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CASE: 1 THE PHARMACEUTICAL INDUSTRY
Managers in pharmaceutical firms face a dynamic and challenging task environment that creates both opportunities and threats. Demand for pharmaceuticals is strong and has been growing steadily for decades. Between 1990 and 2005 there was a 12.5 percent annual increase in spending on prescription drugs in United States. The strong growth was driven by demographics. As people grow older they tend to consume more prescription medicines, and the population in most advance nations has been growing older as the post – World War II baby boom generation ages.
Moreover, successful new prescription drugs can be extraordinarily profitable. Consider Lipitor, the cholesterol-lowering drug sold by Pfizer. Introduced in 1997, by 2005 this drug generated a staggering $12 billion in annual sales for Pfizer. The costs of manufacturing, packaging, and distributing Lipitor amounted to only about 10 percent of revenues, or around $1.2 billion. Pfizer spent close to $400 million on advertising and promoting Lipitor and perhaps as much again on maintaining a sales force to sell the product. That still leaves Pfizer with a gross profit from Lipitor of perhaps $10 billion.
Lipitor is highly profitable because the drug is protected from direct competition by a 20-year patent. This temporary monopoly allows Pfizer to charge a high price. Once the patent expires, other firms will be able to produce generic versions of Lipitor, and the price will fall—typically by 80 percent within a year—but that is some time away.
Competing firms can produce drugs that are similar (but not identical) to a patent-protected drug. Drug firms patent a specific molecule, and competing firms can patent similar, but not identical, molecules that have a similar pharmacological effect. Thus Lipitor does have competitors in the market for cholesterol-lowering drugs—such as Zocor, sold by Merck, and Crestor, sold by AstraZeneca. But these competing drugs are also
Managers in pharmaceutical firms face a dynamic and challenging task environment that creates both opportunities and threats. Demand for pharmaceuticals is strong and has been growing steadily for decades. Between 1990 and 2005 there was a 12.5 percent annual increase in spending on prescription drugs in United States. The strong growth was driven by demographics. As people grow older they tend to consume more prescription medicines, and the population in most advance nations has been growing older as the post – World War II baby boom generation ages.
Moreover, successful new prescription drugs can be extraordinarily profitable. Consider Lipitor, the cholesterol-lowering drug sold by Pfizer. Introduced in 1997, by 2005 this drug generated a staggering $12 billion in annual sales for Pfizer. The costs of manufacturing, packaging, and distributing Lipitor amounted to only about 10 percent of revenues, or around $1.2 billion. Pfizer spent close to $400 million on advertising and promoting Lipitor and perhaps as much again on maintaining a sales force to sell the product. That still leaves Pfizer with a gross profit from Lipitor of perhaps $10 billion.
Lipitor is highly profitable because the drug is protected from direct competition by a 20-year patent. This temporary monopoly allows Pfizer to charge a high price. Once the patent expires, other firms will be able to produce generic versions of Lipitor, and the price will fall—typically by 80 percent within a year—but that is some time away.
Competing firms can produce drugs that are similar (but not identical) to a patent-protected drug. Drug firms patent a specific molecule, and competing firms can patent similar, but not identical, molecules that have a similar pharmacological effect. Thus Lipitor does have competitors in the market for cholesterol-lowering drugs—such as Zocor, sold by Merck, and Crestor, sold by AstraZeneca. But these competing drugs are also