Case The global pharmaceutical industry: harnessing
a whirlwind
Study Sarah Holland
A CEO’s dilemma
In April 2017, Emma Walmsley started work as CEO of
GlaxoSmithKline (GSK). Before joining GSK’s consumer
products division in 2010, Walmsley spent 17 years at
L’Oréal, the French cosmetics group. She was not only
the first female CEO of a global pharmaceutical company
but also brought an unusual outsider background, as a
brands expert with more than two decades of experience
in fast-moving consumer and luxury goods. Her appoint-
ment was seen as a signal that GSK would retain the
consumer business as a core part of its operations, after
facing activist investor pressure to divest it amid flagging
sales and falling profits. GSK was a top ten global phar-
maceutical company with £28 bio in annual revenues, but
the firm’s longstanding policy meant most of the annual
profit was required to pay dividends, severely limiting
strategic flexibility. Less than six weeks after Walmsley
took the reins, she faced a shock when Neil Woodford, a
much celebrated UK fund manager, announced that after
15 years he was pulling every last pence out of GSK stock.
GSK, declared Woodford, was ‘a healthcare conglomer-
ate with a suboptimal business strategy’. Walmsley, whom
he saw as a ‘continuity candidate’, seemed to be the last
straw. It was clear that she needed to act swiftly, but how?
Industry evolution
As described in Box 1, the pharmaceutical industry is
characterised by a highly risky and lengthy research and
development (R&D) process, intense competition for
intellectual property, stringent government regulation
and powerful purchaser pressures. How has this unusual
picture come about?
The origins of the modern pharmaceutical industry
date from the late nineteenth century, when dyestuffs
were found to have antiseptic properties. Penicillin was
a major discovery and R&D became firmly established
within the sector. The market developed some unusual
characteristics. Decision making was in the hands of med-
ical practitioners whereas patients (the final consumers)
and payers (governments or insurance companies) had
little knowledge or influence. Consequently, medical prac-
titioners were insensitive to price but susceptible to the
efforts of sales representatives.
This case study was prepared by Sarah Holland. It is intended as a basis for class discussion, not as an illustration of good or bad practice.
© K.S. Holland 2019. Not to be reproduced or quoted without permission. Terms printed in italics are explained in the Appendix.
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Two important developments occurred in the 1970s.
Firstly, the thalidomide tragedy (an anti-emetic for morn-
ing sickness that caused birth defects) led to much tighter
regulatory controls on clinical trials. Secondly, legislation
was enacted to set a fixed period on patent protection –
typically 20 years. On patent expiry, rivals could launch
generic medicines with exactly the same active ingredients
as the original brand at a lower price. The dramatic impact
of generic competitors is illustrated by Merck's top-selling
asthma and allergy drug Singulair, which lost 90 per cent
of US sales just four weeks after patent expiry in 2012.
Generics had a major impact on the industry,1 driving inno-
vation and a race to market, since the time during which
R&D costs could be recouped was drastically curtailed.
The pharmaceutical industry is unusual since in many
countries it is subject to a ‘monopsony’ – there is effect-
ively only one powerful purchaser, the government.
From the 1980s on, governments focused on pharma-
ceuticals as a politically easy target in efforts to control
rising healthcare expenditure. Many introduced price or
reimbursement controls. The industry lacked the public or
political support to resist these changes.
Business environment
Ageing populations create pressure on healthcare sys-
tems, since ‘over-65s’ consume four times as much health-
care per head as younger people. Combined with an
epidemic of chronic disease linked to obesity, this created
an unsustainable situation.
In response to these pressures, government and pri-
vate payers (such as insurance companies) use a variety
of methods to control pharmaceutical spending (see
Table 1). Some put the emphasis on the manufacturer and
distributor, others on the prescriber and patient. Controls
are designed to reward genuine advances – price and/or
reimbursement levels are based on perceived innovation
and superior effectiveness.
In countries with supply-side controls, negotiating
price or reimbursement can take up to a year. In those
with demand-side controls, market penetration is delayed
while negotiating with bodies such as the National Insti-
tute for Clinical Excellence (NICE) in the UK. NICE typifies
a general trend towards evidence-based medicine, where
payers expect objective evidence of effectiveness to justify
 The global pharmaceutical industry: harnessing a whirlwind

Box 1 The drug development process

The pharmaceutical industry has long new product lead
times, with period from discovery to marketing authorisa-
tion typically taking almost 12 years (Figure 1). New prod-
uct development can be divided into distinct research and
development phases. The research phase produces a new
chemical entity (NCE) with the desired characteristics to be
an effective drug. Development encompasses all of the for-
mulation, toxicology and clinical trial work necessary to meet
stringent regulatory requirements for marketing approval.
During all of these phases ‘attrition’ occurs, as promising
agents fail particular hurdles, so most R&D projects never
result in a marketed drug. Late stage failures are particular-
ly costly and not uncommon – in 2014 Roche announced
the failure of bitopertin for schizophrenia and onartuzum-
ab for cancer, in both cases after heavy investment in broad
Phase 3 programmes. Of those drugs that reach the mar-
ket, 80 per cent fail to recoup their R&D investment. The
cost of developing a new drug is estimated at over $1.4bn
dollars. When the costs of all the projects that do not reach
fruition are considered, it becomes clear that pharmaceut-
ical R&D is a very high stakes game indeed.
Given the enormous risks and considerable invest-
ment involved, it is not surprising that pharmaceutical
companies compete fiercely to establish and retain in-
tellectual property rights. Only by securing a patent that
can be defended against imitators can the value of all this
R&D be recouped.
The industry is subjected to rigorous regulatory scru-
tiny. Government agencies such as the Food and Drug
Administration (FDA) in the USA thoroughly examine all
of the data to support the purity, stability, safety, efficacy
and tolerability of a new agent. The time taken is gov-
erned by legislation and typically averages 12 months.
Obtaining marketing approval is no longer the end of
the road in many countries, as further hurdles must be
overcome in demonstrating the value of the new drug
to justify price and/or reimbursement to cost-conscious
payers. Regulators often also require companies to track
and report patients’ experiences (referred to as ‘pharma-
covigilance’). These requirements are becoming stricter,
raising the investment cost in a given medicine through-
out its life cycle.

Figure 1 Creating new pharmaceuticals: it takes 10–15 years on average for an experimental drug to travel
from the lab to patients

Clinical Trials

Discovery/
Preclinical Testing Phase I Phase II Phase III FDA Phase IV

Years 6.5 1.5 2 3.5 1.5

20 to 100 100 to 500 1,000 to 5,000

Test Laboratory and
healthy patient patient
File NDA/BLA at FDA

Population animal studies Additional

volunteers volunteers volunteers
File IND at FDA

post-
Review
Confirm marketing
Assess safety, Determine Evaluate process/
effectiveness, testing
biological safety effectiveness, approval
Purpose monitor adverse required
activity and and look for
reactions from by FDA
formulations dosage side effects
long-term use

Success 5,000 compounds 5 1

Rate evaluated enter trials approved

Source: PhRMA, Medicines in Development – Biotechnology – 2006 Report, p. 51.

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The global pharmaceutical industry: harnessing a whirlwind
Table 1 Methods used to control pharmaceutical spending
Controls on suppliers Mixed effect
Negotiated prices Partial reimbursement at price
Average pricing negotiated with manufacturer
Reference pricing Generic substitution
Positive and negative lists
Constraints on wholesalers and pharmacists
Imposed price cuts
Pay for performance
Indication-based pricing
*
Where the patient pays some of the drug cost.
funding new therapies. The impact of NICE decisions
reverberates beyond the UK, as countries collaborate
internationally on value assessments. Where new drugs
are approved for funding, this is increasingly in the con-
text of formal patient selection and treatment guidelines,
so their use is carefully controlled and individual pre-
scribers have limited decision-making power.
Switching to generics is one way to cut drug expend-
iture. Countries are experimenting with ‘e-prescribing’
where physicians are presented with recommended
options. Payers are increasingly effective in establishing
generic drugs as first-line treatment for chronic diseases
such as osteoporosis, asthma and depression, with
patented drugs only used if generics fail to work.
The industry has adopted a number of strategic
responses to these challenges. Pharmacoeconomic evalu-
ations are conducted to demonstrate the added value
offered by a new drug from improved efficacy, safety,
tolerability or ease of use. For example, a study of the
cost of diabetes – the fastest-growing chronic disease in
the world – found that 60 per cent was driven by hos-
pitalisations, which could often be avoided by correct
outpatient use of medicines. Companies have introduced
disease management initiatives, which focus on the goals
of the healthcare system for a specific disease. Firms
then offer a broad-based service to improve disease out-
comes, positioning their products as part of the solution.
Another approach is the ‘pay for performance’ deal, for
example UK reimbursement of the cancer drug Velcade
was linked to disease response. Such deals are now also
appearing in the USA: Harvard Pilgrim Health Care, one
of Massachusetts’ largest health insurers, will pay less for
Amgen’s blockbuster drug Enbrel (annual cost of therapy
$53,000), which is used to treat rheumatoid arthritis, if
patients score below a certain level on six pre-specified
clinical effectiveness criteria.
Payers value ‘real-world evidence’, i.e. how drugs per-
form in real populations rather than the artificial popu-
lations studied in trials. Big data gathered in real-world
healthcare settings has become more prevalent and
robust, shedding light on the use, benefits and risks of
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Controls to influence demand
Patient co-payments*
Treatment guidelines
Indicative or fixed budgets
Incentives to prescribe or dispense
generics or parallel imports
Transfer from prescription-only to
OTC
e-prescribing tools
medicines and has been broadly adopted to guide
reimbursement decisions.
One challenge with real-world evidence is that coun-
terfeit products are a growing problem, putting patient
safety and lives at risk. With sales ranging from €150 to
€200bn per year, counterfeit pharmaceuticals are the
most lucrative sector of the global trade in illegally copied
goods. Pain medications laced with powerful and harmful
fentanyl were linked to a recent epidemic of opioid-
related deaths in 12 US states. The World Health Organiza-
tion estimates that 1 in 10 medical products circulating in
developing countries are substandard or fake. Counterfeit
antimalarials and antibiotics cause an estimated 72,000
children to die of pneumonia and 69,000 people to die
of malaria each year, and help drive emergence of dan-
gerous drug resistant pathogens. Drug manufacturers and
distributors are forced to invest in countermeasures, such
as traceability and authentication technologies.
Government price controls create another challenge
for the industry in the form of ‘parallel trade’. The princi-
ple of free movement of goods across the EU mean that
distributors are free to source drugs in low price markets
and ship them to high price markets, pocketing the dif-
ference. EU parallel trade was estimated at €5.4bn in
2015, with the highest penetration in Denmark where it
accounted for a quarter of pharmacy sales.
Industry sectors
Prescription-only or ethical drugs contribute about 89
per cent ($978bn) of the $1.1trn global pharmaceutical
market by value and 50 per cent by volume. Ethical prod-
ucts divide into conventional pharmaceuticals and more
complex biotherapeutic agents and vaccines (see Box 2).
The other 15 per cent of the market comprises over-the-
counter (OTC) medicines, which may be purchased with-
out prescription. Both ethical and OTC medicines may be
patented or generic.
The typical cost structure of ethical pharmaceut-
ical companies comprises manufacturing of goods (25
per cent), research and development (16–24 per cent),
 The global pharmaceutical industry: harnessing a whirlwind
Box 2 Biotherapeutics – the next generation
Biotherapeutics or ‘biologics’ are large molecules that
behave like natural substances, such as proteins and
monoclonal antibodies. Discovery and design of biologics
entails optimising specificity, affinity and making mole-
cules as human as possible to avoid provoking an immune
response. Biologics are typically given by injection and
treat specialist conditions such as cancer and rheumatoid
arthritis. Superior specificity to small molecules avoids
unexpected ‘off target’ side effects, and increases success
rate from Phase 1 to launch from 7 per cent to 12 per
cent. Because of their benefits and use in high-unmet-
need diseases, biologics are generally priced higher than
small molecules.
Initially associated with biotechs, biologics became
mainstream – contributing $258bn in 2017, and seven of
the ten top-selling brands. Companies that invested early
benefited from this rapid growth. Others noted their suc-
cess and acquired biologics capabilities. In addition to lower
attrition and superior pricing, biologics faced less risk from
generics. Sophisticated capabilities to develop and manu-
facture a complex biosimilar product take substantial invest-
ment. Furthermore, regulators were slow to clarify approval
requirements. However, Sandoz led the way with human
growth hormone and erythropoietin in the EU, and scored
the first US biosimilar approval in 2015. The lure of stealing
sales from blockbuster biologics attracted non-traditional
players such as Celltrion and Samsung and with $19bn of
sales facing patent expiry in developed markets in 2018,
global leaders like Roche were bracing for impact.
2017 was a landmark year for cell and gene ther-
apies, so-called Next Generation Biotherapeutics (NGBs).
administration (10 per cent), and medical education,
marketing and sales (25 per cent). The key strategic cap-
abilities of these companies are R&D and medical educa-
tion, marketing and sales. Pressure on margins created an
incentive to restructure manufacturing, rationalising and
relocating production sites and outsourcing to contract
manufacturing organisations (CMOs).
Manufacturing and distribution efficiency is key for
generics manufacturers, whose operating margins are far
below ethical companies’. In the 1990s, US generics prices
collapsed, accompanied by a shakeout to determine cost
leadership. The speed and aggression of generic attacks
on branded products increased sharply. Economies of
scale, including finance to support complex patent dis-
putes, proved decisive and the sector consolidated, with
only four companies holding nearly half the global market
by 2014. Prices fell from 2015 and with only 3 per cent
Two Chimeric Antigen Receptor T-cell (CAR-T) therapies,
Kymriah from Novartis and Yescarta from Kite Pharma,
were approved to treat blood cancers. In these therapies,
patients’ white blood cells, called T-cells, are removed,
genetically altered to specifically target cancer cells, and
put back to fight the disease with impressive efficacy.
Such therapies were crucially enabled by scientific break-
throughs in gene editing. Then in December, Luxturna
from Spark Therapeutics became the first FDA-approved
gene therapy for a rare retinal disorder. Gene therapies
had been around for decades, but safety, delivery and ef-
ficacy hurdles had hindered progress.
Although they make up only 5 per cent of the late
stage industry pipeline, due to their game-changing ef-
ficacy NGBs are expected to contribute a fifth of new
active substance approvals to 2022. Global pharmaceut-
ical companies were completely unprepared for such a
dramatic shift in the innovation landscape and lacked
R&D expertise. CAR-T companies were swiftly acquired by
cash-rich players – Kite Pharma by Gilead and Juno Thera-
peutics by Celgene, while Novartis acquired gene therapy
company AveXis. The arrival of Genentech veteran Hal
Barron as GSK’s new head of R&D was expected to herald
a bold foray into NGBs.
As well as R&D capability gaps, companies must grap-
ple with fundamental business model implications. Such
new treatments stretch the definition of a ‘drug’. Cell
therapy treatments engineered individually for each pa-
tient are more of a service than a product, and delivering
apparently curative results from a single gene therapy
treatment challenges pricing paradigms.
annual volume growth projected to 2022, mainly from
emerging markets, players in the $264m generics market
faced substantial pressure. Pressure on generics margins
actually caused shortages for some essential medicines in
the USA, leading a group of hospitals to respond by set-
ting up a not-for-profit generics company called Civica Rx
in 2018. One of the few bright prospects were so-called
Value Added Medicines: products differentiated by a pro-
prietary delivery method such as a special tablet, capsule,
patch or device.
A new type of industry player appeared in the 1980s –
small biotechnology start-ups backed by venture capital
to exploit the opportunities created by molecular biology
and genetic engineering. Initially, biotechs were associ-
ated with biologics (see Box 2). Biotechs now pursue a
huge variety of core capabilities, creating an extraordin-
arily diverse and innovative sector. Because of the long
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The global pharmaceutical industry: harnessing a whirlwind
product development cycle, most biotechs take years to
reach profitability, if at all, and revenues are concentrated
in a tiny subgroup of highly profitable firms. After a period
of drought during the global credit squeeze, investment
picked up as scientific breakthroughs reignited belief in
the sector, and reached record levels by 2014.
OTC medicines are bought by consumers without a pre-
scription. The global OTC market was estimated at $137bn
in 2017, with the top ten manufacturers accounting for
more than half. Consumer brand loyalty provides defence
against generic competition and prolongs the product
life-cycle. Consistently out-performing the ethical sector
globally, OTC sales are boosted by innovation, promotion
of self-medication and expansion of distribution channels.
Sales have accelerated in emerging markets, providing
global players with a rare source of growth and a quick
way to gain presence in these key markets. Consumer
marketing skills are key, especially with new competition
from companies such as Danone and Nestlé, who capital-
ise on consumer interest in personal wellbeing by making
health claims for so-called nutraceuticals. Walmsley revi-
talised consumer marketing at GSK, aiming to make OTC
brands as loved as Apple, Nike or Coca Cola, and drove
penetration in emerging markets. GSK struck only one
big deal under Walmsley’s predecessor Andrew Witty, a
three-part, £15 bio transaction with Swiss rival Novartis
in 2014 to pool consumer healthcare assets and exchange
cancer and vaccine businesses. Walmsley oversaw the very
Box 3 US dominance under threat?
A number of factors contributed to industry globalisa-
tion. Chief is the international convergence of medical
science and practice thanks to modern communica-
tions technology and increased travel and information
exchange. Well-funded US universities and hospitals gen-
erally lead their fields, while US scientific congresses pro-
vide the most prestigious platforms for new discoveries.
Leading corporations have globalised, with presence
in all significant markets. Production sites have a global
mandate and are selected by worldwide screening. R&D
is sourced from best place worldwide, which often means
the USA. Strong US market growth gave US companies a
springboard in achieving global ambitions, and in 2017
they occupied six of the top ten slots (Table 2).
Biotechnology companies are ‘born global’: from
their inception they draw upon a global pool of collab-
orators and investors, rather than growing from small
domestic beginnings. Once again the USA dominates:
publicly traded biotechs employed over four times more
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successful creation of the consumer joint venture, which
GSK acquired outright in March 2018 for £9.2bn, in the
first big deal of her tenure as CEO.
Another important sector is vaccines, a key industry
growth driver. Prophylactic vaccines provide lifelong pro-
tection against serious diseases, preventing at least 3 mil-
lion deaths annually worldwide and saving an estimated
$7–$20 healthcare dollars per dollar spent on vaccines.
This nearly $35bn market is highly concentrated: just
four global players account for about 80 per cent. Global
vaccine sales grew rapidly with launches of high priced
vaccines for new applications such as human papilloma
virus (HPV). Entry barriers are high, with specialised skills
required in manufacturing, conducting large and complex
clinical trials and managing surveillance programmes. Vac-
cines have higher development success rates and a lower
risk of generic entry than conventional medicines, while
offering blockbuster sales potential. GSK strengthened its
presence through the business swap with Novartis, nar-
rowly securing global market leadership in 2017.
Key markets
The majority of pharmaceutical sales originate in North
America, China, Japan, the EU and Brazil, with ten key
countries contributing over 80 per cent of the global mar-
ket. Pharmaceutical volume use is strongly aligned with
GDP growth, while use of high-priced branded medicines
people in the USA than the EU, with a similar ratio for
R&D spend. US biotechs secure the majority of venture
capital investment.
US pre-eminence in biomedical research is also under
threat from Asia. Global companies opened R&D sites
in Asia, while closing them in the USA and EU. The Chi-
nese government has declared its intention to become
a leader in the field and poured money into new uni-
versities and science parks, while the number of Chinese
graduates in natural sciences overtook the USA by 2004.
Routine research services are already often out-sourced
to China, but as US returnees and home-grown talent
seek more impactful projects, and with vast amounts
of money available for investment, a fully integrated
innovation ecosystem has emerged. A striking signal
of the future threat came with the 2018 submission of
two home-grown molecules by Beigene Ltd to the Chi-
nese regulators, each a fast-follower of highly novel
US-developed molecules.
 The global pharmaceutical industry: harnessing a whirlwind
is concentrated in developed countries. The USA is by
far the largest market – $457bn in 2017 – contributing
41 per cent of global sales. US growth averaged a very
healthy 7.3 per cent from 2013–17, driven by new prod-
uct launches. Indeed, the USA remains critical to launch
success: for NCEs launched during 2011–16, nearly 65 per
cent of sales were from the USA, and only 17.5 per cent
from the top five EU markets.
Following regulatory changes in 1997, direct-
to-consumer (DTC) advertising transformed the US mar-
ketplace and fuelled growth. However, companies' costs
for providing family healthcare benefits to employees
reached nearly $13,000 by 2017, with employees con-
tributing a further $5,700, and had outpaced wages for
15 years. Private payers asked consumers for increasing
co-payments and implemented other cost-control meas-
ures. Medicare reforms extended drug coverage for the
elderly, and gave the government new pricing leverage as
the largest direct purchaser of medicines. President Oba-
ma’s controversial Patient Protection and Affordable Care
Act significantly reduced the number of Americans with-
out health insurance, and expanded Medicaid coverage,
while increasing focus on value for money.
Gilead’s 2014 introduction of Sovaldi for hepatitis
C virus (HCV) put pharmaceutical pricing firmly in the spot-
light. HCV is a devastating condition that can ultimately
lead to cancer, liver transplant and early death. Sovaldi
eradicated the virus rapidly in many cases. Even at a list
price of $84,000 for 12 weeks’ therapy, cost-effectiveness
was indisputable, avoiding expensive future treatment.
However, payers suffered ‘sticker shock’, having never
seen such a price for short-term treatment of a largely
asymptomatic condition. Outrage over drug pricing
strengthened from 2015 when Turing Pharmaceuticals,
sole supplier of the old drug Daraprim for a complica-
tion of AIDS, hiked the price by 5000 per cent. President
Trump’s administration fought back by demanding that
prices are mentioned in DTC advertising. Despite these
pressures, annual US market growth to 2022 is predicted
to be 4–7 per cent.
Japan posted sales of $84bn in 2017. The Japanese
operating environment was historically quite distinct from
the USA and EU. Divergence occurred in medical practice,
regulatory requirements, the lack of generics, distribution,
and the accepted approach to sales and marketing. Not
surprisingly, domestic companies still dominate the mar-
ket. Stagnation caused tax revenues to fall, while the cost
of treating the world’s most rapidly ageing population
rose, resulting in stringent price controls, limiting annual
market growth to 2 per cent from 2013–17, with low or
negative growth expected to 2022.
The European pharmaceutical market, which con-
tributed only $154bn or 14 per cent of global sales in
2017, is highly fragmented and driven by governments’
forever-changing cost containment plans, resulting in
a lack of predictability for companies’ operational plan-
ning. Volatility was further exacerbated by ‘Brexit’, which
also disrupted the regulatory environment with the
forced relocation of the European Medicines Agency from
London to Amsterdam. The UK fell from fifth to eighth
position between 2006 and 2012, illustrating the strong
impact of NICE decisions on reimbursement and access.
European market annual growth is expected to stay well
below 5 per cent out to 2022.
Top tier emerging markets constituted nearly a quarter
of the global market by 2017 and are predicted to grow
at 6–9 per cent per year to 2022, led by China, Brazil, India
and Russia. With its growing GDP and huge population,
China overtook Japan as the second largest market behind
the USA, posting sales of $121bn in 2017. Regulatory
reforms aligning China more closely with global regula-
tory frameworks will address historical barriers to entry
and support further growth. In addition to high net worth
individuals who can afford the most innovative treat-
ments, middle class populations in emerging markets are
growing more rapidly than at any time in history. The key
challenge is to adapt to these countries’ varied needs and
environments. Some companies built their strategy on pre-
mium-priced generics, offering the reassurance of a known
brand and reliable manufacturer, so-called ‘branded gener-
ics’. However this approach was highly vulnerable to local
generic competition and reference pricing reforms. Other
companies expanded access to innovative medicines. For
example, Roche supplied Herceptin free of charge to Chinese
breast cancer patients after they had paid for a threshold
number of months, and fostered health insurance schemes.
Innovation
Pharmaceutical companies’ key contribution to medical
progress is the ability to turn fundamental research find-
ings into proven innovative treatments that are widely
available and accessible. Companies with consistently
high levels of R&D spending and productivity became
industry leaders. For this reason, stock market valuations
place as much importance on the R&D pipeline (i.e. the
products in development) as on marketed products.
The holy grail of pharmaceutical R&D is the block-
buster. Blockbuster drugs are genuine advances that
achieve rapid, deep market penetration. Because of their
superlative market performance, blockbusters determine
the fortunes of individual companies. Gilead leapt into the
top rank of global pharma companies thanks to Sovaldi,
which beat all records by selling $2.3bn in its first quarter.
While blockbusters make immense contributions to com-
pany fortunes, they are few and far between. Sir Andrew
Witty, the previous CEO of GSK, likened the hunt to ‘find-
ing a needle in a haystack right when you need it’.
Focusing on blockbusters exposes an already high-
stakes industry to even greater levels of risk. This was
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The global pharmaceutical industry: harnessing a whirlwind
dramatically brought home in September 2004 when the
cardiovascular safety risks of Vioxx emerged, and Merck
withdrew the brand from the market. Merck lost $2.5bn
in sales, a quarter of its stock market value, and faced the
prospect of numerous liability suits. Blockbusters exacer-
bate the impact of patent expiries, creating a so-called
‘patent cliff’. Companies were projected to lose nearly
$140bn in sales by 2024 due to the combined impact of
generic erosion and biosimilars.
Unfortunately, R&D productivity has declined and
development times lengthened. The average cost to
develop a new drug was estimated at $1.4bn2 in 2014 and
had grown at double the rate of inflation for 20 years.
Despite increasing R&D spend, the industry struggled
to replace the value lost through patent expiries. Attri-
tion increased as companies put higher hurdles in place
to address payer needs for meaningful clinical benefit.
Employing thousands of in-house scientists to develop
drug candidates from scratch became a billion dollar gam-
ble that simply wasn’t delivering.
Companies endeavoured to become both creative and
efficient. They narrowed their areas of therapeutic focus: a
key driver behind the 2014 deal in which Novartis and GSK
swapped oncology and vaccine portfolios. They invested
in alliances with academic institutions, seeking depth
of expertise. Strategic out-sourcing to contract research
organisations (CROs) reduced fixed costs and leveraged
lower cost geographies. Recognising that biotherapeu-
tics had a lower attrition rate, companies acquired bio-
logics capabilities. Some reorganised their R&D to create
smaller and more nimble units: GSK pursued an ultimately
unsuccessful organisational experiment in which internal
research centres competed for funding like internal bio-
techs. Many opened R&D sites in innovation ‘hotspots’,
such as the US West coast, Boston and Asia. All sought
external innovation through licensing deals and acquisi-
tions, although with few real jewels available the cost of
deals spiralled.
To manage better some of the tremendous risks
involved, companies moved towards a more net-
work-based approach to innovation. For diseases that
were just too tough to tackle alone, ‘pre-competitive’ col-
laboration allows costs and insights to be shared. Com-
panies, foundations and regulators working on Alzheimer’s
disease pooled data and resources to create shared under-
standing. Where large, long-term outcome studies were
needed, companies even pooled assets, moving only the
best forward. In diabetes, AstraZeneca and BMS paired up
to develop drugs together, sharing cost, risk and reward.
An intriguing response to environmental change was
pioneered by Roche, who positioned themselves as oper-
ating a ‘personalised healthcare’ business model. Roche
was the global leader in diagnostics and their strategy was
to offer value through targeting treatments to patients
that would benefit most. This appealed to regulators and
546
payers, who endorsed the linkage of high-priced cancer
drugs such as Alecensa for lung cancer with diagnostic
tests to identify suitable patients. Investing in discovery
and development of tests added further to cost and com-
plexity, but offered the chance to reduce attrition, build
unique competencies and secure rapid market uptake.
Most of the Roche pipeline was being developed with
companion diagnostics.
There are encouraging signs that industry’s focus
on meaningful clinical benefit, together with the FDA’s
explicit support for drugs designated as ‘breakthroughs’,
is finally delivering improved R&D productivity: the FDA
approved a record 46 NMEs in 2017.
An exciting new field is the use of digital channels to
manage health. Of five million apps available worldwide,
a third of a million are health-related and ‘mHealth’ is the
fastest growing app category. GSK embraced this trend,
launching MyAsthma in 2017 to empower patients to bet-
ter manage their condition. In September 2017, the FDA
approved Pear Therapeutics’ mobile application reSET
to help treat alcohol, marijuana and cocaine addiction,
based on clinical trial data that permit actual therapeutic
claims, creating the first prescription digital therapeu-
tic. And Akili Interactive Labs aims to help children with
ADHD through a therapeutic video game. The game uses
the same storytelling and reward mechanisms as standard
videogames, but beneath the surface, it features mech-
anisms to act on neural systems and algorithms that dial
the level of stimulus up or down to meet the needs of the
patient. Digital approaches are expected to target condi-
tions that are poorly addressed and to deliver treatment
more cheaply by reducing demands on clinicians’ time.
A more embryonic field is healthcare information tech-
nology. Other sectors are able to analyse huge data sets
to generate and exploit highly personalised consumer
insights, but the pharmaceutical industry was slow to
harness the power of ‘big data’. Electronic health records
offered an opportunity to detect patterns and gain new
insights. However, even simple tests were not standard-
ised between hospitals, and adoption rates were low with
poor inter-operability of medical records systems. Never-
theless, players were starting to tackle these problems. In
2015, Sanofi announced a collaboration with Google Life
Science aimed at improving diabetes health outcomes.
The companies planned to use data and miniaturised
technology to give patients tools to self-manage their
disease.
Early in Walmsley’s tenure she gathered senior R&D
leaders in a room in London and played them a video of
analysts commenting on GSK’s R&D performance. Almost
uniformly, they came back with pretty scathing assess-
ments. It was a ‘punch in the nose’ for an R&D organisa-
tion that thought highly of itself and thought the world
thought highly of it too. Walmsley undertook a dramatic
rationalisation of what she described as ‘hobbyland’,
 The global pharmaceutical industry: harnessing a whirlwind
stopping 65 programmes to enable focused investment
in a slimmed-down portfolio. She also brought in a
Genentech veteran, Hal Barron, as head of R&D. Barron’s
recipe to improve productivity was to focus on immune-
mediated diseases, prioritise genetically defined targets,
leverage functional genomics – for example, through a
$300m alliance with 23andme – establish a new cell ther-
apy platform and engage in targeted deal-making.
Sales and marketing
Historically, sales and marketing capability was important
to competitive advantage. A company that developed a
strong global franchise with its customers could maxi-
mise return on its products and was in a good position to
attract the best in-licensing candidates.
The traditional focus of drug marketing was the per-
sonal detail in which a sales representative (rep) discussed
the merits of a drug in a face-to-face meeting with a
doctor and provided free samples. Promotion is subject
to industry self-regulation. For example, in the UK, reps
have to pass an examination testing medical knowledge.
In some countries, government regulatory agencies check
that promotional claims are consistent with the data.
There were important differences in the marketing
of ‘primary care’ and ‘specialist’ products. Office-based
general practitioners generally prescribe primary care
products, whereas treatment with specialist products is
typically initiated in hospitals. Sales volume, marketing
spend and required skills differed for the two segments.
Product-led marketing was key in the primary care sector,
while specialist products involved more cost-effective tar-
geted relationship marketing.
The term ‘high compression marketing’ was coined
to describe global launches of primary care brands. This
involved near-simultaneous worldwide launches, global
branding and heavy investment in promotion. The aim
was to create a rapid take-off curve that maximised return
by creating higher peak year sales earlier in the product
lifecycle. A hallmark was the launch of Celebrex in 1999,
which netted $1bn sales in the first nine months. In the
USA an important marketing tool was DTC advertising,
where spending peaked at $6.4bn in 2016. DTC was costly
because of the vast target audience and expensive tele-
vision advertising, but profitable. Well-informed patients
asked for drugs by brand name, creating a powerful ‘pull’
strategy.
Sales force size was historically a key competitive attrib-
ute. However, as primary care blockbusters dried up, sales
force productivity declined sharply. Over 500,000 sales
reps were made redundant between 2006 and 2008,
while use of contract sales forces and digital channels
increased. As pipelines shifted to high unmet need dis-
eases treated by specialists, the era of lavish launches
and massive sales forces was over. The new blockbusters,
such as immune-oncology drugs Keytruda and Opdivo,
were specialty care products where lower volumes were
compensated by very high prices. Selling became a more
complex process with multiple stakeholders interested in
cost-effectiveness as well as clinical arguments, requiring
new skills. Crucially for big pharma, size is no longer a crit-
ical advantage: in fact the fastest growing companies are
specialty players such as Biogen and Celgene.
Corporate social responsibility
Today’s EU citizens can expect to live up to 30 years longer
than they did a century ago. Much of this improvement
can be attributed to pharmaceutical innovation. For exam-
ple, EU deaths from AIDS fell by three quarters between
2006 and 2015. Few other industries have done as much
for the wellbeing of mankind. Furthermore, at a global
level the industry has the highest ratio of R&D to net sales,
funds nearly a fifth of all industrial R&D investment, and
makes a significant contribution to skilled employment.3
So how has an industry that delivers all these benefits
acquired such a tarnished image and become an easy tar-
get for government intervention?
Pharmaceuticals have the characteristics of a ‘pub-
lic good’, i.e. expensive to produce but inexpensive to
reproduce. The manufacturing cost of drugs is often tiny
compared with the cost of R&D that led to the discovery.
Setting prices that attempt to recoup R&D therefore look
like corporate greed in comparison with the very low
prices charged for generics. This was exacerbated as sales
volumes dwindled and prices spiralled.
Some companies damage the industry’s overall reputa-
tion. In July 2012, GSK paid $3bn in the largest healthcare
fraud settlement in US history, having pleaded guilty to
promoting two drugs for unapproved uses. The Deputy
US Attorney General declared the settlement ‘unprece-
dented in both size and scope’. And in 2014, China made
an example of GSK when the company ignored a whis-
tle-blower who revealed extensive bribery of doctors and
investigators in a case that ended with guilty pleas and
record penalties of nearly $500m. Even more seriously,
companies were accused of putting profits before patient
safety. After the withdrawal of Vioxx, Merck was accused
of ignoring problems during product development and
publishing misleading scientific results. As a consequence,
the FDA was empowered to demand Risk Evaluation and
Mitigation Strategies (REMS) – costly additional pro-
grammes to monitor and ensure drug safety after product
approval. Soon one third of new drug approvals involved
REMS.
The industry also faces condemnation of its response
to the enormous unmet need in developing countries.
Although effective drugs and vaccines exist for many
diseases affecting millions, often their cost is beyond the
means of the people who need them. It is argued that
547
The global pharmaceutical industry: harnessing a whirlwind
companies could reallocate R&D efforts in favour of tropical
diseases, sell low-priced essential drugs and provide tech-
nology transfer. In response, Walmsley’s predecessor Sir
Andrew Witty, slashed prices in emerging markets and
together with Bill Gates persuaded the industry to donate
drugs for neglected diseases and to pool relevant patents
and make them freely available to researchers. Witty
spoke of the ‘twin poles’ of GlaxoSmithKline’s business
model: innovation – finding new drugs – and access.
Industry mergers and acquisitions
(M&A)
The pharmaceutical market is fragmented, with very
large numbers of domestic and regional players, but con-
solidated at the global level, with the top ten companies
holding 43 per cent of the market in 2017. Table 2 shows
how the industry responded to the patent cliff and declin-
ing productivity with a wave of mergers and acquisitions.
Mergers resulted in the formation of Novartis, Sanofi,
AstraZeneca and GlaxoSmithKline, while Pfizer acquired
Warner-Lambert, Pharmacia and Wyeth. A striking devel-
opment was the sudden appearance of Gilead on the
leader board – clear evidence that a single blockbuster
can still change company fortune.
One rationale for M&A was to acquire global com-
mercial reach. The acquisition of Nycomed transformed
Takeda from a Japanese player with limited geographic
reach to a global company. Companies also used M&A to
access growth segments such as biologics, vaccines and
consumer health.
Buying exciting assets could also boost growth.
Alongside the IPO market, M&A offered another way for
venture capitalists to recover the cash invested in early
stage biotechs. Those with the best programmes could
command remarkable prices, as desperate big pharmas,
Japanese companies seeking to globalise and newly rich
specialty players, all entered the fray. Public companies
were targets too: When Gilead placed its $11bn bet on
what was essentially a one-drug company with its pur-
chase of Pharmasset in late 2011, there were concerns
that it had massively overpaid, but the deal was vindi-
cated when Gilead posted the highest US sales of any
company in 2014.
Mergers were also strongly motivated by falling rev-
enue and the attraction of eliminating duplicated costs.
Within a month of merging with Wyeth, Pfizer announced
a 35 per cent reduction in R&D square footage with six
site closures. Another way to cut costs was to relocate
tax domicile. Actavis first built critical mass as a generics
player, cost-stripping and moving to Ireland in the process.
Fuelled by cheap debt, it acquired Forest Laboratories for
$25bn in 2014, along with CEO Brent Saunders. Shifting
tax domicile for Forest’s US income was quickly accretive
to earnings. Actavis then acquired Allergan (best-known
548
for Botox), for $70bn. Saunders adopted the Allergan
name, and promptly sold the generics business to Teva
for $40.5bn to cement rebranding as a specialty ‘growth’
pharma.
Where next?
At the start of 2019, the global pharmaceutical industry
faced its most challenging outlook in decades. As econ-
omies of scale no longer played a critical role, and size
undermined crucial R&D productivity, industry giants were
supplanted by much faster growing mid-sized players.
Investment in biotechs was strong, thanks to a combin-
ation of scientific breakthroughs and regulatory support
for meaningful advances. The innovation storm encom-
passing cell and gene therapy, genomics and gene editing,
‘big data’ and digital therapies was still in its infancy, with
new areas such as synthetic biology yet to reveal their true
potential. And there was a looming threat from China,
which was seeking to supplant the USA as the engine of
industry innovation. Meanwhile, with innovative pharma-
ceuticals used in ever lower volumes at ever higher prices,
becoming akin to a luxury good, pharmaceutical pricing
remained a focus of public debate, putting the whole
industry model at risk.
While most global players shed businesses to focus
on an innovative pharmaceutical core, a few pursued
a broader strategy. Roche saw value in being a leader
in both therapeutics and diagnostics, while Johnson &
Johnson chose to excel uniquely in the difficult inter-
face between therapeutics and devices. Despite activist
investor pressure to divest consumer health, Sir Andrew
Witty advocated the advantages of diversification for
GSK. High risk-reward in pharmaceuticals was balanced
by greater stability and longer product life cycles in the
other businesses.
Walmsley’s first year
Speaking at the CEO Investor Forum in September 2018
in New York, Walmsley looked back on her first year and
shared her vision for GSK: ‘to become one of the world’s
most innovative, best-performing and most trusted
healthcare companies.’ To achieve this she had replaced
9 of 13 top executives (75 per cent from within the
company) and undertaken a dramatic overhaul of R&D.
Walmsley had instituted unprecedented levels of organ-
isational discipline, implementing uniform KPIs, employee
standards and strategies across GSK’s three businesses.
She had also embarked on a cultural overhaul in which
meetings got straight to the point and the executive
team was highly visible. Even former shareholder Wood-
ford admitted he was impressed by some of Walmsley’s
moves. ‘In time,’ he commented, ‘Glaxo might be back in
the portfolio.’
 Table 2 Leading global pharmaceutical companies, 2008–2017

2008 2011 2014 2017

Sales
Share of Share of Share of Share of Growth
Sales Global Sales Global Sales Global Sales Global (2016
Company $bn Market Company $bn Market Company $bn Market Company $bn Market –2017)
Pfizer1,3 (US) 43.4 6.0% Pfizer1,3,7 (US) 56.4 6.6% Novartis (CH) 51.3 4.9% Pfizer1,3,7 (US) 52.5 4.6% −1.0%
1,3,7
Novartis (CH) 36.2 5.0% Novartis (CH) 51.6 6.0% Pfizer (US) 44.9 4.2% Novartis (CH) 49.1 4.3% +1.0%
Sanofi-Aventis4 35.6 4.9% GlaxoSmithKline2 42.8 5.0% Sanofi4,9 (Fr) 40.0 3.8% Roche8 (CH) 42.3 3.7% +5.0%
(Fr) (UK)
GlaxoSmithKline2 35.4 4.9% Merck & Co6 (US) 40.1 4.7% GlaxoSmithKline2 38.3 3.7% Sanofi4,9 (Fr) 42.1 3.7% +3.6%
(UK) (UK)
AstraZeneca5 32.5 4.5% Sanofi4,9 (Fr) 39.5 4.6% Roche8 (CH) 37.6 3.6% GlaxoSmithKline2 40.8 3.6% +8%
(UK) (UK)
Roche (CH) 30.3 4.2% AstraZeneca5 (UK) 37.0 4.3% Merck & Co6 (US) 36.5 3.5% Merck & Co5 (US) 40.1 3.5% +1%
8
Johnson & 29.4 4.1% Roche (CH) 34.9 4.1% Johnson & 36.4 3.4% Johnson & 36.3 3.2% +8.3%
Johnson (US) Johnson (US) Johnson (US)
Merck & Co (US) 26.2 3.6% Johnson & Johnson 27.7 3.2% AstraZeneca5 (UK) 26.1 2.5% Abbvie12 (US) 28.2 2.5% +10.4%
(US)
Abbott (US) 19.5 2.7% Abbott (US) 25.9 3.0% Teva (Israel) 26.0 2.5% Gilead Sciences10 25.7 2.3% −14%
(US)
Lilly (US) 19.1 2.7% Teva (Israel) 23.9 2.8% Gilead Sciences10 23.7 2.2% Amgen11 (US) 22.8 2.0% −1.0%
(US)

Notes Number Created Originating Companies

1 2000 Warner-Lambert (US) Pfizer (US)
2 2000 Glaxo Wellcome (UK) SmithKline Beecham (UK)
3 2003 Pfizer (US) Pharmacia (US)
4 2004 Sanofi (France) Aventis (France)
5 2007 AstraZeneca (UK) MedImmune (US)
6 2009 Merck (US) Schering-Plough (US)
7 2009 Pfizer (US) Wyeth (US)
8 2009 Roche (CH) Genentech (US)
9 2011 Sanofi (Fr) Genzyme (US)
10 2011 Gilead (US) Pharmasset (US)
11 2013 Amgen (US) Onyx (US)
12 2013 Abbvie (US) spun out of Abbott Laboratories (US)

549
The global pharmaceutical industry: harnessing a whirlwind
The global pharmaceutical industry: harnessing a whirlwind
Notes and references:
1. For example, see the later case study pp. 695–701 on leading generic
pharmaceuticals supplier, Teva.
2. J.A. DiMasi, H.G. Grabowski and R.A. Hansen, ‘Innovation in the
pharmaceutical industry: new estimates of R&D costs’, Journal of
Health Economics, vol. 4, no. 7 (2016), pp. 20–33.
APPENDIX: Glossary
big Pharma A group term for large globalised pharmaceut-
ical companies.
biologic or biotherapeutical Large molecules that behave
like natural substances, such as therapeutic proteins and
monoclonal antibodies.
biosimilar Molecules designed to mimic the therapeutic
effects of an original biologic agent – similar in molecular
structure but not identical.
biotech Shorthand for biotechnology, biotech companies
typically discover and develop products, which may be
diagnostics, therapeutics or vaccines. However, some
biotechs simply provide services to other companies.
blockbuster A drug that is marketed globally and has annu-
al sales exceeding $1bn.
branded generics Branded generics are original brands
that have lost patent protection and are priced similarly
to identical generic medicines, but offer the reassurance
that they are produced by an established manufacturer.
Companion diagnostic A diagnostic product to be used
alongside a drug, to identify patients that are either best
suited, or not suited, to receive the therapy
Contract manufacturing (CMO) A service organisation
that undertakes manufacturing activities on behalf of a
pharma or biotech company, thus avoiding the need for
organisation capital investment in manufacturing plants.
Contract research organization (CRO) A service organisa-
tion that undertakes laboratory or clinical research activ-
ities on behalf of a pharma or biotech company; this has
evolved from a project-based model to more strategic
relationships.
detail/detailing Detailing refers to a sales call in which a
pharmaceutical sales representative (‘rep’) discusses the
merits of a drug in a face-to-face meeting with a doctor
and may provide free samples.
direct-to-consumer (DTC) DTC advertising involves commu-
nication of promotional messages directly to consumers
via print, radio, television and the internet.
disease management initiatives These involve understand-
ing the goals of the healthcare system in addressing
a specific disease. The firm then aligns itself with the
healthcare providers, to offer an integrated service that
improves eventual disease outcomes, positioning its
products as one part of the solution.
550
3. The 2016 EU industrial R&D Investment Scoreboard, Joint Research
Centre, Directorate General Research & Innovation, European
Commission.
ethical Ethical medicines can only be obtained with a pre-
scription from a qualified medical practitioner.
evidence-based medicine Basing medical decisions, and
decisions to fund therapy, on objective evidence of
effectiveness.
Food and Drug Administration (FDA) The FDA is respon-
sible for approving drugs for marketing in the US and
regulating the US pharmaceutical market.
generic medicine A generic medicine contains exactly the
same active ingredients as the original brand, but is typical-
ly launched at less than 60 per cent of the price. Generics
manufacturers cannot use the original manufacturers
brand name. Drugs are known by both a brand and a
‘generic’ name, for example ‘Viagra’ is a Pfizer brand name;
the generic name is ‘sildenafil’. Generic names refer to the
active ingredients and are independent of manufacturer.
HCV Hepatitis C virus.
intellectual property Proprietary knowledge that can be
defended against imitation using patent law.
IPO Initial public offering – launch of a company on the
stock market.
market exclusivity Period during which a first-in-class drug
is the only product of its type on the market and faces no
class competition.
National Institute for Clinical Effectiveness (NICE) A
government-funded organisation in the UK that aims
to provide evidence-based guidelines on the optimal
and most cost-effective use of drugs and other medical
interventions.
Next Generation Biologic (NGB) A term used to describe
cell, gene and viral therapies.
new chemical entity (NCE) A completely new molecule
launched as a medical treatment for the first time.
nutraceutical A nutrition (food) product for which health
benefits are claimed.
over-the-counter OTC medicines can be purchased by con-
sumers without a prescription (OTC) medicines.
pipeline Drugs that are in development but have not yet
reached the market.
real-world evidence Data to support clinical efficacy and
safety based on, or experienced in using, medicines in
everyday use rather than a controlled clinical trial setting.