Corporate Strategy Assignment - The Global Pharmaceutical Industry

The Global Pharmaceutical Industry
Amany Hamza
Student number: 21202244
Module Leader: Roger Cook
Module Tutor: Vladan Hadzic
Course: MBA / Corporate Strategy
Module Code: MC70004E
Date: 12th April 2013
(Mundasad, 2012)
Table of Contents
1. EXECUTIVE OVERVIEW ............................................................................................................ 4
2. INTRODUCTION TO THE INDUSTRY ........................................................................................... 4
3. EXTERNAL ANALYSIS................................................................................................................ 4
3.1. THE PESTEL FRAMEWORK .............................................................................................. 4
3.1.1. POLITICAL FACTORS ......................................................................................................... 4
3.1.2. ECONOMIC FACTORS ....................................................................................................... 5
3.1.3. SOCIAL FACTORS ............................................................................................................. 6
3.1.4. TECHNOLOGICAL FACTORS ................................................................................................ 7
3.1.5. ENVIRONMENTAL FACTORS .............................................................................................. 8
3.1.6. LEGAL FACTORS .............................................................................................................. 8
3.2. KEY DRIVERS FOR CHANGE ................................................................................................ 9
3.2.1. THE NEW ECONOMIC LANDSCAPES AND ITS IMPACT ON PHARMA ........................................... 9
3.2.2. THE PATENT CLIFF AND PHARMERGING .............................................................................. 9
3.2.3. EMERGING MARKETS....................................................................................................... 9
3.2.4. HEALTHCARE SYSTEM REFORMS......................................................................................... 9
3.2.5. POLICY- REGULATION-DRIVEN CHANGES AND IMPACTS THROUGH 2015 ................................ 9
3.3. THE FIVE FORCES FRAMEWORK ................................................................................... 10
3.3.1. THREAT OF NEW ENTRANTS............................................................................................ 10
3.3.2. THREAT OF SUBSTITUTES ................................................................................................ 11
3.3.3. THE POWER OF BUYERS .................................................................................................. 12
3.3.4. THE POWER OF SUPPLIERS .............................................................................................. 12
3.3.5. COMPETITIVE RIVALRY ................................................................................................... 12
4. INTERNAL ANALYSIS ................................................................................................................... 13
4.1. THE VALUE CHAIN .............................................................................................................. 13
4.2. FINANCIAL ANALYSIS OF NOVARTIS...................................................................................... 15
4.2.1. RETURN ON CAPITAL EMPLOYED (ROCE) ......................................................................... 15
4.2.2. LIQUIDITY RATIOS: CURRENT RATIO................................................................................. 15

4.2.3. GEARING RATIOS .......................................................................................................... 16
4.3. ANALYSING CULTURE: THE CULTURAL WEB ............................................................................ 17
4.4. NOVARTIS STRENGTHS & WEAKNESS AND RESOURCES ........................................................... 19
5. CONCLUSION ............................................................................................................................ 20
6. ACRONYMS............................................................................................................................... 21
7. APPENDIX................................................................................................................................. 22
8. REFERENCES ............................................................................................................................. 23
1. EXECUTIVE OVERVIEW
This report provides an analytical strategic review of the global pharmaceutical industry. In the first part, it
covers the external environment of the global pharmaceutical industry using PESTEL analysis and outlines
the Key drivers for change. It then uses the Five Forces analysis to demonstrate the industry attractiveness.
In the second part, we illustrate the strategic capabilities of Novartis using the Value chain to discuss
Novartis activities and identify its core competences, strengths and weaknesses. We then attempt to
highlights its financial performance, position and culture.
2. INTRODUCTION TO THE INDUSTRY
According to Gerhard Kocher, Medicine knows no limits, especially not its own (Quotations Book, 2013).
Innovation is the lifeblood of the pharmaceutical industry, and has been a major driver of industry growth
(Palgrave Macmillan, 2013). Thus a healthy, vibrant and responsive pharmaceutical industry is vital to
society for the development of new medicines (PwC, 2013).
The WHO (2013) has suggested that:
The global pharmaceuticals market is worth US$300 billion a year The 10 largest drugs
companies control over one-third of this market, several with sales of more than US$10 billion a
year and profit margins of about 30%...It is predicted that North and South America, Europe and
Japan will continue to account for a full 85% of the global pharmaceuticals market well into the
21st century.
EVOLUTION OF THE GLOBAL INDUSTRY

The birth origins of the Pharmaceutical Industry can be traced back to the late 19th century. The invention of
penicillin was a major milestone for the emergent industry which consolidated its R&D efforts in the 1950s
(Business Wire, 2013).
3. EXTERNAL ANALYSIS
3.1. THE PESTEL FRAMEWORK
3.1.1. POLITICAL FACTORS
The early presence of the industry was characterised by increasing public discontent especially with
the thalidomide disaster that served as the catalyst for greater regulatory reform. The role of the
governments in enhancing accountability was reformed and the industry was heavily regulated in
most countries.
Under the circumstances that the commercial interests of the Pharma industry and the public-health
interests of patients coincide, governments have developed systems to regulate the pharmaceutical
industry. As a result, they became a political player keen to shape the standards and processes
defining regulation against unethical promotion and excessive industry profits, setting effective
length of a drugs patent life and hence monopoly control. The stringent governmental regulation
associated with lengthy and expensive R&D process for approval of new drugs with fixed patent
expiry, the industry is shaped as a response to these pressures and determinants.
On the other hand with governments being the major payer, industry faces increased political
4
intervention due to the spiralling healthcare costs resulted in various nations have set pricing levels,
which is a threat for the industry reducing its revenues. Governments role in setting prices and
reimbursement policies resulted in pricing disparities; EU enacted the advocate of lucrative parallel
trading to create an opportunity to have a single unified market.
Figure 1: The Political influences on the Pharma industry
Barack Obama sponsored the Genomics and Personalized Medicine Act of 2007 to accelerate genetic
2007 research. This can be an opportunity for Pharma to move towards a broader array of drugs targeting
profitable segments.
The U.S. passed the Affordable Care Act which expands health insurance coverage to 25-30Mn
2010 uninsured Americans. And it grants 12 years of market exclusivity to originator biologics. New
biosimilars are expected to enter the U.S. market by 2014.
Spain and Italy made substantial reductions to generic and off-patent brand prices to encourage higher
2010 generic utilization and lower health system costs.
Japan implemented its first price cut under its new protected innovative products policy, initiating a
2010 change in balance between innovation and the use of off-patent products.
(Euler Hermes, 2012)
3.1.2. ECONOMIC FACTORS
The pharmaceutical and health-care industry have been relatively immune to economic downturn,
because illness doesn't take a vacation (PR Newswire, 2013). Figure 2 suggests that.
Figure 2
(Euler Hermes, 2012)
In Figure 3, we illustrate the external Economic factors influencing the Pharma industry:
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Figure 3
-Pharmaceutical companies increasing ties

Slowing Economic Factors
with generic counterparts to exploit myriad

sales opportunities
-Prescription drug sales, albeit weakened, still
-Governments tend to curb the costly account for the lino's hare of revenu, with an
healthcare budgets opportunity for sales to replace the reduction
on spending on those barnds losing patent
protection
-Sovereign debt crisis -Mature markets, characterised by higher
incomes will see per capita expenditure grow,
-Patent protection is set to dwindle this represents dynamic growth opportunities
between 2011 and 2014 causing a threat European markets are hilghly fragmented,
to brand revenues. The year 2013 will be thus resulted in propensity in parallel trade
crucial for many pharmaceutical giants and more sales opportunities
especially U.S. and European companies
expected to lose up to $29 billion to (Euromonitor, 2012)
patent expiry (Deloitte, 2013) -Switches to Self-Medication, OTC, Consumer
health products are important source of
-R&D costs have risen by more than 80% increasing revenues. Self-medication market
worldwide over the past 10 years and experienced 7% annual growth on average in
stringent admission requirements for 2012;
new drugs (Roland Berger Strategy -Pharmeging 17 is in far better financial
Consultants, 2013) condition and lower levels of public debt,
Growth Economic Factors

which leads to a global growth opportunity
-Generics spending in 2015 is expexted to be
$400-430Bn, 70% of which will be outside
developed markets
- Pharma firms strategies to offset patent
expiries with organic growth and new
products represent an important opportunity
for more sales growth
(IMS, 2011)
-The effective tax incentives to encourage
R&D efforts led to increased business growth
3.1.3. SOCIAL FACTORS
Access to medications is an ethical perspective of equity and human rights (Lage, 2011). This forms
an opportunity for imposing pressure on governments to achieve universal coverage.
The growth of global pharmaceutical markets is stimulated by population growth, accompanied by
the phenomenon of the ageing population. However, some major markets such as Japan and some
European countries are likely to see their populations shrink. As high population growth is outpaced
by an even higher GDP growth, the increase in the middle class income to spend on consumer health
products can lead to a golden opportunity to fuel the shift to these drugs trends and increase the
total revenue of the industry (Mennen, 2010). Figure 4 illustrates that:
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Figure 4
The growing demand from ageing population strains national health insurance plans. This spectre of
straining welfare systems can yield diversified sales opportunities in covering the aggregate level of
population composition geriatric related drugs and on the other hand young generation drugs to
meet the social obligations of access and quality (Mullan, 2002).
The extensive geographic diversity within emerging countries scouts for sales opportunities.
Moreover understanding the divergence of pharmerging markets is an important opportunity to
achieve increased access and breadth to increase ROI (IMS, 2010). Pharmaceutical companies are
exploring non-traditional customer bases calls for overcoming the cultures of secrecy into integrated
synergies and collaboration to maintaining a global outlook (Kumar, 2011).
Social trends call for releasing preclinical data around the pandemic diseases. This forms a threat to
be conceivably used by generic competitors. Though the Pharma industry infringed the IPR by
allowing exporting AIDS drugs to Africa to overcome such threats and gain social support to raise
consumer loyalty.
Change in social life and increasingly hectic lifestyles, accompanied with higher incidences of chronic
and obesity diseases, will drive demand for innovative therapies including weight management,
vitamins and dietary supplements offering astonishing sales opportunities. In addition, companies
are taking advantage of ICT to reach patients creating further opportunities to influence consumer
expectations of health care and build brand awareness thus creating loyalty (Euromonitor, 2012).
3.1.4. TECHNOLOGICAL FACTORS
Technology has a cohesive interrelation with Figure 5: Innovation

pharmaceutical innovation and diffusion. It is the For example, the Examples
makers of Clarityn
technology that made number of synthetic readily created an app
transferable to pharmaceuticals. Since then significant which provides
advances in technology have led to the discovery of users with detailed
information about The collaboration
newer, more effective drugs and therapies. While R&D local pollen count between Orange
is using next generation sequencing technologies, and where to find and m-Pedigree in
nearby medication mobile technology,
clinical trials adapts the incorporating signal detection to help ease patients and
technologies for safe and efficacious pharmaceutical seasonal allergy clinicians can now
drugs grow, technological solutions will be of increasing symptoms check whether
drugs are fake by
interest that reduce barriers to clinical success (Kumar, sending a single
2011). Bioclusters can open the floodgates to bridge SMS, receiving an
instant verification.
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the decline of costly R&D and optimize outsourcing as in-house research is not delivering results as
quickly. The advanced technology can help Pharma to exploit eHealth and eMarketing. Companies
are beginning to embrace social media in terms of interactions with patients and marketing for DTC
drugs as well (PwC, 2012).
3.1.5. ENVIRONMENTAL FACTORS

Figure 6 Manufacturing Impact on Environment
As the pharmaceutical industry expands, it
faces more serious environmental problems
arising from increasing global production.
One indicator of the pharmaceutical industry Air, Water, Processes of
collaboration is its commitment to Soil material input
Pollution generate:
environmental management systems
(EMSs), through the integration between
their environmental, health, and safety
Chemical synthesis Reaction,
practices with principles of quality-based separation,
processes in bulk
management and carbon offset. The overall production
purification
and drying
environmental impact of the pharmaceutical
industry compared with other industries,
Waste
such as energy, automotive, aviation or water,
chemical, is relatively low. The returns to residual
Pollution
wastes,
society from R&D are more than twice the VOC
returns to corporations from R&D which emission
outweighs the impacts of pollution caused
from production (Taggart, 1993).
3.1.6. LEGAL FACTORS
Stronger and broader government regulation is necessary to bridge the current gulf between public
and private interests (Santoro and Gorrie, 2007). Prudent regulations made research a more
expensive and time-consuming process for the approval of new drugs. These regulations thus
involve a potential trade-off between curbing costs today and having fewer drugs and imposing
limits on profits. Regulatory standards operate as IP protectionist barriers, and use tariff and non-
tariff restrictions to protect against price disparities (Health Affairs, 2013). The harmonised
regulations between the EU and the US improve collaboration and give companies simultaneous
access to a wider transnational market, hence an opportunity to ease the regulation process.
Over the past 20 years, more than 165 cases of civil and criminal actions were settled in the US BY
Pharma companies, it adds to the costs and complexity of compliance. Besides the fines, the cost of
litigation can be significant with a threat to a short-term decline in market valuation, as suggested in
Figure 7 (KPMG, 2011).
Figure 7
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3.2. KEY DRIVERS FOR CHANGE
3.2.1. THE NEW ECONOMIC LANDSCAPES AND ITS IMPACT ON PHARMA
The industry is facing reimbursement pressure from spiralling costs and

overwhelmed health systems around the globe to control general spending
on health care. However this recession has benefited the industry for being
attractive investment for investors who are often reluctant to invest in
industries such as buyouts. It also yields great M&A by the bigger Pharma
companies. Moreover socially responsible behaviour is being turned on.
Health and wellness are being emphasized as the antidotes to a stressful
lifestyle (Deloitte, 2013).
3.2.2. THE PATENT CLIFF AND PHARMERGING
The low sales growth in key markets due to high rates of patent expiration,
and the growing competition for low-cost generics are causing losses of
billions in revenues. Besides the rising expenses of clinical testing, Pharma
companies are trying different strategies and expanding their portfolios
Figure 8 Key Drivers for Change beyond prescription drugs (MCE, 2012).
3.2.3. EMERGING MARKETS
The huge swing of power to the 17 pharmerging markets is increasing the Pharma revenue. The pharmerging
market segment is fast becoming the platform that will carry global pharmaceutical performance. Demand
from emerging markets shifts traditional sales and marketing practices which is a prominent key driver for
change in the industry (IMS, 2010).
3.2.4. HEALTHCARE SYSTEM REFORMS
The prospect of painful budget cuts has pushed governments in several leading healthcare markets to
impose price decreases, changes in reimbursement, and tighter government restrictions.
However, the cost of healthcare is increasing as the increasing elderly population lives well beyond their
earning years that result in popularity of spending on generics to gain steadily presence for providing
affordable drugs to millions of people, and represent savings in public healthcare costs (Kumar, 2011).
3.2.5. POLICY- REGULATION-DRIVEN CHANGES AND IMPACTS THROUGH 2015
Significant policy changes, made in 2010, including the passage of the Affordable Care Act in the U.S are
enabling more people into public healthcare. Important steps were also taken in the U.S. and Europe in the
development of scientific guidelines for the approval of biosimilars (IMS, 2011).
More relaxed regulation towards trade liberalisation open new growth opportunities in distribution and
trade channels. Furthermore, new regulations for post-market monitoring, and the evolving media
landscape and mobile apps provide engagement with consumers to better inform themselves and take a
more active role in their diagnoses and treatments (Daemmrich, 2009).
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3.3. THE FIVE FORCES FRAMEWORK
Potential
Entrants
Threat
of Entry
Competitive
Suppliers Buyers
Rivalry
Bargaining Bargaining
Power Power
Threat of
Substitutes
Substitutes
Figure 9 Five Forces diagram
The five forces constitute an industrys structure. Its framework is of value to most organisations. It can
provide a useful starting point for strategic analysis even where profit criteria may not apply. In most parts of
the public sector, each of the five forces has its equivalents. As well as assessing the attractiveness of an
industry or sector, the five forces can help set an agenda for action on the various pinch-points that they
identify (Johnson et al, 2008).
3.3.1. THREAT OF NEW ENTRANTS
The entry barriers into the pharmaceutical sector are particularly high due to a combination of strict
regulations, difficulty in gaining product approval and the need for extensive research and development. In
2011, according to EFPIA, R&D costs in Europe were 27,500m and in U.S was $38,530m. Additionally,
pharmaceutical companies need on average twelve years and more than 500 million investment to bring a
new medicine in the market.
The threat of new entrants is particularly low because of the large economies of scale and the high capital
requirements that the industry demands. All of the above factors do not attract new entrant; the threat of
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new entrants is relatively low, but expected to rise according to the dynamic changes in the industry.
Therefore the industry looks very attractive for existing Pharma companies.
- New biosimilars are expected to enter the U.S. market

by 2014, downward to the U.S. approval pathway,
included in the pathway, included in the Affordable
Care Act, grants 12 years of market exclusivity to
Future
originator biologics
attractiveness for
- New legislation reduced the barriers to generic
new entrants (latter (standard, branded) entry
half of this decade).
- Escalated R&D costs, and decline in new innovative

medicines
Less -Patent protection
attractiveness for - Brand identity
new entrants. - Proprietary product differences
However, very - Capital requirments
strongly in favour of
- Access t distributions
current members.
-Access to raw materials
- Expected retaliation
Figure 10 Threat of Entrant analysis
3.3.2. THREAT OF SUBSTITUTES
While the sales of patented drugs is facing strong headwinds in the developed markets, other substitutes -
consumer health products- will post strong growth rates throughout the world with consistent growth via all
forms (standard, branded and private label). The recent financial success of generic drugs derives from
substantial gains in volume sales (IMS, 2006). However these generics are not always available as substitutes
hence drugs still under the patent protection are experiencing revenues. Similarly there is a growing threat
from biosimilars1 and personalised medicines to meet the transition to preventative medicines. Switching a
product from expired prescription to-OTC is A New life for old drugs (Euromonitor, 2012).
Additionally, other substitutes that Big Pharma faces are the prosperous nutraceutical, as well as the
functional foods and beverage industries.
The above dynamics impose moderate threat on the industry. The more threats of substitution there are,
the less attractive the Pharma industry is likely to be (Johnson et al, 2008).
1
The generic version from the biotech
11
3.3.3. THE POWER OF BUYERS
The end consumer does not have barging power of purchasing; Figure 11 The Power of Buyers
Buyer
the main buyers are generally government with consolidated concentration
distribution networks. While patients maintained their price
insensitivity for drugs, their healthcare providers were far more
price-sensitive. Many number of suppliers
The industry market is highly fragmented where the largest Some Pharma
The weak barging practise in-
market is the public healthcare in the developed countries. Since house tapered
power of suppliers
the deterioration in the healthcare fund there is a transition to influences integration
private healthcare and insured-based care, while the large production
personal out-of-pocket segment is in the Pharmering 17.
The internet engagement will generate health-related websites,
patients will become more knowledgeable. This gives some kind
of power to buyers although not very significant since they do
not have full access to important information. Overall, the power
of buyers is high and with the shift to generics the bargaining power is steadily increasing leading to quite an
unattractive situation.
3.3.4. THE POWER OF SUPPLIERS
The pharmaceutical industry has about 100 very large multinationals, and some increasing domestic MSBs2
producing generics. Suppliers usually provide raw materials, components, intermediates products and other
supplies. There are many raw material suppliers making the pharmaceutical companies have a very low
barging power. Supplying to the domestic firms is often greater however this segment is usually smaller than
for the multinationals. Most suppliers are happy to supply big Pharma, considering it prestigious to be
associated with the industry leaders. Generally, suppliers' power is weak and therefore the pharmaceutical
companies have the strength to ask for lower prices.
3.3.5. COMPETITIVE RIVALRY
The global consumer health industry remains highly fragmented, with vast
distribution channels. By choosing to merge, rivalry among the top firms
increased, as their areas of expertise began to overlap (Mullins, 2006).
Generally, fierce rivalry among large pharmaceutical firms exists to gain more
share of the market. To remain competitive, some Pharmas are lowering their
prices to stay competitive.
The cost of the R&D, and the sharp deterioration in economies have forced
cutbacks in many R&D budgets, which add another layer of difficulty to the
innovation process and causing declines in the productivity of patented drugs
therefore Pharma companies compete aggressively to dominate new
technologies in R&D to produce novel therapies to address the unmet patient
needs.
Thus Competitive rivalry had increased, leading to growing rivalry and slightly less attractive situation.
2
Medium Sized Business
12
4. INTERNAL ANALYSIS
(JP Morgan Healthcare Conference, 2013)
Novartis Pharma was founded in 1996, its headquarters is based in Basel, Switzerland and their net sales
reached $57 Billion in 2012. Novartis is one of the largest pharmaceutical companies in the world with a
diversified portfolio of products that span across a number of categories including innovative medicines, eye
care products, cost-saving generic pharmaceuticals, consumer health products, preventive vaccines and
diagnostic tools. Novartis is the only company with leading positions in each of these areas (About Novartis,
2013).
4.1. THE VALUE CHAIN
The value chain describes the categories of activities within and around an organisation, which
together create a product or service. The concept was developed in relation to competitive strategy by
Michael Porter.
A lot of drug companies target major diseases, but Novartis emphasizes rare ones, the rarity of its
strategic core competency is unique. It leverages distinctive core R&D competence on rare diseases and
biotech. During the last four years, Novartis efforts flourished by receiving more approvals in the US and
EU for new molecular entities than its competitors. (Novartis, 2013)
Novartis is consistently rated as having one of the industrys most respected pharmaceutical
development pipelines with 138 projects in pharmaceutical clinical development; making its innovation
capability difficult to imitate. Also the using of information technology developed a number of online
communities and mobile apps that help patients better manage their own health to improve health;
their development also puts a premium on new capabilities. (Novartis, 2013)
Novartis dynamic capability is its focused diversification geographically and the broad product
portfolio, geared toward the needs of patients. Since Novartis was created in 1996, it has consistently
focused on markets and technologies with potential for sustainable growth which helps in maintaining
growth despite the patent cliff for its expired products. In addition, a diverse portfolio reduces financial
risk, bringing greater value to its stakeholders.
Novartis value chain outlines its activities in relation to its competitive advantages capabilities in the
13
diagram below:
Firm Infrastructure
Expanding geographically in emerging markets
Expanding Niche Medicine 1
10 consecutive quarters of margin improvement, Market cap is 171.89 B
Quality Compliance
Social investments and philanthropy
Human Resources Management

Diversity, (120,000 people worldwide)
SUPPORT ACTIVITIES
Innovative and Scientific resilience (Strategic core competence)

One-stop-shop for grievances and allegations
Streamlined collaboration
Fair working conditions
UN Global compact the code of conduct
Technology Development
Mobilizing the best global resources, expertise and experience
Integrated informatics and bioinformatics and communication tools
Biotech clustering in GCC
Broad use of computer modeling and simulation
Oracles Siebel Pharma Dynamic Sales program
Kick Smoking iOS application
Procurement
New molecular entity (NME) approvals full pipeline
Cost synergies in purchasing
Global spend of over USD 20B per year
Global category management
Shared country Procurement teams.
Inbound Operations Outbound Marketing & Sales Service

Global category Logistics Novartis Brand name Novartis Foundation;
Logistics
management Global launches Training centers;
Supplier Relation Multi-distribution
Broad blockbuster plant; Free samples of Access to healthcare
Management
LM7 warehouse Drug substance Geographical re- Novartis Nicotinell programs;
management solution development allocation; brand Diagnostic tests;
capabilities at
SMS for Life - to track Patient kits Quality
Warehouse SAP
Console middleware different scales (lab, malaria drug supplies Growing segments of remediation;
Barcode warehouse pilot) and eliminate drug healthcare Preventative
Multiple production Global Umbrella Brands Medicare;
Raw materials track stock-outs;
and trace system. technologies (vials, Distribution partners. Customer centric Digital packaging
syringes, devices) approach technologies;
Fill & Finish Key account Managing
manufacturing management vaccinations with
network. Cash discounts to VaxTrak app.
customers.
PRIMARY ACTIVITIES
th
1 Reuters, Finance Stocks [Accessed 10 April 2013] 14
4.2. FINANCIAL ANALYSIS OF NOVARTIS
Gerald et al (2003) suggests that Financial Ratios are computed by the managers to evaluate the
performance, progress and achievements of the companyThey also help investors, creditors, lenders
and analysts in critically analysing an investment opportunity and credit decisions.
4.2.1. RETURN ON CAPITAL EMPLOYED (ROCE)
( )
On 31 Dec ($s millions)
2012 2011
1 1 4 2
11,511x 100 = 11.5% 10,998x 100 = 11.70%
124,216-24,501
3 5 117,496-23,148
4 6
2 3 5 6
2
Interpretation:
ROCE in 2012 fluctuated slightly from 2011, though the operating profit increased in 2012 than prior
year due to the decrease in the marketing expenditure to offset the drop in the sales $58,566m to
$56,578m 2011 for the impact of patent expirations. While the increased in the assets associated
with the investments to complete its acquisition of Fougera, alongside the investments in its R&D by
21% of Pharmaceuticals net sales, net investments in property, plant and equipment and other non-
current assets (Novartis Annual Report, 2012), resulted in a slight drop in ROCE from 11.70% to
11.50 hence Novartis is in line with growth in all financial divisions and its new blockbuster
approved, it is considered efficient and profitable with the return of $11.50 for every $100 of capital
employed.
4.2.2. LIQUIDITY RATIOS: CURRENT RATIO
2012 2011
7 28,004 8
= 1.16T 24,084 = 1.04T
2 24,051 6 23,148
Interpretation:
The current ratio shows that, for every $1 in current liabilities, there is $1.16 available in current
assets.
The current ratio over the last two years has volatilised slightly to 1.16T indicating that its
solvency to meet its obligations.
The industry Benchmark is 1.99T3, Novartis current ratio is still in range within the industry
average.
3
Reuters.com, Accessed 10/4/2013
15
4.2.3. GEARING RATIOS
4.2.3.1. BORROWING RATIO
( )
2012 2011
9 10 12 13
(13,781+5,945) X 100% = 28.50% (13,855+6,374) x 100% = 30.68%
11 69,219 14 65,940
Interpretation:
The 2012 ratio indicates that every $1.00 of capital that stockholders provided, creditors
provided $0.28. That means external debts are equal to 28.50% of shareholders funds.
This is a positive indicator of Novartis having sufficient funds to meet its financial obligations
when they fall due.
It used part of its free cash flow to reduce the financial debt.
4.2.3.2. INTEREST COVER RATIO
2012 2011
1 7 4 8
11,511 = 16.00 10,998 = 15.00
15 724
16 751
1
Interpretation:
The ratio indicates that Novartis can cover its interest charges as the operating profit is
higher than interest payable.
In 2011, this ratio was 15T associated with higher interest payable on total borrowing
20,229m, Novartis managed to lower its borrowing in 2012 to 19,726m. Therefore the
interest cover in 2012 came better indicating a better financial health. It means they are
more capable of meeting their interest obligations from operating earnings. This drop in the
interest cover along with the low debt allows Novarits to increase its borrowings if needed.
Based on the Ratios, the expectations of the Novartis performance look efficient leading to profitability. This
is because they delivered good net income increased by 4% to $9.6 B. The capital structure of it consists of
net debt of 28% to its equity which is considerably low. Novartis strives to maintain a strong credit rating -
the long-term credit rating for the company continues to be double-A.
Novartis makes use of various borrowing facilities provided by several financial institutions. In addition, it
raised funds through its commercial paper programs. The comparison shows its EPS is the highest compared
to the top rating Pharmas in the industry (See Appendix), and is better than Pfizer ROE ratio.
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4.3. ANALYSING CULTURE: THE CULTURAL WEB
The cultural web is a means of understanding both the existing culture and its effects. The cultural web
shows the behavioural, physical and symbolic manifestations of a culture that inform and are informed
by the taken-for granted assumptions, or Paradigm. The elements of the cultural web are:
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"Its exciting being Responsibility is a
involved at the early core part of our
stage in identifying
what are the good Stories Symbols business
and underscores our
targets and trying to
make a difference in
. Novel treatments and . Caring and Curing slogan purpose of caring and
curing.
the lives of people." prevention methods for major . A State- of-the art workplace
Andreas Sailer tropical diseases . Multinational workforce
Senior Research . Drugs and vaccines for neglected . Part of the UN Millennium
Investigator at NIBR diseases Villages project
.Help engage under-served . Modelling and simulation
communities . Novartis Research
. Reward innovation and enhance Foundation
the lives of patients. . NIBR Strategic Alliances
. Pioneering initiatives to enhance Group
access to healthcare . The lab bench to the clinic
. Global driver safety . Novartis Vaccines Institute
. A better today and for Global Health
Tomorrow for patients
Paradigm Power
Rituals
and Routines
. Focused diversification
. Novartis has the best minds in
Structures
the world . Collaborating with
. Performance-oriented governments globally for
. Expertise in science
. Training young scientists pricing arrangements
. With focus on patient outcomes
. Rewarding the people who . Notable rebellions over
. Understand and treat disease
invest ideas and work in our executive pay (Daniel
that
company Vasella's $78m)
will change the practice of
. Cross-functional teamwork . Impressive pool of scientific
medicine.
. Interdisciplinary and talents
. Improve human health
team-based science . Leadership in shifting from
. Flexible thinking
. Access to leading-edge remediation to prevention
. Valuing individuals and their
technology . Possession of the largest no
diverse ideas
. Self-reflection- of approvals for new
. Top-selling products in the
mentoring programs blockbuster than
. Respect for industry.
competitors.
family time.
We want to Control
discover, develop
and successfully
Systems Organisational Novartis
collaborates with
. Worldwide regulatory & policy
market innovative
experience
Structure governments
products to worldwide on new
prevent and cure . Proof-of-Concept clinical trials . Divisional structure (patented, pricing
diseases, to ease . Audit and Compliance committee generic, Eye care, Vaccines, OTC) arrangements,
suffering and to . Deliver on FDA commitments . . Too bureaucratic including money-
enhance the Efforts met targets of access- . Multi-disciplinary approach back guarantees
quality of life. to-medicine programs to . Novartis Euroforum and other types of
Novartis Mission . Standard review and decision- performance-
Statement
More than 100 million
making based pricing, to
patients.
accelerate
The success of Novartis . Managing change
reimbursement
strategy is evident in . Global Code of
negotiations.
their long-established Conduct
track record of research
productivity.
18
Navartis collaborative culture is its gateway for making

significant impact in solving some of society's biggest
health challenges and taking a role in improving health
seriously through focuses its CSR efforts on its market
segments. This is where Novartis aligns its productivity with
its performance-orientated incentives, resulting in receiving
numerous awards for its culture and working environment
(Novartis Newsroom, 2013).
4.4. NOVARTIS STRENGTHS & WEAKNESS AND RESOURCES
Location of Type of Factor

Factor Favourable Unfavourable
Internal Strengths (S) Weaknesses (W)
Focus on high growth segments of Manufacturing quality issues leaving
healthcare, to have more access to more Novarits with one manufactures closed
patients and benefit from the trend in down in 2012;
healthcare to cover more people. Side effects of some flu vaccines have
Its geographic diversification with market been banned in Italy, Germany, and
share in China, and other emerging countries Swiss land. (CBC News, 2012)
benefit from the growing markets in these
countries.
Novartis generic division Sandoz - is positioned
to take full advantage of the patent cliff.
External Opportunities (O) Threats (T)
Extended healthcare coverage in many India rejects patent plea for cancer drug
countries; Glivec causing Novartis losses by having
The potential of the Emerging countries; Indian generics companies sell copies of
During the next five years, many patents the drug for lower price. (BBC, 2013).
will expire while not many approvals
have taken place in 2012.
Novartis possesses a range of resources including intangible resources in its innovative R&D. It got
impressive pool of scientists and expertise alongside the company knowledge into the industry. The physical
resources range from its manufacturing plants, warehouses, inventories and all the technology applications
and modelling implemented in all its processes. That is in addition to its strong balance sheet and fluent cash
flow along with public funds. The future looks bright for Novarits combining its core competences in
innovation, R&D, products diversity in unmet patients needs alongside the productivity indicated in its
financial performance.
19
5. CONCLUSION
The Pharmaceutical firms are the key in meeting society's needs by providing effective medicines, and also
the industry has had a consistent trade surplus for the past twenty years, that is what makes it an attractive
industry for many businesses. Novartis is one of the leading companies in the industry with an innovative
approach in all core competences and capability to managing the change in the industry using very efficient
tools. This can be seen through its M&A, its broad products portfolio, with a shift to the most growing sector
of generics with its division Sandoz.
20
6. ACRONYMS
ACRONYM MEANING
DTC DIRECT TO CONSUMER
EFPIA EUROPEAN FEDERATION OF PHARMACEUTICAL INDUSTRIES AND ASSOCIATION
OTC OVER THE COUNTER
21
7. APPENDIX
22
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Euromonitor (2012) Corporate Strategies in Consumer Health [Accessed 04th of April, 2013]
http://www.euromonitor.com/corporate-strategies-in-consumer-health/report
Health Affairs (2013) The Effect Of Regulation On Pharmaceutical Revenues: Experience In Nineteen
Countries [Accessed 4th April 2013] http://content.healthaffairs.org/content/28/1/w125.full
IMS (2010) Biopharma Forecasts & Trends [Accessed 6th April 2013]
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IMS (2011) The Global Use of Medicines: Outlook Through 2015 [Accessed 09th of April, 2013]
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KPMG (2011) Rising cost of litigation in pharmaceutical s industry [Accessed 11th of April, 2013]
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Issues-monitor-
pharmaceuticals/Documents/issues-monitor-pharmaceuticals-june-2011.pdf
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http://www.bio-itworld.com/2011/02/18/pharma-trend-comment.html, Cambridge HealthTech
Institute
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MEDICC Review, Vol 13, No 3
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http://www.mce-ama.com/executive-issue-38-pharma-industry-2012/
23
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Industry from a Marketing Point of View: Examples of Germany, the UK, the US and Japan, GRIN Verlag
oHG
Mullan, P (2002) The Imaginary Time Bomb: Why an Ageing Population is Not a Social Problem, I.B.Tauris
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2013] http://www.palgrave-journals.com/jcb/journal/v12/n1/abs/3040148a.html
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Writing a Business Plan, Financial Times/ Prentice Hall: 2nd Edition
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2010 Summit [Accessed 11th of April, 2013] http://www.prnewswire.com/news-releases-test/pharma-
and-biotech-leaders-to-converge-in-china-at-asia-pharma-rd-leaders-2010-summit-78310882.html
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1.
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Vision for Future, http://www.cnbc.com/id/100567963
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24

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The Global Pharmaceutical Industry

2. INTRODUCTION TO THE INDUSTRY ........................................................................................... 4

3.1. THE PESTEL FRAMEWORK .............................................................................................. 4

3.1.1. POLITICAL FACTORS ......................................................................................................... 4

3.1.2. ECONOMIC FACTORS ....................................................................................................... 5

3.1.3. SOCIAL FACTORS ............................................................................................................. 6

3.1.4. TECHNOLOGICAL FACTORS ................................................................................................ 7

3.1.5. ENVIRONMENTAL FACTORS .............................................................................................. 8

3.1.6. LEGAL FACTORS .............................................................................................................. 8

3.2. KEY DRIVERS FOR CHANGE ................................................................................................ 9

3.2.2. THE PATENT CLIFF AND PHARMERGING .............................................................................. 9

3.2.3. EMERGING MARKETS....................................................................................................... 9

3.2.4. HEALTHCARE SYSTEM REFORMS......................................................................................... 9

3.2.5. POLICY- REGULATION-DRIVEN CHANGES AND IMPACTS THROUGH 2015 ................................ 9

3.3. THE FIVE FORCES FRAMEWORK ................................................................................... 10

3.3.1. THREAT OF NEW ENTRANTS............................................................................................ 10

3.3.2. THREAT OF SUBSTITUTES ................................................................................................ 11

3.3.3. THE POWER OF BUYERS .................................................................................................. 12

3.3.4. THE POWER OF SUPPLIERS .............................................................................................. 12

3.3.5. COMPETITIVE RIVALRY ................................................................................................... 12

4. INTERNAL ANALYSIS ................................................................................................................... 13

4.1. THE VALUE CHAIN .............................................................................................................. 13

4.2. FINANCIAL ANALYSIS OF NOVARTIS...................................................................................... 15

4.2.1. RETURN ON CAPITAL EMPLOYED (ROCE) ......................................................................... 15

4.2.2. LIQUIDITY RATIOS: CURRENT RATIO................................................................................. 15

4.2.3. GEARING RATIOS .......................................................................................................... 16

4.3. ANALYSING CULTURE: THE CULTURAL WEB ............................................................................ 17

4.4. NOVARTIS STRENGTHS & WEAKNESS AND RESOURCES ........................................................... 19

2. INTRODUCTION TO THE INDUSTRY

EVOLUTION OF THE GLOBAL INDUSTRY

3.1. THE PESTEL FRAMEWORK

3.1.1. POLITICAL FACTORS

Figure 1: The Political influences on the Pharma industry

(Euler Hermes, 2012)

3.1.2. ECONOMIC FACTORS

(Euler Hermes, 2012)

-Pharmaceutical companies increasing ties

with generic counterparts to exploit myriad

Growth Economic Factors

3.1.3. SOCIAL FACTORS

3.1.4. TECHNOLOGICAL FACTORS

Technology has a cohesive interrelation with Figure 5: Innovation

3.1.5. ENVIRONMENTAL FACTORS

3.1.6. LEGAL FACTORS

3.2. KEY DRIVERS FOR CHANGE

3.2.1. THE NEW ECONOMIC LANDSCAPES AND ITS IMPACT ON PHARMA

The industry is facing reimbursement pressure from spiralling costs and

3.2.2. THE PATENT CLIFF AND PHARMERGING

3.2.3. EMERGING MARKETS

3.2.4. HEALTHCARE SYSTEM REFORMS

3.2.5. POLICY- REGULATION-DRIVEN CHANGES AND IMPACTS THROUGH 2015

3.3. THE FIVE FORCES FRAMEWORK

3.3.1. THREAT OF NEW ENTRANTS

- New biosimilars are expected to enter the U.S. market

- Escalated R&D costs, and decline in new innovative

Figure 10 Threat of Entrant analysis

3.3.2. THREAT OF SUBSTITUTES

3.3.3. THE POWER OF BUYERS

3.3.4. THE POWER OF SUPPLIERS

3.3.5. COMPETITIVE RIVALRY

(JP Morgan Healthcare Conference, 2013)

4.1. THE VALUE CHAIN

Human Resources Management

Innovative and Scientific resilience (Strategic core competence)