Case Analysis : Pharma Industry

Introduction

Overview of the Industry

The pharmaceutical industry has enjoyed great prosperity as nineteen-ninety-eight marked another stellar year for the industry. Profits stayed in a sharp up-trend as 28 of the 37 stocks in the industry beat the Standard & Poor's 500 Index, which rose by 26.7%. The pharmaceutical industry includes establishments primarily engaged in manufacturing, fabricating, and processing medicinal substances into finished pharmaceuticals for human and veterinary use. Ethical brand name drugs, generic products, and nonprescription or over-the-counter medication constitute the pharmaceutical industry sub-sector.

Strong and consistent growth in the mid-single digits is expected in the global pharmaceutical market over the next 5 years. Worldwide sales are estimated to reach $335 billion in 1999, up from 1998 sales of $310 billion. Key factors driving this projected growth include long life expectancies, strong demographic expansion in older segments of the population, a rising standard of living in developing countries and large untreated populations, such as persons with elevated cholesterol levels. Increases in life expectancies create more health problems. As the world's population ages, the demand for pharmaceuticals increases. The elderly are the single largest group of users of prescription drugs.

Another major factor fueling the continued growth of the industry is the introduction of breakthrough drugs. The new products are especially in the areas of heart disease, cancer, arthritis, diabetes and HIV. Another trend is the development of quality of life products, which help to keep people looking and feeling young.

The pharmaceutical industry has a history of mergers, acquisitions, and buyouts that are not limited by national boundaries. Joint ventures with small drug discovery companies and research institutions have become popular as a way to access new technologies. In the early 1990's, the mergers were primarily driven by a desire to cut cost. In the late 1990's research and development opportunities appear to be the driving force. The pharmaceutical industry is one of the most research-oriented sectors in the U.S. economy. R&D outlays in 1998 are expected to equal 20% of total industry revenues, compared with 15.9% in 1990 and 11.7% in 1980.

The industry experienced a more industry-friendly environment in 1997, which helped the growth of the market. Food and Drug Administration approval times are now shorter than in the past years, and the number of the approved drugs is on the rise. After several years of a relatively stable pricing environment, prescription drug-makers have also recently being increasing prices.

Overview of Four Companies.

Abbott

Abbott Laboratories principle business are pharmaceuticals, nutritional, hospital products, diagnostics and chemical and agricultural products. Abbott serves customers in more than 130 countries through out the world and has a workforce of more than 56,000 employees worldwide. Abbott's mission statement is "To improve lives by providing cost-effective health care products and services"(5). Headquartered in north suburban Chicago, Abbot discovers, develops, manufactures, and markets health care products all over the world. Abbott's CEO, Miles D. White has been in office for two years, and he has helped the company reach record sales in 1998 of $12.5 billion, up 5% from 1997. Net earnings increased 11.4% to $2.3 billion, and earnings per share rose 12.7 percent to $1.51. This marked Abbott's 26th consecutive year of double-digit growth in earnings per share. In December 1998, the board also declared the 300th consecutive dividend to be paid by Abbott since 1924.

Abbott's strategy is to remain competitive, by expanding and continuing to develop innovative products that will deliver better health care. They also want to focus on internally developed products, external collaborations, and well-targeted acquisitions that possess similar financial discipline. Abbot is committed to discovering, developing and marketing innovative drugs that improve human health. Abbott also strives to increase value for their shareholders, in order to keep investing heavily in science and technology.

Eli Lilly

Eli Lilly is a global research based-based pharmaceutical corporation dedicated to create and deliver health care solutions to enable people to live healthier and more active lives. Lilly focuses in one single segment of the market by producing life-science products. Lilly's total sales rose in 1998 to $9.2 billion from $7.9 billion in 1997, a 16 percent increase. Net income also experienced a significant increase to $2.1 billion, and earnings per share increased by 4% to $1.91. Lilly is based out Indianapolis, Indiana, and it employs 29,000 people around the world. Lilly's CEO, Sidney Taurel, divides their mission in to four parts: "Ensure that all internal and external stakeholders have the information resources..., to support Lilly's innovation strategy, to provide health care solutions, and to build shareholder value"(4). Lilly's five main products are Zyprexa, Prozac, Evista, Gemzar, and ReoPro; they generated 2.4 billion in sales and aided to 93% of the growth in the sales.

Lilly has two main strategies for growth: "discovering, acquiring, and developing promising candidates; and to realize their full potential in the global marketplace. In 1998 for its first strategy, Lilly increased its R&D investments by 27%, to $1.7 billion. For the second strategy Lilly expanded sales forces in key markets and increased their direct consumer advertising in the United States. Lilly's does face some challenges on the upcoming years, such as the expirations of their U.S. Prozac patents. Once generic competition for Prozac comes into the market sometime in the year 2001, Prozac will very likely be out of the market. Lilly must pursue the development of new antidepressants in order to stay competitive in this market.

Merck & Co

Merck is a global, research driven pharmaceutical company that discovers, develops, manufactures, and markets a broad range of human and animal health products, directly through joint ventures, and provides services through Merck-Medco Managed Care. Merck is based in Whitehouse Station, NJ, and its CEO is Raymond V. Gilmartin. Merck's mission is to: "Provide society with superior products and services, innovations and solutions that satisfy customer needs and improve the quality of life; to provide employees