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Literature Review Competition Policy or Strategies in the Pharmaceutical Industry.

CHAPTER TWO: LITERATURE REVIEW

The industry of pharmaceutical is complicated and intricate. The technologies that lead to the discovery of new medicines and development are restricted to the knowledge of human. These huge sized companies and industry because of their complex processes and technologies present, face many management and organisational challenges. The management and development of the system of distribution in pharmaceutical industries are highly costly.

 However, it is necessary for the industry to keep excellence in all the aspects for survival in the industry from the competitors present. Pharma industry faces different challenges for instance the uncertainty of discovery process or huge returns from the discovery of single medicine etc. The success in this industry is dependent on the measure of luck with the correct strategies for competition that helps to cope throughout the period of certainty. Order  writing paper for your best grades.

2.1 Competition Strategies

In a market where competition is tough, companies become successful by defining their winning propositions in an easy yet persuasive ways. Competitive strategies are actions that comprise of patterns that could attract customers and can help companies survive the competitive pressure and make stronger the image and position of the firm (Ohba& Figueiredo, 2007). The goal behind a competitive strategy is to get a competitive advantage over other competitors. The competitive advantage that a company receives from its strategy is specific and subject to each company. The strategies that are used for competition in the pharmaceutical industry are mentioned below:

2.1.1 Price competition

The presence of more than one market segments helps generate profits that can fail to be quasi-concave. The reason behind this is that many firms enjoy monopoly of their price and power on their customers that are loyal. These firms compete by setting prices at high level showing difference in the medicines of their company and their competitors (Frutos et al., 2013).

2.1.1.1  Cost leadership strategies

Cost leadership is a strategy that helps in enabling and securing a huge amount of market share by turning themselves in a producer of low cost in the market they are dealing. However, the companies using these strategies suffer serious challenges in the adoption of this as a competitive strategy. The challenges include changes in structure, price, technology, new sources, globalisation in case of expanded boundary competitions and overall industrial activity impact on external environment (Mueller, 2015). 

2.1.2 Differentiation

Differentiation is another strategy that is linked with the strategies of competition because it supplies a product in the market that is different from all the competitors. If used correctly, this strategy is what the firm seeks. It can help in reducing the issues potentially that have aroused because of competitors. In this strategy, the firm is able to be unique and distinctive in the industry and along with new dimensions that can turn out to be the yardstick of the overall market. It highlights one or more than one attributes that are important for a firm and brings out the uniqueness in the company (Todeva& Knoke, 2005).

2.1.3 Generic Pharmaceutical Production Strategy

Pharmaceuticals at the most basic level use this strategy of simplifying their products. The generic production, strategy is the one that helps the company to develop their most efficient and effective processes of medicinal chemical compounds synthesising for the company to earn their best. For instance, the type of medicine for headache uses acetylsalicylic acid and can be extracted from willow bark or can be synthesised in the lab. Pro-organic customer base can be opened by using Generic acetylsalicylic acid extracted from willow bark. Similarly, the company able to get a better method of acetylsalicylic acid production in the form of a pill can have a huge amount of cut in the price of the product (Redazione, 2014).

2.1.4 Merger and Acquisition (M&A)

Merger and acquisitions are common characteristics of the pharmaceutical industry. It is used as a mechanism to construct innovative values for industries for keeping the leading position in a market environment that is smaller. It is observed that either for many firms their products are already expired or close to getting expired increase the chance of Merger and acquisitions. Along with this, the pressure that firms face economically demands a control in price. Under all these circumstances, the best way is to develop value for all the stakeholders through Merger and Acquisitions (Benson, 2015).

For the development of successful strategies, it is important to study the past strategies of M&A within the pharmaceutical industry. Big pharmaceuticals have been in struggle as they depend on a firm’s flow of profits and growth from their new inventions. For addressing this issue, most of the pharma companies in the late 1960s and 1970s acquired companies to diversify horizontally. For example, Abbott acquired nutritional products and Pfizer acquired cosmetic companies. Investing in a business that is although less profitable offers constancy and balance through stability of risks in the industry and company.

Activity of M&A activity has not shown any sign of slowing down. According to the data of Bloomberg (2015), 2014 has been the years in which more than $ 118 billion of M&A deals have been proposed. A figure near to $ 174 billion has been spent on the activity of merger and acquisition in this industry in the complete year of 2013. Sustained consolidation in UK over the last 20 years has understood as only 11 original members of Pharmaceutical Research and Manufacturers of American industry lobby is in operation today in comparison with the year 1988 where 42 were in operation. A famous company Pfizer has spent over $219 billion from the year 1944. It has done huge take over on large scale of its rival companies like Pharmacia and Warner-Lambert. Earlier this year, AstraZeneca, a UK pharma company has undergone for M&A also.

Between the popular pharmaceutical companies, GSK and Novartis are the ones that have recently confirmed a deal for $ 28.5 billion. GSK was acquired by Swiss based Novartis and has turned into a preferred partner for industrialising its oncological pipelines. Similarly, it has been transferring its section of vaccines to GSK. It has turned into a joint venture for the consumer business of OTC as both the firms signed it (Benson, 2015). As a method of innovation, pharmaceutical companies have been a part of huge proportion of merger and acquisitions compared to all the industries. Pharmaceutical companies compare and want to go higher and higher by providing and growing better and bigger products and reach more markets. Companies have acquired even small companies to increase the competitive advantage over others to control the patent rights and products, facilities, and distribution channels.

2.1.4.1  Types of Merger& Alliance

2.1.4.1.1        Horizontal Mergers

Horizontal mergers are the types of M&A in which when one firm takes over another firm that has the same product line or services. This means company that has been taken over belongs to the same industry as that of the buying firm. Companies in horizontal mergers are direct competitors. It is a merger of business that is done between the same types of firms. These types of mergers are common in industries where competition is higher because of less working companies. In horizontal mergers, the gains and benefits from the consolidation is much higher than in other mergers (Pikula, 2005).

2.1.4.1.2 Vertical Mergers

The aim behind the vertical merger of companies is to combine companies that belong to the same industry of producing services and goods but the difference is the production stages at which the companies are operating. Vertical mergers help companies to secure the essential goods and their supply without any disruption. This merger is among the companies, which for the production of finished product combine with other company. In this merger, mostly the two companies consolidate the operations of the companies. This merger benefits the firm by supporting them in increasing the combined effect that would not be able to develop independently (Gaughan, 2010).

2.1.4.1.3 Concentric Mergers

Concentric mergers are the types of mergers between two companies that do not offer the same product but belongs to the same industry. The products of these two merging firms can be complementary or products that could go together. Concentric merger is also known as congeneric merger, in which one firm absorbs another firm and maintain its existence in the market after the combination of firms. However, the firm maintaining its existence in the market offers significant compensation to the company taken over (Foltz, 2006). 

2.1.4.1.4 Conglomerate Merger

Conglomerate mergers are the type of mergers in which two companies that are completely different and function in very different industries. This type of merger mainly aims to diversify its products that help decline the rate of risks. Conglomerate mergers are the most uncommon types of mergers that happen between unrelated companies that are neither competitor nor have a relationship of buyer or seller. These deals does not consist of strategic rationalisation because it is cost saving. For example, Phillip Morris wished to diversify its risks away through the tobacco industry (Pikula, 2005).

2.1.4.2  Reason behind mergers and acquisitions

Economic research has explained the main causes behind mergers and acquisition in the pharmaceutical industry with their impact in determining if mergers destroy add or redistribute the value of the firm (Maris, 2012). Economic theory examined this point and suggested that there are numerous reasons behind the decision of M&A. These reasons are not mutually exclusive as they include acquisition of specific assets, corporate control for market, and economies of scale and scope. This theory defines hardly the point that this action of Merger and Acquisition has historically been specific in particular industries (Patricia M. Danzon& Nicholson, 2005).It is also assumed that mergers are done to build value for a company; however, no agreement is observed on the methods of creating value or whether the expectations are actually going to give a positive outcome. In the latest review of this procedure, researchers reported a prominent difference in the estimation made on prior and past actions of the merger for many companies. The review showed that mergers have the capacity of improving and enhancing the firms’ gains towards stakeholders. This strategy has helped companies keep their word of fulfilling expectations of all the stakeholders of improving the future cash flows (Moeller& Stulz, 2008). Most researches have also focused on the complete acquisitions that are the way out of the targeted firm being taken. However, it is suggested that outright acquisition or merger is an intense modification in the range of M&A activities with the industry of pharmaceuticals.

2.1.5 Strategic Alliance

Strategic alliance has been explained as the mechanism out of all the strategies that is used to operationalise the contemporary information and the distribution of labour that is innovative in the modern pharma industry. For the sustainability of new and innovative economic performance, the industry has to produce and introduce new drugs consistently. The process of launching new medicines in the market is dependent on the research of medicines and drugs and technological capabilities of the research and development department. Usually, when a new medicine is discovered it undergoes different processes, which includes preclinical and clinical trials in humans, molecule trials, and the overall procedure of drug development. Many strategic alliances are formed between the periods of clinical trials because they need high amount of investment (Nightingale& Mahdi, 2006). 

Strategic alliance is taken as a strategy by pharmaceutical companies to balance the resources for global competition. The process of strategic alliance is based on two firms who are partners and legally independent even after the alliance is made. These companies share advantages and control of managerial section to enhance performance of assigned tasks and contribute in the strategic areas consistently for betterment for example, in technology or production (Tyebjee& Hardin, 2005). These features entail that strategic alliance helps creating independence within the autonomous units of economics for the sake of bringing new gains in the way of intangible assets with an obligation of consistently contributing to the partnership made.

Different alliances that are formed represent distinct approaches made for adoption of controls of their dependence on the partners of their alliance. These strategic alliances are also related to the legal manners, which enables the company to control the allocation of their resources and the distribution of the advantages and gains between the partner companies. Most recently, strategic alliances are considered as a concept in business that is changing the dynamics and organisation of the worldwide competitions. Strategic alliance in a broader term is the relationship within the firms for creating more value than a single company could on its own (Todeva, 2005).

 This strategy supports firm in reaching and achieving objectives when there is a common interest while keeping their independence. Pharma companies are generally making alliances with their competitors, customers, and suppliers. Furthermore, the companies and their groups are in competition with competitor groups that change the way economic power is distributed in a society and push more other companies for alliances (Cojohari, 2007).

2.1.5.1 Types of Strategic Alliance

2.1.5.1.1 Licensing

Licensing is one of the types of strategic alliance that includes an agreement between single firms or more than one company that allows the rights to use it technology, manufacture its products, or use its distribution network. This alliance is on contractual basis for a particular time in which the company asking for license is liable to pay a fixed amount from the company its taking the rights (Išoraitė, 2009).

2.1.5.1.2 Franchising

Franchising is the alliance in which a company give rights to other companies to sell its services or products. A non-exclusive franchise is the one that is made with multiple companies and an exclusive franchise is the one when the rights are given to a single company only. Franchising is based on contractual agreements for a limited amount of time. Similar to licensing, the franchisee is liable to pay an amount to buy the rights from the franchiser (Pellicelli, 2005).

2.1.5.1.3 Research and Development (R&D)

Research and development is a type of strategic alliance in which the collaboration is done for the development of innovative products or technologies. R&D is an alliance, which is beneficial for the companies when research costs are high and when shortening of life cycle of products can be pressurising for the companies. Research and development in growth of medicines includes a huge amount of financial contribution and involvement. It takes numerous years before a new and most importantly successful medicine is introduced in the market (Paul& etal, 2010).

The reason this strategy is successful is the point that after a successful medicine is launched in the market with accurate testing results, pharma companies have the option of patent and selling it on high prices for considerable profits. However, new medicines require advertisement campaigns that need to recognise the niche market, which would help the company in competing directly with its competitor’s famous product. For example, a tough competition is observed in the headache and muscle pain medicines because customers are less likely to use new product (Mueller, 2015).

Although, investment in Research and Development section of a pharmaceutical company is complex as well as expensive. There are many reasons behind this, which includes the dramatic increase in the expenditures of the pharma industry. This is also because of the costs that are linked with the development of new products. This also includes the enhanced focus on establishing and identifying medicines for new diseases. However, this focus has the lowest chances of getting successful. Apart from this, one more reason is the increased demand of authorising the market agencies in relation to quality, scale, and scope of the data (Ohba& Figueiredo, 2007).

 

2.1.5.1.4 Joint Ventures

Joint ventures are agreement between multiple or two companies to combine firms and convert into a single company for initiating a new project. Both the companies have equal shares within the business and share profits and costs. Features of agreement influence whether the joint venture is a strategic alliance or not. For changing the venture into a strategic alliance, it is important for partners to have an agreement. In case of alliance is non-strategic it only requires a tool or technology to get an update. Joint ventures in small-scale companies are difficult and rare because of the cost and commitment required for it (Moles& Terry, 2005).

2.1.5.2  Reason behind Strategic Alliance

It has been viewed that there are numerous reasons behind the strategic alliance of big pharmaceutical companies along with some small-scale companies. The former goes for strategic alliance for understanding and updating their knowledge for keeping the technology and market leadership based on innovation. The small scale companies aims to seek advantage from their existing knowledge through capitalising and sharing the risks they can face due to their new investigation and for gaining access in the market (gottinger& etal, 2010).

Pharma companies focus on forming strategic alliances to balance the resources through this (Hughes, 2006). Around 20,000 companies formed strategic alliance, during the years 1988 and 2002, involving pharma companies. Furthermore, strategic alliances are also formed because of the fact that under patent protection and under the replication difficulty of certain innovative capabilities in the industry of pharma, strategic alliance becomes a necessity. As the global competition accelerates, the demand of customers increase and companies are looking for dramatic changes. Managers are in action of using different strategies, which makes it difficult for the company to stay on all the current resources, technologies, and information (Kesič, 2003).

Strategic alliance as a whole provides new access to markets, geographic expansion, and cut-edge technologies with tough and competitive skills rapidly. Strategic alliance has now turned out to be the source of competition and competitive advantage for many firms that focus on enhancing technological and organisational intricacies that are now a part of worldwide market (Cojohari, 2007).

2.2 Patent Cliff

A controversial aspect of defining the continuous decrease in the profits of expiry of patents of single or more than one firm is defined as patent cliff. A patent cliff happens when profits and earnings of the firms are declined extremely and when more than one product goes off patent (Financier Worldwide Magazine, 2014). As these products are unable to be replicated, they are left to be sold at cheaper prices than their originals by rivals. Patent cliff is a term, which is applicable to all the industries however; the key focus is on the pharmaceutical industries because of its exclusive association within previous years (Jardines, 2010).

From past decade, the big pharmaceutical companies have been under the terror of patent cliff. This is the fall of sales because of the expiration of famous medicines (Mizuho Industry Focus, 2014). These companies are then struck by legal challenges with little time and potential for new medicines to cover the losses. The pharma industry has faced exceptional numbers of expirations between the years 2009 and 2013. Because of the generic competition rising in the pharmaceutical industry, the losses expected were 18% of complete sales. After the research conducted on the industry, it has been suggested that big pharmaceutical companies are in mode of making strategic decisions to fight the losses.

2.2.1 Causes of Patent Cliff

The reason that patent cliff exists is because of the expiration of products of the pharmaceutical industry. Due to this, the increase in generic medicine completion increases which costs the planning of the companies done in advance. Most pharma companies focus on the strengths of the pipeline products when generic competition is present in the industry of pharmaceutical. These products cause the follow on products for example, use of different formulations for the sake of not using novel therapies (Jessop, 2013).

The patent cliff brings with it a huge amount of loss that is faced by targeted companies. As many companies have been listed on the market and industry, marketers and investor focus on companies that are more possible to launch a product, which is a blockbuster (Katsanis, 2015). This is done because the company’s focus on the bringing up the revenues that have been at loss and shortfall because of the expired products. However, it is not an easy task to replace an expired product with a new medicine because of the competitions within the industry. As a result, of patent cliff many organisations focus on mergers and acquisitions as a solution to strengthen the present status (Bailey, 2014). 

2.2.2 Effects of Patent Cliff

Protection for patents cannot be kept forever especially when it comes to pharmaceutical industry. In this industry, the expiration of pills and products, have severe consequences over the losses of pharmaceutical companies in terms of the revenues they earn. This patent cliff has been giving a hard time to the revenues of all the big pharma companies. This results in the cost reduction and price increases along with new sources of profit in the form of a new blockbuster medicine (Jessop, 2013). 

Lilly a famous pharma company ended up firing hundreds of sales staff when its famous medicine Cymbalta (antidepressant) went off as patent in the year 2013’s end. Loss of protection on the medication Singulair for asthma by Merck resulted in the removal of almost three forth of the workforce. In four weeks after the patent cliff on the medicine, 10 generic manufacturers were line up opposed to Merck when product sales dropped by 90%. Similar situation is seen on several other pharmaceutical companies that announced hiring freeze and firing of employees in the last decade because of the decline in revenue because of expirations of patents (The Economist, 2011).

As mentioned by IMS Health (2010), many prescription drugs’ sales growth is in the verge of decline as in the year 2012, the sales of these drugs globally was $856.1 billion, an increase of 1.8 percent from the year 2011. Loss of patents is one of the reasons of many factors for the slowdown of the drugs.

2.3 Competition Strategies in Europe           

In UK and Europe, the competition is motivated by the radical innovation strategies that are found by the institutional settings. Due to the decentralisation of collective bargaining process, the difficulty to accurately place the training and education system that supports in firm collaboration is faced. High bonuses can help companies to develop innovations radically, but these are the strategies that are used in Pharma when patent expirations are not present (Herrmann, 2008).

The strategies that are used by pharmaceuticals at times of patent cliff include the deregulation of financial markets, which offer firms in accessing and sharing capitals easily. These sharing can be either through M&A or strategic alliance as well  (Bottazzi& etal., 2006). However, the capital shared if invested at the right time with innovation leads to higher returns, this strategy is important because if shareholder expectations are not fulfilled the chances are that investment will be shifted to other companies. Therefore, either flexible markets or deregulation system can help provide persuasive and compelling advantage over other rivals (Hanger, 2009).

Another strategy that has been used in Europe from sometime is the use of low-cost strategies. Employers are unlikely to partake in training programmes and sophisticated education as labour-market institutions permits for reasonably low salary levels, once they have finished compulsory schooling. It is observed that whenever these low levels are combined with financial institution of market that is non-transparent, there is more chance that firms engage in the activity of low cost production. By selecting a specialised low cost strategy, firm that have monetary issues seem to use cost as an advantage over competitors (Herrmann, 2008).

Resale price maintenance is another strategy that happens when distributors and retailers agree on resale prices with the manufacturer. It is an established strategy because it works under the law of Europe  (Tuominen, 2011). Maximum sales and its agreements are necessary as well as lawful and have competitive benefits. It is viewed in both Europe and US that manufacturers have the authority to freely suggest the resale prices and advertise the prices as well as suggest the dealer with a correct price list. However, in this case dealer solely determines the adherence of suggested prices. The policy in Europe clearly states that during this strategy manufacturers do not have the right to force dealers for accepting resale prices (Hull& Hester, 2006). 

Price increase is another strategy that is used by many pharma companies especially the ones that have a stronger image in the market. Price increment is used for an attractive and extensive competition examination. Another strategy has been allowed by the Europe and is used extensively in the Europe pharma industry. It is common that a different yet innovative product or medicine is presented in the market with an increase in price. Under the strategies used, another strategy that is easy and used well is the use of technology for producing products that are innovative and new. Many of the companies have also adjusted their price and sometimes increased their price during the times of financial constraints by using technologies and advancements (Gambardella, 2005).

Companies in pharma industry focused on technology for the price fixing and levels of imbursement, price cuts, and delisting (Cassiman& Colombo, 2006). As per many evidence and researches available, these measures are done to recognise the short-term savings and the strike the best shorts. Using this technological approach, rates of growth are not affected however; these strategies have brought up new alterations in the industry. Apart from this, the most popular strategies that are used in Europe are merger, acquisition, and strategic alliance. Compared to both the most common is M&A that is used by big pharmas in Europe (Benson, 2015). The complete analysis shows that the companies in pharma industry are into change processes that help them in the development of competitive strategies to fight the difficult times of patent cliff (Hanger, 2009; Kesič, 2008). 


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