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European Journal of Pharmaceutical Sciences xxx (2011) xxxxxx 1

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Contents lists available at ScienceDirect

European Journal of Pharmaceutical Sciences

journal homepage: www.elsevier.com/locate/ejps

Commentary

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Current trends in the pharmaceutical industry A case study approach

Alexandru Rusu a,, Katja Kuokkanen b, Annabelle Heier c,1
a

Societatea Academica din Romania, 61 Mihai Eminescu, RO-020071 Bucharest, Romania Orion Corporation, Orion Pharma, Nonclinical R&D, P.O. Box 425, FI-20101 Turku, Finland c AstraZeneca Pharmaceuticals, Pathology Department, Safety Assessment, Mereside, Alderley Park, Maccleseld, Cheshire SK10 4TG, UK
b

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a r t i c l e

i n f o

a b s t r a c t
This commentary offers an overview of some current trends of the pharmaceutical industry drawing on examples taken from the analysis of four companies (Pzer, Merck, Novo Nordisk, Crucell). The very brief analysis looks at diversication paths, pipeline management strategies, generic competition as well as corporate social responsibility policies. 2011 Published by Elsevier B.V.
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Article history: Received 20 June 2011 Accepted 8 July 2011 Available online xxxx Keywords: Diversication Pipeline management Open innovation Generic competition Corporate social responsibility

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1. Introduction This commentary aims to present several trends in the pharmaceutical industry based on the analysis of four companies. In this case study approach we show how Pzer, Merck (also known as Merck, Sharp & Dohme or MSD), Novo Nordisk and Crucell have answered different challenges and extrapolate these ndings to the whole industry. The transition of the pharmaceutical industry from its traditional business model is ongoing. This business model aimed at owning the next blockbuster could be described as the R&D intensive identication of promising new molecular entities, testing in large clinical trials followed by extensive marketing. Various scenarios on the direction that this transition could take have been put forward. For instance, Kearneys analysts (Anscombe et al., 2009) believe that the industry is faced with three inter-related tipping points referring to what the industry sells (service models vs. therapies), to whom (mass markets vs. niche), and how it should organize itself (making connections vs. integration). Three paths of evolution for the industry are identied by Roland Berger Strategy Consultants (Danner et al., 2010). The innovation path implies minimum changes to the current high-risk, high-margin business model; the integration path along the healthcare value chain will eventually turn pharmaceutical companies into provid Corresponding author. Tel.: +40 740 503 875.
E-mail address: alex.rusu@sar.org.ro (A. Rusu). Present address: Novartis Pharma AG, Discovery Pathology Group, Klybeckstr. 141, 4057 Basel, Switzerland.
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ers of health outcomes; while the de-risk path implies the move into less regulated markets like animal and consumer health. PricewaterhouseCoopers (2009a) distinguishes between two new business models that are due to emerge by 2020. In the federated business model a company creates a collaborative network of separate entities, based on shared goals and infrastructure, which draws on in-house and/or external assets and combines size with exibility. The fully diversied model is a network of entities owned by one parent company which expands from its core business into the provision of related products and services, thus reducing reliance on blockbusters by spreading the risk across business units. The companies we analyze reect different typologies which inuences the way they approach this transition. Merck and Pzer are two of the largest pharmaceutical companies and the only ones to be currently included in the Dow Jones Industrial Average, with reported revenues for 2010 of 34,720 million and 51,195 million, respectively. They are active in a multitude of therapy areas and have a successful blockbuster history, such as Lipitor and Viagra for Pzer, and Prilosec and Singulair for Merck (Pzer, 2011a; Merck, 2011). Crucell and Novo Nordisk are two European based pharmaceutical companies focused on few therapeutic areas, with total reported revenues for 2010 of 365 and 8,147 million, respectively. Crucell is a Dutch biotech company with its strength laying in ve core proprietary technology platforms that make it the largest independent vaccine maker in the world. Novo Nordisk is a Danish company, specialized and world-leading in diabetes care (Crucell, 2011; Novo Nordisk, 2011a).

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0928-0987/$ - see front matter 2011 Published by Elsevier B.V. doi:10.1016/j.ejps.2011.07.008

Please cite this article in press as: Rusu, A., et al. Current trends in the pharmaceutical industry A case study approach. Eur. J. Pharm. Sci. (2011), doi:10.1016/j.ejps.2011.07.008

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2. Current trends 2.1. Diversication Diversication has presented itself as a solution for many companies that have started to look for alternatives to the blockbuster philosophy. The analyzed companies make use of scientic, business and geographical diversication to various degrees. Both Pzer and Merck pursue a scientic diversication by being active on several therapeutic areas as well as by looking for alternative modalities besides small molecules and vaccines. Their support for the launch of new biopharmaceuticals is illustrated by the creation of new specialized divisions such as BioTherapeutics R&D by Pzer and BioVentures by Merck. For instance, Merck (2011) has sought to strengthen its position through acquisitions such as that of Schering-Plough and Avecia Biologics and has expressed commitment to expand its portfolio to include monoclonal antibodies, peptides and iRNA. Novo Nordisk is already marketing biologic therapies, while Crucell has always been a biotech company. The industry interest in biologics is explained through the higher cost as compared to conventional small molecules which justies premium prices, the use in treatment of chronic diseases or in diseases unsuccessfully treated by a small molecule approach, as well as the very complex manufacturing process that currently prevents approval of generic versions through an abbreviated pathway. Pzer and Merck follow diversication into new business areas being world leaders in consumer healthcare and animal health. Their position has been consolidated through the 2009 acquisitions of Wyeth and Schering-Plough, respectively. Pzers Consumer Healthcare is currently the fth largest over-the-counter (OTC) company in the world, sells two of the ten top selling OTC brands world-wide, and accounted for revenues of 2,093 million after the acquisition of Wyeth (Pzer, 2011b). The acquisition has also allowed Pzer to gain a foothold into the nutraceutical market, whose infant nutritionals have brought revenues of 1,410 million for 2010. Pzer Nutrition is expected to grow due to the less strict regulated market and face competition from other diversiers as well as the established food industry. Additionally, both companies offer a broad range of medicines and vaccines for livestock and companion animals. A clear trend here is the move into delivering s goal for not just treatments, but outcomes. For example, Merck the future is to be the best healthcare, not only pharmaceutical, company in the world. Intervet, Mercks animal health unit, offers more than just medication or vaccines. For instance, ResPig (2011) includes a farm production audit, diagnostics and economic modeling for the most appropriate vaccination for pigs. Another example of outcome management is the Changing Diabetes programs of Novo Nordisk (2011b) via which it provides support such as specialized training for healthcare professionals, support for diabetes patient organizations, free blood sugar screening services and equipment for diabetes clinics. Geographical diversication is pursued through an increased presence in the high-growth emerging markets. The international consultancy IMS Health (2011) calls them the pharmerging markets and classies these countries into three categories based on expected yearly growth of the pharmaceutical market. This can range from about 30 billion in China, to 411 billion in Brazil and India and 14 billion in countries such as Argentina, Turkey and Romania. Despite high variations in their characteristics and stability, business in these areas offers important opportunities for growth over time. For example, looking just at China, Pzer has signed in the last two years several initiatives to boost fundamental research in this country. This step implies relocating expensive R&D activities into a lower-cost country and securing a front position in the largest emerging market through local partnerships

(World Pharma News, 2009). The movement is accompanied by a withdrawal from traditional markets, like the recent closure of research units in the US and UK. Any future acquisitions will make further site closures and reorganization necessary. Facility relocation to emerging markets will continue to proliferate as low corporate tax rates and generous tax incentives become more critical in sustaining protability (PricewaterhouseCoopers, 2009b). In this sense, Merck (2010) reports on its lobby activities directed towards governments on the line of increased health investment and market deregulation. 2.2. Pipeline management Maintaining a constant pipeline of new compounds and timing their introduction to compensate for losses as medicines become open to generic competition is a fundamental aspect of a companys commercial strategy. This pipeline management can take various forms. Large companies active on several therapeutic areas, like Pzer and Merck, appear to operate by the principle to achieve the highest possible output from the pipeline in terms of compounds making it to the market, by having a high number of programs and lling the early pipeline to a maximum. By contrast, specialized companies, like Novo Nordisk and Crucell, concentrate efforts on both fewer therapeutic elds and programs which might leave more room to focus on quality and to an early selection of a winner. Mergers are one strategy to rell the pipeline. In this way companies can increase the number of compounds registered and thus reduce the risk that the pipeline will contain no blockbusters. As an illustration, both Pzer and Merck boast that their recent mergers have increased their pipelines, including a signicant growth in the number of product candidates in Phase III development. However, too many mergers and acquisitions could overstretch a companys capacities of integration. In this respect, Pzers numerous acquisitions in the last years make it appear less stable than Novo Nordisk, which saw its last important reorganization when created in 1989. In the same time, while pharmaceutical majors like Pzer might take over additional companies, the nancial situation permitting, Novo Nordisk is more likely to be a takeover candidate and should look into maintaining high share prices. Crucell is an example in this sense. As a future part of Johnson & Johnson (2011), Crucell will enjoy all the benets of a large pharmaceutical company, including nance for drug discovery and development projects and a strong marketing organization worldwide, but will also be faced with competition and prioritization between different projects within the company. An additional strategy to keep a healthy pipeline is to prioritize R&D activities. Having too many drugs under development can be as risky as having too few of them and pharmaceutical companies need to balance investments between disease areas of unmet medical needs as well as scientic and commercial opportunity. Prioritization also implies exiting certain disease areas and abandoning projects. For example, in the case of Pzer (2011c), 31 projects were discontinued between January and September 2010. These types of decisions may be particularly difcult to take, considering cases like that of Lipitor, the bestselling drug of all times, whose development was nearly terminated by WarnerLambert prior to their acquisition by Pzer (Wislow, 2000). Knowing that their own R&D activities might not produce safe, effective or commercially viable medicines, companies also rely to various extents on an open innovation model. This approach implies both purchasing patents from other companies as well as selling the valuable research and know-how that a company does not want to develop as its own end-product. Merck has reported 51 licensing and alliance agreements for 2009, while Pzers revenues

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from alliances rose to about 2 billion for 2009 (Pzer, 2010; s AdVac Merck, 2010). In 2007, Merck was given access to Crucell and PER.C6 vaccine technologies and in return Crucell acquired rights to certain cell line technologies that Merck had developed for use in development of recombinant proteins. Some of Crucells vaccines have been co-developed with other companies, like in the case of Quinvaxem where 4 of the 5 components are provided by Novartis, while the vaccine is produced by Crucell. The company has also out-licensed several of its proprietary technology to other research organizations or pharmaceutical companies for indications out of its own interest, as for example the use of its PER.C6 technology for the development and commercialization of veterinary vaccines for foot-and-mouth disease by Merial (Crucell, 2010, 2004). Partnering is also important in funding for new discovery programs targeting therapeutic innovations. ViiV Healthcare (2011) illustrates how this approach can allow competing companies working on the same disease to combine their resources. This independent rm, set up in 2009, pools the HIV R&D resources of both Pzer with GlaxoSmithKline, has 10 products on the market and 17 in the pipeline, and boasts revenues of 1.75 billion. 2.3. Generic competition All innovative pharmaceutical companies try to protect their market exclusivity from generics by using a combination of patents and litigation. For example, by life-cycle management, a products patent can be extended by applying for additional patents to cover composition, formulation, route of administration and/or indication. These patents are challenged from time to time by generic companies prior to patent expiration. In US alone, Merck mentions eight of its medicines as being involved in patent litigation, while Pzer reports patent challenges involving 10 of their most important products (Pzer, 2011a; Merck, 2011). Companies also launch generic versions of their own products before patent expiration in order to maintain market share. For instance, Pzers US Greenstone subsidiary sells generic versions of Pzers as well as certain of their competitors pharmaceutical products upon loss of exclusivity (Pzer, 2011a). After selling its generic unit in 2007, which was ranked fourth in the world in terms of sales, Merck currently intends to return to this market and exploit the opportunity presented by biological medicine patent expiries by delivering high quality follow-on biologic products (Merck, 2011). In the case of Novo Nordisk, the majority of its products are large molecules, which are usually harder to copy. However, once outstanding Novo Nordisk products in diabetes care come to the end of their patents, it is likely that health care providers are not prepared to pay for these more expensive branded products. Therefore, Novo Nordisk will have to constantly improve their own products in order not to become a victim of their own success. 2.4. Corporate social responsibility A major challenge to pharmaceutical companies, with potential impacts on revenues, is what Crommelin et al. (2010) call the current societal mistrust of the way drugs are developed, marketed and used. The same trend is mentioned by PricewaterhouseCoopers (2009a) when it notes that numerous studies show the extent to which Pharmas reputation has declined over the past decade. Being aware of this challenge, companies try to improve their reputation by looking at their environmental and donor behavior. Compliance with environmental laws can be costly to companies with large manufacturing facilities like Merck and Pzer. These costs relate to both capital investments as well as expenditures for environmental liabilities. Smaller companies like Crucell can better control their emissions as well as their consumption

and recycling. As an illustration, Crucell (2010) claims that their FLEXFactory concept used in manufacturing is environmental friendly, in the sense that it is energy efcient and eliminates the need for complicated cleaning and sterilization of products. The FLEXfactory can be installed at the nal site for manufacturing of candidate product for Phase III studies eliminating the need of building expensive facilities to t a process and transportation of end-products. The Access to Medicine Foundation ranks 20 of the worlds largest pharmaceutical companies on their actions to increase access to medicines for societies in need. Both Merck and Pzer are included in the 2010 edition of the index on the 2nd and 11th positions, respectively. The companies are rewarded for best-practices such as single-drug donation programs, issuing of non-exclusive voluntary licenses to local African generic companies, and the policy of ensuring that donated medicines reach intended recipients (Merck) as well as for allowing the companys chemical library to be screened in programs aimed at new treatments of neglected diseases and for the promotion of a not-for-prot pricing strategy and a non-exclusive voluntary licensing (Pzer). In the same time, areas of improvement mentioned by the index can be seen as trends for the future. Therefore both companies and society would benet from increasing license territory for pharmaceutical products, increasing capacity advancement activities such as research collaborations with Index country as well as implementing a pricing approach that addresses affordability (Access to Medicines Index, 2010). 3. Conclusion Drawing on our analysis of four pharmaceutical companies we can extrapolate several trends to the whole industry. Most innovative pharmaceutical companies are undergoing a transition from their traditional business model. The industry tries to control the direction of this transition by resorting to a better pipeline management, mergers and open innovation. Diversication is pursued by looking at novel scientic, business and geographical areas. Generic competition is dealt with through a combination of patents and litigation as well as the manufacturing of branded generics. In the same time, the industry tries to improve its reputation through various corporate social responsibility policies. Acknowledgement We would like to thank professor Ole J. Bjerrum, University of Copenhagen, for his precious help and advice in preparing this commentary. References
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