1. Using examples from the case study critically examine the 5 forces which establish the rivalry in the global pharmaceutical industry.

2. Using examples from the case study critically examine the key external factors (Political, Economic, Sociological, Technological, Legal and Environmental)

3. Using the following strategic models (Bowmans strategic choices, and Ansoff Metrix) explains the key issues in the global pharmaceutical industry.

Case Study The global pharmaceutical industry: harnessing a whirlwind A CEO's dilemma In April 2017, Emma Walmsley started work as CEO of GlaxoSmithKline (GSK). Before joining GSK's consumer products division in 2010, Walmsley spent 17 years at L'Oreal, the French cosmetics group. She was not only the first female CEO of a global pharmaceutical company but also brought an unusual outsider background, as a brands expert with more than two decades of experience in fast-moving consumer and luxury goods. Her appointment was seen as a signal that GSK would retain the consumer business as a core part of its operations, after facing activist investor pressure to divest it amid flagging sales and falling profits. GSK was a top ten global pharmaceutical company with E28 bio in annual revenues, but the firm's longstanding policy meant most of the annual profit was required to pay dividends, severely limiting strategic flexibility. Less than six weeks after Walmsley took the reins, she faced a shock when Nell Woodford, a much celebrated UK fund manager, announced that after 15 years he was pulling every last pence out of GSK stock. GSK, declared Woodford, was "a healthcare conglomerate with a suboptimal business strategy. Walmsley, whom he saw as a 'continuity candidate", seemed to be the last straw. It was clear that she needed to act swiftly, but how? Industry evolution As described in Box 1, the pharmaceutical industry is characterised by a highly risky and lengthy research and development (RAD) process, intense competition for intellectual property, stringent goverment regulation and powerful purchaser pressures. How has this unusual picture come about? The origins of the modern pharmaceutical industry date from the late nineteenth century, when dyestuffs were found to have antiseptic properties. Penicilin was a major discovery and RAD became firmly established within the sector. The market developed some unusual characteristics. Decision making was in the hands of medical practitioners whereas patients (the final consumers) and payers (governments or insurance companies) had little knowledge or influence. Consequently, medical practitioners were insensitive to price but susceptible to the efforts of sales representatives. Two important developments occurred in the 19708. Firstly, the thalidomide tragedy (an anti-emetic for morning sickness that caused birth defects) led to much tighter regulatory controls on clinical trials. Secondly, legislation was enacted to set a fixed period on patent protection - typically 20 years. On patent expiry, rivals could launch generic medicines with exactly the same active ingredients as the original brand at a lower price. The dramatic impact of generic competitors is illustrated by Merck's top-selling asthma and allergy drug Singulair, which lost 80 per cent of US sales just four weeks after patent expiry in 2012. Generics had a major impact on the industry, driving innovation and a race to market, since the time during which R&D costs could be recouped was drastically curtailed. The pharmaceutical industry is unusual since in many countries it is subject to a "monopsony"- there is effectively only one powerful purchaser, the government. From the 1980s on, governments focused on pharmaceuticals as a politically easy target in efforts to control rising healthcare expenditure. Many Introduced price or reimbursement controls. The industry lacked the public or political support to resist these changes. Business environment Ageing populations create pressure on healthcare systems, since 'over-65s' consume four times as much healthcare per head as younger people. Combined with an epidemic of chronic disease linked to obesity, this created an unsustainable situation. In response to these pressures, government and private payers (such as insurance companies) use a variety of methods to control pharmaceutical spending (see Table 1). Some put the emphasis on the manufacturer and distributor, others on the prescriber and patient. Controls are designed to reward genuine advances - price andfor reimbursement levels are based on perceived innovation and superior effectiveness. In countries with supply-side controls, negotiating price or reimbursement can take up to a year. In those with demand-side controls, market penetration is delayed while negotiating with bodies such as the National Institute for Clinical Excellence (NICE) in the UK. NICE typifies a general trend towards evidence-based medicine, where payers expect objective evidence of effectiveness to justify funding new therapies. The impact of NICE decisions reverberates beyond the UK, as countries collaborate internationally on value assessments. Where new drugs are approved for funding, this is increasingly in the context of formal patient selection and treatment guidelines, so their use is carefully controlled and individual prescribers have limited decision-making power. Box 1 The drug development process The pharmaceutical industry has long new product lead times, with period from discovery to marketing authorisation typically taking almost 12 years (Figure 1). New product development can be divided into distinct research and development phases. The research phase produces a new chemical entity (NCE) with the desired characteristics to be an effective drug. Development encompasses all of the formulation. toxicology and clinical trial work necessary to meet stringent regulatory requirements for marketing approval. During all of these phases 'attrition' occurs, as promising agents fail particular hurdles, so most R&D projects never result in a marketed drug. Late stage failures are particularly costly and not uncommon - in 2014 Roche announced the failure of bitopertin for schizophrenia and onartuzumab for cancer, in both cases after heavy investment in broad Phase 3 programmes. Of those drugs that reach the market. 80 per cent fail to recoup their R&D investment. The cost of developing a new drug is estimated at over $1.4bn dollars. When the costs of all the projects that do not reachfruition are considered, it becomes clear that pharmaceutical R&D is a very high stakes game indeed. Given the enormous risks and considerable investment involved, it is not surprising that pharmaceutical companies compete fiercely to establish and retain intellectual property rights. Only by securing a patent that can be defended against imitators can the value of all this R&D be recouped. The industry is subjected to rigorous regulatory scrutiny. Government agencies such as the Food and Drug Administration (FDA) in the USA thoroughly examine all of the data to support the purity, stability, safety, efficacy and tolerability of a new agent. The time taken is governed by legislation and typically averages 12 months. Obtaining marketing approval is no longer the end of the road in many countries, as further hurdles must be overcome in demonstrating the value of the new drug to justify price and/or reimbursement to cost-conscious payers. Regulators often also require companies to track and report patients' experiences (referred to as 'pharmacovigilance"). These requirements are becoming stricter, raising the investment cost in a given medicine throughout its life cycle. Figure 1 Creating new pharmaceuticals: it takes 10-15 years on average for an experimental drug to travel from the lab to patients Clinical Trials Dicover Preclinical Testing Phase I Phase II Phase II Years 65 1.5 100 1 500 Laboratory and 20 0 100 1,000 16 5,000 Test animal studies healthy Population patient patient volunteers colunbeers Additional Assass safety. File INO m FLA Evaluate marketing File NOWBLA at FOR approval Healing safety activity and and required formulations side effects reactions from by FID 5.000 compounds after trials Source: PhRMA, Medicines in Development - Biotechnology - 2006 Report, p. 51. Table 1 Methods used to control pharmaceutical spending Controls on Controls to suppliers Mixed effect Influence demand Negotiated prices Partial Patient co- Average pricing reimbursement at payments Reference pricing price negotiated Treatment Positive and negative with manufacturer quidelines lists Generic substitution Indicative or fixed Constraints on budgets wholesalers and Incentives to pharmacists prescribe or Imposed price cuts dispense generics Pay for performance or parallel imports Indication-based Transfer from pricing prescription-only to OTC e-prescribing tools Where the patient pays some of the drug cost. Switching to generics is one way to cut drug expenditure, Countries are experimenting with'e-prescribing where physicians are presented with recommended options. Payers are increasingly effective in establishing generic drugs as first-line treatment for chronic diseases such as osteoporosis, asthma and depression, with patented drugs only used if generics fail to work. The industry has adopted a number of strategic responses to these challenges. Pharmacoeconomic evaluations are conducted to demonstrate the added value offered by a new drug from improved efficacy, safely. tolerability or ease of use. For example, a study of the cost of diabetes - the fastest-growing chronic disease in the world - found that 60 per cent was driven by hospitalisations, which could often be avoided by correct outpatient use of medicines. Companies have introduced disease management initiatives, which focus on the goals of the healthcare system for a specific disease. Firms then offer a broad-based service to improve disease outcomes. positioning their products as part of the solution. Another approach is the 'pay for performance' deal, for example UK reimbursement of the cancer drug Velcade waslinked to disease response. Such deals are now also appearing in the USA: Harvard Pilgrim Health Care, one of Massachusetts' largest health insurers, will pay less for Amgen's blockbuster drug Enbrel (annual cost of therapy $53,000), which is used to treat rheumatoid arthritis, If patients score below a certain level on six pre-specified clinical effectiveness criteria. Payers value 'real-world evidence", i.e. how drugs perform in real populations rather than the artificial populations studied in trials. Big data gathered in real-world healthcare settings has become more prevalent and robust, shedding light on the use. benefits and risks of medicines and has been broadly adopted to guide reimbursement decisions. One challenge with real-world evidence is that counterfeit products are a growing problem, putting patient safety and lives at risk. With sales ranging from 6160 to E200bn per year, counterfeit pharmaceuticals are the most lucrative sector of the global trade in illegally copied goods. Pain medications laced with powerful and harmful fentanyl were linked to a recent epidemic of opioid related deaths in 12 US states. The World Health Organization estimates that 1 in 10 medical products circulating in developing countries are substandard or fake. Counterfeit antimalarials and antibiotics cause an estimated 72,000 children to die of pneumonia and 69,000 people to die of malaria each year, and help drive emergence of dangerous drug resistant pathogens. Drug manufacturers and distributors are forced to invest in countermeasures, such as traceability and authentication technologies. Government price controls create another challenge for the industry in the form of parallel trade". The principle of free movement of goods across the EU mean that distributors are free to source drugs in low price markets and ship them to high price markets, pocketing the difference. EU parallel trade was estimated at 65.4bn in 2015, with the highest penetration in Denmark where it accounted for a quarter of pharmacy sales. Industry sectors Prescription-only or ethical drugs contribute about 89 per cent ($978bn) of the $1.1tm global pharmaceutical market by value and 50 per cent by volume. Ethical products divide into conventional pharmaceuticals and more complex blotherapeutic agents and vaccines (see Box 2). The other 15 per cent of the market comprises over-the- counter (OTC) medicines, which may be purchased without prescription. Both ethical and OTC medicines may be patented or generic. The typical cost structure of ethical pharmaceutical companies comprises manufacturing of goods (25 per cent), research and development (16-24 per cent). administration (10 per cent), and medical education, marketing and sales (25 per cent). The key strategic capabilities of these companies are R&D and medical education, marketing and sales. Pressure on margins created an Incentive to restructure manufacturing, rationalising and relocating production sites and outsourcing to contract manufacturing organisations (CMOs). Box 2 Biotherapeutics - the next generation Biotherapeutics or 'biologics' are large molecules that behave like natural substances, such as proteins and monoclonal antibodies. Discovery and design of biologics entails optimising specificity, affinity and making molecules as human as possible to avoid provoking an immune response. Biologics are typically given by injection and treat specialist conditions such as cancer and rheumatoid arthritis. Superior specificity to small molecules avoids unexpected 'off target' side effects, and increases success rate from Phase 1 to launch from 7 per cent to 12 per cent. Because of their benefits and use in high unmet need diseases. biologics are generally priced higher than small molecules. Initially associated with biotechs, biologics became mainstream - contributing $258bn in 2017, and seven of the ten top-selling brands. Companies that invested early benefited from this rapid growth. Others noted their success and acquired biologics capabilities. In addition to lower attrition and superior pricing, biologics faced less risk from generics. Sophisticated capabilities to develop and manufacture a complex biosimilar product take substantial investment. Furthermore, regulators were slow to clarify approval requirements. However, Sandoz led the way with human growth hormone and erythropoietin in the EU, and scored the first US biosimilar approval in 2015. The lure of stealing sales from blockbuster biologics attracted non-traditional players such as Celltrion and Samsung and with $19bn of sales facing patent expiry in developed markets in 2018, global leaders like Roche were bracing for impact. 2017 was a landmark year for cell and gene therapies, so- called Next Generation Blotherapeutics (NGBs). Two Chimeric Antigen Receptor T-cell (CAR-T) therapies, Kymriah from Novartis and Yescarta from Kite Pharma, were approved to treat blood cancers. In these therapies, patients' white blood cells, called T- cells, are removed, genetically altered to specifically target cancer cells, and put back to fight the disease with impressive efficacy. Such therapies were crucially enabled by scientific breakthroughs in gene editing. Then in December, Luxtuma from Spark Therapeutics became the first FDA-approved gene therapy for a rare retinal disorder. Gene therapies had been around for decades, but safety, delivery and efficacy hurdles had hindered progress. Although they make up only 5 per cent of the late stage industry pipeline. due to their game-changing efficacy NGBs are expected to contribute a fifth of new active substance approvals to 2022. Global pharmaceutical companies were completely unprepared for such a dramatic shift in the innovation landscape and lacked R&Dexpertise. CAR-T companies were swiftly acquired by cash-rich players - Kite Pharma by Gilead and Juno Therapeutics by Celgene, while Novartis acquired gene therapy company AveXis. The arrival of Genentech veteran Hal Barron as GSK's new head of R&D was expected to herald a bold foray into NGBs. As well as R&D capability gaps, companies must grapple with fundamental business model implications. Such new treatments stretch the definition of a 'drug'. Cell therapy treatments engineered individually for each patient are more of a service than a product, and delivering apparently curative results from a single gene therapy treatment challenges pricing paradigms. Manufacturing and distribution efficiency is key for generics manufacturers, whose operating margins are far below ethical companies'. In the 1990s, US generics prices collapsed, accompanied by a shakeout to determine cost leadership. The speed and aggression of generic attacks on branded products increased sharply. Economies of scale, including finance to support complex patent disputes, proved decisive and the sector consolidated, with only four companies holding nearly half the global market by 2014. Prices fell from 2015 and with only 3 per cent annual volume growth projected to 2022, mainly from emerging markets, players in the $264m generics market faced substantial pressure. Pressure on generics margins actually caused shortages for some essential medicines in the USA, leading a group of hospitals to respond by selling up a not-for-profit generics company called Civica Rx in 2018. One of the few bright prospects were so-called Value Added Medicines: products differentiated by a proprietary delivery method such as a special tablet, capsule, patch or device. A new type of industry player appeared in the 19808 - small biotechnology start-ups backed by venture capital to exploit the opportunities created by molecular biology and genetic engineering. Initially, biotechs were associated with biologics (see Box 2). Blotechs now pursue a huge variety of core capabilities, creating an extraordinarily diverse and innovative sector, Because of the long product development cycle, most biotechs take years to reach profitability, if at all, and revenues are concentrated in a finy subgroup of highly profitable firms. After a period of drought during the global credit squeeze, investment picked up as scientific breakthroughs reignited belief in the sector, and reached record levels by 2014. DTC medicines are bought by consumers without a prescription. The global OTC market was estimated at $137bn in 2017, with the top ten manufacturers accounting for more than half. Consumer brand loyalty provides defence against generic competition and prolongs the product life-cycle. Consistently out-performing the ethical sector globally, OTC sales are boosted by innovation, promotion of self- medication and expansion of distribution channels. Sales have accelerated in emerging markets, providing global players with a rare source of growth and a quick way to gain presence in these key markets. Consumer marketing skills are key, especially with new competition from companies such as Danone and Nestle, who capitalise on consumer interest in personal wellbeing by making health claims for so- called nutraceuticals. Walmsley revitalised consumer marketing at GSK, aiming to make OTC brands as loved as Apple, Nike or Coca Cola, and drove penetration in emerging markets. GSK struck only one big deal under Walmsley's predecessor Andrew Witty, a three-part, $15 blo transaction with Swiss rival Novartis in 2014 to pool consumer healthcare assets and exchange cancer and vaccine businesses. Walmsley oversaw the very successful creation of the consumer joint venture, which GSK acquired outright in March 2018 for $9.2bn, in the first big deal of her tenure as CEO Another important sector is vaccines, a key industry growth driver. Prophylactic vaccines provide lifelong protection against serious diseases, preventing at least 3 million deaths annually worldwide and saving an estimated $7-$20 healthcare dollars per dollar spent on vaccines. This nearly $35bn market is highly concentrated: just four globel players account for about 80 per cent. Global vaccine sales grew rapidly with launches of high priced vaccines for new applications such as human papilloma virus (HPV) Entry barriers are high, with specialised skills required in manufacturing, conducting large and complex clinical trials and managing surveillance programmes. Vaccines have higher development success rates and a lower risk of generic entry than conventional medicines, while offering blockbuster sales potential. GSK strengthened its presence through the business swap with Novartis, narrowly securing global market leadership in 2017. Key markets The majority of pharmaceutical sales originate in North America, China, Japan, the EU and Brazil, with ton key countries contributing over 80 per cent of the global market. Pharmaceutical volume use is strongly aligned with GOP growth, while use of high- priced branded medicines is concentrated in developed countries. The USA is by far the largest market - $4576n in 2017 - contributing 41 per cent of global sales. US growth averaged a very healthy 7.3 per cent from 2013-17, driven by new product launches. Indeed, the USA remains critical to launch success: for NCEs launched during 2011-16, nearly 65 per cent of sales were from the USA, and only 17.5 per cent from the top five EU markets. Box 3 US dominance under threat? A number of factors contributed to industry globalisation. Chief is the international convergence of medical science and practice thanks to modern communications technology and increased travel and information exchange. Well-funded US universities and hospitals generally lead their fields, while US scientific congresses provide the most prestigious platforms for new discoveries. Leading corporations have globalised, with presence in all significant markets. Production sites have a global mandate and are selected by worldwide screening. R&D is sourced from best place worldwide, which often means the USA. Strong US market growth gave US companies a springboard in achieving global ambitions, and in 2017 they occupied six of the top ten slots (Table 2).Biotechnology companies are 'born global': from their inception they draw upon a global pool of collaborators and investors, rather than growing from small domestic beginnings. Once again the USA dominates: publicly traded biotechs employed over four times more people in the USA than the EU, with a similar ratio for R&D spend. US biotechs secure the majority of venture capital investment. US pre-eminence in biomedical research is also under threat from Asia. Global companies opened R&D sites in Asia, while closing them in the USA and EU. The Chinese government has declared its intention to become a leader in the field and poured money into new universities and science parks, while the number of Chinese graduates in natural sciences overtook the USA by 2004. Routine research services are already often out-sourced to China, but as US returnees and home-grown talent seek more impactful projects, and with vast amounts of money available for investment, a fully integrated innovation ecosystem has emerged. A striking signal of the future threat came with the 2018 submission of two home-grown molecules by Beigene Lid to the Chinese regulators, each a fast-follower of highly novel US-developed molecules. Following regulatory changes in 1997, direct-to-consumer (DTC) advertising transformed the US marketplace and fuelled growth. However, companies' costs for providing family healthcare benefits to employees reached nearly $13,000 by 2017, with employees contributing a further $5,700, and had outpaced wages for 15 years, Private payers asked consumers for increasing co-payments and implemented other cost-control measures. Medicare reforms extended drug coverage for the elderly, and gave the government new pricing leverage as the largest direct purchaser of medicines. President Obama's controversial Patient Protection and Affordable Care Act significantly reduced the number of Americans without health insurance, and expanded Medicaid coverage, while increasing focus on value for money. Gilead's 2014 introduction of Sovaldi for hepatitis C virus (HCV) put pharmaceutical pricing firmly in the spotlight. HCV is a devastating condition that can ultimately lead to cancer, liver transplant and early death, Sovaldi eradicated the virus rapidly in many cases. Even at a list price of $84,000 for 12 weeks' therapy, cost-effectiveness was indisputable, avoiding expensive future treatment. However, payers suffered 'sticker shock', having never seen such a price for short-term treatment of a largely asymptomatic condition. Outrage over drug pricing strengthened from 2015 when Turing Pharmaceuticals, sole supplier of the old drug Daraprim for a complication of AIDS, hiked the price by 5000 per cent. President Trump's administration fought back by demanding that prices are mentioned in DTC advertising. Despite these pressures, annual US market growth to 2022 is predicted to be 4-7 per cent. Japan posted sales of $84bn in 2017. The Japanese operating environment was historically quite distinct from the USA and BU. Divergence occurred in medical practice, regulatory requirements, the lack of generics, distribution, and the accepted approach to sales and marketing. Not surprisingly, domestic companies stil dominate the market. Stagnation caused tax revenues to fall, while the cost of treating the world's most rapidly ageing population rose, resulting in stringent price controls limiting annual market growth to 2 per cent from 2013-17. with low or negative growth expected to 2022. The European pharmaceutical market, which contributed only $154bn or 14 per cent of global sales in 2017, is highly fragmented and driven by governments' forever- changing cost containment plans, resulting in a lack of predictability for companies' operational planning. Volatility was further exacerbated by 'Brexit', which also disrupted the regulatory environment with the forced relocation of the European Medicines Agency from London to Amsterdam. The UK fall from fifth to eighth position between 2006 and 2012, illustrating the strong impact of NICE decisions on reimbursement and access. European market annual growth is expected to stay well below 5 per cent out to 2022 Top tier emerging markets constituted nearly a quarter of the global market by 2017 and are predicted to grow at 6-$ per cent per year to 2022, led by China, Brazil, India and Russia. With Its growing GOP and huge population, China overtook Japan as the second largest market behind the USA, posting sales of $121bn in 2017. Regulatory reforms aligning China more closely with global regulatory frameworks will address historical barriers to entry and support further growth. In addition to high net worth individuals who can afford the most innovative treatments, middle class populations in emerging markets are growing more rapidly than at any time in history. The key challenge is to adapt to these countries' varied needs and environments. Some companies built their strategy on premium-priced generics, offering the reassurance of a known brand and reliable manufacturer, so-called "branded generics'. However This approach was highly vulnerable to local generic competition and reference pricing reforms. Other companies expanded access to innovative medicines. For example, Roche supplied Herceptin free of charge to Chinese breast cancer patients after they had paid for a threshold number of months, and fostered health insurance schemes. Innovation Pharmaceutical companies' key contribution to medical progress is the ability to tum fundamental research findings into proven Innovative treatments that are widely available and accessible. Companies with consistently high levels of R&D spending and productivity became industry leaders. For this reason, stock market valuations place as much importance on the R&D pipeline (Le. the products in development) as on marketed products The holy grail of pharmaceutical RAD is the blockbuster. Blockbuster drugs are genuine advances that achieve rapid, deep market penetration. Because of their superlative market performance, blockbusters determine the fortunes of individual companies. Gilead leapt into the top rank of global pharma companies thanks to Sovaldi, which beat all records by selling $2.3bn in its first quarter, While blockbusters make immense contributions to company fortunes, they are few and far between. Sir Andrew Willy. the previous CEO of GSK, likened the hunt to finding a needle in a haystack right when you need it"-Focusing on blockbusters exposes an already high-stakes industry to even greater levels of risk. This was dramatically brought home in September 2004 when the cardiovascular safety risks of Vioxx emerged, and Merck withdrew the brand from the market. Merck lost $2 5bn in sales, a quarter of its stock market value, and faced the prospect of numerous liability suits. Blockbusters exacerbate the impact of patent expiries, creating a so-called 'patent cliff. Companies were projected to lose nearly $140bn in sales by 2024 due to the combined impact of generic erosion and biosimilars. Unfortunately, RAD productivity has declined and development times lengthened. The average cost to develop a new drug was estimated at $1.4bn in 2014 and had grown at double the rate of inflation for 20 years. Despite increasing R&D spend, the industry struggled to replace the value lost through patent expiries. Attrition increased as companies put higher hurdles in place to address payer needs for meaningful clinical benefit. Employing thousands of in-house scientists to develop drug candidates from scratch became a billion dollar gamble that simply wasn't delivering- Companies endeavoured to become both creative and efficient. They narrowed their areas of therapeutic focus: a key driver behind the 2014 deal in which Novartis and GSK swapped oncology and vaccine portfolios. They invested in alliances with academic Institutions, seeking depth of expertise, Strategic out-sourcing to contract research organisations (CROs) reduced fixed costs and leveraged lower cost geographies. Recognising that biotherapeutics had a lower attrition rate, companies acquired biologics capabilities. Some reorganised their R&D to create smaller and more nimble units: GSK pursued an ultimately unsuccessful organisational experiment in which internal research centres competed for funding like internal biotechs. Many opened R&D sites in innovation 'hotspots', such as the US West coast, Boston and Asia. All sought external innovation through licensing deals and acquisitions, although with few real jewels available the cost of deals spiralled. To manage better some of the tremendous risks involved, companies moved towards a more network-based approach to Innovation. For diseases that were just too tough to tackle alone, 'pre-competitive' collaboration allows costs and insights to be shared. Companies, foundations and regulators working on Alzheimer's disease pooled data and resources to create shared understanding. Where large, long-term outcome studies were needed, companies even pooled assets, moving only the best forward In diabetes, AstraZeneca and BMS paired up to develop drugs together, sharing cost, risk and reward. An intriguing response to environmental change was pioneered by Roche, who positioned themselves as operating a 'personalised healthcare' business model. Roche was the global leader in diagnostics and their strategy was to offer value through targeting treatments to patients that would benefit most. This appealed to regulators and payers, who endorsed the linkage of high-priced cancer drugs such as Alecensa for lung cancer with diagnostic tests to identify suitable patients. Investing in discovery and development of tests added further to cost and complexity, but offered the chance to reduce attrition, build unique competencies and secure rapid marlost uptake. Most of the Roche pipeline was being developed with companion diagnostics. There are encouraging signs that industry's focus on meaningful clinical benefit, together with the FDA's explicit support for drugs designated as 'breakthroughs', is finally delivering improved RSD productivity: the FDA approved a record 46 NMEs in 2017 An exciting new field is the use of digital channels to manage health. Of five million apps available worldwide, a third of a million are health-related and 'mHealth' is the fastest growing app category. GSK embraced this trend, launching MyAsthma in 2017 to empower patients to better manage their condition. In September 2017, the FDA approved Pear Therapeutics' mobile application reSET to help treat alcohol, marijuana and cocaine addiction, based on clinical trial data that permit actuel therapeutic claims, creating the first prescription digital therapeutic. And Akill Interactive Labs aims to help children with ADHD through a therapeutic video game. The game uses the same storytelling and reward mechanisms as standard videogames, but beneath the surface, it features mechanisms to act on neural systems and algorithms that dial the level of stimulus up or down to meet the needs of the patient. Digital approaches are expected to target conditions that are poorly addressed and to deliver treatment more cheaply by reducing demands on clinicians' time. A more embryonic field is healthcare information technology. Other sectors are able to analyse huge data sets to generate and exploit highly personalised consumer insights, but the pharmaceutical industry was slow to harness the power of big data'. Electronic health records offered an opportunity to detect patterns and gain new insights. However, even simple tests were not standardised between hospitals, and adoption rates were low with poor inter-operability of medical records systems. Nevertheless, players were starting to tackle these problems. In 2015, Sanofi announced a collaboration with Google Life Science aimed at improving diabetes health outcomes. The companies planned to use data and miniaturised technology to give patients tools to self-manage their disease. Early in Walmsley's tenure she gathered senior R&D leaders in a room in London and played them a video of analysts commenting on GSK's RAD performance. Almost uniformly, they came back with pretty scathing assessments. It was a 'punch in the nose' for an R&D organisation that thought highly of itself and thought the world thought highly of it too. Walmsley undertook a dramatic rationalisation of what she described as hobbyland', stopping 65 programmes to enable focused investment in a slimmed-down portfolio. She also brought in a Genentech veteran, Hal Barron, as head of R&D. Barron's recipe to improve productivity was to focus on immune- mediated diseases, prioritise genetically defined targets, leverage functional genomics - for example, through a $300m alliance with 23andme - establish a new cell therapy platform and engage in targeted deal-making. Sales and marketing Historically, sales and marketing capability was important to competitive advantage. A company that developed a strong global franchise with its customers could maximise return on its products and was in a good position to attract the best in licensing candidates. The traditional focus of drug marketing was the personal detail in which a sales representative (rep) discussed the merits of a drug in a face-to-face meeting with a doctor and provided free samples. Promotion is subject to industry self-regulation. For example, in the UK, reps have to pass an examination testing medical knowledge. In some countries, goverment regulatory agencies check that promotional claims are consistent with the data. There were important differences in the marketing of 'primary care' and "specialist" products. Office-based general practitioners generally prescribe primary care products, whereas treatment with specialist products is typically initiated in hospitals. Sales volume, marketing spend and required skills differed for the two segments. Product-led marketing was key in the primary care sector, while specialist products Involved more cost-effective targeted relationship marketing. The term "high compression marketing' was coined to describe global launches of primary care brands. This involved near-simultaneous worldwide launches, global branding and heavy investment in promotion. The aim was to create a rapid take-off curve that maximised relum by creating higher peak year sales earlier in the product lifecycle. A hallmark was the launch of Celebrex in 1989, which netted Sibn sales in the first nine months. In the USA an important marketing tool was DTC advertising, where spending peaked at $64bn in 2016. DTC was costly because of the vast target audience and expensive television advertising, but profitable. Well-informed patients asked for drugs by brand name, creating a powerful 'pull strategy. Sales force size was historically a key competitive attribute. However, as primary care blockbusters dried up, sales force productivity declined sharply. Over 500,000 sales reps were made redundant between 2006 and 2008, while use of contract sales forces and digital channels increased. As pipelines shifted to high unmet need diseases treated by specialists, the era of lavish launches and massive sales forces was over. The new blockbusters, such as immune-oncology drugs Keytruda and Opdivo, were specialty care products where lower volumes were compensated by very high prices. Selling became a more complex process with multiple stakeholders interested in cost- effectiveness as well as clinical arguments, requiring new skills. Crucially for big pharma, size is no longer a critical advantage: in fact the fastest growing companies are specially players such as Biogen and Celgene. Corporate social responsibility Today's EU cilizens can expect to live up to 30 years longer than they did a century ago. Much of this improvement can be attributed to pharmaceutical innovation, For example, EU deaths from AIDS fell by three quarters between 2006 and 2015. Few other industries have done as much for the wellbeing of mankind. Furthermore, at a global level the industry has the highest ratio of R&D to net sales, funds nearly a fifth of all industrial RAD investment, and makes a significant contribution to skiled employment. So how has an industry that delivers all these benefits acquired such a tarnished image and become an easy target for government Intervention? Pharmaceuticals have the characteristics of a 'public good', i.e. expensive to produce but inexpensive to reproduce. The manufacturing cast of drugs is often tiny compared with the cost of RAD that led to the discovery, Setting prices that attempt to recoup RAD therefore look like corporate greed in comparison with the very low prices charged for generics. This was exacerbated as sales volumes dwindled and prices spiralled. Some companies damage the industry's overall reputation. In July 2012, GSK paid $3bn in the largest healthcare fraud settlement in US history, having pleaded guilty to promoting two drugs for unapproved uses. The Deputy US Attorney General declared the settlement "unprecedented in both size and scope'. And in 2014, China made an example of GSK when the company ignored a whistle blower who revealed extensive bribery of doctors and investigators in a case that ended with guilty pleas and record penalties of nearly $500m. Even more seriously, companies were accused of putting profits before patient safety. After the withdrawal of Vicxx, Merck was accused of ignoring problems during product development and publishing misleading scientific results. As a consequence, the FDA was empowered to demand Risk Evaluation and Mitigation Strategies (REMS) - costly additional programmes to monitor and ensure drug safety after product approval. Soon one third of new drug approvals involved REMS. The industry also faces condemnation of its response to the enormous unmet need in developing countries. Although effective drugs and vaccines exist for many diseases affecting millions, often their cost is beyond the means of the people who need them. It is argued that companies could reallocate RAD efforts in favour of tropical diseases, sell low-priced essential drugs and provide technology transfer, In response, Walmsley's predecessor Sir Andrew Witty, slashed prices in emerging markets and together with Bil Gates persuaded the industry to donate drugs for neglected diseases and to pool relevant patents and make them freely available to researchers. Witly spoke of the 'twin poles' of GlaxoSmithKline's business model: innovation - finding new drugs - and access. Industry mergers and acquisitions (M&A) The pharmaceutical market is fragmented, with very large numbers of domestic and regional players, but consolidated at the global level, with the top ten companies holding 43 per cent of the market in 2017. Table 2 shows how the industry responded to the patent cliff and declining productivity with a wave of mergers and acquisitions, Mergers resulted in the formation of Novartis, Sanofi, AstraZeneca and GlaxoSmithKline, while Pfizer acquired Warner-Lambert, Pharmacia and Wyeth. A striking development was the sudden appearance of Gilead on the leader board - clear evidence that a single blockbuster can still change company fortune. One rationale for MAA was to acquire global commercial reach. The acquisition of Nycomed transformed Takeda from a Japanese player with limited geographic reach to a global company. Companies also used M&A to access growth segments such as biologics, vaccines and consumer health. Buying exciting assets could also boost growth. Alongside the IPO market, M&A offered another way for venture capitalists to recover the cash invested in early stage biotechs. Those with the best programmes could command remarkable prices, as desperate big pharmas, Japanese companies seeking to globalise and newly rich specialty players, all entered the fray. Public companies were targets too: When Gilead placed its $1 1bn bet on what was essentially a one-drug company with its purchase of Pharmasset in late 2011, there were concerns that it had massively overpaid, but The deal was vindicated when Gilead posted the highest US sales of any company in 2014. Mergers were also strongly motivated by falling revenue and the attraction of eliminating duplicated costs. Within a month of merging with Wyeth, Pfizer announced a 35 per cent reduction in RAD square footage with six site closures. Another way to cut costs was to relocate tax domicile. Actavis first built critical mass as a generics player, cost-stripping and moving to Ireland in the process. Fuelled by cheap debt, it acquired Forest Laboratories for $25bn in 2014, along with CEO Brent Saunders. Shifting tax domicile for Forest's US income was quickly accretive to eamings. Actavis Then acquired Allergan (best-known for Botox), for $70bn. Saunders adopted the Alergan name, and promptly sold the generics business to Teva for $40.5bn to cement rebranding as a specialty 'growth' pharma. Where next? At the start of 2019, the global pharmaceutical industry faced its most challenging outlook in decades. As economies of scale no longer played a critical role, and size undermined crucial RAD productivity, industry giants were supplanted by much faster growing mid-sized players. Investment in biotechs was strong, thanks to a combinationof scientific breakthroughs and regulatory support for meaningful advances. The innovation storm encompassing cell and gene therapy, genomics and gene editing, "big data and digital therapies was still in its infancy, with new areas such as synthetic biology yet to reveal their true potential. And there was a looming threat from China, which was seeking to supplant the USA as the engine of Industry innovation. Meanwhile, with innovative pharmaceuticals used in ever lower volumes at ever higher prices, becoming akin to a luxury good, pharmaceutical pricing remained a focus of public debate, pulling the whole industry model at risk. While most global players shed businesses to focus on an Innovative pharmaceutical core, a few pursued a broader strategy. Roche saw value in being a leader in both therapeutics and diagnostics, while Johnson & Johnson chose to excel uniquely in the difficult interface between therapeutics and devices. Despite activist investor pressure to divest consumer health, Sir Andrew Witty advocated the advantages of diversification for GSK. High risk-reward in pharmaceuticals was balanced by greater stability and longer product life cycles in the other businesses. Walmsley's first year Speaking at the CEO Investor Forum in September 2018 in New York, Walmsley looked back on her first year and shared her vision for GSK: To become one of the world's most innovative, best-performing and most trusted healthcare companies.' To achieve this she had replaced 9 of 13 top executives (75 per cent from within the company) and undertaken a dramatic overhaul of RS.D. Walmsley had instituted unprecedented levels of organisational discipline, implementing uniform KPIs, employee standards and strategies across GSK's three businesses. She had also embarked on a cultural overhaul in which meetings got straight to the point and the executive team was highly visible. Even former shareholder Woodford admitted he was impressed by some of Walmsley's moves. 'In time,' he commented, 'Glaxo might be back in the portfolio.' Table 2 Leading global pharmaceutical companies. 2008-2017 3014 3017 Share of Share ol Sales Share of Global Company Shin Market Company Company Company Marks 434 56 4 Namartin OCHO 54.3 Price 3 1051 525 Norearth ICHI 45 1 Merck & Cultural Giancamtheme 40N IUKI Hache ICH $1 1 Johnion & Marck & C 26.2 ichnoon & ichmien | 277 25% +104 2.7% Abbot lusi 260 Gilead Sciences 3.3% LEY JUST 1-9.1 2.71% 2.1% Amgen" ' lusi 32 0 2.015 Cammrig h ILE