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Discussion Competition Policy or Strategies in the Pharmaceutical Industry.


The present study focuses on the analysing how the main pharmaceuticals sustain a competitive advantage after the patent-cliff, evaluating the most effective strategy of competitive advantage from Strategic Alliance and M&A, explaining the reasons pharmaceuticals use Strategic Alliance and M&A and observing if M&A have increased efficiency in the R&D to release new drugs. The results overall showed that pharmaceutical industry uses a number of different competitive strategies according to the needs however, the two most common strategies are merger and acquisition and strategic alliance. Out of these two the study reveals that merger and acquisition is the most common and effective strategy being used in the pharmaceutical industry. With respect to pharmaceuticals R&D, the thesis describes that merger and acquisitions have a positive impact on R&D. The reason behind the findings of the research are explained below.

5.1 Pharmaceuticals sustaining competitive advantage after the patent-cliff

The data pointed out in this research, shows that concerned companies faced challenges of growth due to the patent-cliff. For instance, Pfizer Company’s cash flows, revenues, and shares declined in 2011, due to patent-cliff. Patent cliff increases the declining process of revenues in the form of expiry and perfect competition. This situation reduces the competitive advantage of companies. However, for sustaining a competitive advantage after the patent-cliff there are several strategies that are used by different pharmaceutical companies. Most important strategies to sustain a competitive advantage are Merger& Acquisition and strategic alliances, which are used by main pharmaceuticals. The purpose of using these strategies is to sustain the growth in terms of high profit and low cost (Lo, 2015). In this strategy, pharmaceuticals try to change the mechanism of its previous trends and policies.

Similarly, strategic alliance also gives a boost to raise prices for higher profits and control the risk of loss. In other words, these are called innovative models for reducing the effects of patent-cliff (Benson, 2015). Main pharmaceuticals have changed their conventional business models. These companies are using innovative models, which are keys of maintaining market position. They are focused on the needs initiating through high quality policies to the time management. Therefore, from the statistical analysis, it can be seen that Pfizer used M&A strategy to sustain its competitive advantage and its development after patent cliff started after taking this step. Avail  writing paper

Similarly, other main pharmaceuticals such as Bristol Meyers Squibb and GlaxoSmithKline also used these strategies in different ways. They maintain their market position, for instance, they focused on the policy to change their process and differentiation products. For this purpose, speculation in R&D is also known a significant financial investment. This increases the use of technology and innovative products with higher prices and transforms the effects of patent-cliff. Empirical evidence shows that all three pharmaceutical companies used M&A and strategic alliance after patent-cliff. The reason was to increase competitiveness in the market. This sustained and managed their revenues in the post-patent cliff and helped the companies to change their importance. For instance, Pfizer, Bristol Meyers Squibb, and GlaxoSmithKline merged with other companies, which has changed the life cycle and value of these pharmaceuticals.

5.2 Effective strategy between Strategic Alliance and M&A

Due to legal and regulatory changes in the demand of medical products, pharmaceutical industries have evolved into successful and global competitiveness. However, this global competitiveness is not long lasting for main pharmaceuticals. The occurrence of patent-cliff results in becoming a barrier for pharmaceutical companies therefore, for long-term development this must be reduced. To reduce the effects of expiries and to deal with this kind of situation, M&A provides an offer to control the prices and to follow innovative values. The low price of products such as generic drugs and other medicines threatens to weaken the sustainability of pharmaceutical companies. This is in regards lower profits, increase number of competitors, and higher demand for the needs of pharmacovigilance. This tilts a company towards the negative impacts of post-patent cliff.

At the same time, M&A also plays a vital role in the innovation and technology. For instance, this allows establishing an advanced capital, which shows a capital-intensive situation. Many companies including Pfizer took merger as a solution and focused on M&A activity with an attempt to produce synergies of costs and for the sake of diversification production. This technological advancement increases the probability of success with other companies, which become a part of them by following M&A. Statistical results show that initially Pfizer Company was working separately. However, in 2011, it faced a patent-cliff, which reduced its annual revenues and comparative advantage. Due to this, the company faced a huge declined in the cash flows ration and profits.

Furthermore, the patent-cliff reduced the revenues of Pfizer which was a huge decline on annual basis. At the same time, investment of the company in different departments also decreased with the huge expenses. To deal with this problem, Pfizer used M&A and merged with King Pharmaceuticals. This merger helped the company in achieving its previous position in the market and sustains what has been left. The company also majorly focused on working and increasing its R&D approaches and expenditures for the sake of having less affect of patent cliffs in future as well. This increased the profit of Pfizer by shrinking the volume of loss. This has become possible due to the increase in the prices and high quality of products. Initially in the year 2009, it reduced its R&D expenditures in between 8 and 8.5 $ billions. However, it increased it to $ 9.4 billion in the year 2010. On the other hand, quality of products increased as the King pharmaceuticals take an initiative for using advanced technology to focus on product differentiation policy. M&A increased the comparative advantage of Pfizer in the pharmaceutical industry across the world.

According to the findings, Bristol Meyers Squibb Company also faced the same challenge due to patent-cliff in 2011. Consequently, the company’ volume of share, revenues, and cash flows reduced manifold. Company’s two major and most selling drugs of Plavix and Avapro were struck of patent cliff with pulling down revenues by 30. The company was hit by the loss of its famous drug, which was known as the second best selling drug worldwide. This impacted the company’s revenue to decline to $ 3.83 billion from $ 5.5 billion and with net income reduction to $ 609 million from $ 1.1 billion. This shows that the company’ loss were increasing after the hit of patent-cliff. For minimizing the impacts of patent-cliff, BMS used M&A and at the same time, it focused on strategic alliance. The main aim of the company was to raise its investment in R&D and therefore, BMS selected these strategies. M&A strategy not only increases its profitability after the merger with Elli Lilly, but also revised its losses for next 5 years. Sharply and significantly, Sales of the drug cut down due to competition from cheaper generics after patent expiry. Sales of Plavix declined completely declined to 97% that become $ 49 million from $1.1 billion for full year 2012. Therefore, after taking the step for M&A the company heavily invested in R&D. Bristol-Myers Squibb invested about 19 percent of their annual sales of approximately $3.6 billion in 2009.

The most important factor that was seen in this merger is that M&A helped the company in increasing its competitiveness, as it ensnared the stakeholders to invest more in R&D department. From the evidence of GlaxoSmithKline, it can be seen that in 2011, this company also faced a remarkable hit of patent-cliff. As a result, its cash flows reduced from 42% to -4.65% per year, where operating cash flows’ percentage became -30% from 8.05%. However, there was not a sharp decline in the revenues as it was only 0.7 percent. Similarly, the patent-cliff did not hit GSK highly in the department of Sales, General and Administrative expenses. The increment in SG&A was only one percent. Still, the GSK focused on MA& strategy to change the negative impacts of patent-cliff. This was due to the fact the GSK invested its money majorly in R&D. Glaxo’s situation has been clouded because the company has the best selling drugs that faced patent loss and was effective as respiratory inhaler known as Advair. Out of overall sales of Glaxo’s over 20% had been because of Advair that was lost after the company hit patent.

Resultantly, the company was succeeded; however, its success was higher as compared to Pfizer and Bristol Meyers Squibb. The reason is that GSK was already investing on R&D. Therefore, the negative effects of patent cliff were not significant for this company. There are several other specific strategies such as re-innovation and price-focused approaches (Ohba& Figueiredo, 2007); however, M&A and strategic alliance are important ways for sustaining development and comparative advantage (Pikula, 2005). These two strategies offer both innovation and prices control policies to be used. M&A gives an opportunity of huge investment in the department of R&D, which is a key of success for pharmaceutical companies. Therefore, M&A is better than strategic alliance.

5.3 Reason behind using Strategic Alliance and M&A

For the industry of pharmaceutical, the past years have been the years of milestones in relation to the activity of merger and acquisitions. Many other industries also took part in the deals of M&A but mostly this activity took place in the pharmaceutical industry. It has been estimated that $ 317.4 billion has been announced as the transaction amount in merger and acquisition activity within the western market where the main reason of using M&A as a competitive strategy is to decline the issues of product pipelines and patents.

Many firms within the pharma industry are using this strategy of M&A to gain an increased benefit for the future rather than concentrating on 2– 3 years of short term benefits. Acquisitions have been considered as the source of competitive strategy for the betterment of market positioning and long-term benefits. Even though with an increased awareness of this industry’s need of creating momentum, the pharmaceutical industry with the benefit of long product cycles often gave off an air of inactivity. However, this industry has recognised the risks of remaining inactive waiting for the maturation of product pipelines.

These companies now focus on generating growth through unlocking values of shareholders and growing into the emerging markets. The pharma industry has made an effort to increase in specialising their product lines and offers as well as separate from non-core unit business giving their complete attention on numerous primary functions. These mergers help the companies and give them opportunity of growth and moving forward. According to many analysts, M&A is a strong method of remoulding one self (Financier Worldwide Magazine, 2014).

Another reason for going towards M&A is the most common cause known as patent cliff. The expiration of the medicines, the increased negative image of the companies, the increased activity of R&D for the sake of acquiring or merging with companies to increase its prices through new products or complementary products are reasons of going towards M&A. This also includes pressure to reduce costs and gain market and new opportunities are some of the reasons that companies go for M&A. Considering the example of Pfizer, GSK and BMS, all these companies used M&A to save themselves from losses and decrease revenues. These companies invested money in other companies for the sake of securing themselves from the loss they faced due to patent cliffs. They decided to solve its problem by not breaking up with the bigger giants of the industry. Highly focused groups headed by people decided to return power to the specialists of R&D by reorganizing it in their scientific fields to help them inspire and guide their team to be successful.

Patent cliff and merges are not the terms that are new to this industry. Researches show that the companies between the year 2005 and 2007 also underwent through mergers and acquisition because of patent expiration. Between these years, 1,737 M&A took place in the world including Europe. Similarly, between the years 2008 and 2013, 1076 M&A took place with a total value of $513 billion (Katsanis, 2015). The studies also show that horizontal mergers are the common type of mergers that occur in the pharma industry. The pharma industry as a whole is under the period of vital changes including M&A and other tactics for the betterment that will affect the industry in the future.

5.4 R&D efficiency increased through M&A

Research Department of the pharmaceutical industry is the most important part of this industry. This department plays a major role in building and destroying a company in the pharma industry. The companies need to focus more on R&D for increment and betterment of revenues and profits. R&D has been known to impact positively on a firm. However, less work is done on the impact of M&A on R&D. The research shows that M&A has a positive impact on R&D.

GSK is the company that spends more on R&D and has acquired a company that makes medicines and drugs. Compared to BMS and Pfizer, GSK spends more money on R&D and as a result has more stability in revenue compared to the other companies. Many other studies also increase the reliability of the results of this research. It has been known that M&A when occurs between the companies that have ex-ante complementary technologies, its impact on R&D increases and R&D performance become better after M&A. However, in cases where both the companies being merged are technologically substitutive, decrease in R&D activities are seen,

The results show that majorly R&D activities are increased when Mergers and acquisitions take place. R&D activities increase in cases where either M&A has been occurred in related companies in technology or example in this case GSK or Human Genome Sciences or it is beneficial when the companies have been a rival in the past. This overall shows that without the investment in R&D, productivity of the pharma industry and its survival is at stake in the present and future as well.

5.5 Conclusion

Generic comparative advantage has become increasingly important in an environment where patent-cliff is taking place. Patent-cliff is a threat for the pharmaceutical industry across the worlds. Due to the increase in demand and evolution in the pharmaceutical industry, there is a need to restructure the main components of pharmaceutical companies. These components are price factors and innovations. However, patent-cliff does not affect the profitability of a company, but also destroy the development in long-term. Content analysis and discussion shows that patent-cliff is changing the financial statements of Pfizer, Bristol Meyers Squibb, and GlaxoSmithKline. This change is negative as the volume of revenues and cash flows of pharmaceutical companies are shrinking. Furthermore, the expenses in the R&D and sales and increasing, which are cost-effective and reducing the probability of progress.

According to the theoretical findings, patent-cliff is a key of comparative in-competitiveness. Initially, pharmaceutical companies used modest resources to their off-patent strategies. However, now due to the changing in needs and increasing value of companies’ growth, some specific strategies are essential. These strategies are placing stronger emphasis on pharmacoeconomics and to lower expenses and reducing the risks of patent-cliff. Re-innovative, prices-based approach and some other strategies are used to triumph over patent-cliff. However, most important are Merger& Acquisition, and Strategic Alliance. Different pharmaceutical companies have been used these strategies for both short term and long-term benefits.

 Pfizer and Bristol Meyers Squibb in the concerned pharmaceutical companies used M&A. Resultantly, the loss of these companies transformed into the stability of profits and revenues. The use of this strategy increased the product differentiation by focussing on reshaping of prices and products. Pfizer and Bristol Meyers Squibb merged with King Pharmaceuticals and Elli Lilly respectively, which became an accelerator for both of the companies to maintain their reputation in the pharmaceutical industry and sustain the comparative advantage through remarkable investment in R&D. R&D, is known as significant part of pharmaceutical companies. This mainly deals with the huge revenues generation and higher profitability. This research also shows that R&D can be improved using M&A. Mergers and Acquisition is one of the strategies that are commonly used in the pharma industry as a competitive strategy.

As compared to this, GlaxoSmithKline Company also used M&A strategy; however, the growth of the company was manifold. The reason is that GSK was also in the favour of huge investment in R&D, which fasters the development process. GSK’ investment on R&D is incredible for making medicines and drugs. Compared to BMS and Pfizer, GSK is more stable in revenue. From the previous studies, it is quite clear that for multiple tasks, M&A is essential. For instance, this is beneficial for innovation, price control, R&D development and so on. With patent-cliff expenditures escalating at a frightening rate, while R&D productivity is continually declining, pharmaceutical companies are under pressure to maximize the value of their products, which will help in maintaining the life cycle with relative improvement. Therefore, patent-cliff’ impact was relatively less and restructuring of the policies did not take too much time. For instance, little increment in the prices covered the revenues difference and expenses difference based on cost.

M&A and Strategic Alliance are main strategies for pharmaceutical companies to be better off after the remarkable hit of patent-cliff. However, the most effective strategy is the M&A, which is common for all three companies, which faced the challenges of sustaining comparative advantage in the market that has been ruined by patent-cliff. M&A is gold for these pharmaceutical companies. In some recent years, this has been increased the transaction amount for pharmaceutical companies more than 300 dollars. This shows that this increases the competitiveness and therefore, this is called a comparative strategy. M&A is based on the requirements of a company, which must be highlighted before, the selection of strategies. This helps in achieving growth through releasing values of shareholders and expansion of the companies into the emerging markets. Therefore, it can be concluded that all three pharmaceutical companies have made efforts to increase their specialisation in different product lines. For that reason, they have used these strategies so that patent-cliff off should be achieved.

In this industry, the use of R&D to increase the pharmaceutical company’s productivity is yet on a lower side. Due to increased decline in innovation on cost reduction and lack of security of the revenues, the industry has been struck from every angle. This industry is in a perfect trouble of patent cliff that has increased pressure on increasing prices, securing revenues, developing medicines that are advance and go for different strategies to save the name of the company. R&D with patent cliff hitting is the problem that needs focus now. The companies that have been the part of the negative consequences of patent cliff have been surer about the development of their Research and development as a department. The companies also focus on merger and acquisition for the same reason.

5.6  Implication

As the improvement of pharmaceutical industry is based on a number of factors. The implication of this research is on the factors that influence the profits and revenues of the companies. This thesis is helpful for companies who are trying o evaluate the best competitive strategy for their future and interested in knowing the impact of their strategy in future. This study is highly applicable in the context of future patent cliffs that would be striking the pharma industry. This study will help the company’s in recognising the best strategies and steps they can take to make their competitive strategy strong.

This study can also be applied in other researches for quoting the findings as reference. This thesis would also be useful for analysts for making prediction in the future through analysis present in the results section. This thesis will also be helpful for retailers that deal in pharma industry and medicines. This study has also revealed the importance of R&D for pharma companies. It will be applicable in all the health facilities that gain, benefit and loss from patent cliff, expirations and other problematic issues and is applicable in helping different companies make better decisions that can help them in future. 

5.7 Recommendations                       

5.7.1 Practical Analysis of results

  • For practical analysis of results, it is recommended that quantitative as well as qualitative approach be used.
  • Proper data collection methods like the case study or survey questionnaire should be applied to increase validity and generalizability.
  • It is recommended that this research and alike of these researches are conducted to be used in helping other countries in making pharma industry policy.
  • The complete thesis analysis presents results in favor of merger and acquisition with reference to patent cliff. It is recommended that other issues should also be highlighted and researched within the pharma industry and the strategies related to those issues should be analyzed.

5.7.2 Future Research

For the present research, numbers of recommendations are presented

  • Firstly, it is recommended that the study include pioneers of pharma industry as sample population in the researches that plan to replicate the present researches.
  • It is recommended that the future researches on specific countries should be done to see if there is correlation between these results in different countries.
  • It is recommended that the sample pool for future research must be taken differently.
  • The results can be applied to only upper economy and large-scale pharma industries as the data is taken from three of the best pharmaceutical companies in the world including Europe. In this industry, more companies should be taken for study so that comparison of companies must be seen.
  • It is suggested to future researchers that different aspects of employee motivation should be studied.

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