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
1
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.
Return on Equity
2006 - 2010
Table 1
50%
ROE (%)
40%
30%
20%
Pfizer Inc.
10%
Merck & Co.
0%
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Year
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).
Stock Price
Per Share (USD)
Stock Price
2006 - 2011
Table 2
$60
$40
$20
Pfizer Inc.
$0
200
6
200
7
200
8
200
9
201
0
201
1
Merck & Co
Year
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 $23 per share.
Even though Merck shows a more unstable stock price trend, both companies seem to be on an upward
4
path going in to this year. Recently, on April 15, 2011, Merck was able to increase its shares value by
1.9% (Witkowski, pg1). This was due to its settlement with Johnson & Johnson which took a lot of
company focus and caused insecurities with shareholders (Randall, pg 1). Table 2 contains information
on collected financial data from Yahoo Finance (Merck2, pg 1) (Pfizer2, pg1).
Total Assets
2006 - 2010
Table 3
Total Assets
($Millions)
$250,000
$200,000
$150,000
$100,000
Pfizer Inc
$50,000
Merck & Co
$0
2006
2007
2008
2009
2010
Year
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).
Manufacturing Efficiency
Manufacturing Efficiency
Table 4
0.3
0.25
0.2
0.15
Pfizer Inc
0.1
Merck & Co
0.05
0
2006
2007
2008
2009
Year
5
2010
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).
Share of Industry Value
Share of Industry Value
2006 - 2010
Table 5
0.5
0.4
0.3
0.2
Pfizer
0.1
Merck & Co
0
2006
2007
2008
2009
2010
Year
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
6
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
7
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)
8
(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 2628).
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 produced in this
9
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
11
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
Manufacturing
Efficiency
Formula 1
Costs of Goods
Sold
Sales Revenue
2
Merck & Co.
$11,015,00/ $45,987,00 =
0.2
Economies of
Scale
Costs
Total Assets
$11,015,000/
$105,781,000 = 0.104
Inventory
Turnover
Revenue
Average
Inventory
Scale
Total Assets
$45,987,000/$6,961,000
= 6.6
$105,781,00
Pfizer Inc.
$13,196,00/
$67,809,00 =
0.19
3
$13,196,000/
$195,014,000 =
0.068
$67,809,000/
$10,404,000 =
6.5
$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
12
Information from (Young3, Slide 5)
2
Data Collected From IBISWorld (Merck, 6-7)
3
Data Collected From IBISWorld (Pfizer, 6-7)
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).
Scale used: 1=Weakest, 5=Strongest
4
Strength Assessment of Merck & Co and Pfizer Inc.
Merck & Co.
3
Manufacturing Efficiency
1
Economies of Scale
3
Inventory Turnover
1
Scale
4
Key Success
Factor
Calculation Used:
Merck & Co.
Calculation 5
Manufacturing
Efficiency
COGS/Sales Revenue
$11,015,000/
$45,987,000
= .2
Economies of
Scale
Total Costs/Total
Assets
Inventory
Turnover
Scale
Pfizer Inc.
3
5
3
5
Merck & Co.
Competency
Score
3
Pfizer Inc.
Calculation
$11,015,000/
$105,781,000 =
.104
1
$13,196,000/
$195,014,000
= .068
5
Revenue/Average
Inventory
$45,987,000 /
$6,961,000
= 6.6
3
$67,809,000/
$10,404,000 =
6.5
3
Total Assets
$105,781,000
1
$195,014,000
5
Average
Score:
6
$13,196,000/
$67,809,000
= .19
2
Pfizer Inc.
Competency
Score
3
4
*All Calculations use 2010 Data from IBIS World
4
13
Information from (Young3, Slide 5).
5
Data Collected From IBISWorld (Merck, 6-7)
6
Data Collected From IBISWorld (Pfizer, 6-7)
3.
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.
14
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