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Competitive Analysis in Pharmaceutical Industry

Eli Lilly is a global pharmaceutical company founded in 1876. The document analyzes Eli Lilly's competitive position using Porter's Five Forces and SWOT analysis. It identifies key trends in the pharmaceutical industry including mergers and acquisitions, aging populations, expiring patents, and increased regulations. These trends present both opportunities and threats for Eli Lilly. The analysis suggests Eli Lilly should pursue strategies like partnerships, emerging markets, and ongoing R&D to adapt to changes in the competitive landscape over the next 10 years.

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ELI LILLY The Competitive Advantages in Pharmaceutical Industry ● Chee Liung Wun ● Lim Shieh Chern ● Ng Yee Jie ● Terrenz Leong ● Winny Low 1
Preface  Competitive Analysis of Eli Lilly to determine its market position in pharmaceutical industry by identifying issues & challenges using SWOT analysis & Porter’s Five Forces in determinant of industry attractiveness for Eli Lilly  The future directions & strategies will be of assistance for Eli Lilly to meet the urgent & crucial challenges. 2
Content 1. Introduction • 1.1 Team Members • 1.2 The Company – Eli Lilly & Co. 2. Porter’s Five Forces (Current Situation) 3. The Key Trends in Pharmaceutical Industry • 3.1 Mergers & Acquisitions (M&A) • 3.2 Outsourcing • 3.3 Cost Control • 3.4 Expiring Patents • 3.5 Aging Populations • 3.6 Food & Drugs Authority (FDA) Regulations • 3.7 Emerging Disease 4. S.W.O.T. Analysis 5. Eli Lilly Driving Forces • 5.1 Merger and Acquisition (M&A) Emergence of New Biotech Companies • 5.2 Aging Population and New Emerging Market • 5.3 Expiration of Patents and Emergence of Generics 6. Porter’s Five Forces (New Situation) • 6.1 Rivalry Among Competing Firms in Industry • 6.2 Bargaining Power of Buyers • 6.3 Threat of Substitute Products • 6.4 Threat of New Entrants • 6.5 Bargaining Power of Suppliers 7. The Future Direction & Strategies of Eli Lilly • 7.1 Mergers & Acquisitions (M&A) • 7.2 Outsourcing • 7.3 On-going R&D for New Drugs – Emergence Market for Aging Population and New Geographic Market Penetration • 7.4 Regulatory & Government Affair Capabilities & Patents 8. Conclusion 3
Introduction Team Members The Company – Eli Lilly & Co. 4
Team Members Chee Liung Wun 2821927 Lim Shieh Chern 2821959 Ng Yee Jie 2821942 Terrenz Leong 2821913 Winny Low 2821920 5
The Company - Eli Lilly & Co.AboutUs Global, research-based pharmaceutical company and one of the world's largest corporations. Origin Founded in 1876 by a retired colonel & Pharmacist, Eli Lilly. Global headquarter in Indianapolis, United States Mission To makes medicines that help people live longer, healthier, more active lives 6
Eli Lilly & Co. • Today, marketed in 143 countries, 10th largest pharmaceutical company in world. Steadfastly remained independent, but not isolated. Global headquarters in Indianapolis, United States • Global employees’ number approximately 40,000, and its medicines are marketed in 143 countries. • Major research and development facilities in 8 countries and conducts clinical trials in more than 50 countries. 7
Senior Management 8
Porter’s Five Forces (Current Situation) Porter’s Five Forces: Determinant of Industry Profitability (Current) 9
Porter’s Five Forces (Current Situation) Threat of Substitute Products LOW (Low Value, Risk) Threat of New Entrants LOW (Patent, regulatory process & Dist System) Rivalry Among Competing Firms in Industry LOW (Different niches & Patent Protection) Bargaining Power of Buyers LOW (Insurance companies, doctors‘& patients’ buying habit) Bargaining Power of Suppliers LOW (Multiple sources) 10
Our Main Focus  To evaluate the key trends in pharmaceutical industry.  To identify how these trends apply to Eli Lilly currently.  To discover the influences of competitive dynamics within the industry for the next 10 years. 11
The Key Trends in Pharmaceutical Industry Mergers & Acquisitions (M&A) Outsourcing Cost Control Expiring Patents Aging Populations Food & Drugs Authority (FDA) Regulations Emerging Disease 12
Mergers & Acquisitions (M&A) To improve sales & increase competiveness in the healthcare industry To better position themselves to remain competitive To create mutual benefit through sharing resources & complement each other on their product pipelines To increase their shopping lists & product pipelines with a handful of highly prospective blockbuster drugs 13
Mergers & Acquisitions (M&A) No Name of Company Merger/Acquisition Year 1 Bayer and Schering AG Acquisition 2006 2 Merck KG aA and Serono Acquisition 2006/2007 3 Nycomed and Altana Pharma Acquisition 2006/2007 4 UCB and Schwarz Pharma Acquisition 2007 5 Mitsubishi and Tanabe Merger 2007 6 Schering-Plough and Organon Acquisition 2007/2008 7 AstraZeneca and Medlmmune Acquisition 2007 8 Mylan and Merck Serono Acquisition 2007 9 Eisai and MGI Pharma Acquisition 2007/2008 10 Takeda and Millennium Acquisition 2008 11 Eli Lilly and ImClone Acquisition 2008 12 Daiichi-Sankyo and Ranbaxy Acquisition 2008 13 Pfizer and Wyeth Acquisition 2008 14 Merck and Schering-Plough (currently on negotiation) Merger 2009 List of M&A undertaken between 2006 - 2009 Source : Report: Mergers and Acquisitions in the Pharmaceuticals Sector, 2009 14
Outsourcing • Dramatic & durable changes to the operating environment. • The eroding pricing power, patent expiring & tighter regulatory standards. Reasons • Companies to outsource their non- core business, such as preclinical activities to third party Resulted • The core business, cost control & speedy delivery To Focus 15
Cost Control • New generic are competing for expiring patents. • The global financial crisis Reasons • Many companies has undertaken cost cutting exercise as one of the measure Resulted • To lowing fixed cost & eliminating redundancy To Focus 16
Cost Control Top Five Layoff in Pharmaceutical Industry (2007) Total Layoff Top Five Layoff in Pharmaceutical Industry (2008) Total Layoff Pfizer 10,000 Merck 8,400 AstraZeneca 7,600 Schering-Plough 5,000 Bayer 6,100 Wyeth 5,000 Johnson & Johnson 5,000 UCB Pharma 2,000 GlaxoSmithKine 5,000 AstraZeneca 1,400 Data show the total no. of layoff in 2007 & 2008 in the pharmaceutical industry 17
Expiring Patents “Many branded-name drugs lose patent protection will leading to a WAVE of generic medications entering the market” (Quoted from Article “Flooded Generic Pipeline Looms as Branded Patents Expire”) About 183 of branded drugs will go off patent starting 2009 until 2013 $60 billion worth of drugs are going off by 2011 18
Brand Name Drug Patent Expirations 51% 17% 22% 3% 7% Brand Name Drug Patent Expirations 2006 2007 2008 Ex-2009 2009 Source: Expiring Patents Ignite Biotech Boom & Flooded Generic Pipeline Looms as Branded Patents Expire 19
Aging Populations Fact • An increasing aging population is another trend that affects the pharmaceutical industry Current • 6 countries account for 54% of the total number aged 80 years or over • China (12mil), U.S.A. (9mil), India (6mil), Japan (5mil), Germany (3mil) & Russian Federation (3mil) Future • In 2050, 6 countries will have more than 10 million people aged 80 years or over 20
Aging Populations The average expenditure for prescription drugs for people age 65 & above increased 130%, rising from $819 in 1997 to $1,914 in 2004. Source: Drug Spending Increases More Than 2.5 Times in 8 Years 21
Food & Drugs Authority (FDA) Regulations • Glaxo Smith Kline (GSK) Fail to inform physicians that studies had shown that its highly profitable drug Paxil, despite ineffective in adolescents, it also contribute to some cases of suicide Becoming stricter in approving new drugs after a series of lawsuits & scandals involving prestigious pharmaceutical firms • ImClone Erbitux drug failed to get approval from FDA in late 2001, causing the company’s stock price to plummet severely It is very common to see the stock of these companies skyrocket (or plummet) as test data is released 22
Emerging Disease Emerging diseases like SARS, Bird Flu, Aids & the recent type A Influenza H1N1 Roche who own the proprietary drug, Tamiflu that can treat bird flu & type A influenza H1N1 took full advantage of the situation Threaten human kind in the form of a global pandemic Share price of Roche skyrocketed & attracted popular & media attention to the industry 23
S.W.O.T. Analysis S.W.O.T. Analysis 24
Strengths Research-based pharmaceutical company & is one of the largest corporation Existing patent protection for a number of years on key products Marketing strength in major geographical & therapeutic areas 25
Weaknesses Patent expiring for few patent blockbuster drugs such as Zyprexa, Cymbalta & Evista in year 2010 & 2014 Discontinuation of products in the latter stages of development 26
Opportunities Emergence of global markets (China, Vietnam, etc) & aging population Decreasing development time through favorable R&D collaborations & internal efforts 27
Threats Expiring of patent protection for a number of years on key products Increase in growing of generic market Government policy to support generic products 28
Eli Lilly Driving Forces Merger and Acquisition (M&A) Emergence of New Biotech Companies Aging Population and New Emerging Market Expiration of Patents and Emergence of Generics 29
M&A Emergence of New Biotech Companies Current trend of M&A has changed the pharmaceutical landscape dramatically With emergence of many Behemoth pharmaceutical firms like Pfizer & Merck which has become stronger in term of product development, market penetration, etc Many new biotech companies that have developed some highly potential innovated & niche products. This has hastened the need to speed up the development of products in the pipeline The stricter regulation of FDA that tend to slow down the development of drugs in the pipeline also has resulted the Company to embark on the similar exercise in order to remain competitive in the market 30
Aging Population and New Emerging Market The large pool of “growing” market that focus on diagnosis & treatment of illness for old age people, ie, diabetics, Alzheimer or cardiovascular drugs. Zydus Cadila, an India based drug maker on the R&D conducted the joint research program, which could continue for up to 6 years for developing drugs for cardiovascular diseases As part of the agreement, Lilly will have the option to license the result at different stage If Lilly is able to successfully develop the product, it will help the Company to increase their product pipeline & through patent the drug, the Company will able to secure the sale volume at least for another 15-20 years Source: www.ibtimes.co.in/articles/20090401/cadila-healthcare-inks-research-development 31
Expiration of Patents and Emergence of Generics • The oncoming patent expirations & generic pressure • Sales of the 3 blockbuster drugs were raked in 2006 for a combined $6.8bil, nearly half of the Company’s total revenue • The fierce emergence of generics which increase pricing pressures and spiraling drug development costs New Challenges • Between 2011 & 2014, Lilly will lose patents on 3 big name drugs: Zyprexa, Cymbalta and Evista Patents Lost Source: Eli Lilly signals vigour for outsourcing 32
Porter’s Five Forces (New Situation) Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products Threat of New Entrants Bargaining Power of Suppliers 33
Porter’s Five Forces (New Situation) Threat of Substitute Products MODERATE (OTC alternative) Threat of New Entrants MODERATE (Increased Biotech Firms) Rivalry Among Competing Firms in Industry MODERATE (Generics more common, price pressure) Bargaining Power of Buyers MODERATE (Buyer Consolidate, Large governmnet players & hospitals price sensitive) Bargaining Power of Suppliers MODERATE (Multiple sources) 34
Rivalry Among Competing Firms in Industry • To explore a broader differentiation strategy & attract wide range of customer • Increase premium price, increase unit sales & gain buyer brand loyalty Explore • Increase R&D activities • Incorporate features that raise product performance • To avoid replacing old products R&D 35
Rivalry Among Competing Firms in Industry ● Competes against the Pfizer’s Viagra in the erectile dysfunction market. ● CIALIS’ has 36 hours potency as compared to Viagra’s 4 hours. ● Lesser side effects & lasts longer in the body to increase spontaneity. ● The longer duration of effect is ideal for partners who seek for freedom & flexibility to choose the right moment for sexual activity. CIALIS Source: The Edge, 2005 36
Bargaining Power of Buyers Doctors’ bill are increasing & outpacing the general inflation rate each year worldwide. The global medical inflation average 10% each year. Generic drugs can help patient save between 60% to 90% on their medical bills according to a recent study by the school of Pharmaceutical Sciences at USM, Malaysia) Government & private hospitals are now relying more on generic drugs to mitigate the effects of rising medical costs Patient looks for cheaper alternative like generic drugs to ease their burden, e.g., India is famous for its generic drugs & biosimilars. Patent law since 1970s had allowed scientists could take a brand name drug & reverse-engineer it to create similar drug with the same effects. 37
Threat of Substitute Products Self-care lifestyle • Demands of expensive patented drugs are expected to decline Modernizing traditional Chinese Medicine (TCM) • China recently announced a US$10 billion “Mega New Drug Development Programme”, with the aim of growing its drug development industry over the next 13 years, which accounts for 38% of medical products produced in China in 2007 • Cheaper cost 38
Threat of Substitute Products  Burrill stated 3 forces that will shape the healthcare industry: Molecular & personalized medicine Wider access to lower costs and high quality healthcare Proficient use of health information 39
Threat of Substitute Products Molecular & personalized medicine • Genetic screening can identify people risk profile for lethal diseases • Advances in molecular biology and genomics have shown that the efficacy of personalized medicine can be improved by taking a holistic view of the person • Knowing well ahead the conditions and heritage of body will translate to prevention and lower healthcare bills Wider access to lower costs and high quality healthcare • In next few years, the patents of blockbuster drugs from major pharmaceuticals will expire • This could signal a boom in generic drugs in the market, which means that drugs will get cheaper and be available to more people Proficient use of health information • Monitoring devices can be implanted or worn and data can be transferred to secure systems, which allow doctors to effectively monitor and advice patients • Preventive measures are better than wait until someone is sick and then only start treating them 40
Threat of New Entrants The threat of new entry by biotech companies is increasing. Highly potential innovative products being developed by the very agile & innovative biotech companies. It may only take a super blockbuster drug for these small biotech firms to change the entire pharmaceutical industry landscape. Fortunately due to their small size, very few biotech firms have managed to develop their own marketing & distribution channels. 41
Bargaining Power of Suppliers Suppliers have strong bargaining power because they can ensure quality materials supplies under the purview of regulated body Active Phamaceutical Ingredient Committee (APIC), who is a section of The European Chemical Industry Council (Cefic) guards the European pharmaceutical producers to ensure they do not purchase counterfeit or rogue ingredients Penalty is extremely heavy of any offender. Without a patent protection, ethical pharmaceutical companies will not be able to compete with generic producers from China or India who have less stringent law on source of raw materials Therefore, Lilly has established a strong business relationship with a few suppliers so that it will not succumb to bargaining power of suppliers Source: Oldenhof, 2008 42
The Future Direction & Strategies of Eli Lilly Mergers & Acquisitions (M&A) Outsourcing On-going R&D for New Drugs – Emergence Market for Aging Population & New Geographic Market Penetration Regulatory & Government Affair Capabilities & Patents 43
Mergers & Acquisitions (M&A) Future Directions • Joint venture • Acquired small biotechnology companies which have products that complement with Lilly’s product Recent Pharmaprojects • November 2008, Lilly acquired ImClone System (lacks marketing & distribution channels) as wholly-owned subsidiary • ImClone brought four preclinical, two Phase I, two Phase II, one Phase III & one launched anticancer MSb to the table Source : Company Analysis – M&A in 2009 44
Mergers & Acquisitions (M&A) Future Directions • Tapping on the skills & knowledge within 2 firms. • M&A helps to eliminate competitors. • Acquiring a biotech firm that owns a proprietary drug that competes in the same market segment. Recent Pharmaprojects • Lilly acquired PCS Health Systems for $4 billion. • A prescription benefits- management company (PBM) which provides prescription drugs to health maintenance organizations & the employees of large corporations. Source: Nichols, 1994 45
Outsourcing  Company involved outsourcing exercise basically due to reasons as follows: Outsiders can perform certain activities better or cheaper Allows a firm to focus its energies on those activities at the centre of its expertise or core competencies that are the most critical to its competitive and financial success Source: Thompson, Strickland III & Gamble, 2005, p. 175 46
Outsourcing • To fill up its dwindling new product pipeline to accelerate recovery from many impending patent expirations • To provides competitive services & innovative capabilities from the talent pool • To fully utilize overseas market like, whose R&D costs continue to escalate • To diversify operation strategies to handle FDA who required clinical trials to target much larger populations instead of sub-populations resulted slowdown in the new products launches • To operate in a leaner shape, forming itself into a “network structure” that made up of 3rd party service providers & contract firms Benefits • To outsource non-core activities, such as cleaners, some of the manufacturing section, sales representatives & IT works Future Directions 47
Outsourcing • China & India has a strong base of CROs (contract research organizations) & CMO (contract manufacturing organizations) to support the changing business models of western companies • The jobs are human clinical trial testing, side effect testing, product life cycle testing & chemical trial testing Benefits • Outsourced the non-competitive or non competencies job functions to India & China Recent Action 48
On-going R&D for New Drugs Future Direction • The emergence aging population market Strategies • To focus on R&D for aging diseases drugs, such as cardiovascular drugs • To acquire smaller pharmaceutical companies with the expertise to develop drugs for diabetics & Alzheimer to shorten the drug launch time Source : Company Analysis – M&A in 2009 49
On-going R&D for New Drugs Future Direction • China, Vietnam market could emerging middle class income groups Strategies • To explore overseas market to increase its earning through increase in sales. • To facilitate the access to penetrate the local market besides taking advantages of their skill, knowledge & expertise. • Recent Lilly’s project: developing drugs for cardiovascular diseases. Source : Company Analysis – M&A in 2009 50
Regulatory & Government Affair Capabilities & Patents Strategies Lilly has developed its regulatory & government affair capabilities by external recruitment of regulatory & government affair personals to work with & lobby government agencies like FDA & Health departments on drug regulatory related issues Future Directions To protect patent & prevent multibillion lawsuits on ethical issues 51
Regulatory & Government Affair Capabilities & Patents Strategies Lilly has placed an Adverse Drug Experience reporting monitoring system, which facilitates further remedial actions like product recalls. New policies on ethical interaction & promotion of pharmaceutical products for all its employees Future Directions To establish itself as an ethical pharmaceutical firm 52
Regulatory & Government Affair Capabilities & Patents Strategies Lily could undertake to ease the impact of patent expiration are listed in next slide… Future Directions To increase in distribution channels To achieve economic of scale & allow Lilly to sell drugs at cheaper rate to the developing countries such as India & 3rd world countries 53
Regulatory & Government Affair Capabilities & Patents  Maximize promotional activities to strengthen.  Acquisition or partnership with the generic firms in order to bring out their own generic version of the drug  Heavy discount to products soon patent expiring drugs to gain patient & physician loyalty.  Re-engineer the products. One way of doing it is to amend the different dosage strength.  Switch products from prescription to over-the-counter (OTC) status. For example, SmithKline-Beecham create a milder version of Tagamet that does not require prescription to counter the emergence of generic drug. Source : Agrawal et. al., 1997 Special Strategies… 54
Conclusion • Besides, smaller biotech firms that are increasingly agile & innovative must also be guarded, as it may only take a super blockbuster drug for these small biotech firms to change the entire pharmaceutical industry • Although there are still many untapped potential, pharmaceuticals cannot expect profits like the golden era of pharmaceutical industry in the 1990s, but be prepared for a moderate to serious decline in profits • Established & global expertise of firms including Lilly & its rivals like Pfizer, GSK and Merck which manufacture proprietary drugs have a much better chance to reap emerging global opportunities as compared to firms producing generics • Pharmaceutical Industry although will experience more competition & challenges which will affect its profitability, its still a profitable industry to venture in relative to many other industries Profitable Industry Good Opportunities Beware of smaller biotech firms Moderate to Decline Profits
56

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Competitive Analysis in Pharmaceutical Industry

  • 1.
    ELI LILLY The Competitive Advantagesin Pharmaceutical Industry ● Chee Liung Wun ● Lim Shieh Chern ● Ng Yee Jie ● Terrenz Leong ● Winny Low 1
  • 2.
    Preface  Competitive Analysisof Eli Lilly to determine its market position in pharmaceutical industry by identifying issues & challenges using SWOT analysis & Porter’s Five Forces in determinant of industry attractiveness for Eli Lilly  The future directions & strategies will be of assistance for Eli Lilly to meet the urgent & crucial challenges. 2
  • 3.
    Content 1. Introduction • 1.1Team Members • 1.2 The Company – Eli Lilly & Co. 2. Porter’s Five Forces (Current Situation) 3. The Key Trends in Pharmaceutical Industry • 3.1 Mergers & Acquisitions (M&A) • 3.2 Outsourcing • 3.3 Cost Control • 3.4 Expiring Patents • 3.5 Aging Populations • 3.6 Food & Drugs Authority (FDA) Regulations • 3.7 Emerging Disease 4. S.W.O.T. Analysis 5. Eli Lilly Driving Forces • 5.1 Merger and Acquisition (M&A) Emergence of New Biotech Companies • 5.2 Aging Population and New Emerging Market • 5.3 Expiration of Patents and Emergence of Generics 6. Porter’s Five Forces (New Situation) • 6.1 Rivalry Among Competing Firms in Industry • 6.2 Bargaining Power of Buyers • 6.3 Threat of Substitute Products • 6.4 Threat of New Entrants • 6.5 Bargaining Power of Suppliers 7. The Future Direction & Strategies of Eli Lilly • 7.1 Mergers & Acquisitions (M&A) • 7.2 Outsourcing • 7.3 On-going R&D for New Drugs – Emergence Market for Aging Population and New Geographic Market Penetration • 7.4 Regulatory & Government Affair Capabilities & Patents 8. Conclusion 3
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  • 5.
    Team Members Chee LiungWun 2821927 Lim Shieh Chern 2821959 Ng Yee Jie 2821942 Terrenz Leong 2821913 Winny Low 2821920 5
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    The Company -Eli Lilly & Co.AboutUs Global, research-based pharmaceutical company and one of the world's largest corporations. Origin Founded in 1876 by a retired colonel & Pharmacist, Eli Lilly. Global headquarter in Indianapolis, United States Mission To makes medicines that help people live longer, healthier, more active lives 6
  • 7.
    Eli Lilly &Co. • Today, marketed in 143 countries, 10th largest pharmaceutical company in world. Steadfastly remained independent, but not isolated. Global headquarters in Indianapolis, United States • Global employees’ number approximately 40,000, and its medicines are marketed in 143 countries. • Major research and development facilities in 8 countries and conducts clinical trials in more than 50 countries. 7
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    Porter’s Five Forces(Current Situation) Porter’s Five Forces: Determinant of Industry Profitability (Current) 9
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    Porter’s Five Forces(Current Situation) Threat of Substitute Products LOW (Low Value, Risk) Threat of New Entrants LOW (Patent, regulatory process & Dist System) Rivalry Among Competing Firms in Industry LOW (Different niches & Patent Protection) Bargaining Power of Buyers LOW (Insurance companies, doctors‘& patients’ buying habit) Bargaining Power of Suppliers LOW (Multiple sources) 10
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    Our Main Focus To evaluate the key trends in pharmaceutical industry.  To identify how these trends apply to Eli Lilly currently.  To discover the influences of competitive dynamics within the industry for the next 10 years. 11
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    The Key Trendsin Pharmaceutical Industry Mergers & Acquisitions (M&A) Outsourcing Cost Control Expiring Patents Aging Populations Food & Drugs Authority (FDA) Regulations Emerging Disease 12
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    Mergers & Acquisitions(M&A) To improve sales & increase competiveness in the healthcare industry To better position themselves to remain competitive To create mutual benefit through sharing resources & complement each other on their product pipelines To increase their shopping lists & product pipelines with a handful of highly prospective blockbuster drugs 13
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    Mergers & Acquisitions(M&A) No Name of Company Merger/Acquisition Year 1 Bayer and Schering AG Acquisition 2006 2 Merck KG aA and Serono Acquisition 2006/2007 3 Nycomed and Altana Pharma Acquisition 2006/2007 4 UCB and Schwarz Pharma Acquisition 2007 5 Mitsubishi and Tanabe Merger 2007 6 Schering-Plough and Organon Acquisition 2007/2008 7 AstraZeneca and Medlmmune Acquisition 2007 8 Mylan and Merck Serono Acquisition 2007 9 Eisai and MGI Pharma Acquisition 2007/2008 10 Takeda and Millennium Acquisition 2008 11 Eli Lilly and ImClone Acquisition 2008 12 Daiichi-Sankyo and Ranbaxy Acquisition 2008 13 Pfizer and Wyeth Acquisition 2008 14 Merck and Schering-Plough (currently on negotiation) Merger 2009 List of M&A undertaken between 2006 - 2009 Source : Report: Mergers and Acquisitions in the Pharmaceuticals Sector, 2009 14
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    Outsourcing • Dramatic &durable changes to the operating environment. • The eroding pricing power, patent expiring & tighter regulatory standards. Reasons • Companies to outsource their non- core business, such as preclinical activities to third party Resulted • The core business, cost control & speedy delivery To Focus 15
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    Cost Control • Newgeneric are competing for expiring patents. • The global financial crisis Reasons • Many companies has undertaken cost cutting exercise as one of the measure Resulted • To lowing fixed cost & eliminating redundancy To Focus 16
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    Cost Control Top FiveLayoff in Pharmaceutical Industry (2007) Total Layoff Top Five Layoff in Pharmaceutical Industry (2008) Total Layoff Pfizer 10,000 Merck 8,400 AstraZeneca 7,600 Schering-Plough 5,000 Bayer 6,100 Wyeth 5,000 Johnson & Johnson 5,000 UCB Pharma 2,000 GlaxoSmithKine 5,000 AstraZeneca 1,400 Data show the total no. of layoff in 2007 & 2008 in the pharmaceutical industry 17
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    Expiring Patents “Many branded-namedrugs lose patent protection will leading to a WAVE of generic medications entering the market” (Quoted from Article “Flooded Generic Pipeline Looms as Branded Patents Expire”) About 183 of branded drugs will go off patent starting 2009 until 2013 $60 billion worth of drugs are going off by 2011 18
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    Brand Name DrugPatent Expirations 51% 17% 22% 3% 7% Brand Name Drug Patent Expirations 2006 2007 2008 Ex-2009 2009 Source: Expiring Patents Ignite Biotech Boom & Flooded Generic Pipeline Looms as Branded Patents Expire 19
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    Aging Populations Fact • Anincreasing aging population is another trend that affects the pharmaceutical industry Current • 6 countries account for 54% of the total number aged 80 years or over • China (12mil), U.S.A. (9mil), India (6mil), Japan (5mil), Germany (3mil) & Russian Federation (3mil) Future • In 2050, 6 countries will have more than 10 million people aged 80 years or over 20
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    Aging Populations The averageexpenditure for prescription drugs for people age 65 & above increased 130%, rising from $819 in 1997 to $1,914 in 2004. Source: Drug Spending Increases More Than 2.5 Times in 8 Years 21
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    Food & DrugsAuthority (FDA) Regulations • Glaxo Smith Kline (GSK) Fail to inform physicians that studies had shown that its highly profitable drug Paxil, despite ineffective in adolescents, it also contribute to some cases of suicide Becoming stricter in approving new drugs after a series of lawsuits & scandals involving prestigious pharmaceutical firms • ImClone Erbitux drug failed to get approval from FDA in late 2001, causing the company’s stock price to plummet severely It is very common to see the stock of these companies skyrocket (or plummet) as test data is released 22
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    Emerging Disease Emerging diseases likeSARS, Bird Flu, Aids & the recent type A Influenza H1N1 Roche who own the proprietary drug, Tamiflu that can treat bird flu & type A influenza H1N1 took full advantage of the situation Threaten human kind in the form of a global pandemic Share price of Roche skyrocketed & attracted popular & media attention to the industry 23
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    Strengths Research-based pharmaceutical company &is one of the largest corporation Existing patent protection for a number of years on key products Marketing strength in major geographical & therapeutic areas 25
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    Weaknesses Patent expiring forfew patent blockbuster drugs such as Zyprexa, Cymbalta & Evista in year 2010 & 2014 Discontinuation of products in the latter stages of development 26
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    Opportunities Emergence of globalmarkets (China, Vietnam, etc) & aging population Decreasing development time through favorable R&D collaborations & internal efforts 27
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    Threats Expiring of patentprotection for a number of years on key products Increase in growing of generic market Government policy to support generic products 28
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    Eli Lilly DrivingForces Merger and Acquisition (M&A) Emergence of New Biotech Companies Aging Population and New Emerging Market Expiration of Patents and Emergence of Generics 29
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    M&A Emergence ofNew Biotech Companies Current trend of M&A has changed the pharmaceutical landscape dramatically With emergence of many Behemoth pharmaceutical firms like Pfizer & Merck which has become stronger in term of product development, market penetration, etc Many new biotech companies that have developed some highly potential innovated & niche products. This has hastened the need to speed up the development of products in the pipeline The stricter regulation of FDA that tend to slow down the development of drugs in the pipeline also has resulted the Company to embark on the similar exercise in order to remain competitive in the market 30
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    Aging Population andNew Emerging Market The large pool of “growing” market that focus on diagnosis & treatment of illness for old age people, ie, diabetics, Alzheimer or cardiovascular drugs. Zydus Cadila, an India based drug maker on the R&D conducted the joint research program, which could continue for up to 6 years for developing drugs for cardiovascular diseases As part of the agreement, Lilly will have the option to license the result at different stage If Lilly is able to successfully develop the product, it will help the Company to increase their product pipeline & through patent the drug, the Company will able to secure the sale volume at least for another 15-20 years Source: www.ibtimes.co.in/articles/20090401/cadila-healthcare-inks-research-development 31
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    Expiration of Patentsand Emergence of Generics • The oncoming patent expirations & generic pressure • Sales of the 3 blockbuster drugs were raked in 2006 for a combined $6.8bil, nearly half of the Company’s total revenue • The fierce emergence of generics which increase pricing pressures and spiraling drug development costs New Challenges • Between 2011 & 2014, Lilly will lose patents on 3 big name drugs: Zyprexa, Cymbalta and Evista Patents Lost Source: Eli Lilly signals vigour for outsourcing 32
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    Porter’s Five Forces(New Situation) Rivalry Among Competing Firms in Industry Bargaining Power of Buyers Threat of Substitute Products Threat of New Entrants Bargaining Power of Suppliers 33
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    Porter’s Five Forces(New Situation) Threat of Substitute Products MODERATE (OTC alternative) Threat of New Entrants MODERATE (Increased Biotech Firms) Rivalry Among Competing Firms in Industry MODERATE (Generics more common, price pressure) Bargaining Power of Buyers MODERATE (Buyer Consolidate, Large governmnet players & hospitals price sensitive) Bargaining Power of Suppliers MODERATE (Multiple sources) 34
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    Rivalry Among CompetingFirms in Industry • To explore a broader differentiation strategy & attract wide range of customer • Increase premium price, increase unit sales & gain buyer brand loyalty Explore • Increase R&D activities • Incorporate features that raise product performance • To avoid replacing old products R&D 35
  • 36.
    Rivalry Among CompetingFirms in Industry ● Competes against the Pfizer’s Viagra in the erectile dysfunction market. ● CIALIS’ has 36 hours potency as compared to Viagra’s 4 hours. ● Lesser side effects & lasts longer in the body to increase spontaneity. ● The longer duration of effect is ideal for partners who seek for freedom & flexibility to choose the right moment for sexual activity. CIALIS Source: The Edge, 2005 36
  • 37.
    Bargaining Power ofBuyers Doctors’ bill are increasing & outpacing the general inflation rate each year worldwide. The global medical inflation average 10% each year. Generic drugs can help patient save between 60% to 90% on their medical bills according to a recent study by the school of Pharmaceutical Sciences at USM, Malaysia) Government & private hospitals are now relying more on generic drugs to mitigate the effects of rising medical costs Patient looks for cheaper alternative like generic drugs to ease their burden, e.g., India is famous for its generic drugs & biosimilars. Patent law since 1970s had allowed scientists could take a brand name drug & reverse-engineer it to create similar drug with the same effects. 37
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    Threat of SubstituteProducts Self-care lifestyle • Demands of expensive patented drugs are expected to decline Modernizing traditional Chinese Medicine (TCM) • China recently announced a US$10 billion “Mega New Drug Development Programme”, with the aim of growing its drug development industry over the next 13 years, which accounts for 38% of medical products produced in China in 2007 • Cheaper cost 38
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    Threat of SubstituteProducts  Burrill stated 3 forces that will shape the healthcare industry: Molecular & personalized medicine Wider access to lower costs and high quality healthcare Proficient use of health information 39
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    Threat of SubstituteProducts Molecular & personalized medicine • Genetic screening can identify people risk profile for lethal diseases • Advances in molecular biology and genomics have shown that the efficacy of personalized medicine can be improved by taking a holistic view of the person • Knowing well ahead the conditions and heritage of body will translate to prevention and lower healthcare bills Wider access to lower costs and high quality healthcare • In next few years, the patents of blockbuster drugs from major pharmaceuticals will expire • This could signal a boom in generic drugs in the market, which means that drugs will get cheaper and be available to more people Proficient use of health information • Monitoring devices can be implanted or worn and data can be transferred to secure systems, which allow doctors to effectively monitor and advice patients • Preventive measures are better than wait until someone is sick and then only start treating them 40
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    Threat of NewEntrants The threat of new entry by biotech companies is increasing. Highly potential innovative products being developed by the very agile & innovative biotech companies. It may only take a super blockbuster drug for these small biotech firms to change the entire pharmaceutical industry landscape. Fortunately due to their small size, very few biotech firms have managed to develop their own marketing & distribution channels. 41
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    Bargaining Power ofSuppliers Suppliers have strong bargaining power because they can ensure quality materials supplies under the purview of regulated body Active Phamaceutical Ingredient Committee (APIC), who is a section of The European Chemical Industry Council (Cefic) guards the European pharmaceutical producers to ensure they do not purchase counterfeit or rogue ingredients Penalty is extremely heavy of any offender. Without a patent protection, ethical pharmaceutical companies will not be able to compete with generic producers from China or India who have less stringent law on source of raw materials Therefore, Lilly has established a strong business relationship with a few suppliers so that it will not succumb to bargaining power of suppliers Source: Oldenhof, 2008 42
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    The Future Direction& Strategies of Eli Lilly Mergers & Acquisitions (M&A) Outsourcing On-going R&D for New Drugs – Emergence Market for Aging Population & New Geographic Market Penetration Regulatory & Government Affair Capabilities & Patents 43
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    Mergers & Acquisitions(M&A) Future Directions • Joint venture • Acquired small biotechnology companies which have products that complement with Lilly’s product Recent Pharmaprojects • November 2008, Lilly acquired ImClone System (lacks marketing & distribution channels) as wholly-owned subsidiary • ImClone brought four preclinical, two Phase I, two Phase II, one Phase III & one launched anticancer MSb to the table Source : Company Analysis – M&A in 2009 44
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    Mergers & Acquisitions(M&A) Future Directions • Tapping on the skills & knowledge within 2 firms. • M&A helps to eliminate competitors. • Acquiring a biotech firm that owns a proprietary drug that competes in the same market segment. Recent Pharmaprojects • Lilly acquired PCS Health Systems for $4 billion. • A prescription benefits- management company (PBM) which provides prescription drugs to health maintenance organizations & the employees of large corporations. Source: Nichols, 1994 45
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    Outsourcing  Company involvedoutsourcing exercise basically due to reasons as follows: Outsiders can perform certain activities better or cheaper Allows a firm to focus its energies on those activities at the centre of its expertise or core competencies that are the most critical to its competitive and financial success Source: Thompson, Strickland III & Gamble, 2005, p. 175 46
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    Outsourcing • To fillup its dwindling new product pipeline to accelerate recovery from many impending patent expirations • To provides competitive services & innovative capabilities from the talent pool • To fully utilize overseas market like, whose R&D costs continue to escalate • To diversify operation strategies to handle FDA who required clinical trials to target much larger populations instead of sub-populations resulted slowdown in the new products launches • To operate in a leaner shape, forming itself into a “network structure” that made up of 3rd party service providers & contract firms Benefits • To outsource non-core activities, such as cleaners, some of the manufacturing section, sales representatives & IT works Future Directions 47
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    Outsourcing • China &India has a strong base of CROs (contract research organizations) & CMO (contract manufacturing organizations) to support the changing business models of western companies • The jobs are human clinical trial testing, side effect testing, product life cycle testing & chemical trial testing Benefits • Outsourced the non-competitive or non competencies job functions to India & China Recent Action 48
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    On-going R&D forNew Drugs Future Direction • The emergence aging population market Strategies • To focus on R&D for aging diseases drugs, such as cardiovascular drugs • To acquire smaller pharmaceutical companies with the expertise to develop drugs for diabetics & Alzheimer to shorten the drug launch time Source : Company Analysis – M&A in 2009 49
  • 50.
    On-going R&D forNew Drugs Future Direction • China, Vietnam market could emerging middle class income groups Strategies • To explore overseas market to increase its earning through increase in sales. • To facilitate the access to penetrate the local market besides taking advantages of their skill, knowledge & expertise. • Recent Lilly’s project: developing drugs for cardiovascular diseases. Source : Company Analysis – M&A in 2009 50
  • 51.
    Regulatory & GovernmentAffair Capabilities & Patents Strategies Lilly has developed its regulatory & government affair capabilities by external recruitment of regulatory & government affair personals to work with & lobby government agencies like FDA & Health departments on drug regulatory related issues Future Directions To protect patent & prevent multibillion lawsuits on ethical issues 51
  • 52.
    Regulatory & GovernmentAffair Capabilities & Patents Strategies Lilly has placed an Adverse Drug Experience reporting monitoring system, which facilitates further remedial actions like product recalls. New policies on ethical interaction & promotion of pharmaceutical products for all its employees Future Directions To establish itself as an ethical pharmaceutical firm 52
  • 53.
    Regulatory & GovernmentAffair Capabilities & Patents Strategies Lily could undertake to ease the impact of patent expiration are listed in next slide… Future Directions To increase in distribution channels To achieve economic of scale & allow Lilly to sell drugs at cheaper rate to the developing countries such as India & 3rd world countries 53
  • 54.
    Regulatory & GovernmentAffair Capabilities & Patents  Maximize promotional activities to strengthen.  Acquisition or partnership with the generic firms in order to bring out their own generic version of the drug  Heavy discount to products soon patent expiring drugs to gain patient & physician loyalty.  Re-engineer the products. One way of doing it is to amend the different dosage strength.  Switch products from prescription to over-the-counter (OTC) status. For example, SmithKline-Beecham create a milder version of Tagamet that does not require prescription to counter the emergence of generic drug. Source : Agrawal et. al., 1997 Special Strategies… 54
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    Conclusion • Besides, smallerbiotech firms that are increasingly agile & innovative must also be guarded, as it may only take a super blockbuster drug for these small biotech firms to change the entire pharmaceutical industry • Although there are still many untapped potential, pharmaceuticals cannot expect profits like the golden era of pharmaceutical industry in the 1990s, but be prepared for a moderate to serious decline in profits • Established & global expertise of firms including Lilly & its rivals like Pfizer, GSK and Merck which manufacture proprietary drugs have a much better chance to reap emerging global opportunities as compared to firms producing generics • Pharmaceutical Industry although will experience more competition & challenges which will affect its profitability, its still a profitable industry to venture in relative to many other industries Profitable Industry Good Opportunities Beware of smaller biotech firms Moderate to Decline Profits
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Editor's Notes

  • #31 Many new biotech companies that have developed some highly potential innovated & niche products. This has added on to the already very fierce competition in the pharmaceutical industry Hastened the need to speed up the development of products in the pipeline.
  • #36 Statistic shows after 10 or 12 years in general, patents expire & lower-priced generics come in, wiping out the revenues of blockbuster drugs in a matter of weeks.
  • #46 PBMs provide drugs to large corporations at lower costs because of their high volume of sales & their power to negotiate low prices with pharmaceutical companies.