Definition Of Generic Pharmaceutical Company Business Model Economics Essay
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Published: Mon, 5 Dec 2016
This is an essay to identify CIPLA a generic Pharmaceutical company’s business model and to explain the reasons why the company has to change its existing business model. This is done by first identifying the term business model and then using the definition to explain the business model adopted by the company, also determining the inherent changes in world policies and economic environment that prompt the change of the present business model. The second part of the essay addresses the issue of the conflict between the big ethical pharmaceutical companies’ and the relatively smaller generic pharmaceutical companies’ business models. This is addressed by highlighting the big pharmaceutical companies business model and comparing the two models (which will reveal the nature of their competitive relationship) there by identifying if there seems to be a convergence in their models and they are both becoming competitors in the same market or companies producing the same products but competing in different markets or companies where a symbiotic relationship has become inevitable for their survival in this present economic situation.
“Conceptualization” of a Business Model.
A definition of a business model is required to highlight the context to which CIPLA’s (a generic pharmaceutical company) business model can be identified. During my research I encountered various concepts of a business model such as the definition given by Chesbrough and Rosenbloom (2002) ‘a coherent framework that takes technological characteristics and potentials as inputs, and converts them through customers and markets into economic outputs’ (p.532), comparatively, Rayport and Jaworski (2001 cited in Wimmer 2004) defined a business model as the four choices of (1) a value proposition or a value cluster for targeted customers (2) a market space offering which could be products, services, information or all three (3) a unique dependable resource system and (4) a financial model. However Shafer, Smith et al (2005) suggests ‘that a representation of a firm’s underlying core logic and strategic choices for creating and capturing value’ (p.202); is a design or creation, not an accident; what structures are in place to ensure firms capture value.
Factually no sole definition can adequately cover all aspects of the term business model; I will endeavour to use a combination of all the stated business model definitions to better recognize the Generic pharmaceutical company’s business model. I focused on the definition of this model first as most generic companies including CIPLA initially followed this business model before the need for change in 2005. The focus on India is also due to the fact that CIPLA originated from there.
Definition of Generic Pharmaceutical company business model.
Generic pharmaceutical company business model in India is characterised by the production and selling of copy cat pharmaceutical drugs discovered and developed by the big ethical pharmaceutical companies such as GlaxoSmithKline (GSK), this was achieve through the reverse engineering of the drugs invented by the big ethical Pharmaceutical companies and sold at lower costs. This was made possible in India due to the availability of cheap labour in the country, the favourable environment encouraged by the Indian government at the time which allowed low restriction on process patent and little or no conformity with WTO regulations. This was confirmed by Greene (2007) who wrote that ‘government policy culminated in various actions including: the abolition of product patents on food, chemicals, and drugs; the institution of process patents; the limitation of multinational equity share in India pharmaceutical companies, and the imposition of price controls on certain formulations and bulk drugs’. He also highlighted that ‘India has garnered a worldwide reputation for producing high quality, low cost generic drugs’.
Financial evaluation of CIPLA’s business model
Using the Profit and loss account for 2000-2010, sales turnover steady increases from 2000-2004 but in 2005 there is a decline of about 10% which can be attributed to the implementation of the WTO law that affected the number of drugs available for replication. This also affected the earnings per share which dropped from about 51 to about 13 in 2005. Investment and debt also showed a steep decline of over 100% from 2004-2005, this corresponds to the change in business environment which can infer a reduction of debt incurred for drug production.
However the excise duty showed steady from 2000-2005 indicating company focus on domestic market but in 2006 there is a steady decline in excise duties paid and this can be as a result of increased exportation of drugs following a change in business model.
Change in CIPLA’s Business Model
The era of this type of business model however draws to an end as various changes in the economic situation and world policy will threaten the very successful model in which the generics pharmaceutical companies in India have been thriving. In 2005 Indian government changed its law concerning patent drugs and fell in line with World Trade Organization (WTO) Trade Related Intellectual Property Agreement (TRIPs) this limited the production of certain drugs that was filed as a patent from January 1, 1995(Greene 2007).
Another important point is that the rate at which ethical pharmaceutical companies are coming up with new blockbuster drugs is slowing down, with a shift from Research and development (R&D) to marketing. This is as a result of the enormous cost to bring to the market a new drug ranging between 802million – 1billion over a period of 10-15 years (Mogalian, Myrdal 2004). As inferred by Martinez and Goldstein (2007) statement that ‘the century-old approach of finding chemicals to treat diseases is producing fewer and fewer drugs’. Yusuf Hamied (CEO of CIPLA) stated that ‘the World Trade Organization regulations, which since 2005 have prevented Indian generic drug firms from copying patented drugs, signifies that Indian generic companies have to change their business model or risk being swallowed up by multinational firms.’ (Livemint, 5th January 2010).
Most generic companies in India adapted to this setback in their business model by transferring focus from domestic market in India and increase export of generic drugs to the United States and Western Europe, entering into R&D agreements, mergers and acquisitions of foreign drug companies and developing alliances with foreign pharmaceutical firms. CIPLA however chose a slightly different approach than most pharmaceuticals by focusing on organic growth in India and only seldom indulging in strategic business alliances, technological services (such as knowhow transfer, plant supply etc) and in licensing with big pharmaceuticals. CIPLA also increased their export of generic drugs to the United States and Western Europe.
Some points in CIPLA’s corporate presentation in August 2009 highlight the company’s focus:
Business model based on international strategic alliances- Business focuses on organic growth and leads to reduced capital commitment and regulatory/litigation risks.
R&D targeted at ensuring efficient utilization of resources and focused at developing and launching niche products.
The graph below shows a steady increase in the value of India’s pharmaceutical R&D expenditure from 2001-2006 as a result of a shift in business model.
Source: William Greene, US Trade Commission (2007) ‘The emergence of India’s pharmaceutical industry and implications for the US generic drug market’, US Office of Economics Working Paper 2007-05-A
Business models of “Big, Ethical” pharmaceutical companies and the consequent reason for change of model.
The big pharmaceutical company business model is the traditional pharmaceuticals company business model which comprises of large scale Research and Development departments which discover new drugs for diseases and the sale of those drugs to consumers .This is a rudimentary definition of their business model as it also entails many more components than those mentioned above for instance in recent times we see a shift of emphasis from the research and development to sales and marketing campaigns due to the competitive nature of the environment.
A branded drug product is originally discovered and developed by a pharmaceutical company. In order for the company to market and sell their product they must first gain approval from the Food and Drug Administration (FDA) by submitting a New Drug Application. In this documentation the company submits data to establish a drug’s clinical safety and efficacy. Other studies determine the characteristics of the drug dosage form, including the manufacturing process, drug stability, purity, strength, and how it dissolves. Once the drug receives FDA approval, the innovator company can then exclusively market and sell this ‘brand-name’ product for as long as the company has patent protection. (Mogalian, Myrdal 2004)
However a new external threat has evolved apart from the usual competition of rival companies in the form of Generics pharmaceutical companies. These companies as mentioned in prior section of the essay have used the process of reverse engineering to create cheaper replicas of the drugs produced by these big pharmaceutical companies and selling the drugs at cheaper costs to consumers. This has been of great profit to the generics companies as they had to indulge in little or no cost consuming research and development to come up with the drugs in the first place and the availability of low cost of production was just an added advantage to their business model. Martinez and Goldstein (2007) noted however that the rise of generics wouldn’t matter so much if research labs were creating a stream of new hits. But that isn’t happening.
Though the industry doubled its investment from 2002 till 2006 in R&D it yielded 43% less than it had in five years during the 1990’s of chemical-based drugs. There is a change in the business environment for generic companies in India however with the 2005 adherence to WTO laws. They generics companies are focused on R&D to produce their own patent drugs and generic drugs have become more accepted in Western countries over the years, with the rising costs of healthcare these governments are looking to cut costs and are therefore encouraging the adoption generic drug prescriptions to patients.
Another major factor affecting the big pharmaceutical companies is the problem of expired patents. Companies like Pfizer that had a blockbuster drug called Lipitor a cholesterol lowering drug will be coming off patent in 2010 and this will allow the generics companies to bring in a cheaper replica of the drug which will reduce the sales of the company drastically.
Patent expirations are a big problem. Drugs are granted 20 years of patent protection,
Although companies often fail to get a product to market before half of that period has
elapsed. Once it hits the market, however, the patent-protected drug is highly profitable:
Typical gross margins are 90% to 95%. When patents expire, generic makers offer the
products at a price much closer to the cost of production (Martinez and Goldstein 2007).
*Sales data is from IMS World Review (except for China and Poland)
** Patented/generic split is from ESPICOM. Generic defined as a drug whose patent has expired
***2001 values for China; 2000 values for Poland; 2003 values for Brazil reflects patented/unpatented (unpatented includes branded unpatented, generics, similar)
Sources: IMS; ESPICOM; Factiva; EGA; Mckinsey team Analysis
This development will result in the increased encroachment on the market share of the big pharmaceutical companies, though we can see from the chart that countries like China, Brazil, India and Poland have higher percentage of generic drug usage than US, Japan, Germany, France and UK the problem of the global recession may cause an increase in the use of the generic drugs in these countries as well since developed countries like UK are hoping to cut costs on public expenditure like healthcare costs.
Definition of relationships
Based on these new developments in the business environment of pharmaceuticals companies and my research I begin to recognize a trend where big pharmaceuticals and generics have increasingly instances of working together in order to thrive in the new environment. This aids me in my definition of in tension asked in the question, I identify this as the type of relationship generating between the big pharmaceutical and the generics companies and we can see that it if morphing from a completely competitive one to a more competitive-collaborative relationship, where we can even see a convergence in their business models in some cases.
We see big pharmaceutical companies are begin to return to India after the 2005 law passed by the government protecting their drugs, so they can benefit from the availability of cheap labor and low cost of innovative talent, they are even cooperating with the generics companies for Research and Development, in licensing and use of their distribution lines to transport their drugs to underdeveloped countries formally catered to by mainly generics companies. AstraZeneca, GlaxoSmithKline and Bristol-Myers Squibb have also recently suggested they will outsource at least some of their manufacturing. “There are lots of people in India, China and Eastern Europe who can make products of the same quality as ours but at significantly less cost,” says Bristol-Myers Squibb CEO James Cornelius (Martinez and Goldstein 2007).
However though we see them working together big ethical pharmaceuticals companies still have some strategies to compete with generics pharmaceutical companies. Some defensive strategies of the big pharmaceutical companies are to develop new generic subsidiaries of their organization so as to be able to better compete with generics companies. By having their own licensed generic companies, they are able to limit the rate at which generics encroach on their market share for drugs that are off patents, they accomplish this by allowing their licensed patents to release generic copies of their blockbuster drugs into the market just before they are off patent thereby gaining market share before the other generic companies release theirs. In first nine months of this year, Novartis’s generics unit, Sandoz, grew roughly three times as fast as its branded-drugs business and accounted for nearly 20% of overall revenue. “The balance is changing,” says Novartis CEO Dr. Vasella. In the coming quarters, “we will continue to see a faster growth opportunity” in generics. (Martinez and Goldstein 2007)
Competitive strategies of the big pharmaceutical companies include investment in biotechnology and diversification. Biotechnology is of great appeal because of the inability for generics companies to create copies of the drugs as of now. Diversification on the other hand will allow the company to expand the range of services it offers its customers and allow it to get alternative sources of income.
In conclusion we make-out CIPLA business model to be the production of copycat drugs by reverse engineering of branded drugs and the sale of the generic drugs at cheaper prices to the India and any other country where the big pharmaceutical drugs do not have patent rights, however a change in the business model became inevitable in 2005 because of the Indian government adoption of WTO laws and caused a shift of the business model of CIPLA to focus more on R&D for the production of its own Branded drugs and strategic alliances which entail cooperation with Big Ethical pharmaceutical companies through in-licensing and know how transfer. Another point to note is the change in relationship between the generic company and the big pharmaceutical where we see a competitive symbiotic relationship brewing, with increased dealings between the two types of firms where big pharmaceutical companies benefit from the cheaper cost of production and access to generic companies distribution pipelines and generics gain from the in licensing agreements where they share profits with the bug pharmaceutical companies. However big pharmaceutical companies still maintain development of competitive strategies to combat the generic companies by creation of their own generic companies and increased investment in both diversification and biotechnology.
Rayport, J.F. , Jaworski, B.J.(2001). e-commerce, New York: McGraw – Hill/Irwin.
Wimmer M.A., Knowledge management in electronic governance. 5th ed. IFIP international.
William Greene, The Emergence of India’s Pharmaceutical Industry and Implications for the U.S. Generic Drug Market (2007)
CIPLA Corporate presentation August 2009
CIPLA Pharmaceuticals’ Yusuf Hamied: ‘I Am Not Against Patents … I Am Against Monopolies ‘Published: May 07, 2009 in India [email protected]
Pharmacist Erik Mogalian, Assistant professor Paul Myrdal of the University of Arizona’s College What’s the difference between brand-name and generic prescription drugs? December 13, 2004
Big Pharma Faces Grim Prognosis Industry Fails to Find New Drugs to Replace
Wonders Like Lipitor By BARBARA MARTINEZ and JACOB GOLDSTEIN
December 6, 2007; Page A1
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