Pharmaceutical Manufacturing of Brand

Name Drugs Industry Analysis

Table of Contents

PART I: DESCRIBE TWO PUBLICLY TRADED BUSINESS RIVALS..................2

PART 2: OPORTUNITY..............................................................................7

PART 3: INDUSTRY ANALYSIS...................................................................9

PART 4: STRENGTH ASSESSMENT..........................................................13

WORKS CITED.........................................................................................15

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PART I: DESCRIBE TWO PUBLICLY TRADED BUSINESS RIVALS

1.

a) Pfizer Inc

235 East 42nd Street

New York, New York 10017

(Pfizer, pg3)

Merck & Co. Inc.

P.O. Box 100.

One Merck Drive Whitehouse

Station, NJ 08889

(Merck, pg3)

b) The pharmaceutical manufacturing industry is one that involves a high amount of diligence

to retain any competitive edge. In the 1920’s and 1930’s, pharmaceutical manufacturing

began. It assisted with providing important vaccines and other drugs to the people. As soon

as breakthrough drugs were discovered, the pharmaceutical drug companies wanted to protect

and capitalize on their potential (“Health, pg 20). These companies produce patented

chemical and biologic drugs that are used on humans and animals to prevent or treat illness.

Two companies that compete in the brand name drug industry are Pfizer Inc. and Merck &

Co. Inc. (Brand, pg4). Fortunately, for these companies their brand name drugs have been

under patent, which provides security, but forces competition to be elsewhere other than in

the manufacturing process. While the generic drug companies realize the potential market

with patents ending, brand name manufacturers will need to find other ways to reduce costs

to stay competitive. (Brand, pg6 - 8)

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c) IBISWorld names this industry Brand Name Pharmaceutical & Medicine Manufacturing in

the US. They give an enlightened future for the industry saying “new drugs and greater

healthcare coverage keep demand healthy”. Innovation is what keeps the industry going and

will help (Brand, 5).

2. The Pharmaceutical Manufacturing industry employment status is not promising. There shows

signs of steady decrease in employment. This is probably due to the increased efficiency in the

manufacturing process and the need to cut costs. For this industry workers in research and development

are not included, but should be due to their important role in the upcoming years to keep the industry

innovative. (Bureau, 1) According to IBISWorld, employment over the past few years and those to come

show a steady decrease in employment as revenues increase (Brand, pg 4).

Source (Brand; pg4)

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3.

Jan-06 Jan-07 Jan-08 Jan-09 Jan-100%

10%

20%

30%

40%

50%

Return on Equity Table 1 2006 - 2010

Pfizer Inc.Merck & Co.

Year

ROE

(%)

Both companies have had difficult times this past year with their return on equity. This is steady

decline in the economy as well as the industry as a whole. Pfizer has been able to keep their net income

up over the past few years with slight decline, but Merck had a very difficult year. Merck’s net income

from 2009 to 2010 dropped 6.7%. Also, Merck has had a sharper drop in common stock equity. This has

led to less happy shareholders and very poor returns. Table 1 contains information on collected financial

data from IBISWorld (Merck, 6-7) (Pfizer, 6-7).

2006 2007 2008 2009 2010 2011$0

$10$20$30$40$50$60

Stock Price Table 22006 - 2011

Pfizer Inc.Merck & Co

Year

Stoc

k Pr

ice

Per S

hare

(USD

)

Despite the stock price of Merck being so much higher, it does not equate to the rest of the

financials. Pfizer is an overall more stable company with their stock price not exceeding $23 per share.

Even though Merck shows a more unstable stock price trend, both companies seem to be on an upward

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path going in to this year. Recently, on April 15, 2011, Merck was able to increase its shares value by

1.9% (Witkowski, pg1). This was due to its settlement with Johnson & Johnson which took a lot of

company focus and caused insecurities with shareholders (Randall, pg 1). Table 2 contains information

on collected financial data from Yahoo Finance (Merck2, pg 1) (Pfizer2, pg1).

2006 2007 2008 2009 2010$0

$50,000$100,000$150,000$200,000$250,000

Total Assets Table 3 2006 - 2010

Pfizer IncMerck & Co

Year

Tota

l Ass

ets

($M

illio

ns)

Both Pfizer and Merck have increased their total assets in the same manner, only Pfizer has

nearly double the amount. Pfizer has a huge advantage in this area with inventory, intangibles, and

noncurrent assets. Merck is handling their assets more poorly, by accumulating more assets that are

liabilities and not capitalizing on acquiring assets that would help them become more successful. Table 3

contains information on collected financial data from IBISWorld (Merck, 6-7) (Pfizer, 6-7).

2006 2007 2008 2009 20100

0.05

0.1

0.15

0.2

0.25

0.3

Manufacturing Efficiency Table 4

Pfizer IncMerck & Co

Year

Man

ufac

turin

g Effi

cienc

y

5

Manufacturing efficiency for each company has had good report in 2008, but since then have had

an increase. While both have kept their cost of goods sold at a close rate, the revenue gained by Pfizer

has provided a much better manufacturing efficiency. This model above shows that Pfizer has hit some

difficult times with their costs increasing recently, but will need to find ways to reduce that to keep their

profit higher. Table 4 contains information on collected financial data from IBISWorld (Merck, 6-7)

(Pfizer, 6-7).

2006 2007 2008 2009 20100

0.1

0.2

0.3

0.4

Share of Industry Value Table 5 2006 - 2010

PfizerMerck & Co

Year

Shar

e of

Indu

stry

Val

ue

The share of industry value for both Pfizer and Merck seem to increase on a steady rate. Even

though Pfizer has nearly double the market, they both gain more market share as the years have passed.

This shows that either they are doing much better as a company gaining more industry revenue, or they

are eliminating the competition. As their market share grows it will make it more difficult for smaller

companies to gain a hold in their industry. Another factor that could be contributing to the increase in

share of industry is the recent patent expirations. Many companies have undergone patent expiration and

lost their competitive edge to generic drug manufacturers. Pfizer realizes this trend and has partnered

with a biotech company, Zacharon Pharmaceuticals Inc, to drive a stronger focus on drugs for rare

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diseases (Rockoff, pg 1). Table 5 contains information on collected financial data from IBISWorld

(Merck, 6-7)(Pfizer, 6-7).

PART 2: OPORTUNITY

1. The industry that Pfizer Inc. and Merck & Co. compete in is the pharmaceutical manufacturing

industry. For this paper, we will be concentrating on the sector of the manufacturing industry that focuses

on the production of brand name drugs. This industry consists of 2, 500 companies located through the

United States. The companies within the pharmaceutical manufacturing industry focus on researching and

developing medical and other health-related products for the treatment and prevention of diseases and

illnesses. The manufacturing sector of the industry focuses on the production of the finalized development

for consumers. Manufacturing of the drugs is the last step of production, a process that begins with a

discovery and development phase. Companies in this industry spend significant amounts of their finances

on research and development in comparison to other industries. While there may be thousands of

compounds created in the development stage, only hundreds are manufactured and sold on the market per

year (Bureau, 1).

Pfizer Inc. and Merck & Co. are considered large or mainline pharmaceutical companies as they

currently have a substantial amount of FDA approved drugs on the market. Large or mainline

pharmaceutical companies usually have a large number of both research and development laboratories, as

well as, manufacturing plants throughout the United States. These companies also tend to have the

capacity to compete in the global market. Small companies have very few if any drugs on the market, and

specialize mainly on the research and development aspects of the industry rather than production. These

companies may contract out their research and development capabilities to other larger companies. The

final type of company focuses on the manufacturing of drugs that no longer have patents on them.

Because the research and development of these drugs has already been established, these companies do

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not allocate nearly as much of their finances on this aspect, but rather focus on efficient manufacturing

and production of the generic drugs on a large scale (Bureau, 1).

The pharmaceutical manufacturing industry is also developing as a reflection of innovative

technology and knowledge. New technology has allowed researchers to better understand the human body

and the effect that pharmaceutical drugs and medical products have on it. While technology has made a

drastic impact on research and development, it is also advancing the manufacturing and production of

these drugs. In order to be competitive within this industry, the manufacturing process must be efficient

yet technologically advanced to ensure the highest quality of product. This quality production can be most

effectively managed by having continual technological updates and improvements through the

manufacturing line while maintaining an efficient supply chain (Bureau, 1). In 2008, the industry as a

whole decreased R&D spending from $47.4 billion to $45.8 billion (“Healthcare, pg 31). Despite this

decrease, Merck and Pfizer had highly productive R&D programs, each spawning a number of

blockbuster drugs,” (“Healthcare, pg 33).

2. In the pharmaceutical manufacturing industry there are many places of opportunity

geographically. Each company is only able to reach the markets they limit themselves to. Some

companies are global and others are just country wide. The largest area of competition in the global

market is the United States of America. The US has half of the largest companies in the world. Other

countries of high pharmaceutical manufacturing presence are Switzerland, Germany, and the United

Kingdom. Some used to be higher such as Pfizer and Johnson & Johnson, when their drugs weren’t

approved by the FDA. The time and money put in by these companies are huge investments and can

cause large industry market shifts (Carter, 1). The growth of demand for this industry is shown in the

graphs below. The annual growth is at 2.4% but will continue to rise as the median population age

increase. As age continues to rise, the demand for pharmaceutical drugs will rise also (Brand, 6)

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(Brand, pg 6)

PART 3: INDUSTRY ANALYSIS

1. The pharmaceutical manufacturing industry is highly competitive and has several high power

threats to profit. These include the rivalry, substitutes, and buyers. The threat of entry and suppliers in the

pharmaceutical industry is low. The following 5 force analysis has influence from slides presented by Dr.

Young (Young4, Slides 9-13).

Rivalry

With industry leaders and trailblazers like Pfizer, Merck, and GlaxoSmithKline, the

pharmaceutical industry is highly competitive and aggressive market. Because research is so high, and

competitive products are constantly being introduced, pharmaceutical manufacturing companies are in

constant competition with each other to release the next best drug. To survive in this industry which is

based on innovation, companies depend on investing in ideas that will ultimately produce intellectual

property rights and patents on the newest products. Generic suppliers are soon to be a difficult rival to the

drugs coming off patent in the coming years. In addition to the rivalry amongst each other, the

government acts as a rival for pharmaceutical manufacturers in that the government often attracts outside

buyers in efforts to help regulate prices and keep them low and affordable for customers (Brand, pg 26-

28).

Substitutes

In the pharmaceutical manufacturing industry the threat of substitutes is moderate. In this

industry generic brand drugs and medicine are viewed as the primary substitutes for the products

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produced in this industry. Though the generic brands are viewed as substitutes because they keep prices

of brand name medicines competitive, the generic versions of the brand name medicines are not always

available due to the limitations presented by patents (“The Pharmaceutical, Pg 1).

Threat of Entry

The pharmaceutical manufacturing has a low threat of entry. This is probably due to the fact that

the costs that are necessary to enter into the industry are very high (Young4, Slide 12). The costs

associated with developing a new drug are very high, in addition to the time required to conduct research

and for development. Additionally, all drugs must be reviewed and approved by the Food and Drug

Administration (FDA) which can also prove to be a deterrent of entry into the industry. Standard &

Poors states that the “development of a new drug can take 10 years or more, at a total cost of more than

$800 million.” (“Healthcare, pg 26).

Buyers

In the pharmaceutical manufacturing industry, the bulk of consumers and buyers include doctors,

patients, hospitals and local pharmacies. In order to gauge the threat buyers pose in the pharmaceutical

industry, companies must take note of the number of buyers they have and the amount of product

differentiation. However, due to the fact that the majority of pharmaceutical manufacturers devote most

of their resources and research on new drug patents, buyers do not really present a serious threat to the

industry (“The Pharmaceutical, pg 1).

Suppliers

Identifying the suppliers in the pharmaceutical manufacturing industry is slightly complex in that

there are potentially a wide variety of providers involved such as raw materials, manufacturing and

production plants, as well as marketing partners that supply products or third party suppliers.

Furthermore, labor should also be considered as a supplier in this industry given that so much research is

required and clinical trials go into the development of patents and the staff providing the data can be

considered suppliers. Because there are so many various suppliers providing a variety of different things,

there is not much of a threat in this industry (Brand, pg 19).

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2. There are a total of three low-power forces in the pharmaceutical manufacturing industry. They

are the threat of entry, suppliers, and buyers. A company with three low forces has an expected

profitability on average KSF will be about equal to the cost of capital (Young4, Slide 10).

3. A Key Success Factor or KSFs are specific resources or activities that a company must be good at

if they are a profitable and satisfying in consumer demand, while also defending the company against

high-power threats (Young4, Slide 2). In the pharmaceutical manufacturing industry there are several

KSFs a company would need to be good at in order to be a successful and profitable company. In this

industry these include Manufacturing Efficiency, Economies of Scale, Inventory Turnover, and Scale.

Manufacturing Efficiency allows companies to produce more products efficiently, and is a

critical deciding factor in industry competition. It is measured by dividing Cost of Goods

Sold by the Sales Revenue. It is favorable to have a lower manufacturing efficiency for cost

based strategies (Young3, Slide 5).

Economies of Scale allows companies to decrease the internal cost of operation by reducing

the cost per unit, and occurs as a result of increased production it is measured by dividing

Costs by Total Assets. In this industry it is preferable that lower Economies of Scale is

better. By reducing their internal costs pharmaceutical manufacturing companies are able to

operate at less cost than competitors and therefore increase the company’s profit margin

(Young3, Slide 5).

Inventory Turnover is a ratio showing how many times a company’s inventory is sold and

replaced over a period of time. This ratio is measured by dividing the company’s Revenue by

the Average Inventory. A higher inventory turnover is better in industries with product

innovation, such as the pharmaceutical manufacturing industry. Having a high inventory

turnover is extremely beneficial for a company because it means that the company is able to

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sell inventory quickly to make a profit and replace it in a reasonable amount of time

(Young3, Slide 5-13).

Scale gives a snapshot of the total assets a particular company has. The overall span of a

company can be very useful for allocation of resources, and the utilization of assets for

multiple projects. Assets however can have intended strategic fit, but end up being a

detriment to the company (Young, Slide 2).

4.

KSF Formula 1 Merck & Co. 2 Pfizer Inc. 3

Manufacturing Efficiency

Costs of Goods Sold

Sales Revenue

$11,015,00/ $45,987,00 = 0.2

$13,196,00/ $67,809,00 = 0.19

Economies of Scale

CostsTotal Assets

$11,015,000/ $105,781,000 = 0.104

$13,196,000/ $195,014,000 = 0.068

Inventory Turnover

RevenueAverage Inventory

$45,987,000/$6,961,000 = 6.6

$67,809,000/ $10,404,000 = 6.5

Scale Total Assets $105,781,00 $195,014,000

(Source: 2010 Data from IBIS World)

5. Economies of Scale protect companies against the high power threats of rivalry. Economies of

Scale allow for the reduction of internal costs without reducing the quality of the products (i.e. the

equation Profit = [(Quantity x Average Sales Price)] – Costs); the cost per unit decreases as production

increases. Economies of Scale protection comes in when high power rival forces drive average price

down, lower internal costs of production allow for lower prices to be passed onto customers without

reducing profits. Manufacturing Efficiency determines the capability for production to supply the required

1 Information from (Young3, Slide 5)2 Data Collected From IBISWorld (Merck, 6-7)3 Data Collected From IBISWorld (Pfizer, 6-7)

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demand. With lower cost goods sold, the company experiences greater efficiency and higher top line

revenue. Better efficiency leads to a competitive advantage with ability to allocate finds elsewhere

(Young2, Slide 17).

PART 4: STRENGTH ASSESSMENT

1.(Young3, Slide 5).Strength Assessment of Merck & Co and Pfizer Inc. 4

Merck & Co. Pfizer Inc. Manufacturing Efficiency 3 3Economies of Scale 1 5Inventory Turnover 3 3Scale 1 5

Scale used: 1=Weakest, 5=Strongest

Key Success Factor

Calculation Used: 4 Merck & Co.Calculation 5

Merck & Co.Competency Score

Pfizer Inc.Calculation 6

Pfizer Inc.Competency Score

Manufacturing Efficiency

COGS/Sales Revenue $11,015,000/ $45,987,000= .2

3 $13,196,000/ $67,809,000= .19

3

Economies of Scale

Total Costs/Total Assets

$11,015,000/ $105,781,000 = .104

1 $13,196,000/ $195,014,000= .068

5

Inventory Turnover

Revenue/Average Inventory

$45,987,000 / $6,961,000= 6.6

3 $67,809,000/$10,404,000 = 6.5

3

Scale Total Assets $105,781,000 1 $195,014,000 5

AverageScore:

2 4

*All Calculations use 2010 Data from IBIS World

3.4 Information from (Young3, Slide 5).

5 Data Collected From IBISWorld (Merck, 6-7)6 Data Collected From IBISWorld (Pfizer, 6-7)

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Using our strength assessment calculations on key success factors within the pharmaceutical

manufacturing of brand name drugs, Pfizer Inc. is most likely create and sustain a competitive advantage

against Merck Co.. The strength assessment showed that the companies were relatively equal on the key

success factors of manufacturing efficiency and inventory turnover. However, Pfizer Inc. had the greatest

strength on the key success factors of economies of scale and scale. These two key success factors affect

the cost factor of the business model equation, Profit = [(Quantity x Average Sales Price)] – Costs, as

they both decrease internal costs which allows for a greater profit (Young2, Slide 17). As production

increases with the scale of the business, manufacturing cost per unit decreases allowing a lower internal

cost of production, creating a competitive advantage. As the competition in the industry starts to drive the

average selling price of the product, the company with the lowest cost of production will be able to pass

these lower prices onto the customer without sacrificing quality or features of the product (Young2, Slide

17). The advantages will allow Pfizer Inc. to create a sustainable competitive advantage that will protect

against high-powered threats within the industry.

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