Corporate Strategy Assignment - The Global Pharmaceutical Industry
-
Upload
amany-hamza -
Category
Business
-
view
160 -
download
0
Transcript of Corporate Strategy Assignment - The Global Pharmaceutical Industry
The Global Pharmaceutical Industry
Amany Hamza
Student number: 21202244
Module Leader: Roger Cook
Module Tutor: Vladan Hadzic
Course: MBA / Corporate Strategy
Module Code: MC70004E
Date: 12th April 2013
(Mundasad, 2012)
The Global Pharmaceutical Industry
Table of Contents
1. EXECUTIVE OVERVIEW ............................................................................................................ 4
2. INTRODUCTION TO THE INDUSTRY ........................................................................................... 4
3. EXTERNAL ANALYSIS ................................................................................................................ 4
3.1. THE PESTEL FRAMEWORK .............................................................................................. 4
3.1.1. POLITICAL FACTORS ......................................................................................................... 4
3.1.2. ECONOMIC FACTORS ....................................................................................................... 5
3.1.3. SOCIAL FACTORS ............................................................................................................. 6
3.1.4. TECHNOLOGICAL FACTORS ................................................................................................ 7
3.1.5. ENVIRONMENTAL FACTORS .............................................................................................. 8
3.1.6. LEGAL FACTORS .............................................................................................................. 8
3.2. KEY DRIVERS FOR CHANGE ................................................................................................ 9
3.2.1. THE NEW ECONOMIC LANDSCAPES AND ITS IMPACT ON PHARMA ........................................... 9
3.2.2. THE PATENT CLIFF AND PHARMERGING .............................................................................. 9
3.2.3. EMERGING MARKETS ....................................................................................................... 9
3.2.4. HEALTHCARE SYSTEM REFORMS ......................................................................................... 9
3.2.5. POLICY- REGULATION-DRIVEN CHANGES AND IMPACTS THROUGH 2015 ................................ 9
3.3. THE FIVE FORCES FRAMEWORK ................................................................................... 10
3.3.1. THREAT OF NEW ENTRANTS ............................................................................................ 10
3.3.2. THREAT OF SUBSTITUTES ................................................................................................ 11
3.3.3. THE POWER OF BUYERS .................................................................................................. 12
3.3.4. THE POWER OF SUPPLIERS .............................................................................................. 12
3.3.5. COMPETITIVE RIVALRY ................................................................................................... 12
4. INTERNAL ANALYSIS ................................................................................................................... 13
4.1. THE VALUE CHAIN .............................................................................................................. 13
4.2. FINANCIAL ANALYSIS OF NOVARTIS...................................................................................... 15
4.2.1. RETURN ON CAPITAL EMPLOYED (ROCE) ......................................................................... 15
4.2.2. LIQUIDITY RATIOS: CURRENT RATIO ................................................................................. 15
The Global Pharmaceutical Industry
4.2.3. GEARING RATIOS .......................................................................................................... 16
4.3. ANALYSING CULTURE: THE CULTURAL WEB ............................................................................ 17
4.4. NOVARTIS STRENGTHS & WEAKNESS AND RESOURCES ........................................................... 19
5. CONCLUSION ............................................................................................................................ 20
6. ACRONYMS............................................................................................................................... 21
7. APPENDIX ................................................................................................................................. 22
8. REFERENCES ............................................................................................................................. 23
The Global Pharmaceutical Industry
4
1. EXECUTIVE OVERVIEW
This report provides an analytical strategic review of the global pharmaceutical industry. In the first part, it covers the external environment of the global pharmaceutical industry using PESTEL analysis and outlines the Key drivers for change. It then uses the Five Forces analysis to demonstrate the industry attractiveness. In the second part, we illustrate the strategic capabilities of Novartis using the Value chain to discuss Novartis’ activities and identify its core competences, strengths and weaknesses. We then attempt to highlights its financial performance, position and culture.
2. INTRODUCTION TO THE INDUSTRY
According to Gerhard Kocher, ‘Medicine knows no limits, especially not its own’ (Quotations Book, 2013). ‘Innovation is the lifeblood of the pharmaceutical industry, and has been a major driver of industry growth’ (Palgrave Macmillan, 2013). Thus ‘a healthy, vibrant and responsive pharmaceutical industry is vital to society for the development of new medicines’ (PwC, 2013).
The WHO (2013) has suggested that:
The global pharmaceuticals market is worth US$300 billion a year… The 10 largest drugs companies control over one-third of this market, several with sales of more than US$10 billion a year and profit margins of about 30%...It is predicted that North and South America, Europe and Japan will continue to account for a full 85% of the global pharmaceuticals market well into the 21st century.
EVOLUTION OF THE GLOBAL INDUSTRY
The birth origins of the Pharmaceutical Industry can be traced back to the late 19th century. The invention of penicillin was a major milestone for the emergent industry which consolidated its R&D efforts in the 1950’s (Business Wire, 2013).
3. EXTERNAL ANALYSIS
3.1. THE PESTEL FRAMEWORK
3.1.1. POLITICAL FACTORS
The early presence of the industry was characterised by increasing public discontent especially with the thalidomide disaster that served as the catalyst for greater regulatory reform. The role of the governments in enhancing accountability was reformed and the industry was heavily regulated in most countries.
Under the circumstances that the commercial interests of the Pharma industry and the public-health interests of patients coincide, governments have developed systems to regulate the pharmaceutical industry. As a result, they became a political player keen to shape the standards and processes defining regulation against unethical promotion and excessive industry profits, setting effective length of a drug’s patent life and hence monopoly control. The stringent governmental regulation associated with lengthy and expensive R&D process for approval of new drugs with fixed patent expiry, the industry is shaped as a response to these pressures and determinants.
On the other hand with governments being the major payer, industry faces increased political
The Global Pharmaceutical Industry
5
(Euler Hermes, 2012)
•Barack Obama sponsored the Genomics and Personalized Medicine Act of 2007 to accelerate genetic research. This can be an opportunity for Pharma to move towards a broader array of drugs targeting profitable segments.
2007
•The U.S. passed the Affordable Care Act which expands health insurance coverage to 25-30Mn uninsured Americans. And it grants 12 years of market exclusivity to originator biologics. New biosimilars are expected to enter the U.S. market by 2014.
2010
•Spain and Italy made substantial reductions to generic and off-patent brand prices to encourage higher generic utilization and lower health system costs. 2010
•Japan implemented its first price cut under its new protected innovative products policy, initiating a change in balance between innovation and the use of off-patent products. 2010
(Euler Hermes, 2012)
intervention due to the spiralling healthcare costs resulted in various nations have set pricing levels, which is a threat for the industry reducing its revenues. Governments’ role in setting prices and reimbursement policies resulted in pricing disparities; EU enacted the advocate of lucrative parallel trading to create an opportunity to have a single unified market.
3.1.2. ECONOMIC FACTORS
The pharmaceutical and health-care industry have been relatively immune to economic downturn, because illness doesn't take a vacation (PR Newswire, 2013). Figure 2 suggests that.
In Figure 3, we illustrate the external Economic factors influencing the Pharma industry:
Figure 2
Figure 1: The Political influences on the Pharma industry
The Global Pharmaceutical Industry
6
-Governments tend to curb the costly healthcare budgets
-Sovereign debt crisis
-Patent protection is set to dwindle between 2011 and 2014 causing a threat to brand revenues. The year 2013 will be crucial for many pharmaceutical giants especially U.S. and European companies expected to lose up to $29 billion to patent expiry (Deloitte, 2013)
-R&D costs have risen by more than 80% worldwide over the past 10 years and stringent admission requirements for new drugs (Roland Berger Strategy Consultants, 2013)
-Pharmaceutical companies increasing ties with generic counterparts to exploit myriad sales opportunities
-Prescription drug sales, albeit weakened, still account for the lino's hare of revenu, with an opportunity for sales to replace the reduction on spending on those barnds losing patent protection
-Mature markets, characterised by higher incomes will see per capita expenditure grow, this represents dynamic growth opportunities
European markets are hilghly fragmented, thus resulted in propensity in parallel trade and more sales opportunities
(Euromonitor, 2012)
-Switches to Self-Medication, OTC, Consumer health products are important source of increasing revenues. Self-medication market experienced 7% annual growth on average in 2012;
-Pharmeging 17 is in far better financial condition and lower levels of public debt, which leads to a global growth opportunity
-Generics spending in 2015 is expexted to be $400-430Bn, 70% of which will be outside developed markets
- Pharma firms strategies to offset patent expiries with organic growth and new products represent an important opportunity for more sales growth
(IMS, 2011)
-The effective tax incentives to encourage R&D efforts led to increased business growth
Gro
wth
Eco
no
mic
Fac
tors
Slow
ing Eco
no
mic Facto
rs
3.1.3. SOCIAL FACTORS
Access to medications is an ethical perspective of equity and human rights (Lage, 2011). This forms an opportunity for imposing pressure on governments to achieve universal coverage.
The growth of global pharmaceutical markets is stimulated by population growth, accompanied by the phenomenon of the ageing population. However, some major markets such as Japan and some European countries are likely to see their populations shrink. As high population growth is outpaced by an even higher GDP growth, the increase in the middle class income to spend on consumer health products can lead to a golden opportunity to fuel the shift to these drugs trends and increase the total revenue of the industry (Mennen, 2010). Figure 4 illustrates that:
Figure 3
The Global Pharmaceutical Industry
7
The growing demand from ageing population strains national health insurance plans. This spectre of straining welfare systems can yield diversified sales opportunities in covering the aggregate level of population composition – geriatric related drugs and on the other hand young generation drugs to meet the social obligations of access and quality (Mullan, 2002).
The extensive geographic diversity within emerging countries scouts for sales opportunities. Moreover understanding the divergence of pharmerging markets is an important opportunity to achieve increased access and breadth to increase ROI (IMS, 2010). Pharmaceutical companies are exploring non-traditional customer bases calls for overcoming the cultures of secrecy into integrated synergies and collaboration to maintaining a global outlook (Kumar, 2011).
Social trends call for releasing preclinical data around the pandemic diseases. This forms a threat to be conceivably used by generic competitors. Though the Pharma industry infringed the IPR by allowing exporting AIDS drugs to Africa to overcome such threats and gain social support to raise consumer loyalty.
Change in social life and increasingly hectic lifestyles, accompanied with higher incidences of chronic and obesity diseases, will drive demand for innovative therapies including weight management, vitamins and dietary supplements offering astonishing sales opportunities. In addition, companies are taking advantage of ICT to reach patients creating further opportunities to influence consumer expectations of health care and build brand awareness thus creating loyalty (Euromonitor, 2012).
3.1.4. TECHNOLOGICAL FACTORS
Technology has a cohesive interrelation with pharmaceutical innovation and diffusion. It is the technology that made number of synthetic readily transferable to pharmaceuticals. Since then significant advances in technology have led to the discovery of newer, more effective drugs and therapies. While R&D is using next generation sequencing technologies, clinical trials adapts the incorporating signal detection technologies for safe and efficacious pharmaceutical drugs grow, technological solutions will be of increasing interest that reduce barriers to clinical success (Kumar, 2011). Bioclusters can open the floodgates to bridge
For example, the makers of Clarityn
created an app which provides
users with detailed information about local pollen count and where to find nearby medication
to help ease seasonal allergy
symptoms
The collaboration between Orange
and m-Pedigree in mobile technology,
patients and clinicians can now
check whether drugs are fake by sending a single
SMS, receiving an instant verification.
Figure 4
Figure 5: Innovation Examples
The Global Pharmaceutical Industry
8
Air, Water, Soil
Pollution
Processes of material input generate:
Reaction, separation, purification and drying
Chemical synthesis processes in bulk
production
Waste water,
residual wastes,
VOC emission
Pollution
the decline of costly R&D and optimize outsourcing as in-house research is not delivering results as quickly. The advanced technology can help Pharma to exploit eHealth and eMarketing. Companies are beginning to embrace social media in terms of interactions with patients and marketing for DTC drugs as well (PwC, 2012).
3.1.5. ENVIRONMENTAL FACTORS
As the pharmaceutical industry expands, it faces more serious environmental problems arising from increasing global production. One indicator of the pharmaceutical industry collaboration is its commitment to environmental management systems (EMSs), through the integration between their environmental, health, and safety practices with principles of quality-based management and carbon offset. The overall environmental impact of the pharmaceutical industry compared with other industries, such as energy, automotive, aviation or chemical, is relatively low. The returns to society from R&D are more than twice the returns to corporations from R&D which outweighs the impacts of pollution caused from production (Taggart, 1993).
3.1.6. LEGAL FACTORS
Stronger and broader government regulation is necessary to bridge the current gulf between public and private interests (Santoro and Gorrie, 2007). Prudent regulations made research a more expensive and time-consuming process for the approval of new drugs. These regulations thus involve a potential trade-off between curbing costs today and having fewer drugs and imposing limits on profits. Regulatory standards operate as IP protectionist barriers, and use tariff and non-tariff restrictions to protect against price disparities (Health Affairs, 2013). The harmonised regulations between the EU and the US improve collaboration and give companies simultaneous access to a wider transnational market, hence an opportunity to ease the regulation process.
Over the past 20 years, more than 165 cases of civil and criminal actions were settled in the US BY Pharma companies, it adds to the costs and complexity of compliance. Besides the fines, the cost of litigation can be significant with a threat to a short-term decline in market valuation, as suggested in Figure 7 (KPMG, 2011).
Figure 6 – Manufacturing Impact on Environment
Figure 7
The Global Pharmaceutical Industry
9
3.2. KEY DRIVERS FOR CHANGE
3.2.1. THE NEW ECONOMIC LANDSCAPES AND ITS IMPACT ON PHARMA
The industry is facing reimbursement pressure from spiralling costs and overwhelmed health systems around the globe to control general spending on health care. However this recession has benefited the industry for being attractive investment for investors who are often reluctant to invest in industries such as buyouts. It also yields great M&A by the bigger Pharma companies. Moreover socially responsible behaviour is being turned on. Health and wellness are being emphasized as the antidotes to a stressful lifestyle (Deloitte, 2013).
3.2.2. THE PATENT CLIFF AND PHARMERGING
The low sales growth in key markets due to high rates of patent expiration, and the growing competition for low-cost generics are causing losses of billions in revenues. Besides the rising expenses of clinical testing, Pharma companies are trying different strategies and expanding their portfolios beyond prescription drugs (MCE, 2012).
3.2.3. EMERGING MARKETS
The huge swing of power to the 17 pharmerging markets is increasing the Pharma revenue. The pharmerging market segment is fast becoming the platform that will carry global pharmaceutical performance. Demand from emerging markets shifts traditional sales and marketing practices which is a prominent key driver for change in the industry (IMS, 2010).
3.2.4. HEALTHCARE SYSTEM REFORMS
The prospect of painful budget cuts has pushed governments in several leading healthcare markets to impose price decreases, changes in reimbursement, and tighter government restrictions.
However, the cost of healthcare is increasing as the increasing elderly population lives well beyond their earning years that result in popularity of spending on generics to gain steadily presence for providing affordable drugs to millions of people, and represent savings in public healthcare costs (Kumar, 2011).
3.2.5. POLICY- REGULATION-DRIVEN CHANGES AND IMPACTS THROUGH 2015
Significant policy changes, made in 2010, including the passage of the Affordable Care Act in the U.S are enabling more people into public healthcare. Important steps were also taken in the U.S. and Europe in the development of scientific guidelines for the approval of biosimilars (IMS, 2011).
More relaxed regulation towards trade liberalisation open new growth opportunities in distribution and trade channels. Furthermore, new regulations for post-market monitoring, and the evolving media landscape and mobile apps provide engagement with consumers to better inform themselves and take a more active role in their diagnoses and treatments (Daemmrich, 2009).
Figure 8 – Key Drivers for Change
The Global Pharmaceutical Industry
10
3.3. THE FIVE FORCES FRAMEWORK
The five forces constitute an industry’s ‘structure’. Its framework is of value to most organisations. It can provide a useful starting point for strategic analysis even where profit criteria may not apply. In most parts of the public sector, each of the five forces has its equivalents. As well as assessing the attractiveness of an industry or sector, the five forces can help set an agenda for action on the various ‘pinch-points’ that they identify (Johnson et al, 2008).
3.3.1. THREAT OF NEW ENTRANTS
The entry barriers into the pharmaceutical sector are particularly high due to a combination of strict
regulations, difficulty in gaining product approval and the need for extensive research and development. In
2011, according to EFPIA, R&D costs in Europe were €27,500m and in U.S was $38,530m. Additionally,
pharmaceutical companies need on average twelve years and more than £500 million investment to bring a
new medicine in the market.
The threat of new entrants is particularly low because of the large economies of scale and the high capital
requirements that the industry demands. All of the above factors do not attract new entrant; the threat of
Potential
Entrants
Threat
of Entry
Suppliers
Bargaining
Power
Bargaining
Power
Buyers
Substitutes
Threat of
Substitutes
Competitive
Rivalry
Figure 9 – Five Forces diagram
The Global Pharmaceutical Industry
11
Figure 10 – Threat of Entrant analysis
new entrants is relatively low, but expected to rise according to the dynamic changes in the industry.
Therefore the industry looks very attractive for existing Pharma companies.
3.3.2. THREAT OF SUBSTITUTES
While the sales of patented drugs is facing strong headwinds in the developed markets, other substitutes - consumer health products- will post strong growth rates throughout the world with consistent growth via all forms (standard, branded and private label). The recent financial success of generic drugs derives from substantial gains in volume sales (IMS, 2006). However these generics are not always available as substitutes hence drugs still under the patent protection are experiencing revenues. Similarly there is a growing threat from biosimilars1 and personalised medicines to meet the transition to preventative medicines. Switching a product from expired prescription to-OTC is A New life for old drugs (Euromonitor, 2012).
Additionally, other substitutes that Big Pharma faces are the prosperous nutraceutical, as well as the functional foods and beverage industries.
The above dynamics impose moderate threat on the industry. The more threats of substitution there are, the less attractive the Pharma industry is likely to be (Johnson et al, 2008).
1 The generic version from the biotech
- New biosimilars are expected to enter the U.S. market by 2014, downward to the U.S. approval pathway, included in the pathway, included in the Affordable Care Act, grants 12 years of market exclusivity to originator biologics
- New legislation reduced the barriers to generic (standard, branded) entry
- Escalated R&D costs, and decline in new innovative medicines
-Patent protection
- Brand identity
- Proprietary product differences
- Capital requirments
- Access t distributions
-Access to raw materials
- Expected retaliation
Future attractiveness for
new entrants (latter half of this decade).
Less attractiveness for
new entrants. However, very
strongly in favour of current members.
The Global Pharmaceutical Industry
12
Figure 11 – The Power of Buyers
3.3.3. THE POWER OF BUYERS
The end consumer does not have barging power of purchasing; the main buyers are generally government with consolidated distribution networks. While patients maintained their price insensitivity for drugs, their healthcare providers were far more price-sensitive.
The industry market is highly fragmented where the largest market is the public healthcare in the developed countries. Since the deterioration in the healthcare fund there is a transition to private healthcare and insured-based care, while the large personal out-of-pocket segment is in the Pharmering 17.
The internet engagement will generate health-related websites, patients will become more knowledgeable. This gives some kind of power to buyers although not very significant since they do not have full access to important information. Overall, the power of buyers is high and with the shift to generics the bargaining power is steadily increasing leading to quite an unattractive situation.
3.3.4. THE POWER OF SUPPLIERS
The pharmaceutical industry has about 100 very large multinationals, and some increasing domestic MSBs2 producing generics. Suppliers usually provide raw materials, components, intermediates products and other supplies. There are many raw material suppliers making the pharmaceutical companies have a very low barging power. Supplying to the domestic firms is often greater however this segment is usually smaller than for the multinationals. Most suppliers are happy to supply big Pharma, considering it prestigious to be associated with the industry leaders. Generally, suppliers' power is weak and therefore the pharmaceutical companies have the strength to ask for lower prices.
3.3.5. COMPETITIVE RIVALRY
The global consumer health industry remains highly fragmented, with vast distribution channels. By choosing to merge, rivalry among the top firms increased, as their areas of expertise began to overlap (Mullins, 2006).
Generally, fierce rivalry among large pharmaceutical firms exists to gain more share of the market. To remain competitive, some Pharmas are lowering their prices to stay competitive.
The cost of the R&D, and the sharp deterioration in economies have forced cutbacks in many R&D budgets, which add another layer of difficulty to the innovation process and causing declines in the productivity of patented drugs therefore Pharma companies compete aggressively to dominate new technologies in R&D to produce novel therapies to address the unmet patient needs.
Thus Competitive rivalry had increased, leading to growing rivalry and slightly less attractive situation.
2 Medium Sized Business
Buyer concentration
Many number of suppliers
The weak barging power of suppliers
influences
Some Pharma practise in-house tapered integration production
The Global Pharmaceutical Industry
13
4. INTERNAL ANALYSIS
Novartis Pharma was founded in 1996, its headquarters is based in Basel, Switzerland and their net sales reached $57 Billion in 2012. Novartis is one of the largest pharmaceutical companies in the world with a diversified portfolio of products that span across a number of categories including innovative medicines, eye care products, cost-saving generic pharmaceuticals, consumer health products, preventive vaccines and diagnostic tools. Novartis is the only company with leading positions in each of these areas (About Novartis, 2013).
4.1. THE VALUE CHAIN
“The value chain describes the categories of activities within and around an organisation, which together create a product or service. The concept was developed in relation to competitive strategy by Michael Porter”.
A lot of drug companies target major diseases, but Novartis emphasizes rare ones, the rarity of its strategic core competency is unique. It leverages distinctive core R&D competence on rare diseases and biotech. During the last four years, Novartis efforts flourished by receiving more approvals in the US and EU for new molecular entities than its competitors. (Novartis, 2013)
Novartis is consistently rated as having one of the industry’s most respected pharmaceutical development pipelines with 138 projects in pharmaceutical clinical development; making its innovation capability difficult to imitate. Also the using of information technology developed a number of online communities and mobile apps that help patients better manage their own health to improve health; their development also puts a premium on new capabilities. (Novartis, 2013)
Novartis dynamic capability is its focused diversification – geographically and the broad product portfolio, geared toward the needs of patients. Since Novartis was created in 1996, it has consistently focused on markets and technologies with potential for sustainable growth which helps in maintaining growth despite the patent cliff for its expired products. In addition, a diverse portfolio reduces financial risk, bringing greater value to its stakeholders.
Novartis value chain outlines its activities in relation to its competitive advantages capabilities in the
(JP Morgan Healthcare Conference, 2013)
The Global Pharmaceutical Industry
14
diagram below:
Service Novartis Foundation;
Training centers;
Access to healthcare programs;
Diagnostic tests;
Quality remediation;
Preventative Medicare;
Digital packaging technologies;
Managing vaccinations with VaxTrak app.
Procurement New molecular entity (NME) approvals – full pipeline
Cost synergies in purchasing
Global spend of over USD 20B per year
Global category management
Shared country Procurement teams.
Technology Development Mobilizing the best global resources, expertise and experience
Integrated informatics and bioinformatics and communication tools
Biotech clustering in GCC
Broad use of computer modeling and simulation
Oracle’s Siebel Pharma Dynamic Sales program
Kick Smoking iOS application
Human Resources Management Diversity, (120,000 people worldwide)
Innovative and Scientific resilience (Strategic core competence)
One-stop-shop for grievances and allegations
Streamlined collaboration
Fair working conditions
UN Global compact – the code of conduct
Firm Infrastructure Expanding geographically in emerging markets
Expanding Niche Medicine
10 consecutive quarters of margin improvement, Market cap is 171.89 B
Quality Compliance
Social investments and philanthropy
Inbound Logistics
Supplier Relation Management
LM7 warehouse management solution
Warehouse SAP Console middleware
Barcode warehouse
Raw materials track and trace system.
Operations Global category
management
Broad blockbuster
Drug substance development capabilities at different scales (lab, pilot)
Multiple production technologies (vials, syringes, devices)
Fill & Finish manufacturing network.
Outbound Logistics
Multi-distribution plant;
Geographical re-allocation;
SMS for Life - to track malaria drug supplies and eliminate drug stock-outs;
Distribution partners.
Marketing & Sales Novartis Brand name
Global launches
Free samples of Novartis’ Nicotinell brand
Patient kits
Growing segments of healthcare
Global Umbrella Brands
Customer centric approach
Key account management
Cash discounts to customers.
SU
PP
OR
T A
CT
IVIT
IES
PRIMARY ACTIVITIES
1
1 Reuters, Finance Stocks [Accessed 10th
April 2013]
The Global Pharmaceutical Industry
15
4.2. FINANCIAL ANALYSIS OF NOVARTIS
Gerald et al (2003) suggests that ‘Financial Ratios are computed by the managers to evaluate the performance, progress and achievements of the company…They also help investors, creditors, lenders and analysts in critically analysing an investment opportunity and credit decisions.’
4.2.1. RETURN ON CAPITAL EMPLOYED (ROCE)
( )
On 31 Dec ($s millions)
2012 2011
= 11.5%11,511x 100
124,216-24,501
= 11.70%10,998x 100
117,496-23,148
Interpretation:
ROCE in 2012 fluctuated slightly from 2011, though the operating profit increased in 2012 than prior year due to the decrease in the marketing expenditure to offset the drop in the sales $58,566m to $56,578m 2011 for the impact of patent expirations. While the increased in the assets associated with the investments to complete its acquisition of Fougera, alongside the investments in its R&D by 21% of Pharmaceuticals net sales, net investments in property, plant and equipment and other non-current assets (Novartis Annual Report, 2012), resulted in a slight drop in ROCE from 11.70% to 11.50 hence Novartis is in line with growth in all financial divisions and its new blockbuster approved, it is considered efficient and profitable with the return of $11.50 for every $100 of capital employed.
4.2.2. LIQUIDITY RATIOS: CURRENT RATIO
2012 2011
= 1.16T28,004
24,051
= 1.04T24,084
23,148
Interpretation:
The current ratio shows that, for every $1 in current liabilities, there is $1.16 available in current assets.
The current ratio over the last two years has volatilised slightly to 1.16T indicating that its solvency to meet its obligations.
The industry Benchmark is 1.99T3, Novartis current ratio is still in range within the industry average.
3 Reuters.com, Accessed 10/4/2013
1 2
3 4 5 6
1
22
4
7
2
3 5 6
8
6
The Global Pharmaceutical Industry
16
4.2.3. GEARING RATIOS
4.2.3.1. BORROWING RATIO
( )
2012 2011
= 28.50%(13,781+5,945) X 100%
69,219
= 30.68%(13,855+6,374) x 100%
65,940
Interpretation:
The 2012 ratio indicates that every $1.00 of capital that stockholders provided, creditors provided $0.28. That means external debts are equal to 28.50% of shareholders’ funds.
This is a positive indicator of Novartis having sufficient funds to meet its financial obligations when they fall due.
It used part of its free cash flow to reduce the financial debt.
4.2.3.2. INTEREST COVER RATIO
2012 2011
11,511 = 16.00
724
10,998 = 15.00
751
Interpretation:
The ratio indicates that Novartis can cover its interest charges as the operating profit is higher than interest payable.
In 2011, this ratio was 15T associated with higher interest payable on total borrowing 20,229m, Novartis managed to lower its borrowing in 2012 to 19,726m. Therefore the interest cover in 2012 came better indicating a better financial health. It means they are more capable of meeting their interest obligations from operating earnings. This drop in the interest cover along with the low debt allows Novarits to increase its borrowings if needed.
Based on the Ratios, the expectations of the Novartis performance look efficient leading to profitability. This is because they delivered good net income increased by 4% to $9.6 B. The capital structure of it consists of net debt of 28% to its equity which is considerably low. Novartis strives to maintain a strong credit rating - the long-term credit rating for the company continues to be double-A.
Novartis makes use of various borrowing facilities provided by several financial institutions. In addition, it raised funds through its commercial paper programs. The comparison shows its EPS is the highest compared to the top rating Pharmas in the industry (See Appendix), and is better than Pfizer ROE ratio.
7 8 1
15 16
1
9 12 10 13
11 14
4
The Global Pharmaceutical Industry
17
4.3. ANALYSING CULTURE: THE CULTURAL WEB
The cultural web is a means of understanding both the existing culture and its effects. The cultural web shows the behavioural, physical and symbolic manifestations of a culture that inform and are informed by the taken-for granted assumptions, or Paradigm. The elements of the cultural web are:
The Global Pharmaceutical Industry
18
The success of Novartis strategy is evident in their long-established track record of research productivity.
Paradigm . Focused diversification . Novartis has the best minds in the world . Expertise in science . With focus on patient outcomes . Understand and treat disease that will change the practice of medicine. . Improve human health . Flexible thinking . Valuing individuals and their diverse ideas . Top-selling products in the
industry.
Symbols . Caring and Curing slogan . A State- of-the art workplace . Multinational workforce . Part of the UN Millennium Villages project . Modelling and simulation . Novartis Research Foundation . NIBR Strategic Alliances Group . The lab bench to the clinic . Novartis Vaccines Institute for Global Health
Rituals and Routines
. Performance-oriented
. Training young scientists
. Rewarding the people who invest ideas and work in our company . Cross-functional teamwork . Interdisciplinary and team-based science . Access to leading-edge technology
. Self-reflection- mentoring programs
. Respect for family time.
Organisational Structure
. Divisional structure (patented,
generic, Eye care, Vaccines, OTC) . Too bureaucratic . Multi-disciplinary approach . Novartis Euroforum
. Standard review and decision- making
. Managing change . Global Code of Conduct
Power Structures
. Collaborating with governments globally for pricing arrangements . Notable rebellions over executive pay (Daniel Vasella's $78m) . Impressive pool of scientific talents . Leadership in shifting from remediation to prevention . Possession of the largest no
of approvals for new blockbuster than
competitors.
Stories . Novel treatments and
prevention methods for major tropical diseases . Drugs and vaccines for neglected diseases .Help engage under-served communities . Reward innovation and enhance the lives of patients. . Pioneering initiatives to enhance access to healthcare . Global driver safety . A better today and
Tomorrow for patients
Control Systems
. Worldwide regulatory & policy experience
. Proof-of-Concept clinical trials
. Audit and Compliance committee . Deliver on FDA commitments .
Efforts met targets of access- to-medicine programs to More than 100 million patients.
"It’s exciting being involved at the early stage in identifying what are the good targets and trying to make a difference in the lives of people." Andreas Sailer Senior Research Investigator at NIBR
“Responsibility is a core part of our business and underscores our purpose of caring and curing”.
“We want to discover, develop and successfully market innovative products to prevent and cure diseases, to ease suffering and to enhance the quality of life.” Novartis Mission Statement
“Novartis collaborates with governments worldwide on new pricing arrangements, including money-back guarantees and other types of performance-based pricing, to accelerate reimbursement negotiations.
The Global Pharmaceutical Industry
19
Navartis collaborative culture is its gateway for making significant impact in solving some of society's biggest health challenges and taking a role in improving health seriously through focuses its CSR efforts on its market segments. This is where Novartis aligns its productivity with its performance-orientated incentives, resulting in receiving numerous awards for its culture and working environment (Novartis Newsroom, 2013).
4.4. NOVARTIS STRENGTHS & WEAKNESS AND RESOURCES
Location of Factor
Type of Factor
Favourable Unfavourable Internal Strengths (S)
Focus on high growth segments of healthcare, to have more access to more patients and benefit from the trend in healthcare to cover more people.
Its geographic diversification with market share in China, and other emerging countries benefit from the growing markets in these countries.
Novartis generic division – Sandoz - is positioned to take full advantage of the patent cliff.
Weaknesses (W)
Manufacturing quality issues leaving Novarits with one manufactures closed down in 2012;
Side effects of some flu vaccines have been banned in Italy, Germany, and Swiss land. (CBC News, 2012)
External Opportunities (O) Extended healthcare coverage in many
countries;
The potential of the Emerging countries;
During the next five years, many patents
will expire while not many approvals
have taken place in 2012.
Threats (T) India rejects patent plea for cancer drug
Glivec causing Novartis losses by having Indian generics companies sell copies of the drug for lower price. (BBC, 2013).
Novartis possesses a range of resources including intangible resources in its innovative R&D. It got impressive pool of scientists and expertise alongside the company knowledge into the industry. The physical resources range from its manufacturing plants, warehouses, inventories and all the technology applications and modelling implemented in all its processes. That is in addition to its strong balance sheet and fluent cash flow along with public funds. The future looks bright for Novarits combining its core competences in innovation, R&D, products diversity in unmet patients’ needs alongside the productivity indicated in its financial performance.
The Global Pharmaceutical Industry
20
5. CONCLUSION
The Pharmaceutical firms are the key in meeting society's needs by providing effective medicines, and also the industry has had a consistent trade surplus for the past twenty years, that is what makes it an attractive industry for many businesses. Novartis is one of the leading companies in the industry with an innovative approach in all core competences and capability to managing the change in the industry using very efficient tools. This can be seen through its M&A, its broad products portfolio, with a shift to the most growing sector of generics with its division Sandoz.
The Global Pharmaceutical Industry
21
6. ACRONYMS
ACRONYM MEANING
DTC DIRECT TO CONSUMER
EFPIA EUROPEAN FEDERATION OF PHARMACEUTICAL INDUSTRIES AND ASSOCIATION
OTC OVER THE COUNTER
The Global Pharmaceutical Industry
22
7. APPENDIX
The Global Pharmaceutical Industry
23
8. REFERENCES
Fast company, #8 Novartis, [Accessed 6
th April 2013]
http://www.fastcompany.com/mic/2010/profile/novartis, Agrawal, M (1999) Global Competitiveness in the Pharmaceutical Industry: The Effect of National Regulatory, Economic, and Market Factors, Informa Healthcare Mundasad, S (2012) The end of drug discovery? [Accessed 30th March 2013], http://www.bbc.co.uk/news/health-18095669. Business Wire (2013) Research and Markets: Pharmaceutical Industry in Japan 2013 [Accessed 11th of April, 2013] http://www.businesswire.com/news/home/20130207006041/en/Research-Markets-Pharmaceutical-Industry-Japan-2013
Daemmrich, A (2009) Where is the Pharmacy to the World? International Regulatory Variation and Pharmaceutical Industry Location [Accessed 12th of April, 2013] http://www.hbs.edu/faculty/Publication%20Files/09-118.pdf Deloitte (2013) Global life sciences outlook: Optimism tempered by reality in a “new normal” [Accessed 11th of April, 2013] http://www.deloitte.com/assets/Dcom-Ireland/Local%20Assets/Documents/Life%20sciences/2013%20Global%20Life%20Sciences%20Sector%20Report.pdf Euler Hermes (2012) Does the global pharmaceutical industry need a new business model? [Accessed 2nd of April, 2013] http://www.eulerhermes.de/de/dokumente/charts-pharmaceutical-20120329.pdf Euromonitor (2012) Corporate Strategies in Consumer Health [Accessed 04th of April, 2013] http://www.euromonitor.com/corporate-strategies-in-consumer-health/report Health Affairs (2013) The Effect Of Regulation On Pharmaceutical Revenues: Experience In Nineteen Countries [Accessed 4th April 2013] http://content.healthaffairs.org/content/28/1/w125.full IMS (2010) Biopharma Forecasts & Trends [Accessed 6
th April 2013]
http://www.imshealth.com/portal/site/consulting/menuitem.8a745295e4b8b3ef40a5b9643208c22a/?vgnextoid=4b8c410b6c718210VgnVCM100000ed152ca2RCRD&vgnextfmt=default IMS (2010) Pharmerging shake-up: New imperatives in a redefined world [Accessed 10th of April, 2013] http://www.imshealth.com/ims/Global/Content/Insights/Featured%20Topics/Emerging%20Markets/Pharma_Shake-up_Imperatives.pdf IMS (2011) The Global Use of Medicines: Outlook Through 2015 [Accessed 09th of April, 2013] http://www.imshealth.com/deployedfiles/ims/Global/Content/Insights/IMS%20Institute%20for%20Healthcare%20Informatics/Global_Use_of_Medicines_Report.pdf IMS Intelligence Applied (2006) Generic Medicines: Essential contributors to the long-term health of society [Accessed 11th of April, 2013] http://www.imshealth.com/imshealth/Global/Content/Document/Market_Measurement_TL/Generic_Medicines_GA.pdf Johnson, G, Scholes, K and Wittington, R (2008) Exploring Corporate Strategy, Pearson Education Limited: Eight Edition KPMG (2011) Rising cost of litigation in pharmaceutical s industry [Accessed 11th of April, 2013] http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Issues-monitor-pharmaceuticals/Documents/issues-monitor-pharmaceuticals-june-2011.pdf Kumar, AR (2011) A 2011 Wakeup Call for Pharmaceutical Companies [Accessed 10th of April, 2013] http://www.bio-itworld.com/2011/02/18/pharma-trend-comment.html, Cambridge HealthTech Institute Lage, A. (2011) Global Pharmaceutical Development and Access: Critical Issues of Ethics and Equit, MEDICC Review, Vol 13, No 3 MCE (2012) New Opportunities & Strategies in the Pharmaceutical Industry [Accessed 12th of April, 2013] http://www.mce-ama.com/executive-issue-38-pharma-industry-2012/
The Global Pharmaceutical Industry
24
Mennen, M (2010) Implications of the Ageing Population on the Pharmaceutical and the Tourism Industry from a Marketing Point of View: Examples of Germany, the UK, the US and Japan, GRIN Verlag oHG Mullan, P (2002) The Imaginary Time Bomb: Why an Ageing Population is Not a Social Problem, I.B.Tauris Palgrave Macmillan (2013) Managing innovation in the pharmaceutical industry [Accessed 08th pf April, 2013] http://www.palgrave-journals.com/jcb/journal/v12/n1/abs/3040148a.html Mullins, J (2006) The New Business Road Test: What Entrepreneurs and Executives Should Do Before Writing a Business Plan, Financial Times/ Prentice Hall: 2nd Edition Novartis Our Next Phase of Growth, JP Morgan Healthcare Conference, January 7th, 2013
PR Newswire (2013) Pharma and Biotech Leaders to Converge in China at Asia Pharma R&D Leaders 2010 Summit [Accessed 11th of April, 2013] http://www.prnewswire.com/news-releases-test/pharma-and-biotech-leaders-to-converge-in-china-at-asia-pharma-rd-leaders-2010-summit-78310882.html PwC (2012) HealthCast: Global Best Practices in Bending the Cost Curve [Accessed 9th of April, 2013] http://www.pwc.com/gx/en/healthcare/bending-the-cost-curve/assets/pwc-healthcast-global-best_practices-in-bending-the-cost-curve-full-report.pdf PwC (2013) PwC report forecasts a golden era ahead for pharmaceutical companies, but global growth markets won’t guarantee success [Accessed 11th of April, 2013] http://www.pwc.com/us/en/press-releases/2012/pwc-report-forecasts-a-golden-era.jhtml Quotations Book (2013) Quote [Accessed 11th of April, 2013] http://quotationsbook.com/quote/43095/ Roland Burger Strategy Consultants (2013) Global pharmaceutical industry is in a strategic crisis – business models must be adjusted [Accessed 11th of April, 2013] http://www.rolandberger.com/media/press_releases/513-press_archive2013_sc_content/Pharmaceutical_industry_in_a_strategic_crisis.html Santoro, Michael A. and Gorrie, Thomas M. (2007) Ethics and the Pharmaceutical Industry, Cambridge University Press Smith, L (2013), Factors Affecting Growth of Pharmaceutical Industry [Accessed 2nd April 2013], http://www.ehow.com/info_8482145_factors-affecting-growth-pharmaceutical-industry.html#ixzz2PJpHata7 The Canadian peers (2012), Health Canada pulls distribution of Novartis flu vaccines [Accessed 11th of April, 2013] http://www.cbc.ca/news/canada/story/2012/10/27/novartis-vaccines.html 1.
2. CNBC, Leading Pharmaceutical Companies Gather to Discuss IT Challenges Facing R&D Labs and
Vision for Future, http://www.cnbc.com/id/100567963
MCE-AMA, New opportunities in the Pharmaceutical industry, http://www.mce-ama.com/executive-
issue-38-pharma-industry-2012/
Pharmpro, Novartis unveils long-term strategy to grow in a dynamically changing healthcare
environmenthttp://www.pharmpro.com/news/2010/11/novartis-unveils-long-term-strategy-grow-
dynamically-changing-healthcare-environment
Pharmafile, Novartis outlines business strategy , http://www.pharmafile.com/news/101118/novartis-
outlines-consolidation-plans
http://www.novartis.com/downloads/investors/event-calendar/2013/2013-jan-07-novartis-presentation-jpmorgan.pdf JP Morgan Healthcare Conference | Joseph Jimenez | January 7, 2013,
http://www.novartis.com/downloads/investors/event-calendar/2013/2013-jan-07-novartis-presentation-jpmorgan.pdf Novartis R&D Investor Day | David Epstein | Boston, November 8, 2012, http://www.novartis.com/downloads/investors/event-calendar/2012/9-turning-rd-excellence-into-commercial-success.pdf Novartis Homepage, http://www.novartis.co.uk/aboutnovartis/awards_index.shtml