Challenges to the Pharmaceutical Industrys Blockbuster-Driven Business Model - Assignment Example

CHALLENGES TO THE PHARMACEUTICAL INDUSTRY’S BLOCKBUSTER-DRIVEN BUSINESS MODEL AND THE EFFECTIVENESS OF GLAXOSMITHKLINE’S STRATEGIES FOR MEETING THESECHALLENGES By Student’s Name Code+ course name Professor’s name University name City, State Date Challenges to the Pharmaceutical Industry’s Blockbuster-Driven Business Model and the Effectiveness of GlaxoSmithKline’s Strategies for Meeting These Challenges The pharmaceutical sector’s blockbuster strategy of manufacturing new medication is at a critical stage today. This strategy generated one trillion dollars for the shareholders of key players. A number of challenges contribute to this critical stage. GlaxoSmithKline’s is among the sector’s major players and laid out a number of strategies to counter these challenges. The following paper is a report of the challenges facing the blockbuster-driven business model employed by the pharmaceutical sector for several decades. The paper also discusses the success of the strategies implemented by GlaxoSmithKline to meet challenges facing their blockbuster model. Challenges Scientific innovations take unexpectedly long periods to record progress or profits, which is pulling back the pharmaceutical industry’s blockbuster-driven business model (Antonijevic, 2013, p. 4). Many pharmaceuticals that launched blockbuster models between 1995 and 2000 were the outcome of discovery events began between the 1970s and 1980s (Ding et al., 2013, p. 426). Pharmaceuticals made these efforts to commercialize the upsurge of scientific understanding that had been growing for two decades. Recent scientific developments such as increased amounts of screening and genomics have raised output but their effect is yet to be felt at the bottom line. In the meantime, numerous pipelines guarantee just single digit rates of growth following the expiration of patent effects. Increases in development costs pose as another challenge for pharmaceuticals’ blockbuster strategies (Shore, 2012, p. 116). Declining success rates, higher medical expenses per patient, and the need to carry out bigger tests to gratify increasingly strict regulatory barriers cause increases in development costs. Recently printed surveys indicate that the general expenses for an effective medication increased more than twice during the 1990s, reaching $800 million, counting capital expenses (Dubey and Dubey, 2010, p. 182). While R&D is turning out to be less productive, this data is conservative, particularly for extremely competitive blockbuster groups. As a result, rises in development costs could have caused a much more significant blow to blockbuster-driven business models before the 2000s. The deterioration of patent protection contributed significantly to the collapse of blockbuster-driven business models among pharmaceuticals (Rickwood, 2012). Patent challenges included briefer durations of exclusiveness that raised competition from rival commodities that get FDA approval easily. Rising tension from the EU and UK representatives caused patents of European pharmaceuticals to face attacks from MCO insurance firms constantly. As a result, surveys predict that 12 of the 20 leading products or seven of the currently leading 10 blockbusters will lose patent exclusiveness by 2016 (Rickwood, 2012). This means drugs that remain leading globally will be mostly dedicated and biological. The substantial number of patent expirations is causing the domination of the 10 leading pharmaceuticals in the conventionally determined blockbuster market to collapse from 72% in 2006 to 63% in 2011 (Kruse et al., 2014, p. 9). This percentage includes all drugs exceeding billion dollar sales by the leading 10 pharmaceuticals. Figure 1: Pharmaceutical industry players and the financial status of their patents in 2011 Chemists, hospitals, and pharmacists have become tougher clients for pharmaceuticals, which is hindering the success of blockbuster-driven models (Shore, 2012, p. 121). These stakeholders are prescribers who pressure pharmaceuticals when reviewing and purchasing their products. Pharmaceuticals largely depended on developing ever-bigger primary care salesforces to drive returns and get a competitive edge over rival companies during the 1990s (Froud et al, 2006, p. 122). At the same time, these firms accomplished decent marginal revenue for each newly employed agent. Unfortunately, this approach is no longer successful for pharmaceuticals. Today, sales calls flood physicians’ offices as more and more agents chase fewer physicians who are ready to view their products. Additionally, a majority of the medication agents are marketing are fully developed blockbusters that other agents marketed on numerous other occasions in the past. In addition to prescribers’ growing toughness, patients and dealers too have lately been tough for pharmaceuticals (Rickwood, 2012). In the United Kingdom, institutes like NICE (the National Institute of Clinical Excellence) has been trying to meet dealers’ demands about product costs and efficiency (Dubey and Dubey, 2010, p. 188). The spread of the digital and wireless age has caused patients to become increasingly aware of their treatment options. This is because the internet has caused a radical rise in direct-to-consumer marketing. Eventually, pharmaceuticals more and more reconsider their conventional blockbuster strategies. Boundaries between the pharmaceutical and technology and innovation industries affect the current shape of the pipeline (Shore, 2012, p. 125). The surge of innovations, communications, and digitization of workplaces makes boundaries between these sectors vague. For pharmaceuticals, this means the already set up allocation pipeline is not functional anymore. This dysfunctional nature is clear in their blockbuster-driven models (Kruse et al., 2014, p. 11). Pharmaceuticals’ allocation pipeline stretches from research facilities to hospitals and chemists. Since pharmaceuticals are largely blockbuster organizations, maintaining their production within central independent abilities is important. Such pharmaceuticals are usually not part of any enterprise networks that cause high uncertainty levels and organization costs on operations that they may consider of no value. Understanding the differences between old and new business models is crucial for knowing the shape of the pipeline of the pharmaceutical industry (Rickwood, 2012). The blockbuster-driven business model focused on an all-in-house output for blockbuster drugs manufactured specifically for the mass market. This focus caused numerous challenges and these drugs became nearly obsolete between 2006 and 2010 (Shore, 2012, p. 127). As a result, there is a dire need for change within the pharmaceutical industry. Since the late 1980s, inflation has shrunk the value of $1 billion and the general market growth substantially grew the number of products reaching this previous top level. Currently, one billion dollars is just a seventh of the worldwide market share of the pharmaceutical industry’s former value during the enforcement of the first blockbuster strategy (Ding et al., 2013, p. 428). Figure 3: Inflation and market share value influence the blockbuster benchmark Efficiency of GlaxoSmithKline’s Strategies GSK’s (GlaxoSmithKline) first approach to meet challenges facing its blockbuster-driven business model was diversification (Froud et al., 2006, p. 181). This strategy shows that GSK can no longer depend on their blockbuster approach and is attempting to reduce the risk of losing patent security in the future. Blockbuster medication led to significant sales returns for GSK. This means that the diversification approach cannot last longer than the firm’s previous blockbuster-driven business strategy. Most of GSK’s ethical medication, particularly blockbusters, are losing patent protection and luring rivals to make generic drugs. For example, the patent for Valtrex, a GSK blockbuster drug, expired in 2009 (Edwards, 2009). Shortly afterwards, India’s biggest pharmaceutical introduced Valtrex’s generic form into the market. Clearly, diversification is not an effective strategy for combating the loss of patent security, particularly in the United States (Dubey and Dubey, 2010, p. 180). Figure 4: The damage generic drugs caused on GSK’s sales revenue chart (Edwards, 2009) The inability of blockbuster drugs to record soaring profits today as opposed to the 1990s is another sign of the ineffectiveness of the diversification approach (Froud et al, 2006, p. 182). During stiff competition, the sales revenue of diversified drugs might decrease significantly. In 2010, sales returns for Advandia reduced by 22% worldwide because of genetic rivalry (Burton, 2013). Diversification shows the significance of patent protection in the pharmaceutical sector that assures a large profit in ethical drugs and shields these medications from stiff competition. Sales revenue decrease radically when patents for these drugs expire in the future. For example, patents for GSK’s Zantac expired in 1997 and sales revenue dropped by 44.9% the following year. The rise in stiff competition caused a drastic drop in sales revenue for GSK’s diversified drugs, which showed more inefficiency in its strategy. Figure 5: Performance of Avandia between 2009 and 2012 (Burton, 2013) GSK’s potential increase in sales returns comes from vaccines and healthcare services (Froud et al, 2006, p. 182). GSK recorded sales increases of 20% to £11.4 billion and 14% in healthcare services to almost £10.9 billion in December 2011. The following year, vaccine sales revenue continued to rise to £11.2 billion and healthcare services to nearly £11 billion (Jayson, S 2013). Developing markets pose as potential grounds for GSK’s growth in sales revenue. In countries in like India and China, GSK can make the most of the rises in demand for drugs because of population growth. GSK recorded a 12% rise in sales revenue in developing markets in 2008 to £2.3 billion. In developed markets like the United States and the UK, GSK recorded declined sales revenue of 11% during the same financial year (Ding et al., 2013, p. 426). As a result, selling GSK’s diversified drugs in developing markets is wiser than in developed economies. Figure 6: Sales figures in vaccines and healthcare services between 2011 and 2012 (Jayson, S 2013) Another strategy by GSK towards meeting blockbuster challenges is to actively acquire and work alongside external partners (Kruse et al., 2014, p. 12). This means GSK requires outside resources to realize true diversification because of the absence of strong R&D output. Strong R&D output is not the same as a pipeline with a wide array of drugs or numerous new medications. Rather, R&D output is supposed to assist the pharmaceutical in manufacturing additional drugs that have substantial influence on sales returns and have enough strength to support the organization’s approach (Froud et al, 2006, p. 187). GSK can easily garner this strength through collaborations with other companies to acquire more outside resources. Figure 7: GSK’s share performance after acquiring Stiefel (Dunne, 2013) GSK’s diversification strategy has not changed its blockbuster business model completely. This is because the way the pharmaceutical industry makes abnormal profits has not changed either. The blockbuster-driven business model still has deep roots in key industry players like GSK. According to GSK’s CFO, gaining competitive advantage relies on the discovery and advancement of new medications along with successful product promotion (Froud et al, 2006, p. 194). In the meantime, challenges facing GSK’s blockbuster model will keep on exerting pressure on its operations since the diversification approach only counters these challenges temporarily. Diversification and acquisition are responses to challenges facing GSK’s blockbuster-driven business model like loss of patent protection, low scientific innovation output, and high reliance on blockbuster drugs. However, the same strategies do not meet challenges like high development costs and tough prescriber choice, which makes them temporary solutions. These strategies may simply buy more time for GSK and other key players in the pharmaceutical industry to come up with permanent solutions. Bibliography Antonijevic, Z 2013, Optimization of Pharmaceutical R&D Programs and Portfolios, Springer, Los Angeles, CA. Burton, TM 2013, ‘Glaxos Avandia Scores FDA Victory,’ The Wall Street Journal, June 6, viewed 2 December 2014, http://online.wsj.com/articles/SB10001424127887324299104578529632692209940 Ding, M, Eliashberg, J, and Stremersch, S 2013, Innovation and Marketing in the Pharmaceutical Industry: Emerging Practices, Research, and Policies, Springer Science & Business Media, Malden, MA. Dubey, J. and Dubey, R., 2010, ‘Pharmaceutical innovation and generic challenge: recent trends and causal factors,’ International Journal of Pharmaceutical and Healthcare Marketing, vol. 4, no. 2, pp. 175-190. Dunne, M 2013, ‘Healthy gains,’ Shares Magazine, May 16, viewed 2 December 2014, http://www.sharesmagazine.co.uk/articles/keep-taking-the-tablets#.VH16QdKUeSo Edwards, J 2009, ‘GSK Q2: Generics Wreak Havoc; Cost Reductions From Layoffs Spent on Advertising,’ CBS Money Watch, July 31, viewed 2 December 2014, http://www.cbsnews.com/news/gsk-q2-generics-wreak-havoc-cost-reductions-from- layoffs-spent-on-advertising/ Froud, J, Johal, S, Leaver, A & Williams, K 2006, Financialization and Strategy: Narrative and Numbers, Routledge, New York, NY. Jayson, S 2013, ‘GlaxoSmithKline Increases Sales but Misses Estimates on Earnings,’ Chron, February 6, viewed 2 December 2014, http://www.chron.com/business/fool/article/GlaxoSmithKline-Increases-Sales-but- Misses-4257858.php Kruse, S, Slomiany, M, Bitar, R, Jeffers, S, & Hassan, M 2014, Pharmaceutical R&D productivity: the role of alliances,’ Journal of Commercial Biotechnology, 20, 2, pp. 11- 20. Rickwood, S 2012, ‘Redefining the blockbuster model: Why the $1 billion entry point is no longer sufficient - part 1 & 2,’ Pharmaphorum, September 11, viewed 2 December 2014, http://www.pharmaphorum.com/articles/redefining-the-blockbuster-model-why-the-1- billion-entry-point-is-no-longer-sufficient-part-1 Shore, SA 2012, Forces of Change: New Strategies for the Evolving Health Care Marketplace, John Wiley & Sons, New York, NY. Read More