strategic-management

Industry Issues, Facts, and Figures
The industry is marked by rapid advances and is heavily based on research and development.
About 1,500 companies in the U.S. manufacture and market medicinal drugs. Over
$200 billion in U.S. revenue is driven from the sales of prescription drugs (brand name and
generic) and over-the-counter (OTC) medicines. The United States leads the world with
the highest market share and is the home of five of the ten largest drug manufacturers
(Bristol-Myers Squibb, Johnson & Johnson, Merck & Co., Pfizer, and Abbott
Laboratories). Europe, ranked second, is the home of the other five of the world’s top
pharmaceutical companies (AstaZeneca, Sanofi-Aventis, Novartis, Roche Group, and
GlaxoSmithKline). Japan takes third place with companies such Sankyo Co., Takeda
Chemical Industries, and Yamanouchi Pharmaceutical.
The industry is highly concentrated: The 50 largest companies control more than 80
percent of the market. The pharmaceutical industry accounts for 27.3 percent of the healthcare
sector and is capital intensive with exorbitant research and development costs. The
industry also has been growing at over 10 percent annually and is under pressure from Wall
Street to keep up such growth.
Regulations and Patents
Drug discovery and development is a highly sophisticated process that can take several
years to complete and may cost more than $500 million. The cost has escalated 10-fold
every 20 years since the late 1950s when research and development could cost only
$1.5 million. Once the drug is registered and has received a patent, it is protected by competition
from similar or generic drugs for 5 to 15 years. As such, loss of patent protection
could harm the company’s sales and earnings. In some cases, there could be legal attacks
against the validity of a patent. Such problem could be problematic by incurring additional
costs in a legal battle.
Industry Structure
Generic drugs rapidly enter the market when a patent expires by the original brand-named
drug manufacturer. Also, because large research budgets do not guarantee new products,
many large drug companies supplement their own efforts by buying or licensing products
from other companies. As a result, the industry has seen a vast number of mergers and
acquisitions in recent years. Although the merger and acquisition could cost the company
millions or billions of dollars, in some ways, it guarantees future income to the new owner.
In recent months, Merck acquired Schering-Plough for $41 billion, and Pfizer acquired
rival drug maker Wyeth for $68 billion.
Advertising
Drug manufacturers spend billions of dollars in advertising and promotions through frontend
standard media such as television, radio, newspapers, and magazines. The back-end
promotion is accomplished by offering samples and other incentives to doctors and retailers
for prescribing their drugs. Aggressive advertising has been questioned by many government
agencies and organizations. Congress has been considering changing advertising laws,
which will impact the drug companies considerably. Most drug companies have already
reconsidered how to market their drugs by explaining their risks. One strategy of the drug
companies has been to push for more conversations with doctors and by better explaining
the risks. For patients, most companies now offer toll-free hotlines and useful information
through the company’s Web site. Lack of exposing the risks could harm the company’s
reputation and brand.
The Pharmaceutical Research and Manufacturers of America (PhRMA), the drug
industry’s lobbyist, announced a voluntary guiding principle for advertising drugs to all
parties. This working document is requesting that drug companies discuss new drugs with
doctors before launching any advertising to prospective consumers. The organization also
argues that direct-to-consumer (DTC) advertising can be a powerful tool in educating millions
of consumers and improving their health if they are aware of the drugs, and their side
effects and potential benefits.
CASE 26 • MERCK & COMPANY INC. — 2009 257