The Pharmaceutical Industry 2012. A comprehensive Trend Analysis

1. The PharmaceuticalIndustry 2012. A comprehensive Trend Analysis Master’s Thesis Defense Christian Gruber MD Stein, July 20th 2012

2. Abstract Introduction The pharmaceutical industry will face unprecedented challenges in 2012 and the forthcoming years due to macro shocks and changes in external stakeholders. Methods A search in annual reports of big pharmaceutical companies and the PriceWaterhouseCoopers’ “Pharma 2020” series yielded common strengths, weaknesses, opportunities and threats. These were incorporated into the strategic pathway framework (Angwin D et al.) to establish a narrative trend analysis. Results Macro shocks, movers and shakers have been described and the industry terrain shaped. Corporate strategies have been adapted. Within the inner layers of the strategic pathway, however, more and more gaps become apparent with respect to future positioning, dynamic adaptive abilities, change management or corporate sustainability. Conclusion The pharmaceutical industry in 2012 is blocked early in the strategic pathway. A de-maturation through innovation has not yet been achieved. Keywords Pharmaceutical Industry, Strategic Pathway, Business Environment | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

3. Background Will the years 2012 and 2013 turn out to be what is expected for the pharmaceutical industry by many insiders as well as observers – two annihorribiles? | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

4. Objectives The objectives of the present Master’s Thesis include • identifying current external influences and internal prerequisites of big pharmaceutical companies, • pointing out their impact on corporate strategy and • highlighting strategic options for pharmaceutical firms and their forms or options of implementation. • Primary objective of this work, however, is to analyze where exactly the pharmaceutical industry stands in this strategic change adaption process. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

5. Methodology A search by keywords for overlapping topics in the annual reports 2011of 6 large multinational pharmaceutical companies of differing domicile (Pfizer [US], Novartis [SUI], Roche [SUI], Merck, Sharp & Dome [US], Takeda [JP], Sanofi Aventis [FR]) yielded 21 themes of interest which have been grouped within the SWOT analysis and double checked as well as substantiated by taking reference from the Pharma 2020 series, a respected series of analytical reports published by PriceWaterhouseCoopers in 2007. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

6. Methodology The resulting SWOT analysis has been used as a starting point for further strategic analysis. The different factors considered in this primary analysis have then been transferred into the strategic pathway framework as proposed and published by Angwin D, Cummings S and Smith C(“The Strategy Pathfinder: Core Concepts and Micro-Cases”). Although this is a general framework applicable to various businesses, in the present work, is has been entirely applied to and filled with pharmaceutical industry specific content. The trend analysis presented here is primarily applicable to large multinational pharmaceutical companies (“Big Pharma”). Angwin, D.; Cummings, S.; Smith, C. (2007): The Strategy Pathfinder: Core Concepts and Micro Case. 1st eds, Malden: Blackwell Publishing Ltd. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

7. Macro Shocks – the Federal DebtCrisis In the near future, there will be sustained and unprecedented pressure on drug prices in almost all of the major markets. For the time being the situation needs to be divided into two scenarios. There are states which are immediately infected with the debt crisis and others which have cut down on drug prices in an ongoing process in a more preventive intention. UBS Quotes (2012): Union Bank of Switzerland, Zurich. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

8. Macro Shocks – GenericCompetition In an environment of underfunded health care systems incentives or even obligations to prescribe generics have been implemented in many national legislations. Sales of the original product can be expected to decline rapidly by 70%-90% within 3-12 months. Even before patent expiry sales tend to decline because companies would cut back on marketing measures (e.g. withdraw sales force support). Upon expiration of the patent companies usually decrease the price of the original to generic level voluntarily. Certain measures can be taken to soften the declining curve at the end of the life cycle. Hoffmann-La Roche (2011) | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

9. Macro Shocks - Demographics Most industrial nations are aging societies. The baby boomer generation retires now. The consequences of longevity are increased morbidity which generally increases the pool of end consumers for pharmaceutical products. The emerging growth countries will undergo a similar demographic development as the industrialized nations in 40-50 years time. Basically, in all developed and emerging countries life expectancy at birth is on the rise and has surpassed an average of 80 years in many countries. Cancer Research UK. Cancer incidence by age - UK statistics 2012, London. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

10. Macro Shocks - Demographics When considering the example of diabetes type II, a disease classically linked to aging, over nutrition and life style, an important global phenomenon can be observed. Although western nations still lead the list of highest prevalence it is obvious that the emerging growth nations catch up. If this development continues as projected millions of new diabetics will be added from China and India creating a world wide epidemy. With the creation of wealth and the emergence of middle classes in these emerging growth countries millions of people adapt “western” life styles and become prone to acquiring typical “western” diseases. Diabetes Atlas. (2011): Diabetes Map. 5th edition, Brussels, International Diabetes Federation. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

11. Moversand Shakers -Health Technology Assessment A new set of requirements to be met has come into play - commonly referred to as the “4th hurdle” (behind efficacy, safety and quality) • For drug development the 4th hurdle means that additional data need to be generated to satisfy the payers’ needs. • The new product should be differentiated and have unique features (addresses an “unmet medical need”). • More active comparisons against standard of care are required (placebo-controlled trials not sufficient any more). • More health economic data (cost-effectiveness analyses, cost-utility analyses) are required. • More outcome research is demanded. • More patient reported outcome measurements (quality of life measure etc.) need to be taken into account. • Data to demonstrate an added value to the system overall (e.g. reduction of length of hospital stay, shorter time of disability etc) are helpful. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

12. Moversand Shakers -Public Perpception In spite of successes public perception of the pharmaceutical industry remains a weakness at levels close to the energy/utilities industry. In a recent U.S. poll from 2009, investment and brokerage firms (46%), car manufacturers (45%), pharmaceuticals (45%), banks (38%), and cable companies (37%) were among those industries to be perceived as “likely to do a bad job”. The need for efficacious and effective high quality medicines is obvious to almost everyone. Therefore, it is sometimes paradox to see such a low degree of support for the industry among the general population, especially in countries with a strong pharmaceutical industry. The Boston Globe 2010 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

13. Industry Terrain -Strong Balance Streets Overall, the financial situation of big pharmaceutical companies is strong up until now and continues to represent strength in challenging times. In terms of profitability ranking, the pharmaceutical industry used to be placed among the top 5 industries. Although profit margins have recently declined for most pharmaceutical companies they could on average hold a satisfactory level and even outperform other sectors. Of note, the major patent losses ahead are only partially reflected in the financial numbers currently available. Fortune 500 Report 2009, 2012 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

14. Industry Terrain - Industry Life Cycle in 2012 Similar to a specific product the industry at whole undergoes a life cycle. The different stages of this life cycle range from introduction, growth and maturity to decline and point out what companies need to focus on to perform successfully. Like most industries of today, the pharmaceutical industry finds itself in the stage of maturity and risk future decline unless it manages to de-mature through innovation by increasing its R&D productivity. Angwin, D.; Cummings, S.; Smith, C. (2007): The Strategy Pathfinder: Core Concepts and Micro Case. 1st eds, Malden: Blackwell Publishing Ltd. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

15. The Big Picture - An Evolution towards Marketing Orientation During the period of mono-dimensional sales- orientation the pharmaceutical industry has grown in size but also suffered reputational damages. It is only until a couple of years ago that the industry had to adopt a much more market-oriented business model where the needs of the market, being the medical needs of patients or being the needs of the payers, constitute the first strategic priority. At this stage, the job of the classical sales representative gradually loses importance whereas key account managing becomes more and more critical to business success. Adcock, D.;Halborg, A.; Ross, D. (2001): Marketing: Principles and Practice. 4th eds, Essex CM20 2JE: Pearson Education ltd. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

16. The Big Picture - Verticaland Horizontal Integration On the basis of its history and scientific expertise large pharmaceutical companies have taken over differently integrated corporate structures. Novartis, for instance, has adopted a horizontally integrated model which is diversified over different business areas and is designed to provide uncorrelated sources of revenue. Hoffmann-La Roche, in contrast, has build a vertically integrated structure. The company is thus able to generate revenues on any step of the value chain of operations. Novartis AG. (2011): Annual report. Hoffmann-La Roche. (2011): Annual report. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

17. PerfectPositioning - Scientific Progress • Pathways – thePromiseofTranslationalMedicine • StratifiedMedicine • PersonalizedMedicine • Stem Cells • High ThroughputBiology • Systems Biology • Small Interfering RNA • Gene Therapy • Reverse Vaccinology • Modelling & Simulation • Biomarker Research • Clinical Research Progress Giot, L.; et al. (2003): A protein interaction map of drosophila melanogaster, in: Science, 302, 1728-1736. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

18. PerfectPositioning - OrphanDiseases 6.000 to 7.000 diseases are known which – seen separately - only affect a small number of patients each. In total, however, the number of people affected by a rare disease is huge (30 million Europeans estimated). 80% of these rare diseases are of genetic origin and many of them are chronic, severely debilitating or fatal. A while ago, this problem has been noted by regulatory bodies worldwide and specific orphan drug regulations put in place, e.g. in the US (1983), in Japan (1993), in the EU (2000) or in Switzerland (2006). Orphan drug regulations are designed to provide stimuli, economic incentives, to the pharmaceutical industry to conduct research and develop medicines for orphan diseases. Companies such as Genentech, Amgen, Celgene, or Genzyme are examples that have managed to bring orphan drugs to the markets and have by now grown into international multi billion businesses. Additionally, after development of an orphan drug, the possibility exists to develop the product into other indications. Therefore, it is sometimes possible to expand the market of the drug into other, non-orphan disease areas. EMA, Committee on Orphan Medicinal Products 2009 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

19. Living Strategy - the Patent Cliff The effective patent protection for a pharmaceutical is a maximum 15 years in Europe and 14 years in the US, thus limiting the life cycle of a medicine. Patents are filed early in dug discovery, i.e. 6-10 years before market entry, preferably before the first chemical data is published. Fried, S., Arlington, S. (2007a): Pharma 2020 - The Vision. PriceWaterHouseCoopers. Fried, S., Arlington, S. (2007b): Pharma 2020 - The Marketing of the Future. PricewaterhouseCoopers. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

20. Living Strategy - the Innovation Gap Low R&D productivity results in what is called the “innovation gap”: annually steadily increasing drug development expenditure with declining numbers of new molecules entering the market. In the face of the innovation gap the above mentioned end of the age of blockbusters seems even more challenging. As little differentiated mass market drugs will not provide sufficient profit margins any more the industry will have to come up with many more compounds simultaneously on the market – each of which targeting a smaller subset of patients. The current R&D productivity of many companies will not be able to provide these. R&D productivity needs to be bolstered drastically – rather sooner than later. Sukkar, E. (2011): Lack of investment in regulatory science is part of "innovation gap," believes FDA commissioner, in: British Med J, 343/8, 8017. Fried, S., Arlington, S. (2007a): Pharma 2020 - The Vision. PriceWaterHouseCoopers. Fried, S., Arlington, S. (2007b): Pharma 2020 - The Marketing of the Future. PricewaterhouseCoopers. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

21. Living Strategy - the Innovation Gap Tufts (2009): Large pharma success rate for drugs entering clinical trials in 1993-04: 16%. Impact Report 11/4, Boston, Tufts Center for the Study of Drug Development. Another main cost driver in drug development (and one that stubbornly resists eradication) is the high attrition rate. The attrition rate is the proportion of compounds in development which fail to achieve market authorization thus representing sunk costs. The later a compound fails during the development period the more costly the failure becomes to the stockholder. Hofmann La-Roche 2011 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

22. Corporate Character - Reputation In here lies a problem for the industry as already discussed with respect to the media being a mover & shaker to the industry. The pharmaceutical industry has about the same image problem as the oil industry which is constantly not perceived as environmentally sustainable despite desired by oil companies and in spite of sharp marketing efforts. Between how the pharmaceutical company wants to be perceived, its corporate identity, and how it is actually perceived, its corporate image, resides a huge gap. Angwin, D.; Cummings, S.; Smith, C. (2007): The Strategy Pathfinder: Core Concepts and Micro Case. 1st eds, Malden: Blackwell Publishing Ltd. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

23. Crossing Borders - Emerging Growth Markets As a result of economic growth in these emerging economies, hundreds of millions of people belong to new middle classes and gradually gain access to health care which has traditionally been a privilege of the small elite. The number of customers in countries such as China, India or Brazil is forecasted to exceed the number of customers in established markets. Major players have established large scale research facilities in China or Russia (and others) and have partnered with local corporations to gain better market access locally. Most big pharmaceutical companies have achieved above average revenue growth rates in emerging markets. Campell/Chui 2010: www.imshealth.com/pharmerging | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

24. Crossing Borders - Weakening IP rights & Counterfeits/FalsifiedMedicines The production and marketing of counterfeit or falsified medicines has become an illegal multi-billion business and represents a major threat to public health as well to the pharmaceutical industry. The illegal business is fostered by increasingly international connectivity, diverging definitions, non-existance of a uniforme database, conflict of interest between industrialized and developing nations, corruption, weak sanctions and law enforcement and by the inaccessibility of medications. In 2010, sales of illegal medications are estimated to having surpassed USD 75 billion. The organized crime behind the business reckons with profit margins of up to 2.000% and comparatively little threat of legal punishment. Pharmaceutical Security Institute 2011 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

25. Crossing Borders - Weakening IP rights & Counterfeits/FalsifiedMedicines Interpharma 2012 | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

26. Guiding Change – Position ofthePharmaceuticalIndustry in the Change Process Kotter has published a series of 8 individual steps that he claimed to be necessary to be addressed when guiding change successfully. It is necessary, if a company’s vision needs to be changed, to change the corporate culture first. This is clearly happening with much delay. Instead, big pharmaceutical companies, in urgent need to de-mature by innovation, focus heavily on internal processes thus inhibiting the creativeness of its otherwise talented work force. On the other hand a certain “sense of urgency” is doubtlessly there but it is less clear if many companies do have a vision for the future - or, if yes, if it is properly communicated. Taken together, it seems that big pharmaceutical companies have not yet made a lot of progress and are still stuck at the very first steps of the change process. Part the reason is that senior management is not yet constituted of a new generation of managers. Rather, current senior managers have passed the last two decades of their career in a business environment which is now subject to change. Kotter, JP. (1995): Leading change: why transformation efforts fail, in: Harvard Business Review, 2/73, 59-67. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

27. SustainAbility – Patient Adherence/DiseaseMangement Overall, disease management intends to improve patient adherence and outcomes and decrease costs. This has worked in several countries and several disease areas such as diabetes and heart failure., Treating a chronic condition with drugs is tricky. After one year about 50% of the patients will have ceased taking the medication and an overwhelming majority will have taken the medication only irregularily. The question of disease management offers opportunities to the industry beyond selling medicines and improving compliance. Through disease management schemes, pharmaceutical companies can become true partners to the health care system over all, for instance through providing non-traditional services to patients. This concerns the questions of motivating the right subset of patients for the right treatment, of bypassing logistical hurdles, of offering platforms for integrated treatment approaches and of engaging in follow up measures and secondary prevention. Osterberg, L.; Blaschke T. (2005): Adherence to medication, in: New England Journal of Medicine, 5/353, 487-497. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

28. MaverickStrategies– theQuestions • What factors could be eliminated that an industry has taken for granted? • What products/service elements could be reduced below the industry standard? • What elements could be lifted above the standard? • What should be introduced that the industry has never offered the customer? • Could a new offering win buyers without any marketing hype? Angwin, D.; Cummings, S.; Smith, C. (2007): The Strategy Pathfinder: Core Concepts and Micro Case. 1st eds, Malden: Blackwell Publishing Ltd. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

29. MaverickStrategies– ProvocativeAnswers • Only few major pharmaceutical markets of today are entirely “share-of-voice” driven. In almost all markets, physicians are not completely free any more to prescribe what they want. Should we finally abolish the profession of sales representative, rather sooner than later, even in the last share-of-voice driven markets and rather succeed through offering unique products? • Pharmaceutical marketing in mass markets is tricky. Differentiation has to be constructed where, in reality, there is none. Statistical significance is perverted into clinical relevance. Should we really utilize these measures which are more suitable for selling vacuum cleaners or should we restrict pharmaceutical marketing to a minimum? • Can the pharmaceutical industry become a more respected partner in health care, more than sellers of pills? What other services beyond medication could be offered (and sold) to stakeholders, e.g. within the framework of disease management schemes? • Reimbursement becomes more and more difficult and physicians in their daily practice become increasingly dependent on reimbursement questions. The pharmaceutical industry has always provided medication but should it go one step further and offer health insurance solutions? • Should we develop medication with mediocre potential of benefit for the patient (with low probability of getting a good price for it) and then heavily invest in marketing or should we rather attempt to develop medications with unique features that sell by themselves because their benefit is immediately obvious to the customer? | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

30. Summary Angwin, D.; Cummings, S.; Smith, C. (2007): The Strategy Pathfinder: Core Concepts and Micro Case. 1st eds, Malden: Blackwell Publishing Ltd. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

31. Conclusion • It is without doubt that a number of opportunities exist for the future and we have discussed a number of them. We have also pointed out a number of options for companies to react or reactions already taken. • Coming back to the primary objective of this work, in conclusion, we need to note that the pharmaceutical industry in 2012 is stuck early after one third of the strategic pathway and major questions such as positioning, characterization, lively adaption to a changed environment, change management, sustainability of business model and de-maturation remain unaddressed so far. • The adoption of maverick strategies as depicted above may hint at ways out for the future. | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis

32. Thankyouforyourattention! | Master's Thesis Defense | CG | July 20th 2012 | The Pharmaceutical Industry 2012. A Comprehensive Trend Analysis