Company Strategy Merck versus Pfizer

Q1.Why has the attractiveness of the pharmaceutical industry declined so much since the 1980’s? What are the implications of those changes in industry structure for firm strategy? Despite the tremendous profits garnered by large pharmaceutical companies for so-called blockbuster drugs, pharmaceutical companies must make huge investments in R&D to produce profitable medications. The vast majority of drugs which are developed and tested never go to market.

Additionally, once companies produce valuable drugs, they have a limited window on which to capitalize upon a drug’s profitability before its compounds can be sold in the form of a much cheaper generic. The FDA shortened the patient life of drugs from 11-12 years from 17-20, thus vastly reducing the financial ability of companies to cash in on valuable non-generics (Collis & Smith, 2007, p.5). The industry structure also changed significantly, as more and more companies began to enter into the fray of developing new drugs.

With the expansion of the European Union, approval was facilitated for new drugs across all member nations, thus empowering European companies with the ability to make greater profits (Collis & Smith, 2007, p.6). The developing nations of China and India became more competitive, as China had access to more raw chemical materials to produce drugs and India began to graduate more highly trained specialists in the field of chemical engineering (Collis & Smith, 2007, p.6). Greater competition means that companies must price their products more competitively.

One of Porter’s Five Forces is the ability of firms to enter the market. This enabled more international firms to enter the market for developing pharmaceuticals. They had lower costs regarding gaining regulatory approval, cheaper raw materials, and expanded access to the necessary intellectual property to develop new drugs. The power of buyers also increased, as national health services (as existed in the United Kingdom) began to favor less costly drugs like generics or looked less favorably upon newer, more expensive drugs.

Similarly, health insurance companies in the United States began to favor less costly alternatives. Particularly in the face of a lack of new drugs that offer a genuinely new approach to treating disease, profit-making became much more limited. Q2. How do you evaluate Merck and Pfizer’s strategies in the light of changing industry structure? Merck had historically focused on the development of blockbuster drugs for a variety of diseases.

It capitalized upon its high approval rate from the FDA, focusing on approved chemical compounds to facilitate delivery to market (Collis & Smith, 2007, p. 10). Still, this did not prevent the company from occasionally falling afoul of regulatory agencies, as was seen in the debacle of its poorly-vetted painkiller Vioxx, which was later linked to a number of health complaints concealed in the company’s research (Collis & Smith, 2007, p. 11). It also focused on talent recruitment, to use the most cutting-edge intellectual minds in the development of innovative products.

Unlike many other companies, it had not merged with other organizations, thus keeping a relatively lean structure. It prided itself on its efficient use of financial resources and had a much lower R&D budget than many other of its competitors. It also did not invest very much in marketing and advertising. In the face of industry changes, it elected to focus on a much more narrow range of diseases, to better use its available finances.

The focus was on producing a genuinely new drug that would generate profits before going generic.