Industry Segmentation by Products
Industry Segmentation by Distribution
Drugmakers maintain strong growth
Pull factors: Demographics
Pull factors: Opportunities Abroad
Push factors: Direct Consumer Advertising
Push factors: Legal environment
Push-Pull Mechanism: Product life cycles, prices, costs
Relationship Pharmaceuticals - Healthcare
Industry Living Space
Life cycle of products
Life Force of Business: Research and Development
Prohibitive Barriers to Entry
From Industry to Company
The Upjohn Company
Merger with Pharmacia
Johnson & Johnson
New Drugs Boost profits
The ethical sector can be further segmented into:
Figure. Market Shares of Leading Pharmaceutical Companies
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Key global pull factors fueling this growth include:
Being relatively small compared to the U.S. and major European nations, Russian pharmaceutical market expanded at a compound annual rate of more than 30% over the past three years. With more than one billion people, China is another major emerging market. The size of the market in 1996 was about 56.1 trillion, of which U.S. drugmakers accounted for 14%. Leading U.S. drugmakers expanding their presence both in Russia and China include Merck, Bristol-Myers Squibb, Johnson & Johnson, Eli Lilly, and Schering-Plough.
In August 1997, Food and Drug Administration (FDA) has changed rules governing the broadcast of ads. New rules permit drugmakers to promote the benefits of their products directly. While ads must still contain drug's health risks, drugmakers are no longer required to spell out all drug's side effects. The ads, however, must include an 800 telephone number or a Web site for consumers to learn more about adverse side effects.
Push factors: Legal environment
Figure. Mean Approval Time for New Drugs
Consumer pharmaceutical pricing continues to remain in line with overall inflation, despite above-average increases in selected lines. Consumer prices for prescribed pharmaceuticals increase an annual rate of 2.3%, whereas average prices for branded products rise 3.4% year to year.
The shape of the pharmaceutical marketplace transforms rapidly due to growth of managed care in the U.S. healthcare system. The latter becomes more and more popular because of its ability to provide medical products and services in a cost-effective manner. Managed care's share of the retail pharmaceutical market, which was less than 30% at the start of this decade, is expected to reach 90% by the end of it. The managed care providers discount purchases of pharmaceuticals and medical products, as well as physician and hospital services, insisting on the use of low-cost generic drugs whenever possible.
Medicare and Medicaid
Managed care is also moving aggressively into Medicare and Medicaid
markers. Medicare is the principal healthcare financing program for Americans
65 years of age and older. But the program doesn't provide reimbursement
for outpatient prescribed drugs. Enrolling into managed care plans, medicare
beneficiaries are typically given free or low-cost prescription coverage.
Growth of medicare/managed care population increases drug utilization.
Medicare/managed care enrollment has more than doubled over
the past four years.
Medicaid managed care plans are also poised for ongoing growth. Enrollment in Medicaid managed care plans almost tripled from the start of 1993 through 1996.
Pharmaceutical Benefit Management Firms
Figure. Manufactures' Sales by Class of Customer
Pharmaceutical benefit management (PBM) firms are intermediaries between pharmaceutical manufacturers and large drug purchasers. PBMs managed about 35% of all retail prescriptions written in 1996. They use automated mail order processing to fill customer needs. There were a number of mergers between pharmaceutical companies and PBMs as a tactics to defend profits.
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New drugs are discovered in scientific laboratories. The process is long and laborious, with the vast majority of attempts unsuccessful.
Bringing the drug to market
Before a drug can he brought to market, it must undergo years of testing and receive government approval from the FDA. It takes several years of sales buildup in major markets in the U.S. and abroad before a drug reaches its full commercial potential. At that point, new competition of drugs similar in action may enter the market.
Drug's patent expires, typically after eight years on the market. Generic competition usually appears immediately after it, and prices begin to fall. Branded prescription drugs typically have about 10 years before generic competition erodes their profitability.
Companies sometimes switch a patent-expired product from prescription-only status to over-the-counter (OTC) status to broaden its market and extend its economic life. Competition in the market of OTC products is more straightforward. Margins on products switched to OTC status are lower than those on the prescription products they replace, but popular consumer medications can have almost infinite shelf lives.
Figure. R&D Expenditures in Pharmaceutical Industry
The drug industry is one of the most research-oriented sectors of the U.S. economy. Over the past two decades, the industry's R&D expenditures have risen sharply, both in dollar terms and as a percentage of total sales. Its R&D expenditures are equal more than 21% of total industry revenues in 1997, compared with l5.9% in 1990 and l l.7% in 1980. In contrast, the average U.S. manufacturing firm spends less than 4% of sales on R&D.Weaknesses
Figure R&D Expenditures as a Percent of Sales for US Industrial Sectors
Drug manufacturing is also a high-risk business; only one in 5,000 compounds discovered ever reaches the pharmacist's shelf. Fewer than a third of marketed drugs actually achieving enough commercial success to cover their R&D investment.
When a drugmaker launches a new compound that achieves widespread acceptance in the marketplace, the economic rewards can be very high. This is the primary reason for the industry's profit margins.
Threats: FDA approval
The FDA requires manufacturers to perform extensive testing to prove that products are safe and effective before it will sanction commercial sale. All animal and human tests, which often last for years at the cost of many millions of dollars, are conducted by the manufacturer.
The cycle for the development of a new drug is as follows:
Out of 20 drugs entering clinical testing, average 13 successfully complete phase I. Of those about nine finish phase II, but only one likely pass trough the phase III. Only one of 20 will ultimately approved for marketing.
Substantial economic, regulatory, legal barriers stand on the way of new competitors. Development of a new drug takes from 10 to 15 years and costs more than $500 million. Manufactures of new drugs are protected by the patents on new drugs. However, effective patent protection is only 8-10 years given the the length of time to bring a product to market.
Growing influence of managed care buyers' forced drugmakers and PBMs
to develop new strategies, such as "disease management." Under this concept,
pharmaceutical companies focus research and development (R&D) and marketing
efforts on specific ailments; they then offer a comprehensive treatment
package including preventive care, diagnosis and screening, and therapeutic
Fugure. Generics' Share of US Drug Market
Generic drugs are forecast to form nearly two thirds of all prescriptions written by the end of the decade, up from 42% in 1996 and 22% in 1985. Patent expirations of branded drugs influence the generic drug market. Generic competition begins immediately after expiration of a patent, discounting the price from 60% to 90%. To protect their profits, some branded drugmakers have moved into the generic business. Another profit-saving strategy is to convert branded products from ethical to OTC status.
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A Portfolio of Products.
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The Upjohn Company was found in 1886 by Dr. William-Erastus Upjohn in Kalamazoo Michigan, U.S.A. Dr. William Upjohn's discovery of a pill that was friable inside a person's stomach initiated such a demand from doctors in the area that he soon found out he could not keep the supply from solely rudimental production. He installed a small plant which by 1912 manufactured enough pills to earn a million dollars in sales. Major discoveries of the time like the anti-malarial "Quinine", still used today, helped the process. The Upjohn Company, though, did not become world famous until after the World War II with the discovery of "Medrol", a steroid that had fewer the side effects than others.
Today, the Upjohn Company, with a reputation for high quality products, has become one of the major pharmaceutical marketing firms in the United States and abroad. Its firm-specific advantage in brand name pharmaceutical products has led many foreign companies to ask Upjohn Company has developed competitive advantage based on its own high quality best-selling products such as the contraceptive "Deo-Provera", the antibiotic "Lincocin", and the hair growth product "Rogaine". Upjohn has also acquired licenses that later became top-selling products like "Motrin" and Ansaid", both anti-inflammatory pharmaceutical licensed from the Boots Company, England, and "Orinase" and "Micronase" anti-diabetics, licensed from the Hoechst GmbH, Germany.
The Upjohn Company began its first operations abroad at the beginning of the century when its New York branch received an order from a Egyptian pharmacist asking for "Quinine" and Upjohn's line of pills. In 1935 Canada became the first foreign country to ever install an Up-john branch. In 1957 the Upjohn Company decided to transfer its exporting operations from the New York and San Francisco branches to its headquarters in Kalamazoo and the international division was established. The Upjohn Company had paid little attention to Europe until this time, although an exception was the attempt of sending nuns to sell the candy format laxative "phenolax" door-to-door throughout England, Carlisle (1987). It was not until the late1950's that Upjohn had an organized strategy for the European market. Thus, it was late to enter Europe in contrast to its competitors whose internationalization process was already at the manufacturing stage, with some(Merck, Pfizer and Parke/Davis) already making as much as 30 percent of their profits in the European market. Thus, in retrospect, Upjohn's entry inside European markets was as a "late starter".
As it became increasingly difficult to enter the European market, Upjohn's management made an important strategic decision. It would undertake strategic alliances as a means of entry and diffusion in European markets. Strategic alliances are defined to include sales offices and marketing agreements with local distributors and joint ventures with local, host-country, manufacturing firms. Upjohn's name recognition among doctors in Europe helped to obtain patents, fast medicine approvals and acceptable prices from local governments. Another important factor that led Upjohn's management to believe this strategy would work was the competitive advantage that Upjohn was obtaining in the marketing field in the United States, which foreign partners could see as a fine opportunity for their own products. In 1953 the first of these European strategic alliances was created with the Boots Drug Company of England. The same strategy was used in every other country in Europe.
During the 1960's and 1970's Upjohn began manufacturing
in itself in seven European countries, and between the 0970's and 1980's
nine other countries were added to the list. In some
countries Upjohn helps its licensee contractors to better promote Upjohn
products with sales offices or branches.
Merger with Pharmacia
The internationalization process of Upjohn Company is consistent with both the theory of internalization and the theory of internationalization. On 20 August 1995, a merger was announced between the Upjohn Company and Pharmacia AB, a Swedish pharmaceutical company. The new company, merged on a fifty-fifty basis, is to be calied Pharmacia and Upjohn, effective November 1995. Upjohn and Pharmacia are approximately the same size and together will become the ninth largest pharmaceutical company in the world. With Upjohn weak in Europe and Pharmacia weak in the US, the tie-up is a good fit. It gives Upjohn access to new European markets and Pharmacia a line into the US. Both companies had wide ranges of products which they could cut back on. The new company will have a combined workforce of 34,500 employees and a combined stock market capitalization of around U.S. $3 billion. This merger reflects the changing international strategic environment which calls for a smaller number of global firms in major industrial sectors.
The group has combined sales of $6.8 billion working from 1994 figures. This places it at number nine in the world pharmaceutical company rankings, in the top five in Europe, in the top 15 in North America and in the top 20 Japan. P&U set out to achieve sales growth of 10-15% in its first year but it now acknowledges that is more likely to e 5-10%. This is partly because it will launch fewer new products than hoped.
Sales are mainly generated by prescription
pharmaceuticals (78%), followed by over-the-counter medicines (6%), animal
health (5%), biotechnology supply (5%), diagnostics (3%) fine chemicals(3%).
P&U has strong market positions worth more than $500M/a in sales in six therapeutic areas: cancer, metabolic diseases/growth hormones, critical care, diseases of the central nervous system, infectious diseases and reproductive health. Two other areas, nutrition and ophthalmology, generate sales of more than $250M/a.
Meanwhile , Upjohn was suffering falling sales
while undergoing restructuring. Its four biggest-selling pharmaceutical
products—Xanax, Halcion, Micronase and Ansaid for arthritis—all lost US
patent protection in1993-94. The result was a $400M dent in sales.
Upjohn decided to cut costs in sales, marketing and R&D, and create
a generics subsidiary to push OTC equivalents of its drugs. It also
established a disease management company to provide health care services.
Both companies lacked a sufficiently healthy pipeline of new products to counter-balance their struggling older drugs. Together they can pool their resources but P&U still cannot boast a big-mane drug. P&U is struggling with too many therapeutic areas. It would really like to be an oncology company. At the moment, this only accounts for 20-30% of sales. It is the main focus of research but there are few new products as yet.
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Johnson & Johnson, with approximately 91,400 employees, is the world's most comprehensive and broadly-based manufacturer of health care products, as well as a provider of related services, for the consumer, pharmaceutical and professional markets. Johnson & Johnson has more than 180 operating companies in 51 countries around the world, selling products in more than 175 countries. How could Johnson & Johnson compete in this industry and survive?
The story begins with the discoveries of Sir Joseph Lister, a noted English surgeon, who identified airborne germs as a source of infection in the operating room. He called them, with grim aptness, the "invisible assassins." Medical science was beginning to understand, however imperfectly, the need for greater care in protecting the wound area. Yet, this concept of myriad living organisms, unseen and deadly, remained beyond the grasp of many surgeons in the 19th century who were doubtful or even contemptuous of Lister's work.
One man who did not question his theory of antisepsis was Robert Wood Johnson, who heard Lister speak in 1876. For years afterward Robert Wood Johnson nurtured the idea of a practical application of Lister's teachings. What he had in mind was a new type of surgical dressing, ready-made, sterile, wrapped and sealed in individual packages and suitable for instant use without the risk of contamination.
Prior to Lister's discoveries, the postoperative mortality rate was as high as 90 percent in some hospitals. Surgeons could not bring themselves to believe they were contaminating their own patients by operating ungloved with unsterile instruments.
Lister's methods required complex and cumbersome equipment suited only to the largest hospitals, of which there were few. A solution or a spray of carbolic acid bathed the operating room and the patient in a foggy mist. Still, it was a major advance over accepted procedures: unclean cotton, collected from sweepings on the floors of textile mills, was used for surgical dressings; surgeons operated in street clothes and wore a blood-spattered frock coat like a badge of honor.
Robert Wood Johnson concluded there ought to be a better way. Mr. Johnson joined with his two brothers, James Wood and Edward Mead Johnson, who had formed a partnership in 1885. Operations began in New Brunswick, N.J., in 1886 with 14 employees on the fourth floor of a small building that once was a wallpaper factory. In 1887 the Company was incorporated as Johnson & Johnson. With few hospitals in the United States in 1887 large enough to use Lister's methods of antisepsis, Johnson & Johnson entered the surgical dressings industry.
The first products were improved medicinal plasters containing medical compounds mixed in an adhesive. Then a revolutionary surgical dressing was quickly developed and placed on the market. Recognizing the critical need for improved antiseptic surgical procedures, the Company designed a soft, absorbent cotton and gauze dressing that could be mass produced and shipped in quantity to hospitals and every crossroads physician and druggist.
Johnson & Johnson also extensively promoted antiseptic surgical procedures. In 1888 the Company published a book, Modern Methods of Antiseptic Wound Treatment, which for many years remained the standard text on antiseptic practices.
By 1890 Johnson & Johnson was treating cotton and gauze dressings by dry heat in an attempt to produce not only an antiseptic product but a sterile one. In 1891 a acteriological laboratory was established and, early in the following year, the Company successfully met the requirements for a sterile product through a continuous method of handling dressings so they were kept under aseptic conditions and subject to repeated sterilization during production.
The new sterilization processes, first by dry heat and then by steam and pressure, were the genesis of the Company's slogan: "The Most Trusted Name in Surgical Dressings." In 1897 the Company developed another major contribution to surgery, an improved sterilizing technique for catgut sutures.
Among the dedicated people instrumental in these developments was Fred B. Kilmer, the Company's scientific director for 45 years beginning in 1888 and father of Joyce Kilmer, the poet-hero of World War I. A prolific and highly respected writer on scientific and medical subjects, Kilmer influenced the profession's attitude through articles in Johnson & Johnson magazines, which included Red Cross Notes and The Red Cross Messenger.
In cooperation with several leading American surgeons, Johnson & Johnson in 1899 developed and introduced the zinc oxide type of adhesive plaster. Because of its greater strength and quick-sticking quality, this type of plaster became an important adjunct of surgery; it meant relief to patients because irritation to delicate skin was avoided.
International growth, initiated in 1919 with the
establishment of an affiliate in Canada, began in earnest in 1923 with
an around-the-world trip by the two sons of Robert Wood Johnson. The young
men, Robert Wood Johnson, who carried his father's name and J. Seward Johnson,
returned from their worldwide tour with the conviction that the Company
must establish a strong international position. The following year, in
1924, Johnson & Johnson created its first overseas affiliate, Johnson & Johnson Ltd., in Great Britain.
Also during the 1920s the Company stepped up
its program of product diversification,
introducing in 1921 one of the best-known and most widely used of all Johnson & Johnson products BAND-AID® Brand Adhesive Bandages and a number of other new products, including JOHNSON'S® Baby Cream. Robert Wood Johnson, who later became known as General Johnson after his service as a brigadier general in World War II, took over direction of the Company in 1932. He brought a vigorous new approach and philosophy of business to the organization. Under his leadership, a firm policy of decentralization was initiated, giving to the ever-growing number of divisions and affiliates both the autonomy and the opportunity to chart their own futures.
General Johnson wrote a Credo that codified the Company's socially responsible approach to conducting business. The Credo states that the Company's first responsibility is to the people who use its products and services; the second responsibility is to its employees; the third to the community and environment; and the fourth to the stockholders. General Johnson and his successors in managing the business have believed that if the Credo's first three responsibilities are met, the stockholders will be well served.
As individual portions of the Company's business grew, they were characteristically organized as individual divisions or subsidiaries. For example, the manufacture of disposable surgical packs and gowns evolved into Surgikos, Inc. (now called Johnson & Johnson Medical, Inc.), which specializes in products for hospital asepsis. The sanitary napkin line led to the formation of the Modess Division, forerunner of today's Personal Products Company. Ortho, which began with one birth control product in the 1930s, became the Ortho Pharmaceutical Corporation.
As new technologies emerged, the Company responded with new organizations. One of these, Ortho Biotech, formed in 1990, is the first biotechnology company developed and operated as a subsidiary of a major health care manufacturer. The Company also acquired established businesses that augmented its development in the health care field. In 1959 McNeil Laboratories, Inc., a producer of prescription pharmaceuticals, was acquired. In 1977, McNeil became two companies: McNeil Pharmaceutical and McNeil Consumer Products Company, best known for its TYLENOL® Brand of pain-relieving products. In 1993, Ortho-McNeil Pharmaceutical was formed, retaining the business units McNeil Pharmaceutical and Ortho Pharmaceutical.
The 1994 acquisition of Clinical Diagnostics from Kodak (now called Johnson & Johnson Clinical Diagnostics) expanded Johnson & Johnson's existing diagnostic businesses, which include Ortho Diagnostic Systems, Inc., LifeScan and Advanced Care Products. Clinical Diagnostics products are sold to laboratories and used to diagnose diabetes, asthma, liver conditions, and strep A, among others.
Johnson & Johnson's skin care business was expanded with the 1993 acquisition of RoC, S.A., of France and the addition in 1994 of Neutrogena Corporation, two manufacturers of high quality skin and hair care products.
Johnson & Johnson also has kept pace with changing needs in a competitive marketplace. In 1989 the Company's consumer businesses, with the exception of sanitary protection products, were consolidated to form Johnson & Johnson Consumer Products, Inc. In the same year, Surgikos, Inc., and Johnson & Johnson Patient Care, Inc., were combined to form Johnson & Johnson Medical, Inc.
In late 1993 Johnson & Johnson Advanced Behavioral Technologies, Inc., was formed to help the Company become the world leader in prevention and behavior science application. In 1994, Codman and Shurtleff and Johnson & Johnson Orthopedics combined to form Johnson & Johnson Professional, Inc.
The emergence of a new managed care market led to the 1994 formation of Johnson & Johnson Health Care Systems Inc. The organization, which includes the former Johnson & Johnson Hospital Services and Johnson & Johnson Advanced Behavioral Technologies, handles contracting and account management with managed care organizations, health maintenance organizations, large hospitals, physician networks, government and employers.
Elsewhere, international affiliates of Johnson & Johnson were created in more than 50 countries. For example, companies were begun in Australia in 1931, Sweden in 1956, Japan in 1961, Greece in 1973, Korea in 1981 and Egypt in 1985.
The Company is expanding into new markets in the People's Republic of China and Eastern Europe. In 1985, Janssen Pharmaceutica entered the Chinese market in what was then the largest pharmaceutical joint venture in that nation's history. In 1990 Johnson & Johnson Shanghai Limited, a joint venture producing BAND-AID® Brand Adhesive Bandages, was opened in China, followed the next year by Johnson & Johnson China Ltd. As part of the Company's continuing interest in joint venture opportunities, Johnson & Johnson opened an administrative office in Moscow in 1990. The same year also saw the establishment of the Company's first offices in Hungary, Poland and the former Yugoslavia, and in the Czech Republic the following year.
Today Johnson & Johnson has become a worldwide family of more than 180 companies, marketing health care products in more than 175 countries.
The Company's approximately 91,400 employees are engaged in producing products that serve a broad segment of medical needs. They range from baby care, first aid and hospital products to prescription pharmaceuticals, diagnostics and products relating to family planning, dermatology and feminine hygiene.
Starting January 1, 1996, any accidental release or regulatory non-compliance event must be reported to the Corporate Worldwide Environmental Affairs office within 72 hours of occurrence. The report briefly describes the event, its causes and corrective action. Worldwide Environmental Affairs is to provide consultation to the site personnel, and: 1) collaboratively and proactively work to address the issues, and minimize the potential for recurrence; 2) assist in developing a proactive posture to prevent potential incidents; 3) exchange information on common technologies and methodologies; and 4) centralize tracking and monitoring of such events. Based on these efforts and year-to-date reporting, a decrease to approximately 145 events is projected for 1996.
As is the case with virtually all of U.S. industry, Johnson & Johnson companies have in the past sent industrial waste to disposal facilities that, in some cases, are now being remediated under the federal "Superfund" law. Their companies are actively participating in the Superfund process at approximately 17 such sites throughout the United States and Puerto Rico, and are bearing their share of the remediation costs. In most cases, the sums their are being called upon to contribute are quite minimal.
New Drugs Boost Profits- New concepts are the keys
Buoyed by new products, Johnson & Johnson continued its strong financial performance by reporting that revenue and earnings rose substantially. The New Brunswick health care company attributed the increases to several of its newest products, including such prescription drugs as Risperdal, which is used to treat schizophrenia, and Propulsid, a gastrointestinal medicine.
This bodes well for many drug companies, because new products command premium prices from managed-care companies and hospitals. Consequently, Wall Street looks for sustained quarterly gains over the near term.
In fact, rising prices for drugs and medical devices, another area in which Johnson & Johnson is a significant player, are among the factors contributing to a projected 4 percent rise in health costs this year, according to a survey by Foster Higgins, benefits consultants. "New CONCEPTS are the key," said Hemant Shah, an independent analyst who follows the drug industry. "But even more important is the way (Johnson & Johnson) adapts the concepts and manages its business. The growth was pretty good across the board."
Indeed, the company's domestic pharmaceutical sales rose 20 percent, to $877 million, while international drug sales increased 10 percent, to $924 million. Sales of medical devices were up 15 percent, to $2.1 billion. At the same time, sales of consumer products jumped 10 percent, to $1.6 billion. This category includes such popular items as Tylenol and Pepcid AC, a new over-the-counter medication for fighting antacid.
In coming days, several drug makers will report earnings. According to Zack's, which compiles Wall Street estimates, Schering-Plough Corp. is expected to post earnings of 77 cents, while analysts look for 60 cents from Warner-Lambert Corp. American Home Products Corp. is expected to report 78 cents and Merck & Co. is anticipated to post 85 cents. Wall Street looks for $1.41 from Bristol-Myers Squibb Co.
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