Thunderbird Student Voices

 Pfizer: Up to the Challenge?

by Reid Bronson, Lavanya Bhenderu, Brian Gatti, Jyoti Srivastava

Today’s pharmaceutical market is inundated with competitors. It is what strategists call a Red Ocean – a market place saturated with competition, with each competing for market share and where few innovations are made. Pfizer Inc. is one such company facing uncertain times. It has an immediate threat looming over its head, with highly profitable patents expiring in 2011. In order to prevent what comes next: competitive erosion of it’s market share with generic brands, Pfizer is making key strategic changes. Pfizer also faces stiff competition from companies like Merck, Procter & Gamble, and Eli Lily. In a market saturated with entrenched competitors, high development costs, and valuable patent protection time consumed by FDA approval testing, drug makers are under considerable pressure to produce more blockbuster drugs.

Pfizer has come up with a multi pronged approach by identifying key focus areas such as diversifying it’s pharma products portfolio, increasing marketing, expanding its late-stage product pipeline,  and developing a lean but effective Research and Development (R&D) program. 

History

Pfizer is a global healthcare company, with a history of success, dating back to as far as 1849, when it was initially founded as a fine-chemicals business. With the discovery of medicinal properties of penicillin in 1929, Pfizer entered the pharmaceutical business manufacturing penicillin and vitamins.  It sold the first FDA approved Pfizer brand drug in 1950.

The Challenge

One of the main strategic issues Pfizer currently faces is patent protection expiration on it’s main revenue generating drugs. Pfizer has enjoyed the revenue and competitive advantage from being the sole manufacturer of drugs like Aricept, Lipitor, BeneFix, and Xalatan. Patents protecting these drugs are set to expire in 2011, threatening the company’s revenue stream. With the expiration of patent protected drugs come generic branded drugs. Generic brands offer consumers a large price differential due to generic brand’s lack of development and research costs. Pfizer’s blockbuster cholesterol lowering drug Lipitor is coming off-patent in November 2011, it alone brought in $10.7 billion of the company’s $67.8 billion world-wide sales in 2010. 

In 2009, Pfizer made the difficult decision to end their late-stage development program for Torcetrapib (a potential new treatment for cardiovascular disease) due to safety concerns. This was followed by a decision to withdraw Exubera (the world’s first inhalable insulin) from the market. These decisions, after having invested billions of dollars, brought renewed focus to two facts: Drug discovery is enormously expensive and inherently risky, and it is unwise to rely on two blockbuster drugs (whether on the market or in the pipeline) for a disproportionate amount of future revenue and profit. Pfizer has revisited the drawing board and came up with what they call “Our Path Forward”, constituting five strategies:

●     Refocus and optimize the patent-protected portfolio;

●     Find and capitalize on new opportunities for established products;

●     Grow in emerging markets;

●     Grow diversified businesses; and

●     Instill a culture of innovation and continuous improvement.

Diversifying the product portfolio

Pfizer is currently structured against competition with nine diverse healthcare businesses: Primary Care, Specialty Care, Oncology, Emerging Markets, Established Products, Consumer Healthcare, Nutrition, Animal Health and Capsugel.  This is important for two reasons. First, diversification hedges against the leverage of consumers by distributing its revenue generation over multiple businesses. It reduces the potential impact of any one specific customer segment. Consumers are very price conscious and may choose to purchase cheap generic brand alternative to name brand drugs. Consumers also have a large selection of substitutes to choose from herbal supplements, lifestyle changes, a competitor’s drugs, generics, or choose no treatment at all. Consumers may receive heavy discounts due to government regulations. In the U.S. and Europe the consumer has incredible leverage due to generic price competition. Also, due to government healthcare subsidization programs, such as Medicare Part D, consumers are eligible for discount up to 50% on name brand drugs.

Secondly, diversification provides a hedge against leverage of suppliers. With multiple businesses multiple different suppliers can be used. This prevents all of Pfizer from being negatively effected by only one supplier.  A recent example is the Animal Health division.  Agricultural costs have risen due to high demand and low supply. This has put considerable margin pressure on the Animal Health division, which brought in sales of $3.6 billion; however, for its biopharmaceuticals such as Viagra and Lipitor, Pfizer has multiple sources to provide raw material.

Emerging markets

While large drug companies tend to let their products wither after their patents expire, Pfizer stands behind these drugs, believing that it can capture more potential, especially in emerging markets. In the coming years, it will be relying heavily on emerging markets to supplement the revenue lost in the U.S. due to patent expiration. Emerging markets are the fastest growing market within pharmaceuticals and off-patent medicines and their generic equivalents are the fastest-growing segment. Growth in emerging markets serves two purposes: expanding the customer base, and enabling Pfizer to be competitive by increased revenues.

In a recent interview with the Wall Street Journal Pfizer CEO Ian Read stated “We’re not going to lose $11 billion. Not all of that’s going away. The U.S. will be more affected. Part of Europe will be more affected. The franchises in the emerging markets will be more resistant.” China, one such emerging market target for Pfizer, will add $125 billion in healthcare spending alone. Even if China were to institute mandatory price cuts, “those price decreases are compensated by volume increases. To the extent that there’s offset in volume”, said Mr. Read.  

Marketing

Pfizer also needs to increase its marketing to retain customers from moving to generic brands. Launching a strong branding campaign to increase consumer awareness about Pfizer’s research capabilities can increase customer loyalty. Pfizer has been marketing its core products like Lipitor and Viagra without mentioning Pfizer itself. Moving forward Pfizer will include its company name to promote company recognition.

Pfizer is bypassing the wholesaler, distributing directly to pharmacies, doctors, and other direct retailers. It is continuing to promote biopharmaceutical products directly to healthcare providers, nurses, doctors and pharmacists. Pfizer is leading the market in this respect. Pfizer’s competitors currently still deal largely with wholesalers. Using direct to consumer marketing encourages patients to talk to doctors by explaining to consumers the approved uses, benefits, and risks of the products. Informing and educating the consumer helps reduce complicated and confusing conversations patients usually are faced with. This helps the company be more receptive to their customer needs and increases Pfizer’s leverage. This is valuable in the company’s strategy and should be continued to use to uphold its brands. It has been noted by wholesalers that this may force other large drug manufactures to follow suit to remain competitive.

With its patents ending, competition will try to gain market share by offering generics at lower cost.  Consumers switch to these generic brands since there is no major switching cost. In order to prevent this, Pfizer will offer huge discounts and promotion coupons through its existing network of doctors and nurses. The doctor-patient interaction is very important with consumers. There is a lot of trust involved. When a patent go off patent the doctor most of the time will recommend or proscribe the generic low cost option. Again the doctor is looking out for the patients health and pocket book. So, its important Pfizer competes in price. Engaging all physicians with the no-cost optional discounts and coupons to lower the cost of a name brand to a price comparable with Medicare will help drive value for both doctors and patients.  These discounts would be up to both the doctors and patients. No strings attached. Value is built for the doctor by giving them another option to build trust with patients, and offering multiple low cost options for the patient.  Value is also built for the patient by getting brand name proven drugs for prices comparable to generic brands.  

Research and Development

In order to maintain revenues by introducing additional blockbuster drugs and to compete against established rivals new drugs, Pfizer needs to make a key strategic change in its R&D program. Pfizer believes it has found the solution. Pfizer’s plan is to reduce its internal R&D by cutting $2 billion in costs by the end of 2012, and will begin to focus on outsourcing more of it’s R&D to hospitals and to specialized contract research organization (CROs) such as Covance Inc, Charles River Laboratories, and Parexel International Corp. Morningstar analyst Damien Conover said, “CROs can do research and development more effectively than Pfizer, which has had a low rate of drug productivity.”

With a renewed understanding of the risk involved in only a few blockbuster drugs, Pfizer has expanded its late-stage Phase III product pipeline for biologics from 16 and one vaccine to 27 drugs and six vaccines, to reduce risk of product failures.The US government passed the Patient Protection and Affordable which allows for competing companies to produce Biosimilars: compounds that can be approved by the FDA if they show interchangeability with the original, but may not be identically the same compound. As a result, the Biosimilar market is expected to grow from $300 million in 2010 to $2 – 2.5 billion in 2015. Pfizer has two important collaborations, one with Israel based Protalix for the debelopment of taligucerase alfa, an enzyme for the treatment of Gaucher’s disease, and a partnership with the Indian company, Biocon, to commercialize biosimilar insulin and insulin analogues. Development and manufacture of more complex products, such as antibodies or drug-antibody conjugates, will take place in the former Wyeth facilities.

Pfizer is also streamlining its Research and Development focus on a core set of sciences: neuroscience, cardiovascular medicine, oncology, inflammation, immunology, and vaccines; and, three specialized units for pain, sensory disorders, and biosimilars – all of Pfizer’s most efficient divisions. Mr. Read’s strategy is to set company focus “to ensure that the core is productive, the core is working.”

Pfizer is moving into a new phase of it’s storied history. More than ever Pfizer needs to be weary of both competition and itself.  Competition threatens to take away its livelihood and internal failures threaten to make Pfizer irrelevant.  It’s time to change. But the question is “is Pfizer up to the challenge?”

References:

1.  Pfizer’s Annual Review 2009, Chairman’s report

2.  www.pfizer.com

3.  Bloomberg Businessweek, February 03, 2011, “Merck, Pfizer Research Strategies Diverge on Spending”, Tom Randall

4.  CNN Money, December 5, 2006, “Investing after Pfizer’s flop – 3 strategies”, Michael Sivy

5.  Fox News, Dow Jones Newswires, February 01, 2011, “Pfizer Realigns Strategy As Generic Rivals Loom”, Peter Loftus

6.  CBO, October 2006, “R&D in the Pharmaceutical Industry”, http://www.cbo.gov/ftpdocs/76xx/doc7615/10-02-DrugR-D.pdf

7.  Pfizer Inc. 10-k Annual report pursuant to section 13 and 15(d), File Period 12/31/2010

8.  The Day, New London, Conn., Factiva, 15 March 2011, “Pfizer may be turning its attention to new drugs”, Lee Howard

9.  The Wall Street Journal: Europe, Factiva, 2 May 2011, “For Pfizer’s chief, there is life after patent expires for Lipitor”, Jonathan D. Rockoff

10. Dow Jones Newswires, Factiva, 8 June 2011, “Pfizer To Work With Boston Hospitals To Speed Research Efforts”, Jon Kamp

11. Pharmaceutical Technology: 11 July 2011, “Pfizer’s Biosimilar strategy”

Posted: 08|21|11 at 8:55 pm.
Filed under: Miscellaneous.
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