Pfizer Inc. had concluded their purchase of Wyeth, one of its main competitors to increase the diversity of product range and boost market share of Pfizer. This case study aims to assess the present situation of the deal with Wyeth and provide Pfizer other avenues to improve its market position considering most of their high revenue brand lines are ending their patents in the near future.
SWOT analysis and Porter’s Five Forces model will be applied to analyze both internal and external environments that affect Pfizer. The report will further analyze and give recommendation regarding the merger.
INTRODUCTION
Pfizer was founded in 1849 in Brooklyn, New York1, USA and in 2009 it ranks number 1 in Reuters rankings of the largest pharmaceutical companies of the world in terms of annual revenues making US$41.7B in 20092. Prior to this merger, Pfizer first merged with Warner-Lambert on July 20005.
Wyeth formerly owned by American Home Products Corporation (AHP) based in Madison, New Jersey, USA. Famous over the counter (OTC) brands include Robitussin, Advil (Ibuprofen) and prescription drugs like Premarin and Effexor both providing US$3B annual sales3. On October 15, 2009, Wyeth was bought by Pfizer for US$68B financed with cash, shares and loans. The merger created the number one biopharmaceutical company in the USA with a market share of 12% and 10% in the European markets6.
ANALYSES
PEST Analysis of the Pharmaceutical Industry:
POLITICAL:
The pharmaceutical industry has attracted so much political attention due to its significant impact to the economy due to the increasing cost of healthcare that proved to be a burden that pressures most of the government worldwide. This is compounded by protests from consumers regarding the high costs and profits of pharmaceutical companies. The increasing socio-political pressures in the health care industry, the pharmaceutical corporations are now being pressured by governments from all over the world to lower their prices.
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ECONOMIC:
With the consolidation of most pharmaceutical companies through mergers and acquisitions, the projected stock value growth rate 10.5% for the period 2003-2010 plus the health care growth rate of 12.5% for the same period. The total global pharmaceutical industry is estimated to have an audited value in excess of US$500B by 2004. According IMS Health, a leading provider of market intelligence in the pharmaceutical business, in 2006, the industry grew by 7% reaching a total value of US$643B4. Majority of the sales came from North America, Europe, Japan, and Brazil. USA is still the key strategic market for the pharmaceutical industry accounting to as much as 16% of the total worldwide market sales.
SOCIAL:
The consumers although complaining about the high costs of drugs offered by the pharmaceutical companies, they will always appreciate the unique and important role of the pharmaceutical companies in keeping the well being of the society. During the recent global epidemics like SARS, AIDS and swine flu, the pharmaceutical industry took the center stage in ensuring that people are safe for these epidemics resulting to synergistic efforts among government-society-industry to create lasting good relationships.
TECHNOLOGY:
The development in technology is unprecedented forcing pharmaceutical companies to adapt ever faster evolving environments in the industry. Scientific advancements have also resulted to increase the research and development funds of the companies to encourage innovation and sustain competitive advantages by introducing new products to the market.
Porter’s Five Forces Analysis of the Pharmaceutical Industry
Bargaining Power of the Suppliers. Low.
There is an open source of suppliers for the industry. Pharmaceutical companies can outsource their products to other companies and manufacturers which were pre approved and predetermined by the company to be competent to produce their products. Suppliers of the raw materials usually provide negotiated prices due to the volume of the orders made by the pharmaceutical companies. Suppliers are threatened to loose their big accounts and this drives them to give competitive prices to ensure continuous flow of business and orders. Price increases are usually driven by the availability of raw materials rather than the dictated price of the suppliers. Another approach that the pharmaceutical firms can undertake when the prices of raw materials became prohibitive is to form strategic alliances among themselves and produce their own raw materials serving the members of the alliances.
Bargaining Power of the Customers. Low.
Since medicines are more of a necessity to the customers, they have the tendencies to purchase them base on the price list of the manufacturers. Customers usually do not have the active bargaining power to drive the prices down. There are even instances that buyers drive the price higher due to high demand season like the flue vaccines and during the worldwide epidemic cases of AIDS, SARS and swine flu. The prices of vaccines for these illnesses skyrocketed due to high demands. However, class suit actions that can be supported by the government can also affect the prices. But due to the enormous size and contribution, in terms of tax paid, by the pharmaceutical companies, government usually bites the bullet in these cases. The prices are still the same but the government subsidizes the general public. Thus, the bottom line figures for the companies are still the same.
Threat to New Entrants. Low.
The most prohibitive reason for the new comers in the industry is the high initial setup cost for laboratory, equipment and distribution channels. The research and development of medicines, the manufacturing cost, marketing and distribution costs are prohibitive. New entrants cannot easily enter the market. Big names control every aspect of production, marketing and distribution. In some cases, even government mandates and laws are inclined to protect the existing big market players.
Threat of Substitute Products. Low to Medium.
Depending on the product, substitute products are limited in the industry. The greatest step ever made in the industry was the introduction of generic medicines in the prescriptions of the doctors. Consumers have the choice to buy the alternate generic brands rather than pay the hefty prices of branded medicines. In some cases, like the AIDS medicines where alternate medicines from Indian manufacturers are also available, big time manufacturers are investing money to prohibit these alternate sources to prosper. There are also the alternative medicines from herbal source. The threat of new entrants becomes medium when the patent period of the medicine expires. This gives room for other manufacturers to introduce their products in the market. Although these substitute products are being heavily marketed by their proponents, we have yet to see them make a considerable dent in the market.
Competitive Rivalry within an Industry. High.
Although the industry has limited major players and new entrants face constraints, competitive rivalry within the industry is still intense. Big time players tend to support each other to protect their control of the market. Big names and manufacturers seem to control certain types of medicines. I have no concrete data to support this but there is seemingly a cartel in the pharmaceutical industry. The market leaders are dividing amongst themselves. Each big player controls a certain segment of medicines. They are distributing the market among themselves and they observe self regulation to ensure and protect their relationship with the governments of the countries where they are present. But still the competitive rivalry within the industry is high.
SWOT Analysis of Pfizer
Strengths
R&D innovation has a broad precious coverage
Strong marketing in major markets
Strong sales in existing Patent protection on key products
Weaknesses
Some products are discontinued in the last stages of development. This is waste of R&D resources
Pfizer entered to strategic partnership implementing co-marketing agreements of other brands and this approach limits Pfizer’s global presence
With 95,000 employees handling its global operation, this increase in size and complexity of operation lessen the agility of Pfizer
Opportunities
Faster product development through favorable collaborations/partnerships in research and development
An integrated global markets has been setup and new products are globalized
More pharmaceutical companies enter into co-marketing agreements with Pfizer instead of competing with them to capitalize on Pfizer’s marketing strengths and brand recognition, giving Pfizer strong and more diversified products resulting to revenue growth
Threats
Increase in cheaper alternative treatments in some of its core products due to its high costs. Lowering the price of their products may address this threat but it will lower revenues
Increasing safety issues and concern in some of its main products like Viagra and Celebrex
Some competitors has faster research to market turn around time than Pfizer giving the competition head start in the market sales
The growing threat of emerging pharmaceutical companies from China and India serving these markets limits expansions in these regional markets that have high potential.
One of its most profitable products Lipitor, that provides 25% of its revenue, is due to loose its patent protection in 2011 and by 2015, Pfizer is estimated to loose around 70% of its 2007 revenues due to these expiring patent protections. This threat is compounded by the fact that the company has no “blockbuster” product/s in the pipeline to alleviate the losses.
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RECOMMENDATIONS
Based on the PEST analysis of pharmaceutical industry,
PEST analysis mainly focuses on the effects of the environment external to the company. However, based on the result of the analysis, we can see that the merger with Wyeth is indeed a welcome move by Pfizer. Political pressures to lower the price can be addressed without affecting the profits by lowering operating cost. The merger gave Pfizer the opportunity to streamline its combined workforce and manufacturing line. Based on estimates, the company is set to achieve savings amounting to approximately US$4B7 in 2 years. This savings will continue due to the reduction of as much as 15% in workforce and 10% reduction in the total number of manufacturing plants. Both these savings are realized due to the synergies and streamlining overlaps in the operation of the two corporations.
Based on Porter’s Five Forces Analysis,
Porter’s Five Forces analysis provides industry analysis and can be used for strategy development although it does not provide details on the degree of the impacts of factors in the business strategies. In the issues of threats of buyers and suppliers, the acquisition of Wyeth gave Pfizer some breathing room since joining with another leading pharmaceutical corporation keeps it volume advantage in terms of demand. Buyers demand for vaccines and other product lines not originally provided by Pfizer are now under its arsenal and add revenues to the company to replace lost grounds of the brands that will loose patent protection in the coming years. Although the merger will not address the threat of new entrants for the void left by Lipitor since Wyeth has no drugs that offer that line of product, the merger can utilize the R&D capabilities of Wyeth to develop another drug to replace Lipitor. For the mean time, the new product lines from Wyeth can fill the gaps in the revenue stream. The merger also put Pfizer in a better position moving ahead of the competitions in the consolidation of the market. The additional US$22.8B revenue for 20088of Wyeth will boost the market position of Pfizer and strengthening its competitive edge in the industry.
Based on SWOT Analysis,
SWOT analysis can be used in addition to PEST analysis since this analysis takes the internal forces that affect the company. However, personal views and preferences affect the outcome of this analysis, thus, it may differ from the point of view of the person doing the analysis. Based on the SWOT analysis, the main weaknesses and threats of Pfizer can be addressed by the merger. The strength of the Wyeth in the R&D will boost the drug development activities of the company, Wyeth becomes a subsidiary and carry the Pfizer name and not a co-marketing agreement. Workforce can be streamlined as much as 15%. The health issues with some product lines and faster turn-around or laboratory to market time can be addressed by utilizing Wyeth’s R&D capabilities. Revenues from the sales of the additional product lines from Wyeth will fill the void that will be left by Lipitor and other products that will loose patent protection. Surprisingly, Wyeth has entered the over the counter market of China ahead of Pfizer. Pfizer can capitalize on the market position of Wyeth in China to expand its market share in one of the world’s biggest market region.
The acquisition of Wyeth is therefore a recommended move for Pfizer. Analyses show that the overall effects of the acquisition will be beneficial to Pfizer both in the short and long term business scenarios. However, it is further recommended that the company fully utilize the additional R&D capabilities that Wyeth brings to develop new drugs that will replace aging drug patents of both companies and to reduce the R&D period. Pfizer should exploit the present position of Wyeth in the Chinese market. Most of the top 10 pharmaceutical giants are into China like Roche, Novartis and Merck. Like in other industry, today’s battleground is China. The company should also look into the Indian market, another emerging big market.
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