatively small value
deals, averaging $0.5bn. The number of M&A/restructuring deals has risen
continuously during the past decade from 10 in 1995 to 71 in 2004, illustrating the
industry’s sustained appetite for M&A. Speculation also continues that Novartis will
engage in large scale M&A activity, while the weakness of BMS’ pipeline has
encouraged speculation that it may become a target.
45
Figure 2.12: M&A/restructuring activity, 1994-2004
80 200.0
Value of M&A/restructuring deals ($bn)

180.0
Number of M& A/restructuring deals
70
160.0
60
140.0
50
120.0
40 100.0
80.0
30
60.0
20
40.0
10
20.0
0 0.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
Total number of deals Total value of deals
Source: SG Cowen Pharmaceutical Industry Pulse 2005 Business Insights Ltd
Though the merger of two companies may lead to strengthened portfolios, improved
market share and a broader geographical coverage, a critical success factor is the ability
of two sales forces to effectively merge as one. In the short term this is both a complex
and costly process. The merger of large pharmaceutical companies is also often
accompanied by the divestment of competing products, which can result in a fall in
market share and increased competition. Additionally, the fact that R&D productivity
continues to decline after a decade of growth in company size and R&D investment
demonstrates the shortcomings of a strategy that seeks size for the sake of size alone.
Table 2.2 details an analysis of the cost savings produced by mega-mergers, conducted
by Deutsche Bank. The table shows the percentage reduction in sales (mostly resulting
from product divestments) and expenses post merger, as well as the savings in $m and
a breakdown of the areas in which the savings occurred. For example, the Pfizer-
Pharmacia merger resulted in a reduction in sales of 9.1%. However the reduction in
46
expenses was greater (12.6%) producing cost savings of $4bn. Similarly, the merger of
GlaxoWellcome and SmithKline Beecham caused a reduction in combined sales of
12%, but cost savings of 17.7% (£1.8bn). The cost savings were mostly achieved in a
reduction in S,G&A expenses (50%), followed by a 35% savings contribution of cost
of goods (COGS), and 15% R&D.
Table 2.2: Cost savings achieved on past mergers
Companies Combining Savings Reduction Analysis of Savings

$m Sales% Expenses% S,G&A% COGS% R&D%
AHP Cyanamid 600 4.6 5.4 70 20 10

Hoechst MMD 750 7.6 9.2 30 40 30
Glaxo Wellcome 1065 10.8 16.3 35 40 25
Roche Syntex 425 5.3 7.1 80 10 10
Pharmacia Upjohn 500 7.2 8.7 60 40 0
Ciba Sandoz 1525 6.6 8.3 50 30 20
Zeneca Astra 1100 8.4 9.1 70 10 20
Hoechst Rhone- € 750 5.4 6.5 55 25 20
Poulenc
Sanofi Synthelabo € 250 4.8 5.8 n.a. n.a. n.a.
Pharmacia Monsanto 600 5.4 6.4 45 20 35
Pfizer Warner- 1600 7.3 10.7 n.a. n.a. n.a.
Lambert
Glaxo SmithKline £1800 12.0 17.7 50 35 15
Pfizer Pharmacia 4000 9.1 12.6 n.a. n.a. n.a.
Sanofi- Aventis* (1,600) 4.1 (6.5) 5.8 (9.2) n.a.
Synthelabo
Average n.a. n.a. 7.7 9.9 55 27 19
*() Represents synergies arriving from revenue benefits
Source: Company data, Deutsche Bank estimate Business Insights Ltd
pharmaceutical industry during the past decade, it has not proved to be a valuable long-
term strategy. Indeed, there is little evidence of a positive correlation between company
size and productivity or innovation, despite the theoretical potential for greater
efficiency or more successful product development. M&A activity, after considering
one-off cost savings, in terms of consolidating sales, marketing, R&D and
administrative expenses, has regularly failed to deliver long-term benefits. Indeed
47
much consolidation in the industry has been driven by weakness and the need to meet
shareholder expectation for short-term growth rather than the potential to exploit true
long-term synergies.
Mergers are often accused by executives of contributing to significant operational

disruption leading to loss in R&D momentum and resulting in organizational structures
that are unlikely to be optimized for conducting R&D. This problem is compounded by
the fact that few companies that have undergone mega-mergers during the past decade
have had significant opportunity or committed sufficient time and resources to
overhauling their R&D strategies and operations. While strategies based upon serial
M&A activity may be flawed, the need to rethink R&D strategy is not confined solely
to those companies formed through consolidation. Taking into account the
globalization of the pharmaceutical market over the past decade, the organizational
structure of companies that have achieved strong and sustained organic growth are also
likely to require significant review. Figure 2.13 shows the change in market shares of
mega-merged and non-mega-merged companies from 1995 to 2002.
Figure 2.13: Change in market shares of mega-merged & non-mega-merged

companies, 1995-2002
12.0%
Change in ethical drug market share (1995-2002)
10.0%
8.0%
Merck & Co.
6.0%
J&J
4.0%
Eli Lilly
2.0%
"Mega-merged" companies Roche
0.0% Pfizer, GSK,
BMS, Aventis "Non-mega-merged" companies
-2.0% Pharmacia
-4.0%
Source: Wood Mackenzie Business Insights Ltd
48
During the period 1995 to 2002 those top-ten pharma companies involved in mega-
mergers (Pfizer, Pharmacia, BMS, GSK, Aventis) actually saw their combined market
share decline by 2.8%. In contrast, those top-ten companies who have not undertaken a
mega-merger strategy (Merck & Co, J&J, Eli Lilly, Roche) have shown a 10% rise in
market share.
Focus on long-term sustainable growth
The challenges in the industry and the short-term fixes that Big Pharma has used to
sustain double-digit growth in the last 5 years have been highlighted in Chapters 1 and
2. However, these short-term fixes have hidden the need for the implementation of
long-term sustainable strategies for the industry.

expectations for near-term growth is a fundamental step that is required to improve
R&D productivity. The M&A activity that has characterized the top-tier segment of the
pharmaceutical market for the past decade is symptomatic of a more fundamental
barrier to productivity. At the root of the productivity deficit lies sustained investor
demand for near-term earnings growth and the industry’s apparent willingness to
deliver on investor expectation by implementing short-term strategies. These,
unfortunately, do little to improve productivity for the long-term. In this respect the
current productivity problems begin to look, at least in part, as though they have been
self-inflicted by the industry through its failure to think long-term.
To address this central issue, a balance should be struck between implementing short-
term strategies – such as in-licensing to fill late-stage pipelines that will deliver short-
term growth – and focusing resources on addressing long-term productivity gains. Due
to the size and structure of Big Pharma R&D, overhauling strategy and operations is a
costly and time-consuming activity. In order provide a foundation for change there
must be a shift to a longer-term perspective both from the sector’s investor base and the
industry. Any strategy that hopes to address the fundamentals underlying productivity
49
deficits requires long-term commitment from executives and shareholder tolerance for
sacrificing short-term gains for long-term growth.
Conclusions
The following three chapters of this report will present in detail a number of innovative
strategies that are available to pharmaceutical companies in order to achieve long-term
sustainable growth. These strategies are categorized in terms of expanding the
customer base, adjusting the product portfolio and alternative strategies for growth.
Future strategies to expand the customer base
In the next ten years there is likely to be some fairly major growth opportunities for
pharmaceutical companies as the customer base is expanded by the emerging
geographic markets in China, India and Eastern Europe and by growing patient
populations of ageing and obese individuals.
Future product portfolio strategies
With the stagnation of traditional blockbuster pharmaceutical markets, the biotech and
generics sectors may offer companies better growth opportunities to 2015. Both of
these industry sectors are currently outpacing overall pharmaceutical industry growth.
Future growth and alliance strategies
Due to the negative relationship between operational size and R&D productivity, there
are a number of innovative ways that pharmaceutical companies can look to either
restructure their internal R&D operations or source R&D expertise and resources
externally.
50
CHAPTER 3
Future strategies to expand

the customer base
51
Chapter 3 Future strategies to expand
the customer base
Summary
The major opportunities that exist for pharmaceutical companies to expand their
customer base are in the emerging geographical markets of China, India and
Eastern Europe, and in growing ageing and obese populations.
The highest growth rates in 2004 occurred in the smaller revenue markets of
China, Latin America, and the Rest of Europe. China recorded the highest growth
rate, expanding by 28% from $7.4bn in 2003 to $9.5bn in 2004.
Although expansion into China represents a significant growth opportunity, it

will take pharmaceutical companies several years, and some investment, to see
returns to match the potential that the market holds. China is therefore a market
requiring long-term investment to achieve long-term profit, rather than a market
that is going to yield short-term gains.
Several companies in recent years have indeed identified China as an important

growth strategy and have begun to invest heavily in the region, for example
Pfizer, Novartis, AstraZeneca and Roche.
Successful companies in 2015 will be those that can accurately identify the
disease areas that will dominate the market in the future. Closer collaboration
between R&D and commercial functions will ensure that resources are used on
the products that have the best chance of success on the market, and return on
investment is maximized.
The global population of seniors and obese patients are rising rapidly and this
presents enormous growth opportunities for pharmaceutical companies as age and
obesity are risk factors for cardiovascular diseases, certain types of cancer,
diabetes and arthritis. The global market for age-related diseases is estimated at
$143bn, and for obesity-related diseases $154bn, however as age and obesity are
not the only risk factors for these diseases then not all of the sales from these
diseases can be attributed to age and obesity.
52
Introduction
At a time when investors expect double-digit expansion, margins on key operations are
increasingly being squeezed and growth in traditional markets is stagnating, the ability
to forge new and profitable relationships with key customers and to generate strong
sales growth from an increasing patient population is an opportunity that cannot go
unexploited.
The major opportunities that exist for pharmaceutical companies are in the emerging
geographical markets of China, India and Eastern Europe, and in the growing
populations of ageing and obese patients.
Expansion into emerging geographical markets
Expansion into emerging geographical markets represents one of the most significant
growth opportunities for pharmaceutical companies to 2015, as many emerging
markets are growing at rates significantly higher than in traditional markets such as
Japan and Europe. The arguments presented here take note of the higher risk of generic
and copied drugs in emerging markets, and the difference in purchasing power between
patients, governments or healthcare organizations in emerging countries compared to
the US, Europe or Japan.
Global population demographics
According to the United Nations (UN), the global population will increase from
approximately 6.5bn in 2005, to 7.9bn in 2025 and then to 9.1bn by 2050. Greatest
growth will be apparent in newly industrializing countries and developing countries in
Africa and Asia. Within the industrialized world, the rising US population will be
balanced by sharply falling populations in Japan and Europe, most notably in Italy (-
25%), Spain (-22%), Austria (-20%), Greece (-15%) and Germany (-14%).
53
Consequently, the population in industrialized countries will expand by only around
75m (+9%) between 2000 and 2050 compared with 3.2bn (+61%) in newly
industrialized and developing countries. The global population will expand at a faster
rate over the first 50 years of the 21st Century than during the past half-century.
Geographical pharmaceutical markets
Figure 2.9 illustrates pharmaceutical sales and market growth rates on a regional or
country basis in 2004 (reported by IMS). North America recorded the highest sales in
2004, $248bn, which represents 45% of the global market (the US accounts for
approximately 95% of the North American market).
The EU market is the second largest regional market, after North America, with sales
of $144bn in 2004. The EU recorded a relatively slow growth rate in 2004 of 5.7%,
compared to other geographies, primarily as this is a developed healthcare market with
a declining population in major countries – Germany, Italy and Spain. The population
in the other major pharmaceutical market, Japan, is also declining, and by 2050 it is
expected to decline by a further 12.4% from 2005 figures. The Japanese
pharmaceutical market showed the slowest growth rate in 2004 of just $2% and
recorded sales of $58bn. If the Japanese market continues to stagnate then high growth
markets in other parts of Asia, Latin America or Eastern Europe will likely overtake
Japan as the third largest pharmaceutical market.
The highest growth rates in 2004 occurred in the smaller revenue markets of China,
Latin America, and the Rest of Europe. China recorded the highest growth rate of any
single country or region, expanding by 28% from $7.4bn in 2003 to $9.5bn in 2004.
Growth rates in Latin America and the Rest of Europe were also high, at 13.4% and
12.4% respectively. These markets are expanding rapidly and pharmaceutical
companies are beginning to realize the growth potential for expansion of healthcare in
these less-developed regions compared to the US, EU and Japan, where the majority of
sales have traditionally be made. Indeed, successful expansion of operations into
developing regions could provide an incremental increase in sales.
54
Figure 3.14: Pharmaceutical sales and growth rates by region/country, 2004
30
China
Growth rate, 2003-2004 (%)
25
20
Latin
15 America
Rest of Europe
10
Asia (excl. Japan & China), North America
5 Africa and Australia European Union
Japan
0
0 50 100 150 200 250 300
Sales in 2004 ($bn)
Includes audited and unaudited markets
Source: IMS Business Insights Ltd
Chinese market entry
Multinational pharmaceutical companies have been operating in China since the 1980s,
but few have yet realized the potential of the market. Frustrated by China’s complex
regulations and distribution networks, its seemingly unenforceable intellectual property
laws, and its comparatively low expenditures on health care, foreign players foresee
minimal near-term success in China. As a result, companies have traditionally invested
cautiously in this market.
Despite the challenges that operating in China poses, it is the fastest growing
pharmaceutical market, rising by 28% in 2004, versus 7% global growth. It is currently
the ninth largest pharmaceutical market but at current growth rates China is likely to
overtake the fourth and fifth largest pharmaceutical economies – Germany and France
– by 2015. One reason for China’s fast growth is the annual rise of 8 percent of the
aging population in North Asia, especially in China. By the end of 2020, the number of
people aged over 65 years old will account for 16 percent of China's population. A
55
second reason is that China's birth rate has continuously declined, currently standing at
1.8 percent, further contributing to rise in median age of the population. With the
increase of China's per capita GDP, the social purchasing power will also expand. In
addition to economic reasons for entering the Chinese market, China's entry into the
World Trade Organization (WTO), in December of 2001, has meant a tightening of
intellectual property laws, regulatory procedures and GMP standards.
Although expansion into China represents a significant growth opportunity, it will take
pharmaceutical companies several years, and some investment, to see returns to match
the potential that the market holds. Thus China is a market that requires long-term
investment for long-term growth, rather than a market that will yield short-term gains.
Several companies in recent years have identified China as an important growth
strategy and have begun to invest heavily in the region, for example Pfizer, Novartis,
AstraZeneca and Roche.
Case Study: Pfizer expansion in China
Pfizer has been present in the Chinese market since the 1980s, and to date its
pharmaceuticals investment has been over $500m. Pfizer has launched more than 40
new products in China in the disease areas of cardiovascular, endocrinology,
neuroscience, infectious disease, arthritis and inflammation, urology, ophthalmology
and oncology. Seven of Pfizer's global blockbusters have been marketed in China,
namely, Lipitor, Norvasc, Celebrex, Viagra, Diflucan, Zithromax and Zoloft, and as an
illustration of Pfizer’s commitment to the Chinese market the company has launched
many of its innovative drugs in China simultaneously to the rest of the world.
Signaling a further acceleration of Pfizer’s China operations, the company announced

in October 2004 that Shanghai would be the location for new regional headquarters,
along with the creation of the Pfizer Investment Holding Company. This new
investment company was established to facilitate the integration of all of Pfizer’s
operations in China, which includes manufacturing plants in Dalian, Suzhou and Wuxi,
a management centre in Beijing and a trade company in Shanghai. Additionally,
56
through this investment company, Pfizer plans to hasten the entry of new products into
China, with Alan Gabor, chairman and general manager of Pfizer Investment Holding
Co. remarking:
“In the next five years, we plan to introduce another 15 innovative drugs into
China, three times the number of products launched in the past five years.”
Mr. Alan Taylor, Pfizer Pharmaceuticals Regional President for Asia, recently
commented on the importance of this new investment company and the Chinese market
to Pfizer’s overall development strategy:
“China is an important part of Pfizer's global development strategy. We

wanted an increased presence here and an entity to help us to expedite our
investment, and that is the core mission of the new Regional Headquarters”
This ongoing investment in China is despite the ongoing patent dispute for Viagra, one
of its best-selling ED (erectile dysfunction) drugs worldwide.
In addition to its manufacturing activities and product launches, Pfizer also plays an
active role in activities such as health education, medical training, disease control,
charitable donations and disaster relief. For example, in Shanghai, Pfizer is involved
with a Teen Healthcare Education Program together with Shanghai Pudong Social
Worker Association. The company also works with the Shanghai Huashan Anti-
infective Institute to guide physicians on the appropriate use of antibiotic medications.
Furthermore, Pfizer has launched an Anti-Cancer Education Program with the
American Cancer Society (ACS), in association with the Shanghai Drug
Administration and the Shanghai Administration of Industry and Commerce. The
global company recently also conducted Anti-Counterfeiting Training to protect
Chinese patients from the hazardous risk of counterfeit drugs.
57
Targeting growing patient populations
Aligning R&D with commercial business functions
Traditionally in many Big Pharma companies there has been relatively weak linkage
between R&D and more commercial business functions such as sales and marketing.
This is one of the fallouts of the large scale of pharma companies and geographical
fragmentation of functions – issues that are less evident in smaller-sized pharma or
biotech companies.
However, it is essential for pharma companies that their R&D and commercial
functions are aligned to ensure that products in research are commercial before
embarking on expensive product development and clinical trials. By aligning R&D and
commercial business functions, then pharma companies can ensure that resources are
used on the products that have the best chance of success on the market, and return on
investment is maximized.
Dr Joachim M. Greuel, a partner and co-founder of Bioscience Valuation, a German-

based management consultancy specializing in the evaluation of pharmaceutical R&D
projects, commented in 2003 that:
“If a company decides to evaluate early-stage projects, R&D and marketing

have to discuss possible target profiles. An evaluation would then assume
that, in a reasonable time frame, drug candidates can be identified that would
correspond to the defined target profile. The positive effect of discussing a
target profile should not be underestimated, even if the valuation itself is
more uncertain. R&D managers then know exactly in which direction a
molecule has to be modified.”
Additionally, closer collaboration between R&D and commercial functions ensures that
the drugs in research fit with the company strategy in terms of therapeutic area.
Successful companies in 2015 will be those that can accurately identify the disease
areas that will dominate the market in the future, monitor their ongoing commerciality,
and accordingly influence strategic decision making in R&D. Two sets of patient
58
populations that are already showing rises in numbers, and that are predicted to
continue to rise at dramatic rates, are the populations of ageing and obese patients.
The ageing population
The ageing population represents another significant growth opportunity for

pharmaceutical companies, as the global population of seniors is set to more that triple
between now and 2050.
Age demographic trends
The UN reports that by 2050 the median age for the world will increase to 37.8 years,
up from 23.9 years in 1950 and 26.8 years in 2000, as the proportion of older persons
(i.e. those aged 60 years and over) rises. At the global level, the number of older
persons will increase from 672m in 2000 to 1.97bn in 2050 and will be most marked in
less developed regions where the older population will more than quadruple. As Figure
3.15 illustrates, greatest growth will be experienced in the ‘older old’ category.
Figure 3.15: Annual population growth rates by age group and region, 2000-50
4.5
Average annual growth rate (%) by age group
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
World Africa Asia Latin America & Europe North America Oceania
-1.0 the Caribbean
Major area
0--14
0 15- 59 60+ 80+ Total population
Source: United Nations (2003) Business Insights Ltd
59
The UN estimates that the number of octogenarians (aged 80-89) will increase by 5.1
times between 2000 and 2050 to 311m, while the number of nonagenarians (aged 90-
99) will expand by a factor of eight to 63m. However, the number of persons aged over
100 years will rise the most, increasing by 20 times to 3.3m in 2050 compared with
only 167,000 in 2000. Most centenarians will reside in Japan, as today, followed by the
US, China, India, France and Germany.
Healthcare spending by age
As the senior (over 75) population expands, healthcare spending on this group is set to
increase. Figures from the Organization for Economic Co-operation and Development
suggest that healthcare expenditure in the UK is set to rise from 5.6% of total gross
domestic product in 2000 to 6.5% by 2020. Spending in the US shows a similar trend,
where the figure is set to increase from 2.0% to 2.9% over the same period.
Figure 3.16: Healthcare spend in the US by age group, 1985 & 2000
Healthcare expenditure as % of annual spending
16% 4,000
Total healthcare expenditure per year ($)
14% 3,500
12% 3,000
10% 2,500
8% 2,000
6% 1,500
4% 1,000
2% 500
0% 0
Under 25 25-34 35-44 45-54 55-64 65-74 75+
Agegroup
Healthcare spend as % of annual spend 1985 2000

Healthcare expenditure 1985 2000
Source: Bureau of Labor (US) Business Insights Ltd
60
In addition, healthcare spend by seniors themselves is higher than in the general
population. In the US, statistics from the Bureau of Labor show that spending on
healthcare by the US population has not only increased substantially between 1985 and
2000, as illustrated in Figure 3.16, but that spending is clearly age related, rising from
just 2.2% of annual spending among the under 25 population to 15% among seniors.
Age-related diseases
Many diseases display a strong relationship between age and prevalence, and can thus
be defined as age-related diseases. For example, within the seven major markets,
prevalence rates for hypertension range from less than 4% in males and females under
40 years of age in the US to 79% in seniors over 75 years of age in Germany.
Hypertension is a risk factor for other life-threatening conditions, including myocardial
infarction and stroke. In the case of stable angina, prevalence rates rise sharply with
age. In Germany, the UK and the US, just over 2% of persons aged 45-54 are affected
by the condition, compared with more than 12% in the 65-74 year old age group.
Angina not only impairs quality of life but it also identifies a population that is at
increased risk of future cardiovascular complications. As with hypertension, disease
management is essential.
Some of the most common illnesses or diseases associated with age are listed in Table
3.3. Since many of these age-related diseases are chronic, following diagnosis, life-long
treatment is invariably necessary, and thus treatments for these diseases will have high-
usage rates.
Table 3.3: Most common age-related diseases
Alzheimer’s Acute ischemic stroke

Arthritis Hypertension
Type II diabetes Angina
Male sexual dysfunction Urinary incontinence
Osteoporosis COPD
Prostate cancer Age-related macular degeneration
61
The market for age-related diseases
The ageing population presents an enormous growth opportunity for pharmaceutical

companies as seniors consume more than double the number of prescriptions per year
and account for more physician visits than any other age segment.
The precise market size for ageing diseases is difficult to quantify as not all instances
of a particular disease can be attributed to ageing, and for related diseases there are
often common treatments. Thus in Table 3.4 the total global market sizes for diseases
and disease categories common to seniors are estimated from company reported data
and IMS Health data.
Table 3.4: Global ageing diseases market, 2003
Age-related disease Total sales 2003 ($bn)
Alzheimer’s 1.8
Cardiovascular diseases 78.7
Arthritis 10.8
Diabetes 10.4
Sexual dysfunction 2.8
Cancer 38.5
Total 143.0
Source: Company reports; IMS; Author’s research & analysis Business Insights Ltd
The obese population
In addition to the ageing population, the obese population is the other patient group
expected to present significant opportunities for growth to 2015.
Obesity epidemiology
So high are the levels of obesity in many nations that obesity can now be considered an
epidemic. Figure 3.17 shows that the incidence of overweight and obese individuals in
the US has increased significantly in the last 25 years, such that in 1999-2000 64% of
US adults were either overweight or obese.
62
Figure 3.17: Prevalence of obese and overweight adults in US, 1976-2000
70
Prevalence in adult population (%)
60
50
40
30
20
10
0
1976-1980 1988-1994 1999-2000
NHANES surve ys
Overweight or obese Obese
Prevalence is age-adjusted; Adults defined as aged > 20
Source: NHANES II, III and IV Business Insights Ltd
Obesity is a complex condition, one with serious social and psychological dimensions,
that affects virtually all age and socioeconomic groups and threatens to overwhelm
both developed and developing countries. In 1995, there were an estimated 200m obese
adults worldwide and another 18m under-five children classified as overweight. As of
2000, the number of obese adults had increased to over 300m. Contrary to conventional
wisdom, the obesity epidemic is not restricted to industrialized societies; in developing
countries, it is estimated that over 115m people suffer from obesity-related problems.
Generally, although there is a higher proportion of men who are overweight, it is
women have higher rates of obesity.
63
Obesity-related diseases
Obesity poses a major risk for serious diet-related noncommunicable diseases,

including type II diabetes, cardiovascular disease, hypertension and stroke, and certain
forms of cancer. In fact, people with a body mass index (BMI) in the obese category
have a five fold greater risk of developing diabetes than those individuals classed as
neither overweight nor obese. As well as physical forms of disease, obesity is also a
major risk factor for forms of depression and sleep apnea (Table 3.5)
Table 3.5: Obesity-related diseases
Type II diabetes Hypertension

Stroke Heart attack & heart failure
Cancer (prostate, breast, colon) Osteoarthritis
Depression Sleep apnea
The market for obesity-related diseases
As with the ageing diseases market, the market for obesity-related diseases is difficult
to quantitate as although obesity is a risk factor for diseases, there are many other risk
factors and causes, including an overlap with ageing diseases markets. Thus Table 3.6
gives total global sales for cancer, cardiovascular diseases, diabetes, arthritis and
depression, although not all instances of these can be attributed to obesity.
Table 3.6: Global obesity-related diseases market, 2003
Obesity-related disease Total sales 2003 ($bn)
Cardiovascular diseases 78.7

Diabetes 10.4
Cancer 38.5
Arthritis 10.8
Depression 15.5
Total 153.9
Source: Company reports; IMS; Author’s research & analysis Business Insights Ltd
64
CHAPTER 4
Future product portfolio

strategies
65
Chapter 4 Future product portfolio
strategies
Summary

molecule drugs, and this approach has generated the “mega-blockbusters” that
have dominated the industry. However, in recent years, the decoding of the
human genome and the resulting plethora of targets for new drugs has created
new opportunities for growth for biological therapies.
In 2004 the global pharmaceutical market generated sales of $550bn, 8.1%

($44.3bn) of which comprised biotech products, and 11.3% ($62bn) of generic
products.
Biotech is currently the fastest growing sector in the drug industry. The US
biotech market experienced growth of 17% from 2003 to 2004, which was almost
twice the overall drug market growth rate for the second year running.
Pharma companies that are looking to move into the biotech sector need to take
steps designed to maintain the small-scale and entrepreneurial spirit of biotech
companies, as Roche has with its R&D spin-off companies and equity
investments, and as UCB has with its acquisition of biotech company Celltech,
the R&D function of which remains largely independent of the main UCB
research organization.
The generics industry has experienced significant growth over the last few years.
However 2004 was a difficult year for generics companies due to price erosion
and increased levels of competition.
The defining criterion for successful involvement of pharmaceutical companies in

the generics sector has been keeping distance between the branded
pharmaceutical parent company and the generic subsidiary because the two types
of company operate in such different ways.
66
Introduction
This chapter will focus on the strategic options open to pharmaceutical companies in
light of the failings of the Big Pharma strategy of “mega-blockbusters”. The relative
merits of investing in the high value business of targeted therapeutics – in which most
potential lies in biotechnology – and the volume business of generics are discussed in
detail.
Alternatives to a mega-blockbuster strategy
The traditional definition of a blockbuster drug is that which generates sales in excess
of $1bn in a calendar year. However, in today’s pharmaceutical market, Big Pharma is
increasingly reliant on a few “mega-blockbuster” products –drugs with sales of several
billion dollars per year. In 2004, Pfizer’s Lipitor was the first product to reach sales of
over $10bn, and this one product accounted for over 20% of Pfizer’s total revenues for
the year.
“Mega-blockbuster” drugs are aimed at markets that are populated by more than one
million people, targeting chronic, low severity disorders, while several of the 76 drugs
classed at blockbusters in 2004 are actually indicated for the treatment of niche
diseases. For example, Herceptin ($1.3bn) is targeted at a sub-population of breast
cancer patients over-expressing the HER2 protein, while Rituxan ($2.8bn) is targeted at
patients with the B-cell type of Non-Hodgkin’s Lymphoma (NHL).
However, the decline in R&D productivity in Big Pharma in recent years is evidence
that this singular “mega-blockbuster” strategy is unsustainable, because as major
revenue-driving multi-billion dollar drugs come off patent and face generic
competition, companies are launching fewer new “mega-blockbusters” to compensate
67
for declining sales. Therefore, Big Pharma will have to reduce its reliance on “mega-
blockbuster” products, seeking other more sustainable revenue streams to drive growth.
Figure 4.18 illustrates how generics, “mega-blockbuster” drugs (aimed at large chronic
disease markets), and targeted therapies (for niche markets) are positioned in the
healthcare marketplace in terms of four key criteria: medical differentiation; level of
competition; unit sales value of product; and sales volume of product. As drugs for
chronic disease markets sit roughly centrally in terms of each of these criteria, it
follows that in more sustainable revenue streams may lie the high value strategy of
targeted therapeutics, or alternatively in the high volume strategy of generics.
Figure 4.18: Product positioning in the healthcare marketplace
high Sales volume of product low

high
low
Generics
Unit sales value of product

Level of competition
Mega-blockbusters
(Large chronic markets)
Targeted therapeutics
high
low
(Niche markets)
low Medical differentiation high
Mega-blockbuster drugs: Traditional blockbuster drugs are aimed at chronic, low

severity disorders, which are prevalent in the general population. As the number of
diseases these criteria encompass is limited, there is a high level of competition for
68
prescriptions in these disease areas, and the time taken for ‘me-too’ or ‘copycat’
products to be launched has reduced dramatically. Following its 1968 launch,
Inderal enjoyed 10 years market exclusivity, while Invirase, launched in 1995, had
less than a year before rival products Norvir and Crixivan appeared on the market;
Targeted therapeutics: The advent of genomics has opened up the possibility of

developing treatments for less prevalent diseases and tailored to an individual’s
unique genetic profile. These targeted products can command high price points and
high margins because genomic diagnostic tests can identify individuals who will
definitely respond to a specific medicine, limiting side-effects and ineffective
treatments. At the same time, the patient potential is low because these products are
not aimed at a large population, and competition is also likely to be low for the
same reason.
Generics: Generic products are at the bottom end of the price scale, but at the top
end of the volume scale: selling in very high numbers but at small margins. In the
generic marketplace the competition is extremely high, as a generic product
competes, not only against branded products, but also against other generic copies
of the same product from different manufacturers.
Small molecule drugs versus biological therapies

molecule drugs (synthetic organic chemicals), and this approach has generated the
“mega-blockbusters” (described above) that have dominated the industry. However, in
recent years, the decoding of the human genome and the resulting plethora of targets
for new drugs has created new opportunities for growth.
Many of the new drug targets work on protein-protein interactions, thus presenting
barriers to traditional small molecule approaches. As a consequence, biological
therapies (recombinant proteins and monoclonal antibodies) are growing in prominence
in both the marketplace and the clinic, particularly as biotechnology has high potential
69
in the targeted therapeutics market. Figure 4.19 shows that the gap in small molecule
drug approvals versus biological approvals is reducing year-on-year. In 2004, 11 of the
76 blockbuster products were biologicals, and there are several other products (Humira,
Rebif, Synagis, Avastin and Erbitux) that are forecast to attain blockbuster status by
2005.
Figure 4.19: US approvals of small molecule drugs and biological therapies,

1994-2003
50
45
40
Number of FDA approvals
35
30
25
20
15
10
5
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Small Molecule Drugs Biological therapies
Source: Tufts Center for the Study of Drug Development Business Insights Ltd
The small molecule versus biological drug segmentation does not, however, strictly
define the areas in which pharmaceutical and biotech companies operate. The lines
between pharmaceutical and biotech companies have become blurred, with several
biotechnology companies having developed small molecules. Several of the small-
molecule drugs approved in 2003 originated in biotechnology companies, including
Millennium’s Velcade, Gilead’s Emtriva, ICOS/Eli Lilly’s Cialis, Trimeris/Roche’s
Fuzeon, and Vertex/GlaxoSmithKline’s Lexiva. Furthermore, Amgen, the leading
biotechnology company, gained FDA approval for its first small-molecule therapy,
Sensipar (in-licensed from NPS Pharmaceuticals), in March 2004.
70
Similarly, a number of pharmaceutical companies are investing heavily to make
biotechnology a key competence for the future. However, with biotech companies
successfully developing small molecule drugs as well as biologicals, the question arises
as to why biotech companies are able to efficiently develop NCEs while
pharmaceutical companies are struggling with R&D productivity. Two factors
contributing to this productivity disparity between pharmaceutical and biotech
companies are:
Pharmaceutical companies aim for mega-blockbusters that cover the widest

possible patient group, and thus the drugs are more likely to experience adverse
events in such a diverse patient population. Conversely, biotech companies
primarily aim for niche markets or markets where the medical need is unserved by
current therapies. Because the patient population is more targeted, there are likely
to be less adverse reactions to the drug, whether it is a small molecule or a
biological therapy.
There are no proven economies of scale in pharmaceutical R&D, and in fact much
evidence exists that there is actually a negative relationship between the scale of
R&D operations and productivity. Biotech companies, by virtue of operating at a
smaller scale, thus maintain more of an entrepreneurial and innovative culture, and
productivity is higher.
Sector performance
In order to evaluate the most profitable strategy that pharmaceutical companies should
undertake in terms of product portfolio – small molecules, biologicals or generics, or a
combination of the three – it is first necessary to evaluate the industry sectors currently
experiencing highest growth, and those predicted to lead the industry in 2015.
In the 2004 the total pharmaceutical market was worth $550bn, 8.1% ($44.3bn) of
which comprised biotech products, and 11.3% ($62bn) of generic products (Table 4.7).
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Table 4.7: Sales in the global and US markets by sector, 2004
Market sector Global US

Sales % of total Sales % of total
Pharmaceutical 443.7 80.6 189.7 80.6

Biotechnology 44.3 8.1 27.5 11.7
Generics 62.0 11.3 18.1 7.7
Total 550.0 100.0 235.4 100
Source: IMS MIDAS, 2/2005 Business Insights Ltd
In the US the total market grew by 8.3% in 2004, increasing from $217bn in 2003 to
$235bn in 2004. However, the growth rates of the pharmaceutical, biotech and generics
sectors of the industry varied considerably. Both the generic and biotechnology sectors
grew at faster rates (10% and 17% respectively) than the pharmaceutical sector (6.9%),
as indicated in Figure 4.20. This was the second year running that the biotech sector
had grown at almost double the industry average.
Figure 4.20: Growth rates in the US by sector, 2003-2004
18% 17%
16%
Growth (%) 2003-2004
14%
12%
10%
10%
8.3%
8% 6.9%
6%
4%
2%
0%
Pharmaceutical Biotechnology Generics Total
Market sector
Source: IMS MIDAS, 2/2005 Business Insights Ltd
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Sector growth to 2015
In this report’s survey of 300 senior industry executives from pharma, biotech,
speciality and generics companies and external industry observers, respondents were
asked their opinion on the growth potential in the pharma, biotech, speciality and
generic industry sectors.
The graph of survey responses in Figure 4.21 clearly shows that respondents believe
that the biotech and generics sectors are likely to show the highest annual growth rates
in the next 5 to 10 years. 47% believe that biotech will show an annual growth rate of
over 10%, while a further 35% indicated a growth rate of 6-10% to be most accurate.
No respondents believed that the biotech sector was likely to show negative growth,
indicating that the industry sees a very positive future for the biotech sector. Similarly
for generics, 43% of respondent companies believe that this sector will show an annual
growth rate of over 10% in the next 5 to 10 years, with a further 35% answering a 6-
10% growth rate. Again, no surveyed companies thought that this sector would show
decline in the timeframe.
Figure 4.21: Industry prediction of future sector annual growth rates to 2015
100%
90%
Proportion of survey companies
80%
70% > 10%
60% 6-10%
50% 3-5%
40% 1-2%
0%
30%
< 0%
20%
10%
0%
Pharma Biotech Speciality Generic
pharma
Industry sector
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Opinions on the likely annual growth rate of the speciality pharma sector was more
mixed, with 23.5% of surveyed companies responding that a growth rate of greater that
10% was most likely, and a further 35.5% answering 6-10%, and 30.5% of respondents
forecasting 3-5%. It is likely that this mixed response is partly because the speciality
pharma sector encompasses a number of industry subsectors including diagnostics and
small-medium pharma companies focusing on specific technology platforms or
therapeutic areas, and opinions on growth rates likely vary between these different
subsectors.
Responses for the pharma sector were not as positive as for the biotech, generics and
speciality pharma sectors, although single-digit annual growth is still predicted in the
next 5 to 10 years. 49% of respondents thought that the pharma sector would grow 3-
5%, while a further 33% indicated a growth rate of 6-10%.
The biotech sector
Biotech is currently the fastest growing sector in the drug industry. Globally biotech
products generated revenues of $44.3bn in 2004, in a total drug market worth $550bn.
The US is the primary market for biotech products, being the source of approximately
half of sales in 2004 ($27.5bn). The US market experienced growth of 17% from 2003
to 2004, which was almost twice the overall drug market growth rate for the second
year running.
To date 197 biotech products have been approved, with a further 100 under regulatory
review and 800 in advanced stages of clinical trials. Several of these products have
made blockbuster status, a total of eleven brands in 2004. However, since several
companies market erythropoietins, interferons, insulins, granulocyte colony stimulating
factor and human growth hormone under different brand names, these proteins rarely
make bestseller lists in commercial databases, unless taken together.
Erythropoietins had sales totaling $11.8bn in 2004, the second highest selling human
medicine behind Lipitor ($12.0bn). Similarly, interferons and insulins also recorded
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high revenues in 2004, showing that the biotech market is dominated by its top selling
products (Table 4.8).
Table 4.8: Top global biotech products, 2004
Generic name Brands Indications 2004 sales ($bn)
α and β Erythropoietin
Epogen, Epogin, Procrit, Anaemia 11.8
Eprex, NeoRecormon, Aranesp
α and β Interferon PEG Intron, Pegasys, Avonex, Hepatitis C 6.8
Rebif, Betaseron Multiple Sclerosis
Human Insulin Novulin, Humalin, Humalog Diabetes 5.6
Granulocytes – G-CSF Neupogen, Neulasta Granulocytes stimulator 3.0
Rituximab Rituxan Leukemia, Lymphoma 2.8
Etanercept Enbrel Rheumatoid arthritis 2.6
Infliximab Remicade Rheumatoid arthritis 2.1
Human Growth Hormone Serostim, Saizen Dwarfism 1.8
Humatrope, Protopin, Neutropin
Trastuzumab Herceptin Breast cancer 1.3
Palivizumab Synagis RSV 0.95
FSH Gonal F, Follistim Infertility 0.95
Glucocerebosidase Cerezyme, Ceradase Gaucher’s disease 0.88
Adalimuzab Humira Rheumatoid arthritis 0.85
Factor VII Novo Seven Haemophilia 0.76
Botulin toxin Botox Wrinkles 0.70
Bevacizumab Avastin Colon cancer 0.55
Source: IMS MIDAS 02/2005 Business Insights Ltd
Targeted biological therapeutics
One of the most promising categories of new biotech products are humanized
monoclonal antibodies, the leading type of targeted medicine. In 2004, three of the
eleven biotech million-dollar brands were monoclonal antibodies – Rituxan, Remicade
and Herceptin – with Humira, Synagis, Avastin, Rebif and Erbitux also expected to
reach the $1bn sales mark in 2005.
The industry expects that research into the human genome will open up a new
dimension in the understanding of the role of genes in the incidence of these diseases.
In clinical practice, however, diagnosis using human DNA is still largely limited to
single-gene inherited diseases. Examples of real use of possible tests for multifactorial
diseases are still limited at present, the most frequently cited being proof of mutations
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in the bCRA genes causing breast cancer and the association of ApoE with a risk of
Alzheimer’s. At the present time research is focused particularly on diagnosing genetic
disposition to cancer, and thus cancer is likely to be one of the most productive therapy
areas for new targeted therapeutics.
Conventional anti-cancer drugs have tended to be non-selective, attacking both

cancerous and healthy cells. Consequently, cancer chemotherapy is often accompanied
by devastating short- and long-term side effects. Moreover, individual patient
responses to conventional agents are highly variable, even in cases where specific
cancers appear to be histologically identical. Molecularly targeted therapies based on
recent progress in genomics and proteomics, however, hold out the promise of being
more selective, thus drastically reducing the incidence of side effects in patients
undergoing cancer treatment.
Case study: Herceptin – a targeted therapeutic for breast cancer
The most successful example to date of a targeted therapeutic is Roche/Genentech’s

Herceptin (Trastuzumab), which had sales of $1.3bn in 2004. Herceptin was approved
by the FDA in 1998 for the treatment of metastasic breast cancer, or cancer that has
spread beyond the breast and lymph nodes under the arm. Herceptin is a humanized
anti-HER2/Neu antibody, which specifically targets the protein product of the gene
known as HER-2, HER2/neu, or c-erbB2, which is overexpressed in around 30% of all
breast cancer patients.
Herceptin was the second monoclonal antibody approved to treat cancer. The first,
Rituxan (Rituximab) was developed by Genentech and its Partner IDEC
Pharmaceuticals Corp. for patients with one type of non-Hodgkin’s lymphoma, a
cancer of the immune system. Herceptin is a monoclonal antibody bioengineered from
part of a mouse antibody that has been altered to closely resemble a human antibody. It
binds to a protein called HER2, which is found on the surface of some normal cells and
plays a role in regulating cell growth. In laboratory experiments, Herceptin inhibited
tumor cell growth by this binding action.
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In the case of metastatic breast cancer cells, approximately 30% of tumors produce
excess amounts of HER2. Only patients who have tumors with this characteristic have
been studied and shown to benefit from the new, targeted approach using Herceptin.
The development of an accurate diagnostic test to screen the tumors from women with
metastatic breast cancer for HER2 protein was critical to the success of Herceptin.
Denmark-based Dako developed HercepTest to measure HER2 protein in tumors and
help identify the 30% of patients who may benefit from Herceptin treatment.
It is estimated that 40,000 women each year who face a high risk for recurrence could
benefit from the new test; the first gene-based test for prediction of cancer recurrence
to be approved by the FDA. Using the readily available original breast cancer tissue
sample, the Oncor Inform HER-2/neu test identifies the presence or absence of
increased copies of the HER-2/neu gene. This indicates whether or not breast cancer is
likely to return. In clinical trials, 31% of patients with originally localized breast cancer
that had a positive HER-2/neu test died within five years of surgery, while 97% of
patients with negative test results survived at least five years. Conventional detection
procedures must wait until the disease recurrence is present, allowing the cancer to
advance before treatment begins.
Market growth to 2015
Although the biotech market remains a relatively small proportion of the total drug
market (8.1% globally), it is fast growing and forecast to record sales of $140bn by
2010 and $250bn by 2015 (20.3% of the global market).
As a result of the fast pace of the market, many Big Pharma companies have begun to
invest heavily in biotech, with 27% of the active research and development pipeline of
drug companies now focused on biotech. In addition to the great sales potential of the
biotech market, a study by the Tufts Center for the Study of Drug Development has
shown that biotech products have equivalent or better US approval success rates
compared to new chemical entities (NCE), as illustrated in Figure 4.22.
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Figure 4.22: Comparative approval success rates of US biopharmaceutical
products and drugs
NCE Antineoplastic
Immunological
Endocrine
Synthetic peptide
rDNA
Chimeric mAb
0 10 20 30 40 50 60
Approval success rate (%)
Source: Tufts Center for the Study of Drug Development Business Insights Ltd
The generics sector
Like the biotech sector, the generics sector has also grown significantly faster than the
overall drug market in the last few years. The period 1997 to 2003 saw solid overall
industry growth, a compound annual growth rate (CAGR) of 11%. 2000-2003 was the
fastest growing period with a CAGR of 13% globally. This period was characterized by
high market demand exceeding supply and a favorable regulatory environment.
Globally, the generics sector had sales totaling $62bn in 2004, which accounted for
11.3% of the total pharmaceutical market.
However, in 2004 the generics industry witnessed a downturn. Growth in the US

slipped to 10%, versus US generics growth rates in 2002 and 2003 of 27% and 25%
respectively. A number of factors in 2004 have contributed to this difficult market
environment:
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Intensified competition and price erosion: In all of the mature generics markets,
the price of generic drugs is falling. As a result, profitability among generic
companies is low, especially when compared with that of the branded
pharmaceutical companies. If reference prices continue to erode slim profit
margins, there is a chance that in countries such as Germany and France,
governments may destroy some of their domestic generics companies, and therefore
risk their supply of low cost generics because generics companies cannot afford to
market them;
Aggressive brand defense strategy: As R&D productivity has fallen for

pharmaceutical companies, more pressure has been put on lifecycle management of
existing blockbusters. Pharmaceutical companies have used increasingly aggressive
brand defense strategies to stave off generic competition, including entering the
generics marketplace themselves, and using various legal tactics to delay generics
entry;
Regulatory changes: The 2003 amendments to the Hatch-Waxman act have

created a more difficult environment for many generics manufacturers. Under the
previous system individual generics companies were allowed to block competition
if, for example, they had either made a deal with the originator not to launch or else
had agreed to take product from the originator. However, the 2003 amendments
include “forfeiture” provisions which can result in the generics company losing its
180-day exclusivity if found to have made such an arrangement. Additionally, the
2003 amendments allowed for “authorized generics”, which are copies made under
license from the respective innovator companies. In return, the originator receives
royalties on sales. Many generics companies feel that authorized generics dilute the
value of market exclusivities in the US;
Supply exceeding demand: Figure 4.23 shows the number of generic approvals in
the US has more than doubled from 137 in 2000 to 320 in 2004. However, at the
same time the volume growth in US prescriptions has been reducing year-on-year,
although there was a slight increase in 2004. Thus, while demand is reducing and
generic prices are falling, supply is at record levels, with capital expenditure
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increasing for established players, new market entrants and ANDA approvals
increasing.
The generics market is now overcrowded with new entrants having entered the market
to capitalize on this high growth industry, and as a result supply now outstrips demand.
2005 to 2010 is therefore likely to be a period of high consolidation within the industry,
as larger generics players buy out smaller regional generics companies. Beyond 2010
the generics market will approach a more mature state through having fewer
competitors, stable prices and a well-defined regulatory environment.
Figure 4.23: US generic drug approvals, 2000-2005
350 7
300 6
US prescription volume growth

Total generic FDA approvals
250 5
200 4
(ANDAs)
150 3
100 2
50 1
0 0
2000 2001 2002 2003 2004
Year
ANDA approvals prescription volume growth
Approvals for multiple dosage strengths of the same compound are counted as a single approval
Source: FDA; IMS Business Insights Ltd
Due to the highly competitive nature of the generics market, where prices are falling
and margins are low, a notable trend in recent years has seen number of leading
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generics players beginning to make inroads further up the value chain into difficult-to-
make generics, biogenerics and some companies have even moved into branded drugs,
seeking the high margins experienced by branded pharmaceutical companies. Generics
companies have also realized that the generics business is heavily tied to the patent
expiry of blockbuster drugs, and thus these generics companies are seeking greater
control of their own future revenues through investing in R&D.
Case study: Sandoz (Novartis) focusing on biogenerics
The market for biogenerics represents one of the most significant growth opportunities
for generics companies, and should help in boosting the growth of the generics sector
as a whole.
Whilst generic biologic medicines, or biogenerics, have enormous potential to redefine

both the generics industry and the biotechnology industry, the future of biogenerics is
uncertain and hinges on legislative, technological and competitive developments. The
creation of a legal framework that can enable the approval, regulation and marketing of
biogeneric drugs is the largest obstacle. However, the legal framework in North
America and Western Europe is forecast to be in place by 2010, paving the way for the
introduction of biogenerics.
Sandoz, the generics wing of Novartis, has stated its intention to focus its generics
business on difficult-to-make generics and biogenerics. This strategic shift is in light of
poor 2004 sales and growth figures for Sandoz, and recognition of the increasingly
competitive nature of the generics market and declining prices for traditional generic
products. Sandoz sees biogenerics as an opportunity to operate in a less competitive
marketplace, with higher value products.
Market growth to 2015
Despite the slower growth of generics in 2004 compared to the previous two years, the
generics market should continue to outpace the growth of the pharmaceutical market
overall due to the high level of branded drugs facing patent expiry in the next decade,
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increasing efforts to contain healthcare costs and the introduction of biogeneric
products. The global generics market is forecast to grow at a CAGR of 10%, resulting
in 2010 revenues of $100bn and 2015 revenues of $180bn.
Big Pharma involvement in biotech and generics
Having discussed and analyzed the dynamics of the two major growth sectors in the
pharmaceutical industry, this section now examines the current involvement of Big
Pharma in the biotech and generics markets, and if indeed a move into these respective
markets is likely to be a profitable strategic move.
Big Pharma involvement in biotech

Figure 4.24: Biotech sales of leading players, 2003
9,000 200%
2003 biologic medicine sales ($m)
8,000
2002/03 sales growth (%)

7,000 150%
6,000
100%
5,000
4,000
50%
3,000
2,000 0%
1,000
0 -50%
BiogenIDEC
Amgen
J&J
Genentech
Genzyme
Allergan
Plough
Serono
Schering-
Abbott
Lilly
Nordisk
Roche
Chiron
Novo
2003 sales 2002/03 sales growth
Source: Business Insights, company reports Business Insights Ltd
Based on 2002 and 2003 sales figures, Figure 4.24 shows sales derived from biotech
products of the leading players in the sector. This figure shows that a number of the
leading players producing biological medicines are actually Big Pharma companies,
primarily J&J, Eli Lilly, Novo Nordisk, Roche, Schering-Plough and Abbott.
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Successful involvements
For those Big Pharma companies that have been successful in the biotech market, one
of the main ingredients for success has been the creation or maintenance of the small-
scale and entrepreneurial spirit of biotech R&D.
Roche is perhaps the best example of Big Pharma involvement in the biotech sector,
particularly in the high value sector of targeted molecular therapies. Through its major
shareholding in biotech leader, Genentech, Roche is a major force in biological
therapies, especially in oncology. Roche has also spun-out a number of its R&D units
to create smaller, independent biotechnology companies to focus on R&D in specific
therapeutic areas to promote the entrepreneurial spirit and higher productivity
indicative of biotech companies. Companies resulting from this strategy include
Basilea and Actelion in Switzerland, Novuspharma in Italy and, most recently, BioXell.
AstraZeneca has only recently begun to invest heavily in biotechnology. The director
of discovery alliances at AstraZeneca, Jitendra Patel, has commented:
“Turning a blind eye to biotech is not reasonable. Genomics has opened up a

large area of opportunity where biotechnology is the immediate route to
benefit. You need to recognize when the time is right to go beyond small
molecules, where restricting yourself to small molecules will also restrict
your breadth of opportunity.”
AstraZeneca has formed drug discovery partnerships with a number of biotechnology

companies due to its relative inexperience in this field – Cambridge Antibody
Technology (CAT), Abgenix, Lynx, BioVex, and Dyax. Perhaps the most significant
partnership is with CAT, a five-year R&D alliance for the joint discovery of antibody
drugs, one of the fastest growing classes of medicines. Significantly, the deal allows
AstraZeneca to opt-in to existing CAT drugs in development, while the biotech
company has the option of co-marketing drugs with its partner in the US market.
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Investment in the biotech sector
Due to high growth potential of this sector, and the fact that biotechnology is
contributing to an increasing proportion of the total pharmaceutical market, then
investment in biotech is one of the main strategic foci of Big Pharma. The 27% of
active research and development pipelines focused on biotech, compared to the 8.1% of
sales from biotech products, is one indication of pharma’s increasing focus and
investment in this sector.
Since there are no proven economies of scale in pharmaceutical R&D, and indeed
much evidence has suggested that scale actually hinders the R&D process, then this
presents a significant problem for the pharmaceutical industry in trying to compete in
the heavily R&D-focused and innovative biotech industry. Thus, pharma companies
intending to move into the biotech sector should take steps designed to maintain the
small-scale and entrepreneurial spirit of biotech companies, like Roche has with its
R&D spin-off companies and equity investments, and like UCB has with its acquisition
of biotech company Celltech, the R&D function of which remains largely independent
of the main UCB research organization.
Big Pharma involvement in generics
Branded, multinational pharmaceutical companies with R&D specialisms necessarily

operate on a long-term strategy. Generics companies necessarily operate on a short-
term strategy. These key cultural and organizational differences explain the difficulties
inherent in either type of company moving into the other’s market.
Unsuccessful involvements
One example of a branded company that entered the generics market but later withdrew
is Hoechst (now part of Aventis). The company bought Copley in the US in 1994 and
disposed of it in 1999, and sold Cox in the UK to Alpharma in 1998. Similarly, Rhône-
Poulenc Rorer sold its holding in Rugby-Darby to Watson in 1995 and sold UK
company APS-Berk in 1996 to Teva, although it retained an interest in the French
generic market through RPG (which includes French generic pioneer, Biogalénique),
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before selling it to Ranbaxy in 2003. Eli Lilly has also had a commercial interest in the
UK generics market in the late 1990’s under the name of Greenfield but later decided
that generics did not form part of its core business, while Bayer had its own German
subsidiary as well a US joint venture with Schein, which in turn owned Genus in the
UK (now owned by Stada). Bayer later made a strategic decision to leave the generics
market, and it subsequently sold its German generics subsidiary to Ranbaxy and its
French generics business to Teva.
Successful involvements
Nevertheless, some key players in branded pharma have been successful in generics.
The defining criterion has been keeping distance between the branded pharmaceutical
parent company and the generic subsidiary because the two types of company operate
in such different ways. A particular example is Merck Darmstadt, which acquired the
former Generics (UK) network of companies. Merck kept the individual operating
companies as their generic subsidiary in each country and used the existing GUK
model to set up new generic subsidiaries in other countries. This seems to work well
because generics companies, who need to be flexible and responsive, are not subjected
to big company bureaucracy. Pharmacia-Upjohn (now part of Pfizer) also continues to
operate in the UK generic market.
Novartis has also been successful, having bought generics companies such as LEK of
Yugoslavia, Biochemie in Austria, Lagap in the UK in the late 1990’s and others that it
unified under the revived Sandoz name as its generic operation. Sandoz has pursued
further major acquisitions in the last two years, with Sabex of Canada in 2004, and then
Hexal and Eon Labs in 2005 to strengthen its position in the German and US markets.
Novartis has chosen to keep its Sandoz generics subsidiaries at arm’s length and allow
them relative freedom.
Following the merger of Sanofi-Synthélabo and Aventis in 2004, the Sanofi-Aventis

group has maintained the Sanofi-Synthélabo generics division, now trading under the
name Winthrop Pharmaceuticals. The generics division was previously operated
85
independently in several countries through dedicated subsidiaries, namely Laboratoires
IREX s.a in France, Sterwin Medicines Limited in the UK, Lichtenstein Pharmazeutica
GmbH in Germany, IREX Ltda in Portugal, and Laboratoires IREX sro in the Czech
Republic. However, from January 2005 Winthrop Pharmaceuticals has been
headquartered out of a single site in Paris. With Sanofi-Aventis having previously
publicly stated its intention to grow its generics business to become a major player in
the European generics market, this shows that the company is making major strategic
moves in the generics market.
Competitive advantage in the generics sector
The generics companies that have remained part of larger R&D based pharmaceutical
companies have gained from economies of scale in new product development and
purchase of API’s. In addition, being part of a large group has given them access to
larger development facilities and increased buying power when dealing with contract
manufacturers. However, successful generics subsidiaries have also retained a degree
of autonomy leaving them able to respond quickly to changing market circumstances.
Where successful, multinational branded pharmaceutical companies represent a

significant threat to the smaller generics companies. For example, Merck’s French
subsidiary Merck Génériques has been the leading generics company in France for
several years and at the end of 2003 had sales of €232m and a generics market share of
28.3%. In markets where price competition is very high and price erosion is a serious
problem, the ability to contain new product development and production costs by
sharing manufacturing facilities with associated companies makes an important
difference.
Investing in the generics sector
The generics sector has witnessed significant growth in the last decade. However, the
industry is now suffering from competitor saturation and falling prices. Those
companies relying on the periodic boost from major patent expiries could find their
revenue streams shrinking towards the end of the decade.
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Thus, a move into the generics sector for a major pharmaceutical firm is not likely to be
as successful or profitable as it would have been, for example, say 5 or 10 years ago.
That is not to say that Big Pharma cannot be successful in this sector, see Novartis, but
merely that it is unlikely to generate the level of revenue to compensate for poor
performance in the pharmaceutical sector, and thus a move into the generics sector
could form only one minor strategic move to drive sales growth, rather than a singular,
sustainable growth strategy. Such a move, most likely through the acquisition of one of
the leading generics players, would also be dependent on careful management – to
maintain the separate culture and structure of the generics company, in much the same
way as Novartis operates Sandoz.
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88
CHAPTER 5
Future growth and alliance

strategies
89
Chapter 5 Future growth and alliance
strategies
Summary

respondents (83%) to a Business Insights survey exclusively conducted for this
report indicated that they expected the rate of mega-mergers would stay roughly
the same, or that there would be only a slight increase or decrease in the next 10
years.
The number of alliances formed between pharma and biotech companies are
likely to show the greatest increase to 2015, according to the survey. Respondents
also hinted at increased consolidation within the biotech industry.
In order to address the negative relationship of scale versus R&D productivity,

Big Pharma has two fundamental options: to restructure internal R&D operations
to overcome scale deficiencies; or to exploit external R&D resources through
alliances with companies not burdened with the deficiencies of scale.
In an analysis of 418 deals formed during a 19-month period (2002-3004)

collaborative alliances were the most common deal type for accessing drug
discovery technology and capability, accounting for 62% (259) of all deals.
With Big Pharma companies increasingly looking to external collaborations to

source new products to boost ailing pipelines, the reality of networked or ‘virtual’
pharmaceutical companies is moving closer, at least in terms of the R&D
organization.

individual companies will be substantially reduced. Big Pharma will focus more
on its core competencies of sales and marketing which are enhanced by scale of
operation, and will likely grow these functions organically or through
acquisitions. This central core of key competencies will likely be supported by an
R&D organization consisting of multiple long-term relationships with small
external R&D companies.
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Introduction
In recent years the pharmaceutical industry has continued to use mega-mergers, and
their promise of improved productivity and ROI, as a key mechanism for delivering
critical mass in sales and R&D. However, mega-mergers have not proved to deliver
these benefits.

respondents (83%) to this report’s survey indicated that they expected the rate of mega-
mergers would stay roughly the same, or that there would be only a slight increase or
decrease in the next 10 years (Figure 5.25). The most likely candidate for major merger
or acquisition activity is Novartis, who were in talks with Aventis prior to the Sanofi-
Aventis merger in 2004.
Figure 5.25: The rate of mega-mergers to 2015
Decrease significantly
Decrease slightly
Continue at roughly
the same rate
Increase slightly
Increase significantly
0 20 40 60 80 100 120
Number of sur veyed companies
This chapter of the report will explore alternatives to the mega-merger, including
internal R&D reorganization, selective M&A, collaborative alliances and licensing.
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Alliances between industry sectors
This section will analyze the sectors most likely to be involved in alliances, before
considering the type of alliance of licensing activity that would be most beneficial to
Big Pharma and the types of alliances that are expected to dominate the industry in
2015. Figure 5.26 shows the results of a Business Insights survey of 300 senior
industry executives and external industry observers, who were asked about the
likelihood of alliances between pharma, biotech and generics companies increasing or
decreasing in the next 10 years.
Figure 5.26: Alliances between industry sectors, 2004-2015
100%
Proportion of surveyed companies
90%
Increase
80% significantly
70%
Increase
60% slightly
50%
Stay roughly
40% the same
30% Decrease
20% slightly
10% Decrease
0% significantly
Pharma- Pharma- Biotech- Pharma- Biotech-
Pharma Biotech Biotech Generics Generics
Alliance partners
Pharma-Biotech alliances: Respondents believe that the number of alliances

between pharma and biotech are likely show the most increase, with 49% of
surveyed companies indicating that pharma-biotech alliances will ‘increase
significantly’ and a further 42% answering ‘increase slightly’. This highly positive
response to pharma-biotech alliances is due to the fast pace of growth seen in the
biotech sector in the past few years, and evidence of better productivity and rate of
approvals amongst biotech players;
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Biotech-Biotech alliances: The survey also shows that industry executives believe
that there will be increased consolidation within the biotech sector, as it moves
towards greater maturity (69% of respondents answered that biotech-biotech
alliances were likely to either ‘increase significantly’ or ‘increase slightly’). Again,
this predicted increase in biotech-biotech alliances has arisen from the recent
growth in the biotech sector;
Pharma-Generic alliances: There was less of a consensus towards increased

pharma-generics partnerships, although 62% of respondents still believed that there
would be an increase in this type of alliance to 2015. This more reserved response
to an increase in pharma-generic alliances compared to pharma-biotech alliances
corresponds to the predicted faster growth of the biotech sector compared to
generics;
Pharma-Pharma alliances: The majority (42%) of surveyed companies believed

that the number of deals between pharma companies was likely to stay roughly the
same in the next 5 to 10 years, in line with the results shown previously that the
number of mega-mergers was likely to remain similar. Again this response
correlates with previous findings of this report, namely that the pharma sector is
stagnating and that the major product growth opportunities lie primarily in the
biotech sector, and secondarily in the generics sector.
The issue of scale
A mega-merger or acquisition is often justified as offering economies of scale in R&D

as well as sales and marketing. For example, for two leading companies which merged
in 1999, the explanatory document produced for shareholders stated that, “Size is an
increasingly important competitive factor in the pharmaceutical industry.”
However, analysis presented below indicates that:
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Size alone does not improve productivity, despite the theoretical potential for
greater efficiency or more successful new product development;
There are no, or negligible, economies of scale in pharmaceutical R&D.
Larger companies are thus no more productive and no more effective at increasing
productivity than smaller companies. This has implications for their ability to grow
shareholder value, since productivity (manifest in return on capital) feeds directly into
economic value added, a proxy for shareholder value.
Scale in R&D operations
In an analysis of the relationship between company operational size and R&D

productivity (Figure 5.27), there has been shown to be no significant economies of
scale in pharmaceutical R&D.
Figure 5.27: R&D productivity of the top 39 pharma & biotech companies,
2002
6
King
current pipeline projects in 2008 ($m)
5 Universe of 39 companies R 2 = 0.187

R&D spend in 2002 ($m)
R&D productivity ratio
Forecast sales of
4 Gilead Forest
3 MedImmune
Genentech Roche
BMS Pfizer
Lilly Novartis
2
1 AstraZeneca
Wyeth Aventis
GSK
J&J
0 Merck
0 5 10 15 20 25 30 35 40
Company rank by 2002 sales (proxy for company operational size)
Source: Business Insights Business Insights Ltd
94
This is despite the theoretical potential for greater efficiency or more successful
product development. Indeed, analysis of the top 39 pharmaceutical and biotech
companies indicates a potential negative relationship between company size and R&D
productivity. In this case, R&D productivity is defined as the ratio between forecast
2008 sales of current pipeline products and R&D spend in 2002, and a company’s total
2002 ethical sales used as a proxy for the company’s operational size. While
rudimentary, this analysis provides no indication of a positive relationship between
operational size and productivity. Importantly, these data highlight the R&D
effectiveness of smaller companies particularly biotechs such as Genentech, Gilead and
MedImmune, which are expected to demonstrate strong productivity relative to their
peers.
Scale in sales and marketing operations
To look at commercial effectiveness of sales and marketing operations across the

pharmaceutical industry, the ROI for commercial activities can be measured by looking
at the relationship between sales revenues and selling, general and administrative
(S,G&A) expenses. Although S,G&A expenses are not strictly limited to commercially
driven costs, they do exclude the expenses relating to R&D, cost of sales and
depreciation.
Figure 5.28 shows the positive relationship between sales and S,G&A expenses for the
top pharmaceutical companies ranked by 2004 ethical revenues. In 2004 each
additional dollar spent on S,G&A resulted in additional sales of $2.98. Across the Big
Pharma sample there appears to be a linear relationship between sales and S,G&A
(97.9% of the variation in sales is explained by S,G&A expenses).
95
Figure 5.28: Sales vs. S,G&A, 2004
60,000
55,000 y = 2.9829x + 320.73 Pfizer

R 2= 0.9787
50,000
45,000 J&J
Sales revenue ($m)
40,000
GSK
35,000 Sanofi-Aventis
30,000
Roche Novartis
25,000
Merck & Co
20,000 AstraZeneca
Wyeth
BMS
15,000
Eli Lilly
10,000
4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000
Selling, general and administrative expenses ($m)
Source: Company reports Business Insights Ltd
Strategies beyond mega-mergers
Some of the major factors underlying poor R&D productivity in Big Pharma are the
deficiencies associated with traditional large-scale R&D operations, which include:
A low degree of flexibility and slow adaptation to change due to bureaucratic

decision-making;
Inefficient R&D expenditure;
Fragmented organizational structure;
Lack of focus;
96
Poor transparency and accountability and a low degree of ownership,
entrepreneurship and value recognition among R&D teams.
In order to address the negative relationship of scale versus R&D productivity, Big
Pharma has two fundamental options:
To restructure internal R&D operations to overcome the scale deficiencies

highlighted above;
To exploit external R&D resources through alliances with companies not burdened
with the deficiencies of scale.
What is more likely than a straight choice between these two options is that Big
Pharma will pursue a dual strategy of internal and external R&D. Internal R&D is more
risky as the average cost of researching and developing a drug in-house is now
estimated to be in excess of $900m. However the rewards of in-house development are
also greater, as the company retains all profits, which is why it is unlikely that
companies will disband internal R&D altogether, at least in the short-term. One of the
merits of pursuing external R&D resources is the lower risk. External R&D requires
less initial outlay but consequently generates less profit due to revenue sharing or
payment of royalties, license or milestone payments to partners.
Re-organization of internal R&D
GlaxoSmithKline (GSK) has put in place one of the most innovative strategies in the
industry to overcome its poor R&D productivity, and the apparent success of its ‘small
but large’ R&D strategy forms the benchmark by which other companies should look
to overhaul their R&D operations.
Although formed through consolidation, GSK has publicly put aside a strategy based
upon M&A in favor of significantly overhauling its R&D operations through its
pioneering ‘small but large’ approach. GSK’s new R&D strategy is based on the view
that certain activities within drug discovery and development benefit from large
97
operational scale while others are impeded. The company has taken the view that scale
is beneficial at the beginning of the R&D process, for example, in activities such as the
high-throughput screening of compounds against target during hit/lead identification,
and during the later stages of development, specifically the benefits that arise from the
capability to conduct large-scale clinical trials on a global basis.
On the other hand, GSK sees scale as a barrier to productivity and innovation with
respect to activities surrounding the middle ‘chunk’ of drug discovery and development
process, specifically the activities that take place from lead optimization to proof-of-
concept. For that middle ‘chunk’, the company has split this part of the organization
into seven smaller Centres of Excellence in Drug Development (CEDDs), in a bid to
foster the entrepreneurial culture of small biotech players within its massive operations.
Each of the CEDDs is operated as an autonomous, accountable business with a specific
therapeutic focus designed to accelerate early stage R&D and reduce attrition rates.
The company’s new strategy attempts to leverage scale at either end of the R&D
process while replicating a model that bears more resemblance to that of a classic
biotech R&D model than that of a large pharmaceutical company in the middle stages
of the R&D process.
From the implementation of the ‘small but large’ strategy in 2001, the company has
shown tangible results with a 76% increase in projects in clinical trials in from 2001 to
2004.
Exploiting external R&D resources
Exploiting a number of relationships across the R&D value chain provides an

alternative strategy to in-house re-organization for boosting productivity. External
R&D offers a number of advantages including distributing risk, lower upfront
investment and adaptability. A number of companies are already taking advantage of
such external R&D relationships, many of which are with biotech companies.
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Alliance deals
Pharmaceutical companies can use a number of types of deal to exploit external R&D
and drug discovery resources and expertise:
Collaborative alliances,
Technology licensing,
Buyer/supply relationships,
Evaluations
M&A activity.
Figure 5.29: Impact of alliances on future drug development
Alliances with biotechs forming drugs of the future

Most common types of alliances (Sep. 2002 to Mar. 2004)
Collaboration between Roche and deCODE

Collaborative alliances genetics to develop phosphodiesterase (PDE)
62% inhibitors for vascular disease (Nov. 2004)
Novo Nordisk licensed the rights to Neose

Technology licensing Technologies GlycoPEGylation technologies
18% (Nov. 2003)
Dharmacon designed siRNA reagents for Bayer

Buyer-supplier relationships using its SMARTselections and SMARTpool
15% technologies (Nov. 2003)
Initial agreement between ARIUS Research and

Evaluations Protein Design Labs (PDL) to evaluate ARIUS’s
3% anti-cancer antibodies (Oct. 2002)
Acquisition of 3D-Pharmaceuticals by J&J for

Mergers & acquisitions drug discovery capabilities, e.g. HTS, combi-
2% chem, cheminformatics (Mar. 2003)
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418 drug discovery deals formed in the industry between September 2002 and March
2004 were analyzed by type of deal, as shown in Figure 5.29, to establish the types of
deals favored by pharmaceutical companies. It is these alliances that will be the source
of much of the drug development and drug launches in the future.
Collaborative alliances
Collaborative alliances were by far the most common deal type for accessing drug
discovery technology and capability during the period analyzed, accounting for 62%
(259) of all deals. In collaborative alliances both parties contribute to drug discovery
activities by way of expertise and resources. These deals are particularly attractive as
they benefit both parties. In an alliance between a pharma company and a smaller
player such as a biotech, the biotech will often be rewarded for their contribution by a
combination of up-front fees, milestone and royalty payments. However, this
compensation is linked to the success of the research and program and meeting pre-
defined goals. Thus for the pharma company, there is minimal loss if the project fails,
which mitigates risk.
Technology licensing
Technology licensing deals were the second most common type of deal behind
collaborative alliances. Technology licensing accounted for 18% of total activity
during the 19-month period. These deals, while focused and centered around the
licensing of technology or proprietary data for use in drug discovery, may also involve
the participation of the out-licensing company in drug development activities. In this
respect, the licensing deals span pure technology licensing to hybrid licensing/alliance
deals.
Licensing deals (as defined here) range from high value deals, such as the development
and licensing agreements signed between Novo Nordisk and Neose Technologies in
November 2003 (in which Novo Nordisk gained the right to use Neose’s
GlycoPEGylation technology for the development of next generation therapeutic
proteins in return for milestone and royalty payments of up to $55m) to lower value
100
deals. The latter, for example, simply provide in-licensors with access to proprietary
databases or screening technologies.
Buyer-supplier relationships
15% of the deals recorded between September 2002 and March 2004 were buyer-
supplier relationships. In these deals, companies supplying drug discovery technology
or capability are provided fees for their services in the absence of collaborative activity,
transfer of intellectual property between parties through licensing or complex reward
structures involving milestone and royalty payments. A typical buyer-supplier
relationship would therefore be that formed between Bayer and Dharmacon in
November 2003 in which Dharmacon was tasked with designing small interfering RNA
(siRNA) reagents using its SMARTselection and SMARTpool technologies. These
were to be supplied to Bayer for use in target validation and basic drug development
activities.
Evaluations
3% of the deals analyzed were classed by participating companies as ‘evaluations’.

These deals take the form of exploratory pilot projects designed to test the utility of a
company’s technologies or capabilities which, if successful, are expected to give rise to
more substantial licensing/fee-based or longer-term collaborative deals between
parties. For example, an initial agreement between ARIUS Research and Protein
Design Labs (PDL) in October 2002, which concerned the evaluation of two of
ARIUS’s anti-cancer antibodies by PDL, has since given rise to two new collaborative
deals focused on antibody generation.
Mergers and acquisitions (M&A)
Merger and acquisition activity, while only accounting for 2% of all deals in terms of
numbers, represents some of the highest value deals over the period. The evidence
confirms that M&A activity remains an important mechanism by which to exclusively
secure strategically important technology or rapidly enhance existing R&D capabilities.
For example, the $400m ‘merger’ of Applied Molecular Evolution with Eli Lilly in
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November 2003 followed a series of three collaborative agreements between the two
companies in the area of protein optimization. The decision to acquire this partner has
provided Lilly with ownership of Applied Molecular Evolution’s market leading
Directed Molecular Evolution technology for protein optimization and the ability to
apply this capability horizontally and exclusively across multiple therapy areas in the
development of biotherapeutics. For Lilly this is an important strategic acquisition to
support its long-term position as a leader in biotherapeutics.
While M&A activity, such as the merger between Applied Molecular Evolution and
Lilly can been driven by strategic reasons, other companies have been driven by the
need to simply enhance core R&D expertise and capabilities. For example, the $88m
acquisition of 3D-Pharmaceuticals by Johnson & Johnson, which was completed in
March 2003, provided the company with ‘bolt-on’ drug discovery capability for its
R&D operations Johnson & Johnson Pharmaceutical Research and Development,
L.L.C. The acquisition brought with it a suite of capabilities and expertise in high-
throughput screening, combinatorial chemistry, X-ray crystallography, structure-based
drug design and cheminformatics. Likewise, Merck KGaA’s (EMD Biosciences)
acquisition of ProteoPlex in August 2003, while enhancing the functional genomics,
proteomics and micro-array technology offering of its Life Sciences Products Division,
also provides the company with supporting technology for its own drug discovery
activities.
Forecast to 2015
This section presents the results of this report’s survey question on the strategies likely
to have most impact on R&D productivity to 2015, as shown in Figure 5.30.
Respondents were asked their opinion on which types of deals were likely to increase
and which were likely to decrease in order to improve R&D productivity in the next 5
to 10 years. Respondents believe that the selected acquisition of small R&D-focused
companies by pharma companies will be most likely to increase R&D productivity by
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2015. 45% of respondents indicated that this type of alliance would ‘significantly
increase’ while a further 43% thought it would ‘increase slightly’.
The deals least likely to increase in order to improve R&D productivity were the mega-
mergers. This is not surprising given evidence that such mergers provide no economies
of scale in R&D and that R&D productivity is highest in smaller companies. The
reorganization of in-house R&D also showed a relatively poor response, with licensing
activities, discovery partnerships and selective acquisitions all being regarded as more
likely to shape the industry by 2015. Therefore, the evidence from this survey suggests
that companies are looking towards external R&D resources, more that in-house drug
research, to tackle the productivity crisis and deliver the drugs of the future.
Figure 5.30: Growth and alliance strategies to increase R&D productivity,

2004-2015
Decrease significantly Decrease slightly Stay roughly the same
Increase slightly Increase significantly
In-house R&D
reorganization
Discovery partnerships
Type of alliance
Early-stage licensing
Licensing of late-stage
products
Selective M&A
Mega-mergers
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Proportion of surveyed com panies
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The move towards networked pharma
With Big Pharma companies increasingly looking to external collaborations to source

new products to boost ailing pipelines, the reality of networked or ‘virtual’
pharmaceutical companies is moving closer, at least in terms of the R&D organization.
Instead of licensing products at a late stage of development, Big Pharma should focus
more on forming collaborations and partnerships which could yield multiple products
and prove far more profitable in the long-term than the $200m deals which have
categorized Phase II, III and registration deals in the last few years.
In Figure 5.31, respondents were asked whether the best way to achieve growth was by
specializing on core functions (i.e. sales and marketing) or operating a diversified
strategy maintaining many competencies and functions. The results show that three-
quarters of respondents believe that the future of the industry lies in concentrating on
the key strengths of Big Pharma – sales and marketing.
Figure 5.31: Big Pharma should concentrate on core competencies
Maintain a diverse
array of competencies
and functions
25%
75% Concentrate on core

competencies and
divest non-core functions

individual companies will be substantially reduced. Respondents believe that Big
104
Pharma will focus more on its core competencies of sales and marketing which are
enhanced by scale of operation, and will likely grow these functions organically or
through acquisitions. This central core of key competencies will likely be supported by
an R&D organization consisting of multiple long-term relationships with small external
R&D companies, as illustrated in Figure 5.32.
While many companies have adopted elements of a networked or ‘virtual’ R&D model
within their R&D strategy, few large pharmaceutical companies have integrated a
networked model as fundamentally as Roche. In opting out of M&A activity and
establishing a network of collaborative relationships in core therapeutic areas, the
company has increased flexibility and a wider range of options than are afforded by
more traditional R&D models. This has enabled the company to effectively implement
both long- and short-term strategies for ensuring ongoing productivity.
Figure 5.32: Vision of networked pharma in 2015
Discovery R&D network 2015 Licensing

partnerships agreements
R&D 2005
Equity Sales & marketing Technology

investments 2005 & 2015 deals
Joint R&D
ventures spin-offs
105
106
CHAPTER 6
Comparative company
strategy analysis
107
Chapter 6 Comparative company
strategy analysis
Summary
The sheer size that Pfizer has grown to limits its growth potential, with Pfizer
needing to generate several billion dollars of added sales in 2005, or cut costs by
the same amount, to achieve double-digit growth. The geographic expansion of
its operations into emerging markets, particularly China, has been identified as
one of its major growth drivers.
GSK has sought to counter its poor R&D productivity in recent years by setting
up seven Centres of Excellence in Drug Development (CEDD) in an attempt to
foster the entrepreneurial culture of small biotech players within its R&D
operations. Each of the CEDDs is operated as an autonomous, accountable
business with a specific therapeutic focus.
One of the major strategic shifts for the newly merged Sanofi-Aventis was the
creation of a single generics business called Winthrop Pharmaceuticals in January
2005. Sanofi-Aventis has fairly ambitious plans for Winthrop to extend generics
operations to fifteen or more countries by the end of 2006, and become a major
player in the European generics market.
Like many of its competitors in the generics industry, Novartis’ generics

business, Sandoz, has shown slow growth in 2004 due to declining prices and
increased competition. As a result, Sandoz is aiming to readjust its focus to
difficult-to-make generics and biogenerics.
Roche encompasses many of the strategies cited in this report as being essential
to success in the next decade. The company is forecast to become one of the
leaders in the pharmaceutical industry by 2015.
During 2004 and 2005 UCB transformed from a global pharmaceutical and
surface specialties company to a focused biopharmaceutical company. This
transformation was achieved by the $2.5bn acquisition of leading UK
biotechnology leader Celltech in May 2004, followed in March 2005 by the
$1.8bn sale of the surface specialties business to Cytec Industries.
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Introduction
This chapter of the report profiles some of the leading companies in the pharmaceutical
industry, and how these companies are positioning themselves for future growth in
terms of geographic expansion and therapeutic focus, investment in biotech or generics,
and the creation of networked pharmaceutical companies. The companies profiled
include Pfizer, GSK, Sanofi-Aventis, Roche and UCB.
Figure 6.33 shows how each of these pharmaceutical companies profiled are placed in
terms of investment in R&D, S,G&A expenses, and sales revenues in 2004.
Figure 6.33: R&D, S,G&A and sales, 2004
20,000
Selling, general and administration
J&J
15,000
GSK
expenses ($m)
Pfizer
Novartis
10,000 AstraZeneca Sanofi-A ventis

BMS Roche
Wyeth Merck
5,000 & Co
UCB Eli Lilly
Amgen
0
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000
R&D expenses ($m )
Source: Business Insights, Company reports Business Insights Ltd
109
Pfizer
Pfizer is the world’s leading pharmaceutical company, generating revenues of $52.5bn

in 2004. As well as generating the highest sales, Pfizer also has the highest expenditure
both in R&D and in S,G&A.
However, the sheer size that Pfizer has now grown to limits its growth potential, with
Pfizer needing to generate several billion dollars of added sales in 2005, or cut costs by
the same amount, to achieve double-digit growth, not accounting for losses in sales due
to blockbuster patent expiries. The number of NCEs required to drive growth of a
company Pfizer’s size is likely to be in excess of that which Pfizer can produce, even
with its $7.7bn R&D spend. This is because increasing the amount invested in R&D
does not increase the productivity of this investment, and the R&D productivity of
large companies has shown to be poorer than that of smaller, more focused outfits.
Growth and alliance strategy
Pfizer tends to in-license products at a late stage of development, or after the product
has been approved (as it did with Rebif), and will continue to need to seek late stage
and/or recently launched products over the next few years, in order to fill the gaps in its
cardiovascular, CNS, infectious diseases and oncology pipelines. However, continued
reliance on sourcing individual late-stage products means the company will not gain
full benefit in terms of revenues and profitability from the products it markets and will
not have full control over their development, as recently indicated by the termination of
the deal for CDP-870 with Celltech.
One more profitable strategy available to Pfizer is to establish a stable network of small
R&D companies from which pipeline products are sourced, which Pfizer could help
fund in return for an option on full marketing rights to the resulting products. Such a
strategy could improve Pfizer’s limited in-house R&D productivity and allow the
company to focus on its core strength - not in drug discovery, but in identification of
products with high potential and creation/management of an effective marketing
110
strategy. Pfizer’s recent move to establish Esperion Therapeutics as a wholly owned
subsidiary, rather than attempting to integrate its operations as it did with the
Pharmacia and Warner-Lambert mergers may represent a step in this direction.
Geographic expansion
Pfizer has identified the geographic expansion of its operations into emerging markets,
particularly China, as one of its major growth drivers. Although Pfizer has been present
in the Chinese market since the 1980s, the company signaled a significant acceleration
in its China operations in 2004 with the creation of a new regional headquarters in
Shanghai and the new Pfizer Investment Holding Company. The investment company
was created in order to coordinate the activities of all Pfizer operations in China and
speed-up product entry into this fast-growing market (28% growth in 2004).
GlaxoSmithKline
GSK’s key strength lies in sales and marketing, and in effectively linking its sales and
marketing operations with its lifecycle management programs to ensure maximum life
span of each product. Strong historical examples of this include the success of the
antidepressant Wellbutrin SR, the value of the over the counter (OTC) switch of the
anti-ulcerant Zantac and the added benefits of GSK’s combination HIV therapies
Combivir and Trizivir. The ability of GSK’s sales and marketing team to maximize the
revenue opportunities for the combination asthma drug Seretide/Advair, the
combination oral antidiabetic Avandamet and the controlled-release Paxil CR will be
key to growth.
Despite its success as a sales and marketing company, GSK has suffered from poor
R&D productivity in recent years. However, the company sought to counter its poor
R&D productivity by completely overhauling its R&D operations in 2001 in a
significant long-term strategic move. GSK set up seven Centres of Excellence in Drug
111
Development (CEDD) in an attempt to foster the entrepreneurial culture of small
biotech players within its massive operations. Each of the CEDDs is operated as an
autonomous, accountable business with a specific therapeutic focus designed to
accelerate early stage R&D and reduce the attrition rate (Figure 6.34).
Figure 6.34: GSK Centres of Excellence in Drug Development (CEDD)
CEDDs
Microbials, muskuloskeletal &

proliferative diseases
Metabolic & viral diseases
Genetics Preclinical
Cardiovascular & urogenital
research development
Neurology & gastrointestinal
Discovery Worldwide
Psychiatry
research development
Respiratory & inflammatory
Biopharmaceuticals
CEDD 2004
Scale beneficial Scale impedes Scale beneficial
The success of GSK’s R&D reorganization cannot be fully judged until after 2010,
since it takes 10-15 years for projects to advance through the research and development
stages. However, the early signs are positive, with GSK reporting an 88% increase in
clinical NCE projects from 2001 to 2004, although 87.5% of its 88 NCE projects are in
phase I/II trials, with only 11 projects in phase III. Therefore, there remains significant
risk in the pipeline of GSK.
Despite having one of the best early-stage pipelines among leading pharmaceutical
companies, the investment community’s reception to GSK’s reorganization has been
lukewarm, as its investment analysis is focused on late-stage pipeline prospects and
112
earnings growth on a two-to-three year time horizon, which is less positive for GSK
due to the number of products subject to generic threat. Little credit has been given to
the fact that the company, having fundamentally addressed its R&D strategy and
reorganized its operations, provided evidence that it is delivering productivity
improvements that are likely to pay off in the longer-term.
One possible strategy to address the issue of risk within its immature internal pipeline
and boost its late-stage pipeline, is for GSK to build on its already productive alliance
and licensing activities, in addition to internal organic growth. In fact, this alliance
network has provided GSK with some of its most valuable pipeline products, including
the erectile dysfunction therapy Levitra and the cancer drug Bexxar. GSK’s alliance
network falls into a number of different categories:
Early-stage discovery partnerships (e.g. Exelixis, Ranbaxy);
Joint ventures for drug development (e.g. Shionogi, Tanabe);
Licensing deals to bolster pipeline (e.g. Medivir for MIV-210);
Co-marketing/co-promotion deals to bolster pipeline and marketed portfolio (e.g.

Bayer for Levitra, Yamanouchi for Vesicare);
Technology deals to facilitate product differentiation and lifecycle management.
In summary, GSK is operating a twin strategy of developing a networked R&D

organization around its core sales and marketing capability, as well as investing heavily
in internal R&D operations. This twin strategy is an attempt to mitigate the risk of
either strategy, although both center on the principal of smaller R&D units resulting in
higher productivity (Figure 6.34).
113
Figure 6.35: GSK’s R&D network
Exelixis Ranbaxy
GS
K
ne
tw
Shionogi Drug discovery partnerships
or
k
Licensing Medivir
agreements
Joint
Ventures
Tanabe GSK
various
Core competencies Technology
deals
Microbials, GSK Centres of Excellence in Drug Development

muskuloskeletal, Biopharm aceuticals
& proliferative
diseases
Metabolic & Respiratory &
viral diseases inflammatory
Cardiovascular Neurology & Psychiatry
& urogenital gastrointestinal
Sanofi-Aventis
Sanofi-Aventis was formed by the merger of two European Pharmaceutical giants,

Sanofi-Synthélabo and Aventis, in 2004. The merged company has a broad based
strategy for growth, investing in its pharmaceuticals, vaccines and generics businesses.
Within its pharmaceutical business, Sanofi-Aventis also has quite a broad strategy,
with eight primary care blockbusters and also several smaller speciality care products,
and the company continues to invest in research in both these areas.
114
Geographic expansion
Sanofi-Aventis has publicly stated that it believes there are no ‘small markets’ and it
therefore intends to grow its business in emerging as well as traditional markets. The
company is particularly focused on growing its market share in the US market, as well
as the high growth markets in Asia and South America.
Investment in generics
One of the major strategic shifts for the newly merged company was the creation of a
single generics business called Winthrop Pharmaceuticals in January 2005. The basis
of Winthrop Pharmaceuticals was the existing Sanofi-Synthélabo generics division,
operated through independent dedicated subsidiaries in seven countries: France,
Germany, Portugal, UK, Czech Republic, Colombia and a newly-launched business in
South America. However, with the creation of Winthrop the generics business in now
operated globally out of a single site in Paris.
Winthrop will be operated through an arms-length approach due to the fundamental

differences in commercial strategy of operating a generics and a pharmaceutical
business: a generics business operates a short-term, reactive strategy, while the
pharmaceutical business requires long-term vision and direction.
Sanofi-Aventis has fairly ambitious plans for Winthrop to extend generics operations to
fifteen or more countries by the end of 2006, and become a major player in the
European generics market.
Prior to the merger, Sanofi and Aventis had very different attitudes to external
partnerships and alliances. Sanofi traditionally produced the majority of its drugs in-
house and only took partners to aid drug development and expand its geographical
presence. Aventis, on the other hand, traditionally employed licensing to improve its
growth prospects, with 19.3% of its 2003 sales derived from in-licensed products.
115
The merged company’s late-stage pipeline is relatively strong, with 12 drugs forecast
to be launched between 2004 and 2010. However, due to its large size the company is
also looking externally to supplement its R&D resources and pipeline, particularly in
the field of biotechnology. Examples of its partner and collaborations include
Millennium, Immunogen, Cephalon and Regeneron Pharmaceuticals.
Therefore, from the evidence presented Sanofi-Aventis appears to be adopting a

corporate strategy similar to that of Novartis – seeking growth opportunities in a wide
variety of markets.
Novartis
In contrast to many of its peers, Novartis has opted for a highly diversified business
model – being involved in a number of different business areas – rather than one of
depth.
Table 6.9: Novartis sales by division, 2003-2004
2003 sales 2004 sales Growth (%) % of 2004

($m) ($m) 2003-04 total sales
Pharmaceuticals 16,020 18,497 15 65.5
Consumer Health (Total) 8,844 9,750 10 34.5

Sandoz 2,906 3,045 5 10.8
OTC 1,772 1,975 11 7.0
Animal Health 682 756 11 2.7
Medical Nutrition 815 1,121 38 4.0
Infant & Baby 1,361 1,441 6 5.1
CIBA Vision 1,308 1,412 8 5.0
Total 24,864 28,247 14 100.0
Source: Novartis annual report 2004 Business Insights Ltd
As well as its pharmaceutical division, comprising of branded drugs, Novartis also has
a sizeable consumer healthcare division, with over-the-counter (OTC) drugs, generics
116
(Sandoz), the CIBA Vision ophthalmic business, infant and baby, medical nutrition and
an animal health unit. In 2004 the consumer health unit comprised 34.5% of Novartis’
total sales, as shown in Table 6.9.
Investment in generics
Novartis’ generics business, Sandoz, experienced slow growth in 2004 of just 5%

compared to 59.9% growth seen in 2003. This downturn was evident right across the
generics industry with growth slowing from 25% in 2003 to 10% in 2004, due to
increasing levels of competition and decreasing Gx (generic) prices.
Sandoz sales have been particularly weak in the important US and German markets. In
the US, Sandoz has been affected due to pricing pressures, the highly competitive
generics environment, and launch delays. The company has suffered in Germany
because of one-off impairment charges, a decrease in reference prices by the German
authorities, and the rebate war between market leaders.
In order to counter this slowdown in growth and increasingly competitive nature of the
generics market, Sandoz has two main strategies:
Biogenerics: In order to differentiate its products, and operate in a less competitive

and higher value market, Sandoz has identified “difficult-to-make” generics and
biogenerics key growth drivers, utilizing its biopharmaceutical contract
manufacturing expertise;
Acquisitions: Unlike its ethical pharmaceutical division, Novartis’ generics

division (Sandoz) has pursued a strong acquisition strategy in the last few years. In
2002 Sandoz acquired LEK pharmaceuticals for a cash price of $835m. This was
followed in 2004 by the purchase of Canadian generics company, Sebex.
Significantly, despite the difficulties experienced in 2004, Novartis has underlined
its commitment to the generics market with the dual purchase of Hexal and Eon
Labs, which should increase Sandoz’s contribution to overall Novartis sales from
11.7% to 17%. The Hexal purchase should increase Sandoz’s presence in the
117
German market, while Eon Labs will increase its penetration in US – both markets
that proved to be problematic in 2004.
With a number of recent successful launches and its promising pipeline, Novartis is set
to continue to achieve strong organic growth in its pharmaceuticals business over the
next few years, although it has also signaled its intention to expand further through in-
licensing agreements. While the company has continued to make acquisitions to boost
its presence in the generics market, it has not yet undertaken any major M&A activity
in the pharmaceutical market, although it did signal some intention in this area through
the recent talks with Aventis, prior to its agreement with Sanofi-Synthélabo in 2004.
Novartis has increased its level of licensing activity in recent years, in order to boost its
pipeline, and has signaled its intention to increase activity in this area. Novartis has one
partnership at the marketing level. It promotes its women’s health line through the
Novogyne joint venture with Noven Pharmaceuticals, but in general most of the
company’s existing growth drivers were developed in-house, leaving Novartis with
strong operating profit growth. The majority of Novartis’ licensing activity has been to
foster relations with a number of companies to boosts its R&D productivity. Major
products developed in collaboration with partners include the asthma drug Xolair
(Genentech and Tanox) and the cancer therapy PTK787 (Schering AG). Novartis also
has a number of early stage products resulting from new collaborations, including one
with Dr Reddy’s Pharmaceuticals for a novel diabetes drug. As well as direct product
related licensing deals, Novartis has established a number of development
collaborations in the last five years, including discovery alliances with Tanabe, Vertex
and Rigel, and technological agreements with Incyte and Geneva. The licensing of
pitavastatin for European markets from Kowa + Nissan Chemical Industries is a key
example of late stage in-licensing. A presentation at an analyst day in 2003 also
highlighted Novartis’ changing attitude to in-licensing, indicating that in the future it
will be a more central part of Novartis’ overall strategy.
118
However, the company’s marketed portfolio is heavily reliant on in-house discovered
and developed products, with over 95% of its sales in 2003 derived from internally
sourced and developed products.
Roche
In recent years Roche has implemented one of the most innovative and forward-
thinking R&D strategies in the pharmaceutical industry. Indeed Roche has transitioned
into the leading example of a networked pharmaceutical company, utilizing in-
licensing and collaborative R&D partnerships to drive innovation and drug
development. Through its major shareholding in Genentech, Roche has positioned
itself as a leader in biotechnology, especially within the growing oncology field, and
targeted the Japanese market through its equity investment in Chugai.
Since Roche encompasses many of the strategies cited in this report as being essential
to success in the next decade, then Roche is forecast to become one of the leaders in the
pharmaceutical industry by 2015.
Rather than following a singular networking strategy, Roche has used a number of
different strategies in order to drive R&D productivity: equity investments; licensing
agreements; and R&D spin-offs, as shown in Figure 6.36. By operating its R&D
structure through a network of small independent companies or units, Roche is
attempting to promote the entrepreneurial spirit and higher productivity indicative of
biotech companies.
119
Figure 6.36: Roche’s R&D network
ROCHE network
Genentech
Licensing Antisoma
agreement
Equity
investments
Chugai ROCHE
core competencies
R&D spin-offs
Basilea
Acetilion
BioXell Novuspharma
As a leading Networked Pharma company, Roche has utilized its strong collaboration
strategy to drive company growth in a franchise-targeted manner. It formed at least 33
key collaborations between January 2003 and October 2004. These collaborations are
wide-ranging, and have allowed Roche to build up its product pipeline, in addition to
strengthening and diversifying its research programs and technology platforms.
Over the longer term, the wide mix of collaborations that it has formed positions Roche
for strong growth and diversifies the risk associated with the company’s dependence on
a small number of blockbusters. Additionally, Roche has fostered close links with
potential collaboration partners by choosing to partner with companies that it has spun
out, such as BioXell. This forms part of the company’s strategy to retain innovation
and knowledge capital.
120
Investment in biotech
By examining the companies that Roche forms partnerships with, it can be seen that
Roche is investing heavily in the biotech sector. As well as its majority shareholding in
biotech giant Genentech, Roche has licensed the rights to biotech company, Antisoma’s
entire oncology pipeline.
Through its biotech partnerships and spin-offs, Roche is now the front-runner in
molecular targeted medicine, and the world leader in the oncology market, the largest
therapeutic area currently served by biologicals (Figure 6.37).
Figure 6.37: Biologic medicine approvals by major indication, 2003
Others
CNS
Respiratory
7%
4% Oncology
Reproduction 4%
5% 30%
Infectious disease 6%
7%
Cardiovascular
11% 15%
11%
Hormone/Enzyme Autoimmune
replacement
Diabetes
Source: PhRMA, FDA, Business Insights Business Insights Ltd
Roche has also positioned itself as the leader in the diagnostics market, recognizing the
importance of diagnostics in the targeted medicines marketplace. For example Roche’s
targeted breast cancer drug, Herceptin, is reliant on the diagnostic test for the HER2
protein for its success.
Since the biotech market is forecast to show the strongest growth in the next 10 years,
and with Big Pharma increasingly looking to external R&D resources for innovation, it
is likely that the Roche model will be replicated by other companies.
121
UCB
Investment in biotech
UCB has undertaken a major transformation of its business strategy since early 2004.
The company has transformed from a global pharmaceutical and surface specialties
company to a focused biopharmaceutical company. This transformation was achieved
by the $2.5bn acquisition of leading UK biotechnology leader Celltech in May 2004,
followed in March 2005 by the $1.8bn sale of the surface specialties business to Cytec
Industries.
This major shift in business strategy underlines UCB’s confidence in the high growth
potential of the biotech sector, which has grown at almost twice the rate of the overall
pharmaceutical industry for the past two years.
As well as shifting its research and product focus towards biotechnology, UCB’s
acquisition of Celltech also signified a change in growth strategy for a company that
had previously relied on internal growth as the primary mechanism to drive growth.
The company has internally discovered and developed a number of compounds that
have gone on to become globally important drugs including Zyrtec and Keppra. The
acquisition also plugs UCB’s pipeline gap between 2007 and 2010 and gives the
company access to a product pipeline that could drive long-term growth in new, high
growth therapeutic areas such as oncology, arthritis and Crohn’s disease.
The successful integration of Celltech’s R&D activities with UCB’s existing operations
represents a significant challenge for UCB, as UCB is a traditional pharmaceutical
company while Celltech is a biotechnology company and both have very different
business models and strategies, and additionally, UCB has limited prior expertise in
oncology, rheumatoid arthritis and Crohn’s disease.
122
Given Celltech’s proprietary knowledge in these therapy areas and in antibody
technology, UCB has decided to manage Celltech’s expert R&D division differently
from its current pharmaceuticals business, allowing Celltech to operate at arms length.
This approach has involved the creation of R&D “centers of excellence”, in as similar
fashion to GSK, with the Celltech R&D site in Slough (UK) now named the Celltech
Antibody Centre of Excellence in Antibody Research, the Celltech R&D site in
Cambridge (UK) now named the Cambridge Centre of Excellence for inflammation,
and the original UCB R&D site in Braine (Belgium) called the Braine-l’Alleud Centre
of Excellence for CNS.
In addition to its major investments and divestments in the past year, UCB is also
involved in several research partnerships, and appears to be using in-licensing to enter
new areas. In June 1999, UCB in-licensed the global rights to Xyzal excluding the US
and Japan, from Sepracor. More recently, UCB in-licensed the European rights to
Watson's oxybutynin transdermal patch for the treatment of urinary urge incontinence.
UCB also has a successful co-promotion agreement with Pfizer in the US for Zyrtec.
In February 2004, UCB formed a research, development and licensing agreement with
Dynavax for its novel treatments for ragweed and grass allergy therapies, and an option
to license Dynavax’s pre-clinical peanut allergy program. This agreement was a shift
for UCB who have previously tended to license single products at a much later stage of
development. Prior to its acquisition of Celltech, UCB was already showing interest in
the biotech market through a variety of alliances, including drug discovery and
technology deals with GeneLogic, Genfit, Galapagos and BioFocus.
UCB’s ‘network’ of R&D activities is illustrated in Figure 6.38, and shows a

resemblance to other pharmaceutical companies such as GSK, although on a much
smaller scale.
123
Figure 6.38: UCB R&D network
Genelogic
Genfit
UC
B
ne
tw
Galapogos Drug discovery partnerships
or
k
Sepracor
Licensing agreements
Technology
deals
Biofocus UCB
Watson
Core competencies
UCB Centres of Excellence in R&D Dynavax
Antibody Research CNS

(Celltech) Inflammation
(Celltech)
Therefore, with its investment in biotech through the acquisition of Celltech,

divestment of non-core activities, and subsequent R&D re-organization, UCB
encompasses many of the future growth strategies highlighted in this report.
124
Conclusions
Through the analysis of six pharmaceutical companies – Pfizer, GSK, Sanofi-Aventis,

Novartis, Roche and UCB – there is evidence of each of the strategies highlighted in
this report being implemented.
Future strategies to expand the customer base: Pfizer has identified China as a
major market in which to grow its business, and has begun to invest heavily in the
country through the creation of an investment holding company to manage its
operations;
Future product portfolio strategies – investment in biotech: Roche and UCB

have recognized the growing importance of the biotech sector and have adapted
their business models accordingly. Roche has set up a networked R&D model,
while UCB has acquired UK biotech leader Celltech in order to gain a foothold in
the sector;
Future product portfolio strategies – investment in generics: Novartis is

currently the most successful Big Pharma company involved in the generics sector,
through its generics division, Sandoz. Sandoz is run essentially as an independent
generics company, which is the model being also being adopted by Sanofi-Aventis,
through the creation of its Winthrop Pharmaceuticals generics unit in January 2005;
Future growth and alliance strategies: Several companies have recognized the
advantage of small scale in R&D operations. GSK has undertaken a major
reorganization of its internal R&D activities to create a number of small R&D
entities in order to boost productivity, while Roche has established a wide network
of biotech alliance partners.
125
126
CHAPTER 7
Appendix
127
Chapter 7 Appendix
Primary research methodology
The primary research contained within this report includes a detailed survey identifying
key pharma industry trends. The survey data was generated with inputs from 300 senior
industry experts and external industry observers. These respondents were drawn from
multiple company types and job functions in order to get a cross-sectional view of key
trends. Figure 7.39 shows the sample split by company type, and Figure 7.40 by job
function.
Figure 7.39: Survey respondents by type of company
Other
20%
Major
pharmaceuticals
Speciality products
300
(incl. diagnostics) 10% respondents 48%
9%
Generics
13%
Biotech
128
Figure 7.40: Survey respondents by job function
Corporate
Other
20%
20%
300
R&D 11%
respondents
28%
15%
Marketing
Commercial &
Business 6%
Development
Sales
129
Index
Abbott, 82 GlaxoSmithKline, 19, 20, 49, 70, 97, 98, 109,

111, 112, 113, 114, 123
ageing population, 30, 59, 62
Immunogen, 116
alliances, 14, 83, 91, 92, 93, 97, 99, 100, 115,
118, 123 India, 10, 31, 50, 53, 60
Amgen, 70 in-licensing, 35, 42, 44, 49, 118, 119, 123
AstraZeneca, 56, 83 Johnson & Johnson, 49, 82, 102
Bayer, 85, 101, 113 mega-blockbusters, 13, 67, 69, 71
Biogen IDEC, 45 mega-mergers, 14, 35, 46, 47, 48, 49, 91, 93,
96, 103
biotech, ii, 13, 14, 31, 50, 58, 70, 71, 72, 73,
74, 75, 77, 78, 82, 83, 84, 92, 93, 94, 95, 98, Merck & Co, 20, 21, 41, 49, 85, 86, 102
100, 109, 112, 119, 121, 122, 123
me-too drugs, 22, 41
blockbusters, 31, 41, 42, 56, 67, 79, 114, 120
Novartis, 56, 81, 85, 87, 91, 116, 117, 118
BMS, 49
obese population, 62
Cambride Antibody Technology, 83
parallel trade, 25, 28, 29
Celltech, ii, 13, 84, 110, 122, 123
Pfizer, 21, 40, 41, 45, 46, 47, 49, 56, 57, 67,
China, 10, 31, 38, 50, 53, 54, 55, 56, 57, 60, 85, 109, 110, 111, 123
111
Procter & Gamble, ii
cost containment, 25, 29
productivity, 14, 19, 21, 23, 25, 27, 28, 39, 40,
Eli Lilly, 49, 70, 82, 85, 101, 102 42, 45, 46, 47, 49, 50, 67, 71, 79, 83, 91, 92,
94, 96, 97, 98, 102, 103, 105, 110, 111, 113,
EU, 28, 29, 37, 38, 54 118, 119
France, 36, 55, 60, 79, 86, 115 R&D, 84, 86
Genentech, 76, 83, 95, 118, 119, 121 Ranbaxy, 85
generics, 13, 27, 28, 50, 67, 68, 71, 72, 73, 74, Roche, 13, 47, 49, 56, 70, 76, 82, 83, 84, 105,
78, 79, 80, 81, 82, 84, 85, 86, 87, 92, 93, 109, 119, 120, 121
109, 114, 115, 116, 117, 118
Sandoz, 47, 81, 85, 87, 117
Genzyme, ii
Sanofi-Aventis, 45, 47, 49, 84, 85, 91, 109,
Germany, 28, 36, 54, 55, 60, 61, 79, 86, 115, 114, 115, 118
117
UCB, ii, 13, 84, 109, 122, 123, 124
130
UK, 21, 22, 28, 36, 60, 61, 84, 85, 86, 115, 122, Vioxx, 10, 19, 20, 21, 41, 42
123
Western Europe, 81
US, ii, 13, 21, 22, 25, 26, 27, 29, 35, 36, 37,
38, 53, 54, 60, 61, 62, 63, 70, 72, 74, 77, 78, Winthrop, 85, 115
79, 80, 83, 84, 85, 115, 117, 118, 123
131

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H E A LT H C A R E

The Pharmaceutical Market Outlook

Copyright © 2005 Business Insights Ltd

While information, advice or comment is believed to be correct at the time of

Chapter 1 Challenges and resistors to

Chapter 2 Failing short-term strategies 34

Chapter 3 Future strategies to expand the

Chapter 4 Future product portfolio

Chapter 5 Future growth and alliance

Chapter 7 Appendix 128

Challenges and resistors to growth

As well as facing difficult challenges in 2004, the pharmaceutical industry

Since pharmaceutical companies are subject to price constrictions in major markets

The reliance of pharmaceutical companies on a small number of blockbuster drugs

Although expansion into China represents a significant growth opportunity, it will

Several companies in recent years have indeed identified China as an important

In 2004 the global pharmaceutical market generated sales of $550bn, 8.1%

The defining criterion for successful involvement of pharmaceutical companies in

In an analysis of 418 deals formed during a 19-month period (2002-3004)

With Big Pharma companies increasingly looking to external collaborations to

Compared to the industry as it stands today, by 2015 the peripheral interests of

Challenges and resistors to

As well as facing difficult challenges in 2004, the pharmaceutical industry

Business Insight’s Pharmaceutical Market Outlook to 2015 report outlines, in Chapter

New challenges faced by the industry in 2004

Full clinical trial data disclosure

Accusations of industry and FDA collusion

Major product recalls

Plummeting stock values

Region Relative Performance % Absolute Performance %

US Pharma to S&P 500 -18.1 -15.8 +1.6 -11.2 +6.4 -21.6

As well as facing difficult challenges in 2004, the pharmaceutical industry continues to

Counterf eiting of drugs

Increased competition Price containment

Poor product Parallel importation

Counterf eiting of drugs

Source: Business Insights Primary Research Survey Business Insights Ltd

Weakening product pipelines

R&D productivity continues to be a major issue for pharma companies. This is

Figure 1.2: Number and time of NME approvals, 1995-2004

Median total approval time (months)

Priority: Number of approvals Standard: Number of approvals

Source: FDA Business Insights Ltd

Soaring costs of R&D

Table 1.2: Total pharmaceutical R&D expenditure ($bn), 1980-2004

1980 1985 1990 1995 2000 2001 2002 2003 2004e

US 1.5 3.4 6.8 11.9 21.4 23.5 25.7 27.1 30.6

Source: PhRMA Annual Membership Survey 2005 Business Insights Ltd

Increasing generic competition and parallel trade

No generic copies 1 generic copy 2+ generic copies

Source: IMS; FDA Orange Book Business Insights Ltd

The pharmaceutical industry will experience a significant reduction in the revenues

In addition to increasing productivity levels while maintaining efficiency of R&D

Parallel trade is another factor challenging pharmaceutical sales and marketing

Alongside the key pricing issues of cost-containment, pharmacoeconomics, parallel

Figure 1.5: Pharmaceutical expenditure as a share of total healthcare

Source: OECD Health Data 2004 Business Insights Ltd

The key factors underlining pharmaceutical expenditure growth include:

The ageing population;

The emergence of “life-style” drugs;

A shift to newer and more expensive drugs;

Figure 1.6: Pharmaceutical market drivers, 2004