The Pharmaceutical industry in the Global Economy
Introduction
This paper summarizes the results of our global pharmaceutical industry analysis and is
intended to increase awareness of the general public *€“ investors, policy makers,
managers, employees of the companies *€“ about its current developments. The paper has
the following major goals:
1) To analyze the current situation, major challenges and the prospects of the
pharmaceutical industry;
2) To identify major players of the global pharmaceutical industry and make a comparative
analysis of their business practices and financial results;
3) To determine the relative position of the U.S. pharmaceutical companies in the global
pharmaceutical industry, as well as to reveal opportunities for further strengthening of their
positions.
The paper consists of three major parts. In the first part we present an overview of the
pharmaceutical industry as a whole *€“ its major players, current trends and challenges.
The second part focuses on a more detailed analysis of major pharmaceutical companies.
These major companies are divided into two major groups: a) companies with
headquarters in the U.S., b) foreign pharmaceutical companies with headquarters outside
of the U.S. Pharmaceutical companies are compared with other companies in the same
group; and major trends within each group are analyzed. Part 3 sums up our findings.
Part 1. Pharmaceutical industry overview.
Major players of the world pharmaceutical industry
The pharmaceutical industry is characterized by a high level of concentration with fifteen
multinational companies dominating the industry. Table 1.1 contains information about
these major pharmaceutical companies that are sorted in the order of their 2004 revenues
from the sales of pharmaceutical products. Numbers provided in this table include sales of
all subsidiaries and affiliated companies that are consolidated in annual reports of the
corresponding companies. In order to facilitate a comparison of different companies
revenues of all of them are shown in US dollars; financial data of the companies with
headquarters outside of the U.S. was converted to US dollars using average 2004 rates
provided in Table 1.2.
Table 1.1. Major pharmaceutical companies.
As Table 1.1 shows, the majority of the largest pharmaceutical companies are not
diversified. They are either concentrated exclusively on pharmaceutical products (Eli Lilly
and AstraZeneca are good examples with virtually 100% of their revenues coming from
sales of pharmaceutical products) or, although they develop and manufacture other health
care products, they still have pharmaceutical divisions as the core of their business that
provide more than 50% of their revenues. Other products manufactured by these
companies usually include medical devices, nutritional products, consumer healthcare
products and products for animal health.
Only two out of these 15 major pharmaceutical companies have revenues from sales of
pharmaceutical products that are lower than 50% of their total sales. These companies are
world giants Johnson & Johnson (which besides pharmaceutical products manufactures
consumer goods and medical devices) and Bayer which has only about 15% of its revenues
from the sales of pharmaceutical products.
Eli Lillys $13.1 billion sales figure made it the twelfth largest company *€“ with
Pharmaceutical sales considerably larger than Bayers $5.5 billion but a lot less than Pfizers
$46.1 billion.
Geographical headquarters of major pharmaceutical companies are approximately evenly
distributed between the U.S. and Western Europe with only one Asian company in the list.
Indiana is home to one of these companies, Eli Lilly. More detailed analysis of these
companies will be made in the second part of this paper.
Table 1.2. Average 2004 exchange rates.
Industry Trends
Here we examine structural changes causing significant transformations, major factors
leading to strong future sales growth, and point out the industrys strong reliance on
research and development.
Structural changes
The pharmaceutical industry is currently undergoing a period of very significant
transformation. The majority of Big Pharma companies generate high returns, thus
providing them with excess cash for further rapid growth *€“ whether organic, or through
mergers and acquisitions. Although size of the company on its own does not guarantee
success, it gives a significant advantage, especially in pharmaceutical industry. Besides
economies of scale in manufacturing, clinical trials and marketing, bigger companies can
allow investments in more research and development (R&D) projects that diversify their
future drugs portfolio and make them much more stable in the long term. As the result,
top-companies in the industry were active participants of mergers and acquisitions (M&A),
new joint ventures and spin-offs of non-core businesses.
The largest acquisitions in the industry during last years were the acquisition of Pharmacia
by Pfizer (purchase price $58 billion), and acquisition of Guidant by Johnson & Johnson
(purchase price $25 billion). Both acquisitions allowed these twoth acquisitions allowed
these 2an Pfize eleventh largest company — considerably g towast have a good time. snt do
much good t U.S.-based companies to solidify their places among the elite of the
pharmaceutical industry. European companies were even more aggressive in M&A activity
than their American competitors *€“ 3 out of 6 major European companies underwent
mergers during the last several years: GlaxoSmithKline (merger of Glaxo Wellcome and
SmithKline Beecham), AstraZeneca (merger of Astra and Zeneca) and Sanofi-Aventis
(merger of Sanofi-Synthelabo and Aventis).
Another form of structural change in the industry was establishing of new strategic
alliances and joint ventures. So far as the research and development process for each drug
take many years and requires significant investments, and the outcome of these
investments of time and financial resources remains unclear until the final approval of the
drug, Big Pharma companies are constantly looking for synergies that they can get from
cooperation with their competitors. Last years gave multiple examples of such initiatives.
For example, cooperation of Sanofi-Aventis and Bristol-Myers Squibb resulted in
production of Plavix, which is currently one of the top-selling products for each of these
companies.
Finally, Big Pharma companies in order to maintain strong sales growth and meet
profitability expectations of their shareholders were actively selling low-profitability or
non-core businesses. For example, in 2003 Merck sold its low-profitability Medco Health
Solutions that helped to increase its profitability margin. Massive sales of
non-pharmaceutical businesses by Takeda also were compatible with its strategy to
concentrate its financial resources on its core pharmaceutical business.
Major factors of future growth
The pharmaceutical industry showed high sales growth rates in the recent past, and a
number of factors suggest that this trend will continue in the future.
First, due to numerous advancements in science and technology, including those in the
health care industry, life expectancy in the developed countries has been steadily growing.
As the result, growing proportion of elderly people promises further growth of demand for
healthcare products.
Moreover, according to various studies, a significant portion of elderly population in the
United States and other countries does not receive proper treatment. For example, only
about one third of the U.S. population who requires medical therapy for high cholesterol is
actually receiving adequate treatment. As it is expected, the Medicare Prescription Drug
Improvement and Modernization Act starting from the beginning of 2006 will increase
access of senior citizens to the prescription drug coverage, thus increasing pharmaceutical
sales.
Although developing countries at the moment have a small portion of world
pharmaceutical sales, these countries also have a significant potential for the
pharmaceutical industry in the future. Fast growing economies in Asia, South America and
Central & Eastern Europe suggest an increasing solvency of population and make these
markets more and more attractive for Big Pharma companies. Further reforms of
legislation systems in the countries of these regions, especially regarding patent protection
issues, will inevitably result in growing pharmaceutical sales.
Strong emphasis on R&D
One of the distinctive characteristics of the Big Pharma companies is a very high level of
investments in research and development. On average, it takes about 10-15 years, and
millions of dollars to develop a new medicine. According to industry statistics, only about
one in ten thousand chemical compounds discovered by pharmaceutical industry
researchers proves to be both medically effective and safe enough to become an approved
medicine, and about half of all new medicines fail in the late stages of clinical trials. Not
surprisingly, according to Research and Development in Industry: 2001 report of the
National Science Foundation, in 2001 the pharmaceutical industry had one of the highest
R&D expenditures as percentage of net sales. More detailed information on this issue is
provided in the second part of this paper.
Key Challenges
The main challenges for drug companies come from four areas. First, they must deal with
competition from within and without. Second, they must manage within a world of price
controls that dictate a wide range of prices from place to place. Third, companies must be
constantly on guard for patent violations and seek legal protection in new and growing
global markets. Finally, they must manage their product pipelines so that patent expirations
do not leave them without protection for their investment.
Competition
The pharmaceutical industry currently represents a highly competitive environment. One
can distinguish three layers of competition for Big Pharma companies:
First, obviously, Big Pharma companies compete among themselves. Although not all
leading pharmaceutical companies cover all segments of pharmaceutical market, almost all
of them are active in R&D and production of drugs in the segments with the highest
potential *€“ such as treatment of infectious, cardiovascular, psychiatric or oncology
diseases.
Secondly, Big Pharma companies experience significant profit losses due to competition
