Interdisciplinary Journal of Research in Business Vol. 1, Issue. 10, (pp.

73- 85) November, 2011

Management as applied to New Products Penetration in the Competitive

Environment of Pharmaceutical Industry
Kasapi Z. 1
Hellenic Open University, School of Social Sciences
57-59 Bouboulinas Str., 262 22 Patras, Greece.

Mihiotis A. 2 (Corresponding author)

Hellenic Open University, School of Social Sciences
57-59 Bouboulinas Str., 262 22 Patras, Greece.
E-mail: mihiotis@eap.gr

1.
Mrs. Zafiria Kasapi studied Chemistry at the National University of Athens, Greece and she holds a Master of Business
Administration (MBA) degree (Hellenic Open University, School of Social Sciences). She has worked in senior managerial
posts in the private sector of pharmaceutical companies, multinational and domestic, for more than 15 years. She has been
Member of the Hellenic Association of Chemists since 1991 and also Member of the Hellenic Association of Pharmaceutical
Marketing since 2007. Her interests lie in strategic management and change management.
2
Dr. Athanassios Mihiotis is an Associate Professor at the Hellenic Open University, School of Social Science, and MBA
Course. He graduated from the Department of Mechanical Engineering of the National Technical University of Athens,
Greece, and he holds a PhD degree from the NTUA. Dr. Mihiotis has more than 15 years teaching experience in several
universities in Greece at undergraduagte and postgraduate level. He has in the past worked as Planning and Logistics
Director for multinational and domestic companies and has served as Member of Project Teams in the Greek Public Sector.
His interests lie in operations management and crisis management. He is the Editor-in-chief of the International Journal of
Decision Sciences, Risk and Management.

ABSTRACT

The continuously changing environment which has to do with drugs regulations’ differentiation and increased
customers’ demands, leads every player to revise strategic thinking, planning and implementing so as to be
adapted to new challenges and trends, by taking advantage of strengths and opportunities, overcoming
weaknesses and threats. This paper has been fulfilled to analyze, based on M. Porter’s five forces model, what
kind of strategies are to be followed regarding the introduction and penetration of new products in the
pharmaceutical market taking into consideration the extremely competitive and challenging environment
existing around the pharmaceutical industry.

Keywords: Customers’ demand, strategic management, new products penetration, pharmaceutical industry,
Porter’s FFM .

1. INTRODUCTION

The pharmaceutical sector is a highly competitive and global industry. Yet, unlike most other sectors the
pharmaceutical industry focuses on and allocates the majority of its resources to the process of drug discovery,
whilst processes such as manufacturing, marketing, and logistics are very much complementary (Halliday et al,
1997). Today, the success of the drug discovery process relies heavily on the successful application of scientific
knowledge and technology, yet back in the early 1900s, there was a limited understanding of human biology and
chemistry (Mintzberg 1994a, Mintzberg 1994b).

A common proposition in strategic management literature is the desire to co-align the strategy with the
environment. Central to this co-alignment is three organization’s factors; (i) environment, (ii) organization’s
routines and processes, and (iii) resources. A change in these factors leads to a change in the resulting strategy.
Depending on the strategic management that is adopted, the change could be seen as the result of either careful
design or reaction to the new environmental status.

The first factor, environment, is the pattern of all the external conditions and consists of other organizations,
their strategies, technologies, knowledge, the market, and possibly legislation. The second factor, routines and
processes, represents the people involved in the implementation of a strategy, the mechanisms for allocating and
coordinating organizational resources. These mechanisms can be both formal (e.g. governance structure) and
informal (e.g. culture, politics, control) (Farjoun, 2002). The third factor resources include the internal means

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and developments that can be drawn upon to accomplish the firm’s goals, and especially those unique features
called distinctive competencies.
Based on the global bibliography, the objectives of this study are:
• To analyze the importance of SMP for new products” introduction & growth
• To discern -to what extent-SMP is applied by medium & upper level managers
• To assess competition in the pharmaceutical industry's environment

The rest of the paper is constructed by additional four sections. In the second section, we develop the history and
the characteristics of the World Pharmaceutical Industry, by focusing on the SM in the Pharmaceutical Industry.
In the third section we will analyze how Porter’s FFM and SMP can be applied in that sector, focuses on the
industry’s revenues. Additionally, in the fourth chapter, this study provides a detailed analysis on new
pharmaceutical products” lifecycle i.e. drug discovery, development, introduction and subsequently their
growth, maturity and decline phase. Finally, the paper concludes in the fifth chapter by giving advice for all
interested managers to be open-minded in order for them to be able to overcome old mental models and apply
change management taking into consideration that we live in the age of uncertainty and turbulence.

2. WORLD PHARMACEUTICAL INDUSTRY

The pharmaceutical industry develops, produces, and markets drugs licensed for use as medications (McGuire,
2007). Pharmaceutical companies can deal in generic and/or brand medications. They are subject to a variety of
laws and regulations regarding the patenting, testing and marketing of drugs. Legislation was enacted to test and
approve drugs and to require appropriate labeling. Prescription and non-prescription drugs became legally
distinguished from one another as the pharmaceutical industry matured.

Most of today's major pharmaceutical companies were founded in the late 19th and early 20th centuries.
Switzerland, Germany and Italy had particularly strong industries, with the UK, US, Belgium and the
Netherlands following suit. In 1964, the World Medical Association issued its Declaration of Helsinki, which
set standards for clinical research and demanded that subjects give their informed consent before enrolling in an
experiment. (Hadzović, 1997). Managed care and Health maintenance organizations (HMOs) spread during the
1980s as part of an effort to contain rising medical costs, and the development of preventative and maintenance
medications became more important. A new business atmosphere became institutionalized in the 1990s,
characterized by mergers and takeovers, and by a dramatic increase in the use of contract research organizations
for clinical development and even for basic R&D. Marketing changed dramatically in the 1990s, partly because
of a new consumerism. The Internet made possible the direct purchase of medicines by drug consumers and of
raw materials by drug producers, transforming the nature of business. In the US, Direct-to-consumer advertising
proliferated on radio and TV because of new FDA regulations in 1997 that liberalized requirements for the
presentation of risks.

2.1 Characteristics of the world Pharmaceutical Industry

One may define the main characteristics of the world pharmaceutical industry as follows:
 increased globalization,
 changing structure of competition and increased competitiveness,
 lack of new products, despite increased investments into R&D (Research & Development) activities,
 fast consolidation and concentration of the world pharmaceutical industry,
 increased importance of strategic management,
 development of new therapeutic fields and technologies (biotechnology, pharmacy genomics),
 ageing of world population and opening up of new, not yet satisfactorily covered therapeutic fields,
 quick development of the world generic markets.

The world pharmaceutical market has undergone fast, unprecedented, tremendous and complex changes in the
last several years. The pharmaceutical industry is today still one of the most inventive, innovative and lucrative
of the so-called »high-tech« industries; however, we may say that the pharmaceutical industry has been adapting
itself more and more to strategic market trends and market demands. Further strategic development of the world
pharmaceutical industry shows clearly its consolidation, concentration and strong market orientation.

Regarding a pharmaceutical company, to achieve market success with a brand new product, it needs to invest
strongly into marketing and sales activities. Thus, one may conclude that basic research and development
(R&D), together with marketing and sales activities are two of the most important operative and even more
strategic priorities of the world pharmaceutical industry. Having analyzed these figures, the biggest inventive

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world pharmaceutical companies invest, on average, approximately 16% of their sales into R&D and even more,
about 26% or more into marketing and sales activities (Kesič, 2006).

As mentioned, the world pharmaceutical industry is structurally not unique, as pharmaceutical companies differ
according to their basic mission, performance and strategic development. One can define three different groups
of the world pharmaceutical companies: pharmaceutical companies which primarily work on basic research,
development and marketing and sales of brand new, original pharmaceutical products (called originators);
pharmaceutical companies which primarily work on development and sales of generic products (called generic
producers); and pharmaceutical companies which primarily work on basic research and development of
biotechnology and pharmacogenomic products and technologies of new delivery systems (called specialists).

The leading world pharmaceutical markets in terms of sales and also of per capita consumption of medicines are
the USA, Japan and Germany (Table 1).The size of the American pharmaceutical market comprised more than
40% of the whole world pharmaceutical market in 2005. The leading world pharmaceutical market has some
specific factors which distinguish it from the other world markets like: generally free pricing policy of
medicines which is not a common issue with other markets (they have usually regulated reference pricing
systems, especially in the EU); high consumption of medicines; intensive marketing activities, sometimes called
»turbo marketing«; and intensive competition (World Review 2005), (Pharma Strategy Group, 2005).

Position Markets Value in billion $

1. USA 248
2. Japan 67
3. Germany 29
4. France 26
5. United Kingdom 17
6. Italy 16
7. Canada 14
8. Spain 12
9. Brazil 9
10. Mexico 8
Table 1: Leading World Pharmaceutical Markets in 2005 (Source: World Review 2005)

The products themselves are the main generator of growth of the world pharmaceutical industry. Pharmaceutical
companies compete on products' characteristics and tend to invest heavily into marketing activities in an
endeavor to gain physicians'/patients' loyalty and, moreover, to compete directly with other pharmaceutical
companies. For a better understanding, one may define the generic product as a bioequivalent product with the
same active ingredient as an original one and is subject to standard registration procedure as the original one,
nevertheless is only legally allowed to be launched upon final expiration of all pending intellectual property
rights (patent expiry). According to this fact, and taking into account that the generic producers do not need to
invest huge sums of money into basic R&D activities, they merely compete only on the lower prices of their
products. The most developed and the biggest world generic market in terms of sales is the generic market of the
USA which has reached close to $40 billion in sales in 2005 and posted a growth rate of 12%, which is even
higher than the growth rate of the whole pharmaceutical market of the USA, which grew by 7.5% in the same
year (World Review, 2005).

Position Company Country of origin Sales in billion $ World market share in %

1. Pfizer USA 44.3 7.4
2. Sanofi-Aventis France 33.6 5.6
3. GlaxoSmithKline United Kingdom 32.1 5.3
4. Novartis Switzerland 24.9 4.1
5. AstraZeneca United Kingdom 23.9 4.0
6. Johnson & Johnson USA 22.3 3.7
7. Merck & Co USA 22.1 3.7
8. Roche Switzerland 21.5 3.6
9. Wyeth USA 15.3 2.5
10. BMS USA 15.3 2.5
Table 2: Leading world pharmaceutical companies in 2005 (originators)-(Source: IMS Health Statistics 2006)

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The leading ten world pharmaceutical companies currently command more than 42% of the market share of the
global pharmaceutical market (Table 2). For comparison reference, this figure was only 30% 10 years ago
(Pharma Strategy Group, 2005). This is a clear sign and proof how an intensive market consolidation and
concentration of the pharmaceutical industry has changed the world pharmaceutical market in the last several
years.

Position Company Sales in billion $

1. Teva, Israel 5.3
2. Sandoz, Germany 4.7
3. Merck Generics, Germany 2.3
4. Ivax, USA 1.8
5. Ratiopharm, Germany 1.7
6. Watson, USA 1.65
Table 3: Leading world generic companies in 2005 (generics)-(Source: IMS Health Statistics 2006.

By comparing the sales figures achieved between originator pharmaceutical companies and generic companies
(see Tables 2 and 3), we can see that originators achieve almost 10 times higher sales than generics. This is
primarily due to the differences in their strategic orientations: originators invest heavily into R&D and
marketing and sales activities to get inventive products which are marketed at premium prices. However,
generics tend to perform a typical “follower strategy”, bringing the equivalents of the original products to the
markets which are priced much lower than the original ones, thus enabling customers to afford less expensive
medical treatments, creating additional competition as well.

One may argue that competitiveness has been increasing tremendously, thus there is an urgent need for the
pharmaceutical companies to behave in a good, sharp and speedy manner. Taking into account the described
elements, a further consolidation and concentration of the world pharmaceutical industry is realistically
forecasted. Besides, further lack of new products is expected with highly increased competitiveness and a
furious fight for market shares and global customers' loyalty.

2.2 Strategic Management in the Pharmaceutical Industry

World guru of management, Peter Drucker (1993), who has especially emphasized the core importance of
strategic marketing management for a successful, long-term highly competitive business performance of
companies, has once said about globalization management: “In the years to come, there will be two types of top
managers: those who would be able to think globally with strong strategic marketing management commitment
and those jobless”. Strategic marketing management with an emphasized global way of thinking, performance
and management thus enables companies to put customers into the center of all their business activities and
integrally focus all business activities to a common and final goal – to be successful in satisfying customers’
needs and to be better than the competitors. It is worth underlining as well the importance of innovative
management and management of changes.

Strategic marketing management is especially important in the pharmaceutical industry as pharmaceutical

companies tend to be market oriented and proactive by emphasizing the advantage of their pharmaceutical
products, as they try to communicate within regulatory allowed frameworks, they tend to build strong brand
names and create long-term loyalty to final customers. The concept of strategic management with an
emphasized market orientation and a certain focus clearly designates one company's business philosophy,
respectively. One may entirely agree with Corstjens' (1991) conclusions that “sector of the pharmaceutical
industry, despite being very specific in all aspects, is an ideal case, how the practice and usage of strategic
marketing management concept directly relates to a very successful business performance of this industrial
sector”.

Changes of today’s world, even yet of tomorrow, are so fast and profound that it is difficult to follow them
entirely. However, changes represent new challenges as well and create new business opportunities. Thus, it is
important to react and act quickly and to be proactive. The urgency of a quick adaptation is not just the strategy
for smaller companies and countries but is a valid strategy of a victorious survival for bigger systems, too.

World pharmaceutical companies perform their business activities in a very turbulent environment which
requires constant adaptation to changes and quick final action decisions. In case they want to be globally leading
ones and successful business performers in the future need to primarily think entirely and differently about

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customers, markets, competitiveness, competitors, and strategy with relation to structure to reach the planned
goals.

They have to especially bear in mind that the needs of tomorrow’s customers are different from the needs of
today’s customers and they do change fast and tremendously in relation to the elements and facts which are
important to the pharmaceutical industry itself. In that relation, one can foresee the decisive role of strategic
management with a strong market orientation as crucial and most important as well for the pharmaceutical
companies to be successful performers in the future and even more globalized world (Kesič, 2006).

3. PORTER’S MODEL IN THE PHARMACEUTICAL INDUSTRY

3.1 Industry Rivalry

The pharmaceutical industry is a highly competitive and aggressive market that makes over a trillion dollars a
year in sales; with industry leaders like Pfizer, GlaxoSmithKline, and Merck who make up over 25% of total
market presence. With strict government regulations, high costs with research, and highly competitive products
in the market place, companies are left frantically trying to release the next best miracle product to stay ahead.
This sort of strategy puts a lot of pressure on them to find drugs that will pay off.

Within the dynamics of the industry a diverse struggle for market share exists based on innovation, intellectual
property rights and patents on the products. Although such ownership of patents and specific rights sometimes
neutralizes competition in the market place, there still exists an avenue for higher levels of competition.

The government acts as the largest of the industries hurdles, which is responsible for organizations such as the
Federal Drug Administration to test products for safety and reliability. Governments can also attract buyers by
trying to regulate prices and keep them low. Yet in the end a company’s ability to get buyers falls on the
demands they exhibit.

Companies that use foresight and plan based on educated projections are better positioning themselves for
success. It still is not certain that product investment will pay off. When this happens companies can become
weak and risk liquidation or being bought out by competitors.

This environment makes for rivalry in an environment where only the strongest will survive. However, the
government regulates the way companies strategically pair, and that is the common standard in this type of
industry. This is done to keep the market competitive in the long run by using companies’ innovation to fuel
more competition in the fight for the buyer (Carter, 2005).

3.2 Threat of Substitutes

Generic brand medication is often seen as the main substitute for products produced by the pharmaceutical
industry (Barney, 2006). Generic brands are a substitute because they keep the prices of brand name medicines
competitive. However, generic medicines are not always an available substitute due to patents. Also, it is
debatable whether or not generic medicine is really a substitute and not a rivalry.

Brand names and generics are the same product delivered to the customer in a similar way. The only major
differences are the name and price. Complementary Alternative Medicine (CAM) and alternative medicine are
also substitutes for the pharmaceutical products. CAM includes a wide array of healthcare products and
practices that are not recognized as being a part of conventional medicine. Usually people use CAM as well as
conventional medicine. In a survey from May 2004, 36% of adults admitted to using some sort of CAM
(http://nccam.nih.gov/health/whatiscam/2007).

However, alternative medicine looks to replace conventional medicine completely instead of just acting as a
supplement. Although these substitutes do not impact the pharmaceutical industry as much as generic brands,
they can be considered as more of an actual substitute.

3.3 Threat of New Entrants

The threat of new entrants into the pharmaceutical industry is very low because of the high costs required to
enter the industry. Even though the economies of scale for production may not be very significant, other barriers
to entry are high (Barney, 2006).

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To develop new drugs is a very costly and timely process that requires a lot of research and development.
Along with high R&D costs, the heavy regulation of the pharmaceutical industry is another barrier to entry. All
drugs and chemicals used need to be approved by the Food and Drug Administration (FDA), and when the drugs
are not approved the time and money used to develop them is lost by the firm. The standards are very strict,
starting with preclinical testing by the FDA, then clinical (human) testing and finally the firm applies to the
FDA for final approval (FDA Consumer Magazine, 2002).

Another regulation present is that of patents, which generally last about 20 years, and these products are
protected by the firm that created them. Patents are a huge barrier for new firms trying to enter the market and
are very discouraging. The established firms have differentiated from one another and constructed strong brand
names with loyal customers, making it hard for new companies to build up a brand name. (Carter, 2005).

3.4 Bargaining Power of Buyers / Suppliers

Major consumers in the pharmaceutical industry include doctors, patients, hospitals, drug stores, and
pharmacists. There are several significant indicators of the threat of buyers in the pharmaceutical industry; they
include the number of buyers, product differentiation and product significance of a buyer’s final cost (Barney,
2006). Buyers do not pose a big threat to the pharmaceutical industry because firms spend most of their research
and development on new patent drugs. Since the industry has many buyers and given that competition normally
occurs among consumers (e.g. competition among hospitals or drug stores) the power of buyers in terms of the
number of buyers in the industry is relatively small.

Although products are branded, buyers are able to purchase according to their own preferences because of the
similarity of products. More often than not, individual consumers prefer generic to brand name drugs, since
generic drugs are cheaper. Big hospitals can pressure individual pharmaceutical companies to lower prices as
they purchase large quantities and have a higher bargaining power.

However, if a certain pharmaceutical company owns the patent to a specific drug, it monopolizes the market for
that specific drug and it becomes the price setter. To a lot of consumers, drugs are necessities. Although
hospitals do not have to have every drug to operate, patients prefer hospitals to be able to supply their
medications if they are having in-patient services. Of course, hospitals can always choose to carry similar drugs
from different pharmaceutical companies; so again, successfully developing a patent drug will really serve as an
advantage for a specific pharmaceutical company.

It is essential to identify the suppliers for the pharmaceutical industry. The suppliers could be a wide variety of
the providers such as the raw materials and intermediates, the manufacturing and production plants, the overseas
head offices who supply finished product, the local co-marketing partners who supply product, etc. Also, labor
can be considered as a supplier to industry. Depending on the department, for example the clinical research
departments, the suppliers can be the patients in clinical trials, the investigators or the study staff who provide
the data. It is not easy for the pharmaceutical industry to change suppliers even when they threaten to withhold
supply. Labor also holds immense power when inquiring for more compensation or reducing quality by working
fewer hours.

In the pharmaceutical industry, each supplier holds a certain level of power to be a threat, but it is not too high.
Pharmaceutical companies usually own manufacturing plants so that suppliers cannot charge unreasonable
prices on their own and it is doubtful they will make threats to take their business somewhere else. Thus, the
threat from suppliers in the pharmaceutical industry is not considered significantly bigger than that in other
industries as long as there is no considerable threat from the raw material suppliers (Carter, 2005).

3.5 The Influence of Five Forces Model on Profitability

The five forces have an important effect on how profitable the pharmaceutical industry will be. Suppliers do
affect the profitability of companies in the pharmaceutical industry, but many firms now own their own
manufacturing plants, so their profits are not influenced very much by suppliers. When buyers have a high
bargaining power they are able to put pressure on firms to lower prices, but buyer’s power for pharmaceutical
firms, especially ones that have patented drugs, is relatively low. This also goes along with the effects of
substitutes, because buyers switching from expensive brand names to generic brands are significantly lowering
prices and profitability, but a firm with a patent on its new drug is not affected by generic drugs. Since the
barriers to entry make it hard for new firms to enter the market, this force also does not affect profitability
(Carter, 2005). Forces all effect profitability differently, and industry rivalry is intense in this industry and has a

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large effect on profitability. Firms in the pharmaceutical market need to be aware of all five forces in order to
be profitable and keep a competitive advantage.

For the first time ever, in 2006, global spending on prescription drugs topped $643 billion, even as growth
slowed somewhat in Europe and North America. The United States accounts for almost half of the global
pharmaceutical market, with $289 billion in annual sales followed by the EU and Japan. Emerging markets such
as China, Russia, South Korea and Mexico outpaced that market, growing a huge 81 percent (Herper, 2006). US
profit growth was maintained even whilst other top industries saw little or no growth (IMS Health, 2004).

Despite this, "...The pharmaceutical industry is — and has been for years — the most profitable of all businesses
in the U.S. In the annual Fortune 500 survey, the pharmaceutical industry topped the list of the most profitable
industries, with a return of 17% on revenue." (TIME magazine, 2004). Pfizer's cholesterol pill Lipitor remains a
best-selling drug worldwide. Its annual sales were $12.9 billion, more than twice as much as its closest
competitors: Plavix, the blood thinner from Bristol-Myers Squibb and Sanofi-Aventis; Nexium, the heartburn
pill from AstraZeneca; and Advair, the asthma inhaler from GlaxoSmithKline (Herper, 2006). IMS Health
publishes an analysis of trends expected in the pharmaceutical industry in 2007, including increasing profits in
most sectors despite loss of some patents, and new 'blockbuster' drugs on the horizon (IMS Health Statistics,
2006). Teradata Magazine predicted that by 2007, $40 billion in U.S. sales could be lost at the top 10
pharmaceutical companies as a result of slowdown in R&D innovation and the expiry of patents on major
products, with 19 blockbuster drugs losing patent (Teradata magazine, 2005). The following is a list of the 20
largest pharmaceutical and biotech companies ranked by healthcare revenue. The phrase Big Pharma is often
used to refer to companies with revenue in excess of $3 billion, and/or R&D expenditure in excess of $500
million (Table 4).

Reve- Company Country Total Healthcare Net income/ Employees

nue Revenues R&D 2006 (loss) 2006 2006
Rank (USD (USD (USD
2006 millions) millions) millions)
1 Novartis Switzerland 53,324 7,125 11,053 138,000
2 Pfizer USA 48,371 7,599 19,337 122,200
3 Bayer Germany 44,200 1,791 6,450 106,200
4 GlaxoSmithKline UK 42,813 6,373 10,135 106,000
5 Johnson & Johnson USA 37,020 5,349 7,202 102,695
6 Sanofi-Aventis France 35,645 5,565 5,033 100,735
7 Roche Switzerland 33,547 5,258 7,318 100,289
8 AstraZeneca UK/Sweden 26,475 3,902 6,063 50,000+
9 Merck & Co. USA 22,636 4,783 4,434 74,372
10 Abbott Laboratories USA 22,476 2,255 1,717 66,800
11 Wyeth USA 20,351 3,109 4,197 66,663
12 Bristol-Myers Squibb USA 17,914 3,067 1,585 60,000
13 Eli Lilly and Co USA 15,691 3,129 2,663 50,060
14 Amgen USA 14,268 3,366 2,950 48,000
15 Boehringer Ingelheim Germany 13,284 1,977 2,163 43,000
16 Schering-Plough USA 10,594 2,188 1,057 41,500
17 Baxter International USA 10,378 614 1,397 38,428
18 Takeda Pharmaceutical Japan 10,284 1,620 2,870 15,000
19 Co.
Genentech USA 9,284 1,773 2,113 33,500
20 Procter & Gamble USA 8,964 n/a 10,340 29,258
SUM 497,519 70,843 110,077 1,342,700
AVERAGE 24,876 3,542 5,504 67,135
Table 4: Top 20 Pharmaceutical Companies Charts & Lists. Source: Med Ad News, September 2007

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4. NEW PHARMACEUTICAL PRODUCTS

New pharmaceutical products’ life cycle

Drug discovery
In the fields of medicine, biotechnology and pharmacology, drug discovery is the process by which drugs are
discovered and/or designed. The process of drug discovery involves the identification of candidates, synthesis,
characterization, screening, and assays for therapeutic efficacy. Once a compound has shown its value in these
tests, it will begin the process of drug development prior to clinical trial (Blake, 2009). Despite advances in
technology and understanding of biological systems, drug discovery is still a lengthy, "expensive, difficult, and
inefficient process" with low rate of new therapeutic discovery. Currently, the research and development cost of
each new molecular entity (NME) is approximately US$1.8 billion (Steven Paul, 2010)

Drug development
Candidates for a new drug to treat a disease might theoretically include from 5,000 to 10,000 chemical
compounds. On average about 250 of these will show sufficient promise for further evaluation using laboratory
tests, mice and other test animals. Typically, about ten of these will qualify for tests on humans.

New Chemical Entities (NCEs) are compounds which emerge from the process of drug discovery. These will
have promising activity against a particular biological target thought to be important in disease; however, little
will be known about the safety, toxicity, pharmacokinetics and metabolism of this NCE in humans.

Many aspects of drug development are focused on satisfying the regulatory requirements of drug licensing
authorities. These generally constitute a number of tests designed to determine the major toxicities of a novel
compound prior to first use in man. If a compound emerges from these tests with an acceptable toxicity and
safety profile, and it can further be demonstrated to have the desired effect in clinical trials, then it can be
submitted for marketing approval in the various countries where it will be sold. In the US, this process is called
a New Drug Application or NDA. (Stratmann, 2010).

Studies published in 2003 report an average pre-tax cost of approximately $800 million to bring a new drug to
market (Di Masi, 2002) /(Di Masi,2003).The $800 million quoted include the cost of all drug development
which did not result in a new drug. It also includes some $400 million of opportunity costs. A study published in
2006 estimates that costs vary from around $500 million to $2 billion depending on the therapy or the
developing firm (Adams C, 2006).

Patents and generics

Patenting plays a considerable role in the pharmaceutical industry given the high likelihood that firms will
patent inventions (Cohen et al., 2003).Depending on a number of considerations, a company may apply for and
be granted a patent for the drug, or the process of producing the drug, granting exclusivity rights typically for
about 20 years (http://www.wipo.int/patentscope/en/patents).When the patent protection for the drug expires, a
generic drug is usually developed and sold by a competing company.

Additionally, we have to explore the propensity to patent. Consistent with Hicks et al., (2001)”propensity to
patent” is defined as the ratio of patents to R&D expenditures (constant dollars, in millions). The numerator in
this measure equals the total number of (defined) pharmaceutical patents issued to our sample firms. Using a
similarly-constructed measure, Hicks et al., (2001) find a constant propensity to patent of 0.38 from 1991 to
1998 in the chemical sector, which includes pharmaceuticals in their study (Brouwer, 1999). Hicks et al. plot the
patent intensity measure in Figure 1. As a matter of fact, the measure declines from 1987 to 2001 with a sharp
decline in the post-1995 period. For emphasis, Figure 1 compares this decline in “propensity to patent” against
the ratio of real R&D expenditures to real sales. This latter ratio has remained reasonably constant at around 15
percent throughout the same time period.

Accordingly, it appears that increases in R&D expenditures have kept pace with increases in sales. Taken
together this suggests that the rate of R&D expenditures is increasing at a faster pace than is patenting, thereby
depressing the overall “propensity to patent” measure in the later years depicted in Figure 2. The interpretation
is consistent with the overall decline in research productivity in the pharmaceutical industry described by
Higgins and Rodriguez (2006).

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Figure 1: The ratio of total firm pharmaceutical patenting to real R&D expenditures is plotted against the ratio
of real R&D expenditures to real sales. Source: Hicks, 2001

Drug Introduction

Pharmaceutical firms appear quite adept at timing their new product introductions to substitute for their loss of
monopoly position on other of the firm’s products selling in the marketplace. One can assume the strong
incentives firms have to effectively manage complementary assets. Downstream complementary assets have
been shown to be a significant factor in determining incumbent firms’ success at bringing new products to
market (Teece, 1986), no less so in the pharmaceutical industry. Examples of complementary downstream assets
include distribution channels, manufacturing and production capabilities, reputation, strategic alliances,
customer relationships, licensing agreements, and marketing capabilities (Pisano, 1991),(Macher and Boerner,
2006). Several studies of firm innovation have shown that possessing these assets is advantageous, but previous
research has tended to examine changes in the character of technology inputs, focusing on derivative measures
of innovative success such as market share or overall firm profitability (Tripsas, 1997) (Rothaermel, 2001).
Instead, our analysis focuses upon firms’ performance at timing their new product introductions. Mismanaging
the timing of new product introductions increases “adjustment costs” associated with the relevant
complementary assets (Chan et al., 2007), while managing their timing may be particularly difficult given the
technological complexity of pharmaceutical development, the cumbersome regulatory environment, and the
long innovation lags. The downstream assets needed to bring products to market are costly to create and
maintain, particularly when those assets are specific to the innovation (Williamson, 1985).

In fact, a simple schematic for the management of the complementary assets for new product introduction is
given in Figure 3. Higgins and Rodriguez (2006) demonstrate that pharmaceutical product sales over time take
on an “inverted U” shape, and Figure 2, Panel (A) illustrates stylized representations of new products being
introduced by a firm at times t1, t3, and t5. For simplicity, we show the firm maintaining a constant level of
complementary assets over time as a dashed line “CA.” Note that at the apex of product sales, the
complementary assets are fully utilized. Panel A represents a firm that manages the introduction of new products
relatively poorly: By delaying introduction of its second new product until t3, the firm suffers a term of
unproductive complementary assets, represented by the shaded region denoted Z. This firm thus faces a choice
of either disgorging itself of these specialized assets, or maintaining the assets and suffering costs without
commensurate revenues. Panel (B), by comparison, represents a firm that more effectively manages its new
product introductions. By introducing five new products at times t1, t2, t3, t4, and t5, the firm minimizes the
extent to which its downstream assets remain unproductive (in essence, minimizing Z).

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Figure 2: A simple schematic of the management of complementary assets. Source: Higgins and Rodriguez,
2006.

As such, firms are able to easily forecast the point in Figure 3 when an existing product’s sales will collapse,
thus offering managers a readily available target for introducing a new product if, as we hypothesize, the
objective is to minimize adjustment costs.

Drug growth phase

As far as product penetration and growth concerned, this phase offers the satisfaction of seeing the product take-
off in the marketplace. This is the appropriate timing to focus on increasing the market share. If the product has
been introduced first into the market, then it is in a position to gain market share relatively easily. A new
growing market alerts the competition’s attention. The company must show all the products offerings and try to
differentiate them from the competitors’ ones. A frequent modification process of the product is an effective
policy to discourage competitors from gaining market share by copying or offering similar products (Clifford,
1969). Promotion and advertising continues, but not in the extent that was in the introductory phase and it is
oriented to the task of market leadership and not in raising product awareness. A good practice is the use of
external promotional contractors. This period is the time to develop efficiencies and improve product
availability and service. Cost efficiency and time-to-market and pricing are major factors in gaining customer
confidence. Good coverage in all marketplaces is worthwhile goal throughout the growth phase.

Managing the growth stage is essential. Companies sometimes are consuming much more effort into the
production process, overestimating their market position. Accurate estimations in forecasting customer needs
will provide essential input into production planning process. It is pointless to increase customer expectations
and product demand without having arranged for relative production capacity, because that will result into
losing customers not finding the product in the drugstore (Cox, 1967).

The combination of high growth and high sales is the most desirable star position in the quadrant, while the low
growth and low sales products are represented as dogs. The opportunities have high growth but low sales, as is
typical of new products, while older products with low growth are said to be the cows for milking. Depending
on the balance of the portfolio, investment would be directed towards the opportunities and stars, reduced for
cows and withdrawn for dogs. This is a simple but effective analysis tool at a high level for mature companies
with a broad portfolio. It is less useful in the context of a younger company where the portfolio will tend to fall
into one or two categories, leaving little strategic choice as to where to direct investment. Additionally, based on
Bowman’s Strategy Clock, pharmaceutical industry’s managers can make decisions according to the following
figure 5.

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Figure 5: Bowman’s Strategy Clock. Source: Based on the work of Cliff Bowman

As a matter of fact, a manager, to get on with a product’s growth, can have one or more competitive strategy
options, as follows (Bowman, 1997):
1. Low price/low added value strategy which is likely to be segment specific
2. Low price strategy that contains the risk of price war and low margins; there is adequate need for the
company to be cost leader
3. Hybrid strategy with low cost base and reinvestment in low price and differentiation
4. Differentiation strategy
(a) Without price premium or perceived added value by user, yielding market share benefits
(b) With price premium or perceived added value sufficient to bear price premium
5. Focused differentiation or perceived added value strategy to a particular segment, warranting price premium
6. Increased price/standard or higher margins strategy if competitors do not value follow/risk of losing market
share
7. Increased price/low value strategy which is only feasible in monopoly situation
8. Low value/standard price strategy in the case of loss of market share

Drug maturity phase

When the market becomes saturated with variations of the basic product, and all competitors are represented in
terms of an alternative product, the maturity phase arrives. In this phase market share growth is at the expense of
someone else’s business, rather than the growth of the market itself. This period is the period of the highest
returns from the product. A company that has achieved its market share goal enjoys the most profitable period,
while a company that falls behind its market share goal, must reconsider its marketing positioning into the
marketplace. During this period new brands are introduced even when they compete with the company’s
existing product and model changes are more frequent (product, brand and model). This is the time to extend the
product’s life. Promotion and advertising relocates from the scope of getting new customers, to the scope of
product differentiation in terms of quality and reliability. The battle of distribution continues using multi
distribution channels. A successful product maturity phase is extended beyond anyone’s timely expectations
(Avlonitis, 2001).

Drug decline phase

The decision for withdrawing a product seems to be a complex task and there are a lot of issues to be resolved
before we decide to move it out of the market. Dilemmas such as maintenance, spare part availability, service
competitions reaction in filling the market gap are some issues that increase the complexity of the decision
process to withdraw a product from the market. Often companies retain a high price policy for the declining
products that increase the profit margin and gradually discourage the “few” loyal remaining customers from
buying it. Sometimes it is difficult for a company to conceptualize the decline signals of a product. Usually a
product decline is accompanied with a decline of market sales. Its recognition is sometimes hard to be realized,
since marketing departments are usually too optimistic due to big product success coming from the maturity
phase. The prices must be kept competitive and promotion should be pulled back at a level that will make the
product’s presence visible and at the same time retain the “loyal” customer. Distribution is narrowed. The basic
channel should be kept efficient but alternative channels should be abandoned.

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5. EPILOGUE

We live in the age of uncertainty, turbulence and structural discontinuities and as Drucker (2005) reminds us, the
greatest danger in times of turbulence is not the turbulence, but to act with yesterday’s logic. The current
turbulence being witnessed in both the pharmaceutical and biotech industries is not a temporary aberration; it
should be expected that there will be continued and unrelenting pressures in the next 15 years from a growing
range of stakeholders, along with increasing competitive forces from Asia and other regions.

As a matter of fact, managers from lower to top levels have to take into consideration all the external and
internal strengths based on Porter’s FFM so as to be able to face the existing challenges originated by the
industry’s environment. If challenges are converted into opportunities and incorporated into new products’
strategic plan, then these drugs will be developed more rapidly having acquired greater advantage compared to
competitive similar ones by offering greater value to the pharmaceutical company itself.

To conclude, the existing arguments all this study long might assist other investigators to fulfill next
generations” project in order for them to be able to forecast trends for pharmaceutical industry’s future during
next decade’s time.

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