Restructuring the pharmaceutical industry cross-borders - Free Essay Example

Cross border restructuring of the Pharmaceutical industry There is no doubt that the pharmaceutical Industry has seen considerable changes to its structure over the past two decades. As this report the structural changes have not only been brought about by the internal forces that attract to the industry, but also because of the external forces imposed upon it by the increase in cross-border trade. The demands and increasing costs of research and development has seen manufacturers forming liaisons, via mergers and acquisitions, with RD companies as they seek to address the demand for new products, and replace those that are reaching the end of their patent period. Globalisation has seen companies driven to merge with organisations in other countries, again by the route of mergers and acquisitions, as they seek to expand their market share out of their domestic location. The result of these moves has been a consolidation of the market into a much smaller number of competitors. As can be seen from this report, the formation of the EU, by the moves that it has made towards harmonisation, has accelerated this structural change within its member states, such as the UK, France and Italy. It is anticipated that the consolidation of the industry will continue for at least the next decade. Contents page Executive Summary Introduction Changes in industry Structure National Markets International Market à ¢Ã¢â€š ¬Ã¢â‚¬Å" European Union Conclusion The global pharmaceutical industry has grown significantly over the past two decades, in terms of the numbers and range of products manufactured and the consumer demand. At the s ame time, there have been considerable changes to the structure of the industry and the organisations within it. These changes have taken place within the individual organisations and have affected the way the industry has expanded on national, regionally and international basis. A combination of combination of internal and external factors has led to this restructuring. The objective of this report is to examine the factors that have brought about these changes and report upon the impact they have had on the industry. In view of the potential audience for this document and the constraints under which it is being prepared, the specifics of the examination has been limited to the industry as it exists within the regional European market and three of the member states, namely the UK, France and Italy. Pharmaceuticals are a product that incorporates a number of diverse component parts, including research and development, innovation, manufacture and marketing (Barral, 1996). It is an industry that responds to the demands of a specific consumer segment, which is healthcare. The industry is split into two distinct segments, which are à ¢Ã¢â€š ¬Ã…“prescribedà ¢Ã¢â€š ¬Ã‚  and à ¢Ã¢â€š ¬Ã…“over the counterà ¢Ã¢â€š ¬Ã‚  (OTC) drugs (Dominic, 2005). à ¢Ã¢â€š ¬Ã…“Prescribedà ¢Ã¢â€š ¬Ã‚  drugs can only be used or dispensed under the guidance of a medically qualified person or organisation, such as doctors, hospital staff or qualified pharmacists. Dependent upon the level of danger the drugs represent, there are varying levels of regulations and restrictions imposed. OTC drugs are more widely available and can now be purchased through numerous retail outlets, including high street stores and supermarkets. The expansion and restructuring of the Pharmaceutical industry over the past two decades has been driven by three main forces. New products The cost of developing new products in the pharmaceutical industry is extremely expensive. It is estimated the RD cost per product is around  £550 million (Dominic Fenn 2005). Unlike other products, drugs then have to undergo a series of stringent tests and there is no guarantee that they will be successfully launched onto the market. Therefore, the return on investment can be precarious. In addition, universities and other researchers have begun to recognise the value of their work and this has spawned numerous small commercial biotechnology organisations. Many of the larger manufacturers, such as Pfizer Inc., GlaxoSmithKline PLC, who were already involved in drug development, quickly recognised the need to foster associations in this area. Other organisations concentrated their efforts in more limited fields. The result is that, globally the industry has now become a mixture of large conglomerates and small specialist organisations. Increase in demand The success of the curative powers of drugs over the years, as promoted in the business marketing campaigns, has led to an increase in consumer awareness (J. Morrison, 2006). Therefore, the demand from the public for the development of new drug products to treat a wide range of illnesses and diseases increased. To address these issues, the pharmaceutical industry needed to secure capital investment. This could only effectively be achieved by assuring investors that the supply chain from research and development to manufacturer was sufficiently robust and able to resist the pitfalls of their particular products, namely the high risk of failure (Barrel 1996) Globalisation Following the evolution of the information era in the 1970à ¢Ã¢â€š ¬Ã¢â€ž ¢s and 1980à ¢Ã¢â€š ¬Ã¢â€ž ¢s, the pharmaceutical industry has followed others in seeking to expand their markets beyond national borders, creating multi-national and transnational organisations. Whilst initially, this expansion was concentrated in developed countries, more recently, partially driven by international concerns, it has also expanded into the third world. However, such expansion has not been without its difficulties as a pest analysis reveals. Political and Legal structures An organisation that expands its business beyond its own domestic borders is faced with the problem of having to deal with a number of different political and legal structures (J. Morrison 2006). Therefore, in addition to having to work within their own domestic system, expanding pharmaceutical corporations also found themselves becoming subject to the laws and regulations of regional authorities, as is the case wi th the European Union, and the growing international laws and directives (D. Held et.al. 1999). A typical example of this is the difference between the various healthcare and drug testing programmes. For example, in a free market economy such as the US, these are likely to be less stringent than they would be in some of the European countries, or even the EU as an entity in its own right (A. Quick, ed. 2002). Economics Economically, pharmaceutical companies also faced problems as they sought to expand. Due to the long lead time from inception to marketing of their products, estimated at between ten and twelve years (Dominic Fenn 2005), and the likelihood of failure product, this could have a significant upon the viability of an organisation. Whilst most of the products were protected by patents, many were nearing the end of that protection period, at which time similar low cost products would be produced. Therefore, part of the expansion programme was driven by a need to se ek innovations and a wider product range in order to safeguard the future and value of their businesses. This could either be achieved by further investment, were the flow of risk capital available, a by forming closer association with other organisations. From a social point of view, the pharmaceutical companies were not only facing the problem of increased demands for new products, but also suffering from the changes in consumer demographics. Globally, the population was aging (EFPIA (2006). A can be seen from the following chart from the EFPIA report, the number of the population has more than doubled in the EU over the past forty five years and in the next fifteen is estimated to increase by a further fifteen percent. These age demographics serve to further increase the demand for pharmaceutical products. Figure 1 Elderly population Technological advances within pharmaceuticals, as other industries, have increased at a pace, which established organisations have foun d difficult to match (Brooks et al. 2004). Small, more versatile corporations, with more flexible management structures and cost base were beginning to eat into the market shares of the establish corporations. The route that the industry took to address all of these problems was to seek consolidation through mergers and acquisition. Some saw the reason for this route being driven by two forces. à ¢Ã¢â€š ¬Ã…“One is an act of desperation by two firms hoping that getting bigger will solve all their troubles. The other is a union of firms in good shape that want to grow.à ¢Ã¢â€š ¬Ã‚ ¦ à ¢Ã¢â€š ¬Ã…“ (Doliveux, 2006) During the 1980à ¢Ã¢â€š ¬Ã¢â€ž ¢s and 1990à ¢Ã¢â€š ¬Ã¢â€ž ¢s the MA in the industry continued at an rapid pace as companies sought to consolidate their market share position internationally. To address the organisationà ¢Ã¢â€š ¬Ã¢â€ž ¢s internal economic position, many of these involved closer relationships between established manufacturers and biotechnology c ompanies, which gave them additional sources of specialist knowledge in this field. In addition, MAà ¢Ã¢â€š ¬Ã¢â€ž ¢s addressed many of the political and social problems that occurred with operations in non-domestic environments. Cross-Border difficulties were perceived to have less of an impact on the future of the business if an organisations took over or merged with a target organisation that had experience of dealing with these issues in their domestic environment. The merger of Glaxo and SmithKline was one of the most notable in the global industry, and this was achieved in the 1990à ¢Ã¢â€š ¬Ã¢â€ž ¢s. Consolidation of the market players has continued right through to the the early 2000à ¢Ã¢â€š ¬Ã¢â€ž ¢s, with GlaxoSmithKline (Dyer 2004), predicting there were more to come. However, there have been warnings that perhaps a pinnacle had been reached (Wiesmann et.al. 2006), especially as financial results are not having the desired financial results (Feature 2006). The res ult of the problems that many of the major pharmaceutical companies have experienced over the past two decades, together with mergers and acquisitions within the industry has had the effect of changing the industry structure considerably. Where once there were numerous separate organisations operating in areas such as research and development, biotechnology and manufacture within their own domestic markets, as the following study of Europe will show, the industry domesically and globally is becoming dominated by multinational and transnational organisations that encompass all of these activities. Unlike the US, which has a large number of Public corporations, European countries, because of their fragmented make-up and diverse political and cultural structures, have historically had a much higher concentration of private organisations although this position is now changing. Even within individual nations, there are differences in the structure, dependent upon their political and d emographic structure. UK Historically, the UK has a much higher level of regulations in respect of drug licensing than other EU member states. This is largely because of the NHS. Therefore, the government exerts a significant amount control over pharmaceutical organisations, often to their displeasure (Health 1998). However, with the recent relaxation of regulations, which allowed other retailers to enter the market place, this had the effect of increasing the distribution sources, but at the same time, because a number of these retailers were supermarkets, reduced the prices paid. Being amongst the first European nation to recognise the commercial benefits of Globalisation has led to the UK market seeing a high level of consolidation (Industry profile UK 2005), with GlaxoSmithKline, Pfizers and Merck Inc, being amongst the major players. Figure 2 UK Predicted Market It can be seen from the above table (figure 2), that the forecasted size of the market over the ne xt five years, whilst forecasting a slowdown of growth in the latter three years (2008-2010), at $28.7 billion, provides an attractive pull for the industry corporations. Similarly, with the population growing at a steady rate, and aging in line with previous statistics, the market shares are set to increase as well. Figure 3 UK Population France France has one of the highest rate of drug consumption per capita in the EU, however it also has one of the longest lead times for drugs to reach the market (Industry profile France 2005). Whilst there is a higher dominance of national organisations in the country, multinationals such as GlaxoSmithKline and Merck Inc (Kirsti Park 2006) are making significant inroads into the market place. Figure 4 France predicted market The French market for pharmaceuticals is set to grow at a similar rate to that of the UK. However, in financial terms, due to the size of population, the projected financial rewards, at $40.5 billion, are significantly higher. France offers tax incentives to assist companies with research and development budgets and easing the burden of long investment periods. Italy Italy is the third largest pharmaceutical product consumer per capita in the EU, following France and Germany (Industry profile France 2005). Out of the three studied it also is the country that has seen the least penetration from Global corporations such as GlaxoSmithKline, although organisations from other EU countries, such as Roche Holdings AG, are among the major players. Figure 5 Italy predicted market Although the growth in the Italian market is predicted to be lower than the UK or France, the financial value is similar to the former. Like the other two countries, the aging population is expected to continue to act as an increased revenue driver. In recent years the EU, which has grown out of the à ¢Ã¢â€š ¬Ã…“society of member states?à ¢Ã¢â€š ¬Ã‚  (D. Held et.al) has sought to achieve a programme of harmonisation of trade rules and regulations over all industry sectors, and the pharmaceutical industry is no exception. The EU itself, by eliminating the interstate trade and technical barriers and creating community-wide regulations and laws( P. Dicken 2003), has paved the way for the consolidation of the industry both on a regional and international basis. With cross-border freedom, mergers and acquisitions between member states leading to further consolidation in the industry, the regional structure is experiencing change with multinational and global organisations acquiring much of the smaller competitors in all areas of the industry. Figure 6 New entities EU The above (figure 6) shows that one of the adverse effects of this has been that from a position of leading the world in entities, Europe has now slipped to second place behind the US (EFPIA 2006). Nevertheless, it is still a market of considerable size (see figure 7), with over à ¢Ã¢â‚¬Å¡Ã‚ ¬1 20 billion in value. Figure 7 European member states market value Conclusion As this report has demonstrated, the changes in the structure of the Pharmaceutical industry over the past two decades, has resulted from a number of internal and external factors (J. Morrison 2006). Internally, organisations have had to reorganise their businesses to cope with the demands that research and development, and the ending of patents on existing drugs has caused. Externally, they have had to react to the many factors that globalisation has brought to bear on international trade. These include the political, legal and cultural make-up of new markets. They have been added to by the aging of the population, both nationally and globally and technological advances. In terms of the Europe market, the formation of the European Union and the moves that it is making towards harmonisation has accelerated the changing structure in this regional. Instead of having to deal with a number of in dividual national environments, as was previously the case, the EU has gone a long way to providing a standard situation for all, at least from the political and legal aspect. Central legislation and regulations, which are incumbent upon member states, have led to the creation of a continent wide market. With the increasing number of states joining the European Union, the size of the marketplace is also set to see a continued growth. The result has been that the Industry in Europe is now being consolidated, by way of mergers, acquisition and other relationships, into a much smaller number of competitors. 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