PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS EXECUTIVE SUMMARY In 1991, the U.S.

International Trade Commission (the Commission) conducted a study on the pharmaceutical industry, Global Competitiveness of U.S. Advanced-Technology Manufacturing Industries: Pharmaceuticals,1 as part of a series on global competitiveness of U.S. advanced-technology manufacturing industries requested by the Senate Committee on Finance. Many of the findings of that study are still valid today, although significant changes have occurred in the industry. The purpose of this report is to describe the principal factors currently affecting the competitiveness of the U.S. pharmaceutical industry, particularly in relation to the industries of Western Europe and Japan. The pharmaceutical industry is complex, dynamic, and highly globalized; moreover, the industry is characterized by high research and development (R&D) expenditures and extensive regulation of its products compared with other manufacturing sectors. The industry has also been affected by a high number of mergers and acquisitions (M&As), which have increased globalization and, arguably, heightened efficiency. In the Commissions 1991 study, the major factors of competitiveness were found to be those that affect a companys ability to develop and deliver new pharmaceutical products or new chemical entities (NCEs), particularly those NCEs successful on a global basis.2 In the United States, changes in U.S. Food and Drug Administration (FDA) policies have led to faster approval times for NCEs, which result in extended periods during which companies can exclusively market their pharmaceutical products. As noted in the Commissions 1991 competitiveness study, longer periods of market exclusivity for pharmaceuticals increase sales revenues, and increased sales revenues in turn lead to greater profits and potentially more funding for R&D. The Commissions 1991 competitiveness study also indicated that changes in Government policies affect the competitiveness of pharmaceutical firms. Sweeping changes in barriers to trade worldwide, from tariffs to intellectual property rights and patent issues have occurred since 1991. An initiative on pharmaceuticals, established during the Uruguay Round, was implemented on January 1, 1995, providing duty-free treatment for about 7,000 pharmaceutical products and pharmaceutical intermediates; another 496 products and intermediates became duty-free on April 1, 1997, and negotiations are currently underway to make further additions. There is KISHINCHAND CHELLARAM COLLEGE 1

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS greater participation of member countries of the World Trade Organization (WTO), formed in 1995, including those of the European Union (EU),3 in agreements relating to intellectual property and patents. In the Western hemisphere, the North American Free Trade Agreement (NAFTA) has resulted in low or no tariff barriers and greater protection of patents and intellectual property rights among Canada, Mexico, and the United States. Overall, the U.S. pharmaceutical industry seems to enjoy a domestic environment conducive to researching and developing drugs, protecting its intellectual property, and obtaining regulatory approval to market its products. There is also a strong trend in the United States to invest those profits in new R&D. Recent improvements to the patent systems and Government regulatory policies in Western Europe and Japan are likely to benefit the U.S. industry as well. Because of the strong international component to this industry, that which benefits the industry in any one of these three areas will likely work to the benefit of the others. Since aging populations will only bring a rise in the demand for drug products, the U.S. pharmaceutical industry, along with the industries of Western Europe and Japan, can expect growing markets for their products.

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS PURPOSE AND SCOPE In 1991, the U.S. International Trade Commission (the Commission) conducted a study on the pharmaceutical industry, Global Competitiveness of U.S. Advanced-Technology Manufacturing Industries: Pharmaceuticals, as part of a series on global competitiveness of U.S. advanced-technology manufacturing industries requested by the Senate Committee on Finance. In the Commissions 1991 study, the major factors of competitiveness were found to be those that affect a companys ability to develop and deliver new pharmaceutical products or new chemical entities (NCEs), particularly those NCEs successful on a global basis. While the ability to put innovative products on the market is still considered the key to success in the pharmaceutical industry, pharmaceutical companies are currently affected by several changes, such as lower tariff and nontariff barriers, improved protection of intellectual property rights, and global consolidation. The purpose of this report is to describe the principal factors currently affecting the competitiveness of the U.S. pharmaceutical industry, particularly in relation to the industries of Western Europe and Japan. The original study found that a pharmaceutical companys research and development (R&D) infrastructure is a major contributing factor to its competitiveness. R&D, which by its nature is capital intensive, is necessary to create new, innovative treatments for the market. Sales revenues generate company profits, allowing for more research, which in turn might lead to another successful novel product. A cycle is initiated whereby profits from existing drug sales fund the development and marketing of future drugs. The cycle may potentially be repeated for each new drug developed and marketed. The Commissions 1991 competitiveness study also indicated that Government policies affect the competitiveness of pharmaceutical firms. Sweeping changes in barriers to trade worldwide, from tariffs to intellectual property rights and patent issues have occurred since 1991. There is

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS greater participation of member countries of the World Trade Organization (WTO), formed in 1995, including those of the European Union (EU), in agreements relating to intellectual property and patents. In the Western hemisphere, the North American Free Trade Agreement (NAFTA) has resulted in low or no tariff barriers and greater protection of patents and intellectual property rights among Canada, Mexico, and the United States. In the United States, changes in Government policies have also led to faster approval times for NCEs by the U.S. Food and Drug Administration (FDA). As noted in the Commissions 1991 competitiveness study, Government policies that lead to longer periods of market exclusivity increase the amount of sales revenues; increased sales revenues lead to greater profits and potentially more funding for R&D. Another Government policy examined in this report is the initiative on pharmaceuticals established during the Uruguay Round (see chapter 4). The agreement was implemented on January 1, 1995, providing duty-free treatment for about 7,000 pharmaceutical products and pharmaceutical intermediates; another 496 products and intermediates became duty-free on April 1, 1997, and negotiations are currently underway to make further additions. The cumulative effect of this initiative has not yet been ascertained. The Commissions 1991 competitiveness study examined conditions of competitiveness in world markets. Now, as then, the pharmaceutical industry continues to be global in scope and any distinct delineation between a domestic and foreign firm is further blurred by continued consolidation. In the Commissions 1991 competitiveness study, country and regional data were aggregated based on geographical location of facilities rather than the location of corporate headquarters. The same practice will be used in this report, unless otherwise specified. Overviews of the U.S., Western European, 6 and Japanese industries, similar though less extensive than in the Commissions 1991 report, are provided for assessment of relative competitiveness.

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS HISTORY The earliest drugstores date to the middle ages. The first known drugstore was opened by Arabian pharmacists in Baghdad in 754, and many more soon began operating throughout the medieval Islamic world and eventually medieval Europe. By the 19th century, many of the drugstores 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. Legislation was enacted to test and approve drugs and to require appropriate labeling. Prescription and non-prescription drugs became legally distinguished from one another as the pharmaceutical industry matured. The industry got underway in earnest from the 1950s, due to the development of systematic scientific approaches, understanding of human biology (including DNA) and sophisticated manufacturing techniques. Numerous new drugs were developed during the 1950s and massproduced and marketed through the 1960s. These included the first oral contraceptive, "The Pill", Cortisone, blood-pressure drugs and other heart medications. MAO Inhibitors, chlorpromazine (Thorazine), Haldol (Haloperidol) and the tranquilizers ushered in the age of psychiatric medication. Valium (diazepam), discovered in 1960, was marketed from 1963 and rapidly became the most prescribed drug in history, prior to controversy over dependency and habituation. Attempts were made to increase regulation and to limit financial links between companies and prescribing physicians, including by the relatively new U.S. Food and Drug Administration (FDA). Such calls increased in the 1960s after the thalidomide tragedy came to light, in which the use of a new anti-emetic in pregnant women caused severe birth defects. In 1964, the World Medical Association issued its Declaration of Helsinki, which set standards for clinical research and demanded that subjects give their informed

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS consent before enrolling in an experiment. Pharmaceutical companies became required to prove efficacy in clinical trials before marketing drugs. 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 to a greater rate. Legislation allowing for strong patents, to cover both the process of manufacture and the specific products, came in to force in most countries. 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. The pharmaceutical industry entered the 1980s pressured by economics and a host of new regulations, both safety and environmental, but also transformed by new DNA chemistries and new technologies for analysis and computation. Drugs for heart disease and for AIDS were a feature of the 1980s, involving challenges to regulatory bodies and a faster approval process. Managed care and Health maintenance organizations (HMOs) spread during the 1980s as part of an effort to contain rising medical costs, and the development of preventative and maintenance medications became more important. A new business atmosphere became institutionalized in the 1990s, characterized by mergers and takeovers, and by a dramatic increase in the use of contract research organizations for clinical development and even for basic R&D. The pharmaceutical industry confronted a new business climate and new regulations, born in part from dealing with world market forces and protests by activists in developing countries. Animal Rights activism was also a challenge. Marketing changed dramatically in the 1990s. The Internet made possible the direct purchase of medicines by drug consumers and of raw materials by drug producers, transforming the nature of business. In the US, Direct-to-consumer advertising proliferated on radio and TV because of new FDA regulations in 1997 that liberalized requirements for the presentation of risks. The new antidepressants, the SSRIs, notably Fluoxetine (Prozac), rapidly became bestsellers and marketed for KISHINCHAND CHELLARAM COLLEGE 6

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS additional disorders. Drug development progressed from a hit-and-miss approach to rational drug discovery in both laboratory design and naturalproduct surveys. Demand for nutritional supplements and so-called alternative medicines created new opportunities and increased competition in the industry. Controversies emerged around adverse effects, notably regarding Vioxx in the US, and marketing tactics. Pharmaceutical companies became increasingly accused of disease mongering or overmedicalizing personal or social problems. RESEARCH AND DEVELOPMENT 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 earlystage drug discovery has traditionally been carried out by universities and research institutions. Public funding accounts for 80% of the amount spent on basic research for new drugs and vaccines in the United States. 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. The amount of capital required for late stage development has made it a historical strength of the larger pharmaceutical companies.

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS INDUSTRY ASSOCIATIONS

European Confederation of Pharmaceutical Entrepreneurs (EUCOPE) Drug Information Association (DIA) European Generic Medicines Association European Federation of Pharmaceutical Industries and Associations (EFPIA) European Pharmaceutical Market Research Association (EphMRA) International Federation of Pharmaceutical Manufacturers and Associations (IFPMA) Japan Pharmaceutical Manufacturers Association (JPMA) New York Health Products Council (NYHPC) Pharmaceutical Research and Manufacturers of America (PhRMA) Irish Pharmaceutical Healthcare Association (IPHA)

REGULATORY AUTHORITIES International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH)

European Medicines Agency (EMEA) Therapeutic Goods Administration (Australia) (TGA) U.S. Food and Drug Administration (FDA) Ministry of Health, Labour and Welfare (Japan) Medicines and Healthcare products Regulatory Agency (MHRA) Central Drugs Standards Control Organisation (India) (CDSCO) Ukrainian Drug Registration Agency Medicines Authority (Malta)

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS THE COST OF INNOVATION Drug companies are like other companies in that they manufacture products that must be sold for a profit in order for the company to survive and grow. They are different from some companies because the drug business is very risky. For instance, only one out of every ten thousand discovered compounds actually becomes an approved drug for sale. Much expense is incurred in the early phases of development of compounds that will not become approved drugs. In addition, it takes about 7 to 10 years and only 3 out of every 20 approved drugs bring in sufficient revenue to cover their developmental costs, and only 1 out of every 3 approved drugs generates enough money to cover the development costs of previous failures. This means that for a drug company to survive, it needs to discover a blockbuster (billion-dollar drug) every few years. Drug discovery and development is very expensive; of all compounds investigated for use in humans only a small fraction are eventually approved in most nations by government appointed medical institutions or boards, who have to approve new drugs before they can be marketed in those countries. In 2010 18 NMEs (New Molecular Entities) were approved and three biologics by the FDA, or 21 in total, which is down from 26 in 2009 and 24 in 2008. On the other hand, there were only 18 approvals in total in 2007 and 22 back in 2006. Since 2001, the Center for Drug Evaluation and Research has averaged 22.9 approvals a year. This approval comes only after heavy investment in pre-clinical development and clinical trials, as well as a commitment to ongoing safety monitoring. Drugs which fail part-way through this process often incur large costs, while generating no revenue in return. If the cost of these failed drugs is taken into account, the cost of developing a successful new drug (New chemical entity or NCE), has been estimated at about 1.3 billion USD

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS (not including marketing expenses). Professors Light and Lexchin reported in 2012, however, that the rate of approval for new drugs has been a relatively stable average rate of 15 to 25 for decades. Industry-wide research and investment reached a record $65.3 billion in 2009. While the cost of research in the U.S. was about $34.2 billion between 1995 and 2010, revenues rose faster (revenues rose by $200.4 billion in that time). A study by the consulting firm Bain & Company reported that the cost for discovering, developing and launching (which factored in marketing and other business expenses) a new drug (along with the prospective drugs that fail) rose over a five-year period to nearly $1.7 billion in 2003. These estimates also take into account the opportunity cost of investing capital many years before revenues are realized (see Time-value of money). Because of the very long time needed for discovery, development, and approval of pharmaceuticals, these costs can accumulate to nearly half the total expense. Some approved drugs, such as those based on re-formulation of an existing active ingredient (also referred to as Line-extensions) are much less expensive to develop. Calculations and claims in this area are controversial because of the implications for regulation and subsidization of the industry through tax credits and federally funded research grants.

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS PRODUCT APPROVAL In the United States, new pharmaceutical products must be approved by the Food and Drug Administration (FDA) as being both safe and effective. This process generally involves submission of an Investigational new drug filing with sufficient pre-clinical data to support proceeding with human trials. Following IND approval, three phases of progressively larger human clinical trials may be conducted. Phase I generally studies toxicity using healthy volunteers. Phase II can include Pharmacokinetics and Dosing in patients, and Phase III is a very large study of efficacy in the intended patient population. Following the successful completion of phase III testing, a New Drug Application is submitted to the FDA. The FDA review the data and if the product is seen as having a positive benefit-risk assessment, approval to market the product in the US is granted. A fourth phase of post-approval surveillance is also often required due to the fact that even the largest clinical trials cannot effectively predict the prevalence of rare side-effects. Post-marketing surveillance ensures that after marketing the safety of a drug is monitored closely. In certain instances, its indication may need to be limited to particular patient groups, and in others the substance is withdrawn from the market completely. Questions continue to be raised regarding the standard of both the initial approval process, and subsequent changes to product labeling (it may take many months for a change identified in post-approval surveillance to be reflected in product labeling) and this is an area where congress is active. The FDA provides information about approved drugs at the Orange Book site. In many non-US western countries a 'fourth hurdle' of cost effectiveness analysis has developed before new technologies can be provided. This focuses on the efficiency (in terms of the cost per QALY) of the technologies in question rather than their efficacy. In England NICE approval requires technologies be made available by the NHS, whilst similar arrangements exist with the Scottish Medicines Consortium in Scotland and the Pharmaceutical Benefits Advisory Committee in Australia. A product must pass the threshold for costeffectiveness if it is to be approved. Treatments must represent 'value for money' and a net benefit to society. There is much speculation that a NICE style framework may be implemented in the USA in an attempt to decrease KISHINCHAND CHELLARAM COLLEGE 11

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS CONTROVERSIES Due to repeated accusations and findings that some clinical trials conducted or funded by pharmaceutical companies may report only positive results for the preferred medication, the industry has been looked at much more closely by independent groups and government agencies. In response to specific cases in which unfavorable data from pharmaceutical company-sponsored research was not published, the Pharmaceutical Research and Manufacturers of America have published new guidelines urging companies to report all findings and limit the financial involvement in drug companies of researchers. US congress signed into law a bill which requires phase II and phase III clinical trials to be registered by the sponsor on the clinical trials.gov website run by the NIH. Drug researchers not directly employed by pharmaceutical companies often look to companies for grants, and companies often look to researchers for studies that will make their products look favorable. Sponsored researchers are rewarded by drug companies, for example with support for their conference/symposium costs. Lecture scripts and even journal articles presented by academic researchers may actually be 'ghost-written' by pharmaceutical companies. Some researchers who have tried to reveal ethical issues with clinical trials or who tried to publish papers that show harmful effects of new drugs or cheaper alternatives have been threatened by drug companies with lawsuits. Since 2008, pharmaceutical companies have been increasing the cost of name-brand prescriptions to offset declining revenues as out-of-patent drugs become available as generics. Simultaneously, pharmaceutical manufacturers are taking increasing advantage of tax havens to avoid taxation.

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS LEGAL ISSUES Where pharmaceutics have been shown to cause sideeffects, civil action has occurred, especially in countries where tort payouts are likely to be large. The top 20 pharmaceutical cases account for over $16 billion in recoveries. Due to high-profile cases leading to large compensations, most pharmaceutical companies endorse tort reform. Recent involved Vioxx and SSRI antidepressants. PHARMACEUTICAL FRAUD Pharmaceutical fraud involves activities that result in false claims to insurers or programs such as Medicare in the United States or equivalent state programs for financial gain to a pharmaceutical company. There are several different schemes used to defraud the health care system which are particular to the pharmaceutical industry. These include: Good Manufacturing Practice (GMP) Violations, Off Label Marketing, Best Price Fraud, CME Fraud, Medicaid Price Reporting, and Manufactured Compound Drugs. The Federal Bureau of Investigation (FBI) estimates that health care fraud costs American taxpayers $60 billion a year. Of this amount $2.5 billion was recovered through False Claims Act cases in FY 2010. Examples of fraud cases include the GlaxoSmithKline $3 billion settlement, Pfizer $2.3 billion settlement and Merk $650 million settlement. Damages from fraud

controversies

have

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS can be recovered by use of the False Claims Act, most commonly under the qui tam provisions which rewards an individual for being a "whistleblower", or relator (law). Antipsychotic drugs are now the top-selling class of pharmaceuticals in America, generating annual revenue of about $14.6 billion. Every major company selling the drugs Bristol-Myers Squibb, Eli Lilly, Pfizer, AstraZeneca and Johnson & Johnson has either settled recent government cases, under the False Claims Act, for hundreds of millions of dollars or is currently under investigation for possible health care fraud. Following charges of illegal marketing, two of the settlements set records last year for the largest criminal fines ever imposed on corporations. One involved Eli Lillys antipsychotic Zyprexa, and the other involved Bextra. In the Bextra case, the government also charged Pfizer with illegally marketing another antipsychotic, Geodon; Pfizer settled that part of the claim for $301 million, without admitting any wrongdoing. On 2 July 2012, GlaxoSmithKline pleaded guilty to criminal charges and agreed to a $3 billion settlement of the largest health-care fraud case in the U.S. and the largest payment by a drug company. The settlement is related to the company's illegal promotion of prescription drugs, its failure to report safety data, bribing doctors, and promoting medicines for uses for which they were not licensed. The drugs involved were Paxil, Wellbutrin, Advair, Lamictal, and Zofran for off-label, non-covered uses.Those and the drugs Imitrex, Lotronex, Flovent, and Valtrex were involved in the kickback scheme. The following is a list of the four largest settlements reached with pharmaceutical companies from 1991 to 2012, rank ordered by the size of the total settlement. The following is a list of the four largest settlements reached with pharmaceutical companies from 1991 to 2012, rank ordered by the size of the total settlement. Legal claims against the pharmaceutical industry have varied widely over the past two decades, including Medicare and Medicaid fraud, off-label promotion, and inadequate manufacturing practices. KISHINCHAND CHELLARAM COLLEGE 14

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS IMPORTANCE OF PHAMACEUTICALS Pharmaceuticals are important in all aspects of health care and have been shown to be the most cost-effective means of treating some diseases when compared with surgical procedures. In the United States, emergence of health maintenance organizations (HMOs), coupled with rising private medical care costs and Government management of Medicare and Medicaid health programs, has contributed to a trend toward finding the most cost-effective way of treating illnesses. As a result of these trends, consumption of both ethical8 and overthe- counter (OTC) pharmaceuticals increased during 1993-97. Increases in Western European and Japanese consumption of pharmaceuticals also occurred during the period covered.
Laws allegedly violated (if applicable)

Company

Settlem Violation(s) ent

Year

Product(s)

GlaxoSmithKline

$3 billion

Off-label promotion/failure 2012 to disclose safety data

Avandia/Wellbu trin/Paxil

False Claims Act/FDCA

Pfizer

$2.3 billion

Off-label promotion/kickba 2009 cks

Bextra/Geodon/ Zyvox/Lyrica

False Claims Act/FDCA

Abbott Laboratories

$1.5 billion $1.4 billion

Off-label promotion Off-label promotion

2012

Depakote

False Claims Act/FDCA False Claims Act/FDCA

Eli Lilly

2009

Zyprexa

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS INDUSTRY REVENUES For the first time ever, in 2006, global spending on prescription drugs topped $643 billion, even as growth slowed somewhat in Europe and North America. The United States accounts for almost half of the global pharmaceutical market, with $289 billion in annual sales followed by the EU and Japan. Emerging markets such as China, Russia, South Korea and Mexico outpaced that market, growing a huge 81 percent. US profit growth was maintained even whilst other top industries saw little or no growth. Despite this, "the pharmaceutical industry is and has been for years the most profitable of all businesses in the U.S. In the annual Fortune 500 survey, the pharmaceutical industry topped the list of the most profitable industries, with a return of 17% on revenue." Pfizer's cholesterol pill Lipitor remains a best-selling drug worldwide. Its annual sales were $12.9 billion, more than twice as much as its closest competitors: Plavix, the blood thinner from Bristol-Myers Squibb and Sanofi-Aventis; Nexium, the heartburn pill from AstraZeneca; and Advair, the asthma inhaler from GlaxoSmithKline. IMS Health publishes an analysis of trends expected in the pharmaceutical industry in 2007, including increasing profits in most sectors despite loss of some patents, and new 'blockbuster' drugs on the horizon. Teradata Magazine predicted that by 2007, $40 billion in U.S. sales could be lost at the top 10 pharmaceutical companies as a result of slowdown in R&D innovation and the expiry of patents on major products, with 19 blockbuster drugs losing patent. MARKET LEADERS IN TERMS OF HEALTHCARE REVENUE The following is a list of the 20 largest pharmaceutical and biotech companies ranked by healthcare revenue. Some companies (e.g., Bayer, Johnson and Johnson and Procter & Gamble) have additional revenue not included here. The phrase Big Pharma is often used to refer to companies with revenue in excess of $3 billion, and/or R&D expenditure in excess of $500 million.

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS

Revenue Rank 2008 Company Country Total Healthcare Revenues R&D 2006 (USD millions)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Pfizer Novartis Merck & Co. Bayer GlaxoSmithKline Johnson Johnson Sanofi HoffmannLa Roche AstraZeneca Abbott Laboratories Bristol-Myers Squibb Eli Lilly Company Amgen Boehringer Ingelheim Schering-Plough Baxter International Takeda Pharmaceutical Co. Genentech Procter & Gamble and and USA Switzerland USA Germany United Kingdom USA France Switzerland United Kingdom USA USA USA USA Germany USA USA Japan 33,547 26,475 22,476 17,914 15,691 14,268 13,284 33,547 26,475 22,476 17,914 15,691 14,268 13,284 10,594 10,378 10,284

Net income/ Employees (loss) 2006 2006 (USD millions)

19,337 11,053 4,434 6,450 10,135 7,202 5,033 19,337 11,053 1,717 1,585 2,663 2,950 2,163 1,057 1,397 2,870 122,200 138,000 74,372 106,200 106,000 102,695 100,735 122,200 138,000 66,800 60,000 50,060 48,000 43,000 41,500 38,428 15,000

(USD millions)
7,599 7,125 4,783 1,791 6,373 5,349 5,565 5,258 3,902 2,255 3,067 3,129 3,366 1,977 2,188 614 1,620

18 19

USA USA

9,284 8,964

1,773 n/a

2,113 10,340

33,500 29,258

SUM AVERAGE

497,519 22,476

70,843 2,255

110,077 1,717

1,342,700 66,800

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS MARKET LEADERS IN TERMS OF SALES The top 15 pharmaceutical companies by 2008 sales are: Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Company
Pfizer GlaxoSmithKline Novartis Sanofi-Aventis AstraZeneca HoffmannLa Roche Johnson & Johnson Merck & Co. Abbott Eli Lilly and Company Amgen Wyeth Bayer Teva Takeda

Sales ($M)
43,363 36,506 36,506 35,642 32,516 30,336 29,425 26,191 19,466 19,140 15,794 15,682 15,660 15,274 13,819

Based/Headquartered in
United States United Kingdom Switzerland France United Kingdom Switzerland United States United States United States United States United States United States Germany Israel Japan

MERGERS, ACQUISITIONS, AND CO-MARKETING OF DRUGS A merger, acquisition, or co-marketing deal between pharmaceutical companies may occur as a result of complementary capabilities between them. A small biotechnology company might have a new drug but no sales or marketing capability. Conversely, a large pharmaceutical company might have unused capacity in a large sales force due to a gap in the company pipeline of new products. It may be in both companies' interest to enter into a deal to capitalize on the synergy between the companies.

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS PRESCRIPTIONS In the U.S., prescriptions have increased over the past decade to 3.4 billion annually, a 61 percent increase. Retail sales of prescription drugs jumped 250 percent from $72 billion to $250 billion, while the average price of prescriptions has more than doubled from $30 to $68. PATENTS AND GENERICS Patents have been criticized in the developing world, as they are thought to reduce access to existing medicines.[74] However, without the financial incentive of patents, future innovation of medicines is discouraged. Reconciling patents and universal access to medicine would require an efficient international policy of price discrimination. Moreover, under the TRIPS agreement of the World Trade Organization, countries must allow pharmaceutical products to be patented. In 2001, the WTO adopted the Doha Declaration, which indicates that the TRIPS agreement should be read with the goals of public health in mind, and allows some methods for circumventing pharmaceutical monopolies: via compulsory licensing or parallel imports, even before patent expiration. In March 2001, 40 multi-national pharmaceutical companies brought litigation against South Africa for its Medicines Act, which allowed the generic production of antiretroviral drugs (ARVs) for treating HIV, despite the fact that these drugs were on-patent. HIV was and is an epidemic in South Africa, and ARVs at the time cost between 10,000 and 15,000 USD per patient per year. This was unaffordable for most South African citizens, and so the South African government committed to providing ARVs at prices closer to what people could afford. To do so, they would need to ignore the patents on drugs and produce generics within the country (using a compulsory license), or import them from abroad. The Indian pharmaceutical company Cipla audaciously offered to make the drugs at 350 USD per patient per year, roughly 1/40th of the lowest price available from a patent holder, which stunned the world community. After massive international protest in favor of public health rights (including the collection of 250,000 signatures by MSF), the governments of several developed countries (including The Netherlands, Germany, France, and later the US) backed the South African government, and the case was dropped in April of that year. KISHINCHAND CHELLARAM COLLEGE 19

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS PUBLICATIONS The drug company Merck & Co. publishes the Merck Manual of Diagnosis and Therapy, the world's best-selling medical textbook, and the Merck Index, a collection of information about chemical compounds. MARKETING Pharmaceutical companies commonly spend a large amount on advertising, marketing and lobbying. In the US, drug companies spend $19 billion a year on promotions. Advertising is common in healthcare journals as well as through more mainstream media routes. In some countries, notably the US, they are allowed to advertise directly to the general public. Pharmaceutical companies generally employ sales people (often called 'drug reps' or, an older term, 'detail men') to market directly and personally to physicians and other healthcare providers. In some countries, notably the US, pharmaceutical companies also employ lobbyists to influence politicians. Marketing of prescription drugs in the US is regulated by the federal Prescription Drug Marketing Act of 1987. TO HEALTHCARE PROFESSIONALS Currently, there are approximately 81,000 pharmaceutical sales representatives in the United States pursuing some 830,000 pharmaceutical prescribers. A pharmaceutical representative will often try to see a given physician every few weeks. Representatives often have a call list of about 200-300 physicians with 120-180 targets that should be visited in 1-2 or 3 week cycle. The number of pharmaceutical sales reps has been shrinking between 2008 and 2010, an estimated 30% industry wide reduction has occurred and current estimates are there May only be 60,000 pharmaceutical sales reps in the United States. TO INSURANCE AND PUBLIC HEALTH BODIES Private insurance or public health bodies (e.g. the NHS in the UK) decide which drugs to pay for, and restrict the drugs that can be prescribed through the use of formularies. Public and private insurers restrict the brands, types and number of drugs that they will cover. Not only can the insurer affect drug sales by including or excluding a particular drug from a

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS formulary, they can affect sales by tiering or placing bureaucratic hurdles to prescribing certain drugs as well. In January 2006, the U.S. instituted a new public prescription drug plan through its Medicare program known as Medicare Part D. This program engages private insurers to negotiate with pharmaceutical companies for the placement of drugs on tiered formularies. TO RETAIL PHARMACIES AND STORES Commercial stores and pharmacies are a major target of non-prescription sales and marketing for pharmaceutical companies. DIRECT TO CONSUMER ADVERTISING Since the 1980s new methods of marketing for prescription drugs to consumers have become important. Direct-to-consumer media advertising was legalized in the FDA Guidance for Industry on Consumer-Directed Broadcast Advertisements. Internationally, many pharmaceutical companies market directly to the consumer rather than going through a conventional retail sales channel. CONTROVERSY ABOUT DRUG MARKETING AND LOBBYING There has been increasing controversy surrounding pharmaceutical marketing and influence. There have been accusations and findings of influence on doctors and other health professionals through drug reps, including the constant provision of marketing 'gifts' and biased information to health professionals; highly prevalent advertising in journals and conferences; funding independent healthcare organizations and health promotion campaigns; lobbying physicians and politicians (more than any other industry in the US); sponsorship of medical schools or nurse training; sponsorship of continuing educational events, with influence on the curriculum; and hiring physicians as paid consultants on medical advisory boards. To help ensure the status quo on U.S. drug regulation and pricing, the pharmaceutical industry has thousands of lobbyists in Washington, DC that lobby Congress and protect their interests. The pharmaceutical industry spent $855 million, more than any other industry, on lobbying activities from 1998 to 2006, according to the non-partisan Center for Public Integrity. KISHINCHAND CHELLARAM COLLEGE 21

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS Some advocacy groups, such as No Free Lunch, have criticized the effect of drug marketing to physicians because they say it biases physicians to prescribe the marketed drugs even when others might be cheaper or better for the patient. There have been related accusations of disease mongering (over-medicalising) to expand the market for medications. An inaugural conference on that subject took place in Australia in 2006. In 2009, the Government-funded National Prescribing Service launched the "Finding Evidence - Recognising Hype" program, aimed at educating GPs on methods for independent drug analysis. It has been argued that the design of the Diagnostic and Statistical Manual of Mental Disorders and the expansion of the criteria represent an increasing medicalization of human nature, or "disease mongering", driven by drug company influence on psychiatry. The potential for direct conflict of interest has been raised, partly because roughly half the authors who selected and defined the DSMIV psychiatric disorders had or previously had financial relationships with the pharmaceutical industry. The president of the organization that designs and publishes the DSM, the American Psychiatric Association, recently acknowledged that in general American psychiatry has "allowed the biopsychosocial model to become the bio-bio-bio model" DEVELOPING WORLD The role of pharmaceutical companies in the developing world is a matter of some debate, ranging from those highlighting the aid provided to the developing world, to those critical of the use of the poorest in human clinical trials, often without adequate protections, particularly in states lacking a strong rule of law. Other criticisms include an alleged reluctance of the industry to invest in treatments of diseases in less economically advanced countries, such as malaria; Criticism for the price of patented AIDS medication, which could limit therapeutic options for patients in the Third World, where most of the AIDS infected people are living. However, a better policy of price discrimination would benefit to both patients and companies.

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS SWOT ANALYSIS: Strengths: 1. Cost Competitiveness 2. Developed Industries with Strong Manufacturing Base 3. Well Established R&D infrastructure 4. Access to pool of highly trained scientists, Weaknesses: 1. Low investments in innovative R&D. 2. Lack of resources to compete with MNCs for New Drug Discovery & Research 3. Lack of strong linkages between industry and academia. 4. Low medical and healthcare expenditure in the country Opportunities: 1. Significant export potential. 2. Marketing alliances for MNC products in domestic market and international market. 3. Contract manufacturing arrangements with MNCs 4. Potential for developing India as a centre for international clinical trials. Threats: 1. Product patent regime poses serious challenge to domestic industry unless it invests in research and development 2. R&D efforts of Indian pharmaceutical companies hampered by lack of enabling regulatory requirement. 3. Drug Price Control Order puts unrealistic ceilings on product prices and profitability 4. Export effort hampered by procedural hurdles in India as well as nontariff barriers imposed abroad.

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS

Power of Suppliers Volume benefits occur Inputs standard, available locally Numerous suppliers-switching cost low Suppliers can go for forward integration Raw material cost constitute more than 50% of the total expenses

Barriers to Entry Very low barriers to entry Government policies supportive For entry price regulation exists Economies of scale exist Proprietory technology and Product will exist after 2005

Industry Competition Highly competitive. Top five players have mere 18% market share Lower fixed cost and high working capital

Threats of Substitutes No substitutes for the medicines Biotechnology is a threat to synthetic pharma products

Power of Buyers End consumers do not have bargaining power Brand identity exists but is in the hands Of Influencer (Doctors) Price Sensitivity is less Highly fragmented market, so buyer Concentration v/s industry is low

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS OVERVIEW OF PHARMACUETICAL INDUSTRY IN INDIA The Indian pharmaceutical industry currently tops the chart amongst India's science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. A highly organized sector, the Indian pharmaceutical industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high amongst all the third world countries, in terms of technology, quality and the vast range of medicines that are manufactured. It ranges from simple headache pills to sophisticated antibiotics and complex cardiac compounds; almost every type of medicine is now made in the Indian pharmaceutical industry. The Indian pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The Pharmaceutical and Chemical industry in India is an extremely fragmented market with severe price competition and government price control. 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 injectibles. There are approximately 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units).The Government has also played a vital role in the development of the India Software Industry. In 1986, the Indian government announced a new software policy which was designed to serve as a catalyst for the software industry. This was followed in 1988 with the World Market Policy and the establishment of the Software Technology Parks of India (STP) scheme. In addition, to attract foreign direct investment, the Indian Government permitted foreign equity of up to 100 percent and duty free import on all inputs and products.

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS CURRENT SCENARIO India's pharmaceutical industry is now the third largest in the world in terms of volume and stands 14th in terms of value. According to data published by the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, the total turnover of India's pharmaceuticals industry between September 2008 and September 2009 was US$ 21.04 billion. Of this the domestic market was worth US$ 12.26 billion. The Indian pharmaceuticals market is expected to reach US$ 55 billion in 2020 from US$ 12.6 billion in 2009. The market has the further potential to reach US$ 70 billion by 2020 in an aggressive growth scenario. Moreover, the increasing population of the higher-income group in the country, will open a potential US$ 8 billion market for multinational companies selling costly drugs by 2015. Besides, the domestic pharma market is estimated to touch US$ 20 billion by 2015, making India a lucrative destination for clinical trials for global giants. Further estimates the healthcare market in India to reach US$ 31.59 billion by 2020. Diagnostics Outsourcing/Clinical Trials The Indian diagnostic services are projected to grow at a CAGR of more than 20 per cent during 2010-2012. Some of the major Indian pharmaceutical firms, including Sun Pharma, Cadilla Healthcare and Piramal Life Sciences, had applied for conducting clinical trials on at least 12 new drugs in 2010, indicating a growing interest in new drug discovery research. Generics India tops the world in exporting generic medicines worth US$ 11 billion and currently, the Indian pharmaceutical industry is one of the worlds largest and most developed. Moreover, the Indian generic drug market to grow at a CAGR of around 17 per cent between 2010-11 and 2012-13. Union Minister of Commerce and Industry and Minister for Trade and Industry, Singapore, have signed a 'Special Scheme for Registration of Generic Medicinal Products from India' in May 2010, which seeks to fasttrack the registration process for Indian generic medicines in Singapore. KISHINCHAND CHELLARAM COLLEGE 26

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS ADVANTAGE INDIA The Indian Pharmaceutical Industry, particularly, has been the front runner in a wide range of specialties involving complex drugs' manufacture, development and technology. With the advantage of being a highly organized sector, the pharmaceutical companies in India are growing at the rate of $ 4.5 billion, registering further growth of 8 - 9 % annually. More than 20,000 registered units are fragmented across the country and reports say that leading Indian pharmaceutical companies control 70% of the market share with stark price competition and government price regulations. Competent workforce: India has a pool of personnel with high managerial and technical competence as also skilled workforce. It has an educated work force and English is commonly used. Professional services are easily available. Cost-effective chemical synthesis: Its track record of development, particularly in the area of improved cost-beneficial chemical synthesis for various drug molecules is excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk drugs. Legal & Financial Framework: India has a 53 year old democracy and hence has a solid legal framework and strong financial markets. There is already an established international industry and business community. Information & Technology: It has a good network of world-class educational institutions and established strengths in Information Technology. Globalization: The country is committed to a free market economy and globalization. Above all, it has a 70 million middle class market, which is continuously growing. Consolidation: For the first time in many years, the international pharmaceutical industry is finding great opportunities in India. The process of consolidation, which has become a generalized phenomenon in the world pharmaceutical industry, has started taking place in India. KISHINCHAND CHELLARAM COLLEGE 27

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS

Company name Cipla Ranbaxy Lab Dr Reddy's Labs Sun Pharma LupinLtd Aurobindo Pharma Piramal Health Cadila Health Matrix Labs Wockhardt Sales in US$ million 1,033.46 951.03 866.44 805.51 603.99 582.27 483.1 354.02 310.06 309.68

RANBAXY Ranbaxy is among the predominant pharmaceutical companies in India and was founded in 1961. Ranbaxy is a research based pharma giant and became a public limited company in 1973. Ranbaxy was recently ranked among the top 10 international pharmaceutical companies in the world have presence across 49 countries. Ranbaxy is also reputed for its 11 state-of-the-art manufacturing facilities in countries like China, India, Brazil, South Africa, and Nigeria. The company has also won several awards and recognitions for its pioneering initiatives in the developing markets of the world. Ranbaxy is also a member of the Indian Pharmaceutical Alliance and Organization of Pharmaceutical Producers of India. In the present scenario Ranbaxy commands more than 5% share of the Indian pharmaceutical market. Ranbaxys product portfolio is diverse and includes drugs that cater to nutrition, infectious diseases, gastro-enteritis, pain management, cardiovascular ailments, dermatology, and central nervous system related ailments. Ranbaxys operations in India are designed under as many as 9 SBUs which take care of the various categories of medicines and drugs that are manufactured by Ranbaxy. The company is especially well-known for having the highest research and development (R&D) budget among pharma companies in the world which is as high as US$ 100 million. Ranbaxy India operations are handled by 2,500 employees and the companys market share in India is worth around US$6 billion. KISHINCHAND CHELLARAM COLLEGE 28

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS DR. REDDY'S LABORATORIES Dr. Reddy's Laboratorie is one of the popular pharmaceutical companies with base in more than 100 countries. The medicines of Dr. Reddy's Laboratories Limited are easily available all across the globe. Dr. Reddy's Pharmaceutical Company is very much customer friendly. It takes care of the fact that maximum people get benefited by the products of this pharmaceutical company. It commercialized various treatments so as to provide high tech treatment to the masses. It tries to meet the medical needs of the people. Though Dr. Reddy's Laboratories is located in various parts of the world, it has its headquarters in India. The subsidiaries of this company are found at various countries like US, Germany, UK, Russia and Brazil. 16 countries have the representative offices of Dr. Reddy's Laboratories Limited. 21 countries have third party distribution. CIPLA Cipla was founded by Khwaja Abdul Hamied in 1935 and was known as The Chemical, Industrial and Pharmaceutical Laboratories, though it is better known by the acronym Cipla today. Cipla was registered in August, 1935 as a public limited enterprise and it began with an authorized capital of Rs. 6 lakh. Though set up in 1935, it was only in 1937 that Cipla began manufacturing and marketing its pharmaceutical products. Today, the company has its facilities spread across several locations across India such as Mumbai, Goa, Patalganga, Kurkumbh, Bangalore, and Vikhroli. Apart from its strong presence in the Indian market, Cipla also has an extensive export market and regularly exports to more than 150 countries in regions such as North America, South American, Asia, Europe, Middle East, Australia, and Africa. For the year ended 31st March, 2007 Ciplas exports were worth approximately Rs. 17,500 million. Cipla is also considerably well-known for its technological innovation and processes for which the company received know-how loyalties to the tune of Rs. 750 million during 2006-07. KISHINCHAND CHELLARAM COLLEGE 29

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS SUN PHARMACEUTICALS: Sun Pharmaceuticals was set up in 1983 and the company started off with only 5 products to cure psychiatric illness. Sun Pharma is known worldwide as the manufacture of specialty Active Pharmaceuticals Ingredients and formulations. However, the company is also concerned with chronic treatments such as cardiology, psychiatry, neurology, gastroenterology, diabetology, and respiratory ailments. Active Pharmaceuticals Ingredients (API) include peptides, steroids, hormones, and anti-cancer drugs and their quality is internationally approved. The international offices of Sun Pharmaceuticals Industries Ltd. are located in British Virgin Islands, Russia, and Bangladesh. There are 3 major group companies of Sun Pharmaceuticals Industries are: Caraco Pharmaceuticals Laboratories (based in Detroit, Michigan) Sun Pharmaceuticals Industries Inc. (Michigan) Sun Pharmaceuticals (Bangladesh) Aurobindo Pharma Aurobindo Pharma, an India-based private pharmaceutical company having presence around the world. Aurobindo Pharma was set up in the year 1986 and started its operations in 1988-89 in Pondicherry, India. Now, the company is headquartered at Hyderabad, India. Further, and the pharmaceutical major markets over 180 APIs and 250 formulations throughout these destinations. This Indian pharmaceutical major has filed over 110 DMFs and 90 ANDAs for the USA market. So far, Aurobindo has received 45 ANDA approvals (both final and tentative) from USA alone. Aurobindo Pharma products cover segments like Antibiotics, Anti-Retro Virals, Gastroenterologicals, Anti-Allergics, CVS, CNS

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PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS CHALLENGES Over the past decade, pharmaceutical companies have entered a difficult period where shareholders, the market and regulators have created significant pressures for change within the industry. The core issues for most of drug companies are declining productivity of in-house R & D, patent expiration of number of block buster drugs, increasing legal and regulatory concern, and pricing issue. Current global financial conditions and the threat of a broad recession accelerated the timetable for implementing transformational changes in global organizations, as the industry confronts lower corporate stock prices and an increasingly cost-averse customer. Leaders of the largest global pharmaceutical companies recognize the need for transformational change in their organizations, but will need to move swiftly to ensure sustained growth. Transformations in the business model of larger pharmaceutical industry spell more opportunities for Indian pharmaceutical companies. Pharmaceutical production costs are almost 50 percent lower in India than in western nations, while overall R&D costs are about one-eighth and clinical trial expenses around one-tenth of western levels. Riding on better sales in the domestic and export markets, Indian pharmaceutical industry is expected to continue with its good performance. There are opportunities in expanding the range of generic products as more molecule come off patent, outsourcing, and above all, in focusing into drug discovery as more profits come from traditional plays. At the same time, the Indian Pharmacy Industry would have to contend with several challenges particularly the Effects of new product patent Drug price control Regulatory reforms Infrastructure development Quality management and Conformance to global standards. KISHINCHAND CHELLARAM COLLEGE 31

PHARMACEUTICAL SECTOR: INDUSTRY ANALYSIS GROWTH The Indian pharmaceutical market reached US$ 10.04 billion in size, with a value-wise growth rate of 20.4 per cent over the previous years corresponding period on a Moving Annual Total (MAT) basis for the 12 months ended July 2010. Cipla maintained its leadership position in the domestic market with 5.27 per cent share, followed by Ranbaxy. The highest growth in the domestic market was for Mankind Pharma, which grew 37.2 per cent. Leading companies in the domestic market such as Sun Pharma (25.7 per cent), Abbott (25 per cent), Zydus Cadila (24.1 per cent), Alkem Laboratories (23.3 per cent), Pfizer (23.6 per cent), GSK India (19 per cent), Piramal Healthcare (18.6 per cent) and Lupin (18.8 per cent) had impressive growth during July 2010, shows the data. The pharmaceuticals industry in India will grow by over 100 per cent over the next two years. The pharmaceutical industry is currently growing at the rate of 12 per cent, but this will accelerate soon. The sale of all types of medicines in the country stands at US$ 9.61 billion, which is expected to reach around US$ 19.22 billion by 2012. India's domestic pharmaceutical market is valued approximately at US$ 12 billion in 2010, and has shown a strong growth of 21.3 per cent for the 12 months ending September 2010. It estimates that over the next 10 years, the domestic market will grow to US$ 49 billion, at a compounded annual growth rate (CAGR) of 15 per cent. The formulations industry is expected to prosper parallel to the pharmaceutical industry. It is expected that the domestic formulations market in India will grow at an annual rate of around 17 per cent in 2009-10, owing to increasing middle class population and rapid urbanization.

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