PHAM INDUSTRY by JOY SIMMON

PHARMACEUTICAL INDUSTRIAL ANALYSIS


JOY.S
7/27/2009



 
CONTENTS



I. INTRODUCTION
II. HISTORY
III. CONTRIBUTION TO NATIONAL ECONOMY
IV. PHARMACEUTICAL INDUSTRY OVERVIEW
a. EXPORT
b. MAJOR PLAYERS
c. EMPLOYMENT
V. CLASSIFICATION
VI. INDUSTRIAL ENVIORNMENT
VII. OVERALL ATTRACTIVENESS
VIII. MAJOR PRACTISES
IX. MAJOR PLAYERS
X. TRENDS/FUTURE  

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 pharmaceutical companies in the global pharmaceutical industry, as well as to reveal opportunities for further strengthening of their positions.

The paper consists of two 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.
History
The first known drugstore was opened by Arabian pharmacists in Baghdad and many more soon began operating throughout the medieval Islamic world and eventually medieval Europe. By the 19th century, many of the drug stores in Europe and North America had eventually developed into larger pharmaceutical companies.
Most of today's major pharmaceutical companies were founded in the late 19th and early 20th centuries. Key discoveries of the 1920s and 1930s, such as insulin and penicillin, became mass-manufactured and distributed. Switzerland, Germany and Italy had particularly strong industries, with the UK, US, Belgium and the Netherlands following suit.
Numerous new drugs were developed during the 1950s and mass-produced and marketed through the 1960s. These included the first oral contraceptive, "The Pill", Cortisone, blood-pressure drugs and other heart medications. MAO Inhibitors, chlorpromazine , Haldol (Haloperidol) and the tranquilizers ushered in the age of psychiatric medication. Cancer drugs were a feature of the 1970s. From 1978, India took over as the primary center of pharmaceutical production without patent protection
The industry remained relatively small scale until the 1970s when it began to expand at a greater rate. By the mid-1980s, small biotechnology firms were struggling for survival, which led to the formation of mutually beneficial partnerships with large pharmaceutical companies and a host of corporate buyouts of the smaller firms. Pharmaceutical manufacturing became concentrated, with a few large companies holding a dominant position throughout the world and with a few companies producing medicines within each country.
Drug discovery is the process by which potential drugs are discovered or designed. In the past most drugs have been discovered either by isolating the active ingredient from traditional remedies or by serendipitous discovery. Modern biotechnology often focuses on understanding the metabolic pathways related to a disease state or pathogen, and manipulating these pathways using molecular biology or Biochemistry. A great deal of early-stage drug discovery has traditionally been carried out by universities and research institutions.
Drug development refers to activities undertaken after a compound is identified as a potential drug in order to establish its suitability as a medication. Objectives of drug development are to determine appropriate Formulation and Dosing, as well as to establish safety. Research in these areas generally includes a combination of in vitro studies, in vivo studies, and clinical trials.
Contribution to National Economy
The Pharmaceutical industry has grown rapidly in recent years, doubling in size between 1993 and1999. Much attention is given to the potential of the pharma industry, from drugs, agricultural and environmental products currently in the pipeline. These products have the potential to generate tremendous opportunities for society, by improving the quality of health care, increasing pharmaceutical production and producing a cleaner environment. No less significant, however, is the fact that the industry clearly makes substantial current economic and fiscal contributions to the national economy.

This report presents the estimates of the significant financial contributions of the pharmaceutical industry to the U.S. economy and to revenues collected by the federal, state and local governments. In 2002, the pharmaceutical industry generated:

•437,400 jobs. Of these, 150,800 jobs were generated directly by pharma
companies, while the remaining 286,600 jobs were generated by companies supplying inputs to the industry, or by companies providing goods and services to pharma employees.
•$47 billion in additional revenues. Even though the industry as a whole remains
unprofitable, pharma companies produced revenues of $20 billion.
•$11 billion in research & development spending. This includes research and development conducted by pharmaceutical firms, but does not include research and development conducted by firms supplying the pharma industry with inputs or workers with goods and services.
•$10 billion in tax revenues, including federal, state and local taxes. The largest components of the tax revenues were individual income taxes, social security and property taxes, with a little over two-thirds of total taxes going to the federal government.
The analysis also estimated the contributions generated by publicly traded and private companies.

Pharmaceutical industry overview

Major players

The pharmaceutical industry is characterized by a high level of concentration with fifteen multinational companies dominating the industry.

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 and Bayer which has only about 15% of its revenues from the sales of pharmaceutical products.

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.

Indian pharmaceutical industry
The Indian Pharmaceutical Industry today is in the front rank of India’s science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously.

Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Pharma Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK.
The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. The pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectables. There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India .

Many Indian companies are part of an agreement where major AIDS drugs based on Lamivudine, Stavudine, Zidovudine, Nevirapine will be supplied to Mozambique, Rwanda, South Africa and Tanzania which The domestic Pharma Industry has recently achieved some historic milestones through a leadership position and global presence as a world class cost effective generic drugs' have about 33% of all people living with AIDS in Africa. Many Indian companies maintain highest standards in Purity, Stability and International Safety, Health and Environmental (SHE) protection in production and supply of bulk drugs even to some innovator companies.
 
Exports
According to the Quick Estimates of Directorate General of Commercial Intelligence and Statistics (DGCIS), Pharmaceuticals exports registered an impressive growth rate at 30.7% terms during April-October,2008 compared to the corresponding period of the last year. This growth further increases to 38.5% when valued in rupees terms.
Indian company Multinational Product
Lupin Laboratories Fujisawa Cefixime
Apotex Cefuroxime Axetil, Lisinopril (Bulk)
Nicholas Piramal Allergan Bulk and Formulations
Advanced Medical Optics Eye Products
Wockhardt Ivax Nizatidine (anti- ulcerant)
Dishman Pharmaceuticals Solvay Pharmaceuticals Eprosartan Mesylate
IPCA Labs Merck Bulk Drugs
Tillomed Atenelol
Orchid Chemicals and Pharmaceuticals Apotex Cephalosporin and other injectables
Sun Pharma Eli Lilly CVS products, anti-infective drugs and insulin
Kopran Synpac Pharmaceuticals Penicillin- G Bulk Drug
Cadila Healthcare Altana Pharma Intermediates for Pantoprazole
Boehringer Ingelheim Gastrointestinal and CVS Products
Biocon Bristol Myers Squibb Bulk Drugs


Employment

Pharmaceutical and medicine manufacturing provided 292,000 wage and salary jobs in 2006. Pharmaceutical and medicine manufacturing establishments usually employ many workers. Nearly 90 percent of this industry’s jobs in 2006 were in establishments that employed more than 100 workers .Most jobs are in California, Illinois, Texas, Indiana, New Jersey, New York, North Carolina, and Pennsylvania.


Under the North American Industry Classification System (NAICS), workers in research and development (R&D) establishments that are not part of a manufacturing facility are included in a separate industry—research and development in the physical & engineering
 
Classification of Pharmaceutical industry
The Indian pharmaceutical industry can be classified into organized and unorganized sectors. Accounting for over 70% of total sales, the organized sector has about 250 manufacturing and formulation units. On the basis of management control, the organized sector can be further classified into MNCs and Indian companies.

On the basis of the product manufactured, the pharmaceutical industry can be classified into:
• Bulk drugs: They are the key ingredients that form the basic raw material for the manufacture of formulations.
• Formulation: Particular mixture of a bulk drug or a combination of different bulk drugs.

Formulations constitute nearly 81% and bulk drugs account for the remaining 19%. Indian pharmaceutical industry has about 2400 licensed manufacturers and more than 100,000drugs.

On the basis of formulations, the pharmaceutical industry can further be classified into:
• Prescription medicines: Also known as ethical formulations. They can be dispensed only on the prescription from a qualified medical practitioner.
• Over-the-counter medicines: Also known as OTC formulations. They can be dispensed even in the absence of prescription, e.g. analgesics, cough drug, etc.

On the basis of formulations patent, pharmaceutical industry can be classified as
• Branded formulations: They are ethical formulations prepared using a bulk drug under product patent and are marketed by a single pharmaceutical company.
• Generics: They are formulations that do not contain any patented bulk drug and can be manufactured by more than one company.
Industrial environment
Four major factors are affecting the pharmaceutical industry. This report contains exhaustive research analyzing how these factors influence the industry now and how they will affect players over the next 5-10 years.
The four areas are covered as follows and include:
1. Government Regulations--drug prices, FDA regulations, sales & marketing practices--U.S. lawmakers are focusing on developing solutions to problems surrounding the multiple aspects of the pharmaceutical industry.
2. Loss of Patent Protection -- patent expiration, biogenerics, legal attack of patent validity, patent law reform, health crises--Patent expiration is no longer the only threat to patent protection.
3. Industry Player Environment -- outsourcing, M&A, spin-outs, future industry structure--A churning of pharma industry players will continue as both large and small companies fight for survival.
4. New Product Development -- R&D, poor quality drug candidates, slow production of novel drug discovery technology5. Socio-economic Trends -- greater end-user involvement, threat of bioterrorism, epidemiology, DTC advertising & customer confidence, employment, stock market performance, worldwide market.
Industry Prospects and Overall Attractiveness
Increasing emphasis on health standards around the world and on the cost-benefit relationship of pharmaceutical use will further increase the demand for the industry. The industry is attractive with operating profit margins exceeding 30% which is approximately twice the Industrial Index. Pharmaceutical corporations have lower interest expenses, raw materials costs, tax rates and general and administrative cost as a percentage of sales when compared with most industries. Overall the pharmaceutical industry is very attractive with above-average profitability.
Performance Analysis
Total industry sales have been increasing steadily for the last 5 years. In 1998, the pharmaceutical industry had sales of $124,609.4 million in the US. From 1994 through 1997 sales were $77,611.1 million, $91,039.0, $101,580, and $110,848.1 million, respectively. Industry sales growth have grown by 60% over the last five years and the trend is expected to continue in 1999.
The profitability ratio for the pharmaceutical companies looks good compared to the industry average. The average gross margin for the four companies was: Pfizer with 81.88%, Abbott with 62.65%, Lilly with 78.12% and Merck with 61.84%. The gross margin for the companies were quite stable and there were no dramatic changes in the gross margin during the past five years. The industry had an average return on asset of 10.96% for years 1993 through 1997. Comparing the liquidity ratios with the companies and the industry, we see that all four companies were below the industry average of 1.63 for current ratio and 1.11 for quick.

Major practices in pharma industry
Marketing
Physicians are perhaps the most important component in pharmaceutical sales. They write the prescriptions that determine which drugs will be used by the patient. Influencing the physician is the key to pharmaceutical sales. Historically, this was done by a large pharmaceutical sales force. A medium-sized pharmaceutical company might have a sales force of 1000 representatives. The largest companies have tens of thousands of representatives around the world. Sales representatives called upon physicians regularly, providing information and free drug samples to the physicians. This is still the approach today; however, economic pressures on the industry are causing pharmaceutical companies to rethink the traditional sales process to physicians.
Pharmaceutical companies are developing processes to influence the people who influence the physicians. There are several channels by which a physician may be influenced, including self-influence through research, peer influence, direct interaction with pharmaceutical companies, patients, and public or private insurance companies. There are also web based instruments that can be used to determine the influencers and buying motives of physicians.


Major players of pharmaceutical industry

U.S. pharmaceutical companies

U.S. companies play a key role in the world pharmaceutical industry – 8 out of 15 leaders of this market are headquartered in the United States; moreover, the largest world pharmaceutical company, NJ-based Pfizer, has sales of pharmaceutical products that are approximately 1.5 times higher than those of its closest competitor.

Only two companies, Merck and Eli Lilly, concentrate their resources almost exclusively on pharmaceutical industry; each of these two companies has about 94% of sales from this business segment.

For leading pharmaceutical companies, investments in research and development are crucially important for survival and prosperity; not surprisingly the pharmaceutical industry is characterized by a very high level of R&D cost as percent of total revenues. So far as it usually takes a long time to develop a new medicine (usually 10-15 years), and there is a high level of uncertainty whether this particular R&D project will be successful, many companies have a policy of investing in R&D an approximately stable share of company revenue.


Several comments should be made regarding profitability analysis. First, regardless of their very active acquisition policy, Johnson & Johnson manages to keep its ROA, profit margin, and total assets turnover stable. Unlike J&J, Pfizer experienced significant fluctuations in all three of these parameters which definitely can be connected with its acquisition of Pharmacia.

.Current litigation charges of Wyeth (company paid in litigation charges $1.4 billion in 2002, $2 billion in 2003 and $4.5 billion in 2004) lead to decline of ROA from 18.2% in 2002 to just 3.8% in 2004.




All companies have high enough level of Current Ratio, showing the ability of the company to cover its short-term liabilities with it current assets. At the same time several companies have Cash Flows from operations to Total Liabilities ratio at the level below 20% which is considered as a minimum safe level for financially healthy company.
Analysis of geographical distribution of sales in 2004 revealed that 7 out of 8 major U.S. pharmaceutical companies have more than 50% of their sales from the U.S. market; and only Schering-Plough in 2004 was the exception to this rule. Most important international markets for U.S. companies remain Japan and Western Europe.


Pharmaceutical companies outside the U.S.

Seven out of 15 largest pharmaceutical companies are headquartered outside of the U.S. : this is British GlaxoSmithKline and AstraZeneca, Swiss Novartis and Roche, French Sanofi-Aventis, Japanese Takeda and German Bayer.
Business segment decomposition for non-US pharmaceutical companies is very similar to that of major US-based pharmaceutical companies. The pharmaceutical segment of almost all of these companies is the largest one; the only exception is Bayer pharmaceutical sales of which was just about 14.7% of total sales in 2004.


As mentioned above, German Bayer stands apart from all other companies with only 14.7% of its sales from pharmaceutical segment and 35% of its sales from all Health Care businesses. Besides the Health Care segment Bayer also works in Crop Science, Material Science and Chemical business segments. Because of extremely low share of its pharmaceutical segment it is difficult to call Bayer a pharmaceutical company; nevertheless, with total sales of about 30 billion euro even the small share of the pharmaceutical segment gives Bayer about 4.4 billion euro of revenues from sales of pharmaceuticals products.


As it was discussed above, after expiration of its patent, drugs usually experience very sharp decline in their sales. Therefore, companies with a well balanced portfolio of their products with no any single product having very high share of sales can be considered as less risky. From this point of view non-US pharmaceutical companies look better.

Industry Trends

Here we examine structural changes causing significant transformations, major factors leading to strong future sales growth, and point out the industry’s 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. 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.

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.

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.

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.

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.

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 from the generic drug manufacturers.
Finally, the whole pharmaceutical industry competes with other health care industries. In this case, pharmaceutical companies should not only demonstrate high efficiency of their products, but also provide obvious proof of cost advantages in comparison with other forms of care.

Price control

Pharmaceutical companies have to operate in a highly regulated environment; the degree of regulation to a significant extent depends on the country and type of the product.

One of the most important aspects of government regulation for pharmaceutical companies is price regulation, and different countries have different policies on this issue.

As the result of price control, prices of the same products can significantly differ in different countries.

 
Protection of patents

Generic drugs manufacturers sometimes start production of patent-protected drug analogues even before a patent expires. Although research-oriented companies in many cases are able to protect their patents, they do suffer from lost revenues.

Therefore, protection of patents is one of the key conditions necessary for further development of the pharmaceutical industry. At the same time, non-efficient legislation that does not provide the necessary level of patent protection is one of the factors that hamper expansion of “Big Pharma” companies to the developing countries.

Summary

Indiana is home to Eli Lilly and is the location of several other pharmaceutical manufacturing companies. These companies contribute significantly to Indiana’s domestic and international profile. The good news is that that these companies – like the rest of the industry – are doing well and share in a sanguine outlook. Demographics and rising incomes in industrial and developing countries combine to promise rapidly growing future sales.

But the gains for any particular company are not guaranteed. Drug companies compete vigorously – with themselves, generic producers, and with related-health companies who want a share of their action. The industry is changing fast. To survive and to prosper involves managing drug pipelines – as drugs come off patents they no longer bring in enough revenues and must be replaced quickly by other drugs with durable patents. This means that the companies have to think ahead, something that sounds easy but involves great risks.
As companies develop their new pipelines they must be mindful of changes caused by regulations and deregulations in countries all over the globe. While most of drug consumption and sales is a U.S.-European-Japanese affair – deregulation means sales opportunities are growing rapidly in the developing world. China, Thailand, Egypt, Mexico, Argentina, Brazil, and Venezuela have been increasing their imports of pharmaceuticals products at rapid rates. Of course, where there is growing demand – there is also growing supply and competition.
Many new drug companies are springing up in developing countries and the biggest global firms are moving into those territories. But even this has more than the usual global risk for drug companies because of the importance of intellectual property protection. Picking places and partners takes more than the usual scrutiny or a company can lose valuable resources.




 
References

1. (Abbott Laboratories Annual Report 2002)
http://abbott.com/investor/2002annualreport/downloads/abbott2002ar.pdf

2. (Agarwal Sumit, Desai Sanjay, Holcomb Michele, Oberoi Arjun, “Unlocking the Value in Big Pharma)
The McKinsey Quarterly, 2001 Number 2

3. (AstraZeneca Annual Report 2002)
http://www2.astrazeneca.com/annualrep2002/pdf/AZ%20ENG_Report.pdf


4. (Bayer Annual Report 2002)
http://www.investor.bayer.com/docroot/_files/berichte1032356037/geschftsberichte1032356052/gb_2002_e1047539476.pdf

5. (Bristol-Myers Squibb Annual Report 2002)
http://www.shareholder.com/bmy/edgar.cfm?PageNum=3&DocType=&SortOrder=Date%20Descending&Year=2003#


6. (Eli Lilly Annual Report 2003)
http://www.lilly.com/investor/annual_report/lillyar2003complete.pdf

7. (Eli Lilly Annual Report 2004)
http://www.lilly.com/investor/annual_report/lillyar2004complete.pdf

8. (GlaxoSmithKline Annual Report 2002)
http://www.gsk.com/financial/reps02/annual-review-02/cautionary-report.htm