Strategy Pfizer Case Study

Strategy : Pfizer Case Study QUESTIONS: 1. Identify the key drivers of change in Pfizer’s environment. “The pharmaceutical industry is heavily influenced by legal, political, and technological forces” Legal factors : ● Food and Drugs Act in 1906 : the Food and Drug Administration (FDA) has regulatory authority over drugs in the US. ● Food, Drug and Cosmetic Act signed by President Roosevelt in 1938 : expansion of federal oversight of drug manufacturing and marketing. The FDA has the authority to mandate pre-market review of drugs and can regulate drug labelling and advertising. ● Prescription Drug User Fee Act passed by Congress in 1992 : the FDA can collect fees from drug manufacturers to aid in funding the pre-market review process for new drug approvals. ● ⇒ These reforms have increased significantly the time and cost of drug for drug manufacturers to bring new drugs to market. In 2006, a study estimated the cost of bringing a new drug to market was between $802 million and $2 billion ⇒ approximately 60% of the total cost of drugs was related to pre- market clinical trials required by the FDA. ● Creation of the Office Pharmaceutical Quality in January 2015 in order to reduce product recalls & shortages of critical drugs & limit inspection efforts. OPQ was created to enhance oversight of drug quality for all pharmaceuticals “provide seamless integration of review inspection, surveillance, policy, and research across the product life cycle” ● In 2014, the Internal Revenue Service : annual fee imposed on branded prescription drug manufacturers (which was included in the Patient Protection and Affordable Care Act (ACA)). The branded prescription drug fee is allocated to manufacturers based on their relative percentage of total reported prescription drug sales. ● ACA : acceleration approval for biosimilars products i.e. generic drugs by the FDA. Political factors : ● The rising cost of healthcare is a growing concern among voters. ● Health care reform and regulation are reaching political platforms ● Political lobbyists on both sides are spending millions of dollars to influence the outcome of initiatives such as limiting the amount that state agencies pay for prescription drugs Technological factors : ● Reduction in R&D in reaction to expanding costs has resulted in : ○ a decrease in innovation and crisis for many large drug manufacturers ○ no drugs produced of significant value : the number of new drugs approved by FDA per billion dollars of R&D expenditures has halved every nine years since 1950 ○ Rapid increase in the cost of drug development and the reduction in the approval frequency Economic factors : ● Inflation : “As inflation, increased regulation, and other factors have affected the pharmaceutical industry, a 2012 study indicated that the cost per drug for the largest manufacturers has increased to over $5.5 billion”. 2. What are Pfizer’s options for dealing with increased government oversight and regulation ? Customer outrage? 1) Increased government oversight and regulation led to a decrease in innovation, to respond to this Pfizer has change its business model Before : Pfizer has a “blockbuster” business model highly dependant on his R&D to develop and launch high volume drugs. In 2012, Pfizer began restructuring its operations into a new commercial operating model : ● He sold his infant nutrition business and his animal health unit. ● He restructured its operations into 2 business segments : ○ Innovative Products Business : ■ Global Innovative Pharma : developing, registering and commercializing value-creating drugs that improve patients’ lives. ■ Global Vaccines, Oncology, and Consumer Healthcare Business : ● high organic growth ● distinct specialization, operating models, market approach ● position Pfizer as a market leader on a global basis ○ Established Products : consists of three primary product segments: ■ Peri-LOE products which are losing a losing position in market exclusivity ■ Legacy established products in developed markets that have lost market exclusivity and those with growth opportunities ■ Emerging market products with growth opportunities such as organic initiatives, partnerships, product enhancements, sterile injectables, and biosimilars 2) Increased government oversight and regulation led to an increase in costs (Changing pricing strategy due to the increased costs ) a. To respond to the increase in costs, large drug companies’ revenue growth has been possible thanks to a rising in the price of older drugs, particularly those nearing patent expirations. i. which means the new drugs are expensive to develop and takes long time to generate revenue ii. eg: 34% of Pfizer’s revenue growth over the past 3 years has come from increasing prices on existing drugs. Over this period, Pfizer has increased the price of Viagra by 57%, of Lyrica by 51%, and of Premarin by 41% iii. However, it is unsustainable as increased drug pricing scandals and media and societal attention on drug pricing. 3) Growth strategy : Pfizer has become one of the largest pharmaceutical companies in the world primarily as a result of aggressive mergers and acquisitions (M&A) Mergers and acquisitions : expanding its capabilities and acquiring brands with strong revenues. a. b. Aggressive M&A Fail to acquire a foreign drug company and relocate its headquarters overseas. c. a competitive disadvantage with foreign rivals that have significantly lower tax bills (us company but headquarter elsewhere to give lower tax) d. merge with Allergan à largest pharm comp in world + lower corporate tax rate in Ireland à but the new rule 4) Innovation strategy : The opportunities for revolutionary drugs have been mostly exploited, with very few areas of medicine in which breakthrough drugs can have a huge impact ⇒ Pfizer has shifted its strategy of maintaining an industry-leading drug pipeline from in-house development to being more reliant on strategic partnerships and mergers and acquisitions. 3. Using Porter’s 5 Forces framework, discuss the attractiveness of the pharmaceutical industry. Has the attractiveness of the industry change in recent years?(John) (In order to clarify attractiveness, I define the attractiveness as possibilities to earn high ROI per dollars or EPS. ) A: We conclude that the pharmaceutical industry is very attractive in the past owing to high marginal returns, strict regulations and high barriers to entry; less but still attractive now due to the same reasons above with pricing pressure caused by consumers and also along with the rising costs. From the viewpoints of Five Forces, the reasons are as follows: 1.Strong bargaining power toward suppliers. - Low concentration for the whole company because Pfizer claims to have over 200 supply chain partners, but regarding certain product, may rely on 2~3 major suppliers. It’s because the suppliers need to pass the strict regulations of FDA and also have the capacity to produce large amount of drugs. - Switching cost for Pfizer may be fair but not too much, because everytime switching to new supplier, Pfizer needs to inspect the supplier and testing the quality of products in compliance of regulations after 21 CFR part 11 came into effect. 2.Strong bargaining power toward buyers in the past, but now facing the pressure on pricing decision from activists and government. - Low concentration for over the counter drugs but high concentration for prescription medicines. For examples, Pfizer employs a direct-to-consumer advertising campaign in the U.S.; this provides similar information and suggests that interested customers have discussions with their doctor. Meanwhile, prescription pharmaceutical products are sold primarily to wholesalers. In 2015, the “top three biopharmaceutical wholesalers accounted for approximately 34% of our total revenues (and 74% of total U.S. revenues)”. - Switching cost for individuals and organizations are probably high. Consumers need to search for informations regarding the safety of the drugs made by unknown brands. For wholesalers and hospitals, they need to sell and use drugs made by brands that are familiar to consumers or they may questioned by customers or patients. - However, the pressure on pricing decision given by government and society is affecting the bargaining power of the company. Etc. the protest toward raising price of Daraprim 3. Competitive rivalry is growing nowadays because market growth slowed down by increasing pricing pressures, while major players tend to invest and compete in similar areas, and also the cost structure highly focuses on fixed cost such as R&D. - According to IBM, overall, pharma spending growth is expected to grow at an average of 4 percent during 2015 to 2019, reaching USD 1.4 trillion by 2019. Though growth may slow due to increasing pricing pressures. - Competitive situation may be tough due to some expirations of different patents and the rising R&D cost. Every competitors in this field try to innovate and develop the effective next generation drugs. - Major Competitors The pharmaceutical industry invests heavily in research and clinical trials and relies on obtaining FDA approval and patent protection for its products to ensure prolonged profits while the next “miracle” drug is under research. There are high payoffs when a drug is successfully brought to market; but there also great costs, in the form of massive time and monetary investments for failures, if it is not. - Among Pfizer’s largest competitors are Merck, Novartis, Bristol-Myers and Johnson & Johnson 4.Low risk on new entrant. Pharmaceutical industry requires huge capital investment and the ability to bear with long payback period. Also, strict regulation and high legal compliance cost are another entry barriers. - A 2012 study indicated that the cost per drug for the largest manufacturers has increased to over $5.5 billion. For Pfizer, the total Research & Development (R&D) cost for each drug that received FDA approval was $7.7 billion between 1997 and 2011 - Most of major growth are driven from M&A, so the big brands like Pfizer has more ability to invest and bear with the risk in the M&A trade. - Manufacturing pharmaceuticals can be extremely complex. For example, the vaccine known as Prevenar 13 was produced for the one-billionth-time in 2015. According to Pfizer, manufacturing Prevenar 13 includes the participation of 1700 employees, 678 quality tests, 400 different raw materials, 580 steps in manufacturing, and over 2 years - Legal compliance to FDA and GMP cost a lot every year. 5.There is no substitute for the medicine treatment. The only chances of substitute are new developing drugs and new technologies, however, R&D for new drugs or buying new patents are the strong suits of Pfizer. 4. Summarize the main opportunities and threats that you have identified in the Pfizer case. main opportunities: ● ○ ○ ○ ● Emerging of new start-up (more new technology) M&A is getting common in the industry and become main strategy for growth Companies could get stronger with the synergy of reducing R&D cost, and also get access to more market channel Provide new goods and services due to the paradigm shifts of customer: ○ Escalating incidence and increasing spending on chronic disease ○ Spend more on health care, not only in medicine but also in all kind of related technology ● government subsidy In 2014, the Internal Revenue Service issued final regulations for the Branded Prescription Drug Fee (BPD), an annual non-tax deductible fee imposed on branded prescription drug manufacturers, which was included in the Patient Protection and Affordable Care Act (ACA). The new legislation requires government-funded drug programs to report yearly prescription drug sales data to the Department of Treasury.The branded prescription drug fee is allocated to manufacturers based on their relative percentage of total reported prescription drug sales. The total 2014 BPD fee, according to the IRS fee schedule, was $3 billion – Pfizer’s portion was approximately $220 million, which was paid in 2015 . ● Legislation ○ In January 2015,in an effort to reduce recognized shortcomings, the FDA created an Office of Pharmaceutical Quality (OPQ). The OPQ was created to enhance oversight of drug quality for all pharmaceuticals . Its mission is to assure supply of quality drugs to the American market, use enhanced science and risk based methods, leverage quantitative and expert assessments for product oversight, encourage development and adoption of new technologies, and “provide seamless integration of review inspection, surveillance, policy, and research across the product life cycle” ○ FDA ( the Food and Drug Administration (FDA)oversight impacts several areas of the value chain. The update requires anyone designing, manufacturing, or testing pharmaceuticals to follow the guidelines. This encouraged manufacturers to keep better electronic records to include timestamps, validation, and signatures. Main threats: ● Generic drugs are now changing the competitive landscape ○ Customer are now favoring the generic drug due to it’s conveniency and low price ○ The demand for Generic drugs will continue to increase ○ Brand drugs manufacturer would suffer from decrease of revenue if they don’t change the product portfolio ● The economy factors ○ pre-market clinical trials:In 2006, a study found that approximately 60% of the total cost of drugs was related to pre-market clinical trials required by the FDA. As inflation, increased regulation, and other factors have affected the pharmaceutical industry, a 2012 study indicated that the cost per drug for the largest manufacturers has increased to over $5.5 billion.The steep rise in development costs has forced Pfizer to cut R&D budgets in an attempt to control rising costs.Not only have many drug companies’ blockbuster drugs gone off patent in recent years, but the reductions in R&D spending have resulted in drug pipelines that have failed to produce anything of significant value ○ Drug pricing scandals and Healthcare reform ■ Drug pricing scandals:Public outrage over increasing drug prices came to a head recently, with many scandals receiving national headline attention.An incident involved Mylan, the company that manufacturers the injector EpiPen, which contains a drug used to treat life-threatening allergy attacks (a drug Pfizer manufacturers). ■ Healthcare reform:rising cost of healthcare in the United States is a growing concern among voters,Political lobbyists on both sides are spending millions of dollars to influence the outcome of such initiatives.Pfizer donated more than $9.4 million to political action groups in opposition to Prop 61. ● Physical environment ○ corporate inversions:Pfizer has attempted unsuccessfully to acquire a foreign drug company and relocate its headquarters overseas. ■ 2014, Pfizer attempted a merger with rival AstraZeneca, which faced fierce opposition from lawmakers on either side. In the end, Pfizer walked away from the $118 billion deal after rejection by AstraZeneca’s board . ■ In 2016, Pfizer entered into an agreement to merge with Allergan. The $160 billion deal would have created the largest pharmaceutical company in the world and would have allowed Pfizer to relocate its headquarters to Allergan's home country of Ireland in order to take advantage of their lower corporate tax rate . ■ However, on April 4, 2016, the U.S. Department of Treasury took measures to limit corporate inversions.Pfizer would not have realized the full tax benefit of the inversion because Allergan’s relative size would have fallen below the 20% threshold under the new tax rules. ○ Competitors:Among Pfizer’s largest competitors are Merck, Novartis, Bristol-Myers and Johnson & Johnson ■ Merck:The cholesterol-lowering drug branded Zetia, which is Merck’s 2nd largest revenue gener0ator, is a direct competitor to Pfizer’s drug Lipitor . Zetia is selling at a rate of nearly $3 billion a year whereas Lipitor is generating $1.86B . ■ Novartis:Novartis AG is the pharmaceutical industry's world leader in sales, generating $50.4B in 2015 revenues. Novartis has several oncology products in the pipeline that will directly compete with Pfizer pharmaceuticals.