The changing role of key stakeholders in pharmaceutical value chain

Dinar Kale

The Open University

The pharmaceutical value chain model depicted in Figure 1 covers a full range of activities that are required to bring a product from conception to final consumer. The key players in the chain are industrial firms as developers, producers and distributors, government as regulator and policy maker, healthcare providers such as hospitals and doctors and finally patients as consumers. Over the years the core value chain model and key players have remained the same but in the last decade the role of key stakeholders has been in a state of transformation with its focus changing from blockbuster drugs to a holistic healthcare service model.

Figure 1: Pharmaceutical value chain

Changing nature of market

The changing nature of Markets is one of most important drivers of transformation in pharmaceutical value chain and the role of different stakeholders. According to an IMS report (2011) the contribution of emerging markets to the growth of the pharmaceutical market has increased from 8% in 2003 to 40% in 2010. For example, in 2008 Chinese government launched an ambitious healthcare transformation programme and donated US$ 125 billion to improve healthcare infrastructure and achieve universal healthcare coverage. As a result of this initiative the Chinese market is expected to double its size by 2013. Similarly it is expected that by 2015 four emerging market countries such as China, Brazil, India and Russia will be in the top ten global markets. Other changes in the market include the rise of personalised medicine and pricing pressure in advanced markets. In addition, a decline in R&amp,D productivity is having a severe impact on MNCs as well as emerging country firms’ location of various R&amp,D and production activities.

“…the contribution of emerging markets to the growth of the pharmaceutical market has increased from 8% in 2003 to 40% in 2010…”

The changing role of NGOs and government

In the past World Health Organisation and Non-Government Organisations (NGOs) have played a significant role in promoting affordable healthcare and ethical practises in pharmaceutical markets. However, the recent rise of influential NGOs such as the Bill and Melinda Gates Foundation (BMGF) has given rise to the new organisational structure such as Public–Private Partnerships. For example, the International AIDS Vaccine Initiative (IAVI) was initiated in 1994 as a not-for-profit organisation, a public–private partnership working to accelerate the development of vaccines to prevent HIV infection and AIDS. Initially it was convened and funded by the Rockefeller Foundation but established itself as a powerful force later with substantial funding from the BMGF. Chataway et al (2009) suggest that IAVI played a dual role, on the one side that of a ‘virtual pharmaceutical company’ and on other hand they acted as an international development agency. This is an example of many ‘Push’ initiatives launched by private foundations, but in 2010 the BMGF launched a ‘Pull’ initiative, namely Advance Market Commitment’ for developing Pneumococcal vaccine for developing countries. According to the AMC website (2011) AMCs give companies an incentive to invest in R&amp,D, production and distribution of a new vaccine. Under the new AMC, the BMGF and five national governments — Italy, Canada, Norway, Russia and the UK — have committed $1.5 billion to purchase pneumococcal vaccines once they have been developed. Developing countries are then able to purchase the vaccines at guaranteed prices that they can afford. Initiatives such as this have significant impact in the area of R&amp,D and in driving new collaborations and consolidation in the pharmaceutical industry. For example, in 2009 Pfizer acquired Wyeth, maker of largest selling pneumococcal vaccine (Prenvar), to diversify itself in the vaccine and biotech sector. In 2001, Merck and serum Institute of India formed a collaboration to develop and commercialize a pneumococcal conjugate vaccine (PCV) for use in the emerging and developing world countries.

“This is driving the evolution of pharmaceutical value chain and providing space for firms from countries such as India and China to become key nodal points.”

The changing role of private industrial firms

Analysis of MNCs and companies from emerging countries suggests their strategies regarding business models are undergoing significant changes. MNCs have reconfigured their business models and created strong footprints in these new growth centres. This is driving the evolution of pharmaceutical value chain and providing space for firms from countries such as India and China to become key nodal points.

According to an Ernst and Young report (2011) India and China have emerged as an important destination for outsourcing and offshoring by MNCs across the pharma value chain – from R&amp,D to late stage manufacturing. MNCs are also outsourcing complex manufacturing and process R&amp,D work to the Indian pharmaceutical firms while tapping Chinese companies for building blocks and intermediate work. Table 1 show the various activities that MNCs are now conducting in the developing countries. Some of these activities are carried out by the companies in their own facilities while some of these are outsourced to local firms.

Table 1: MNC’s footprint in India and China (Source: author’s modification of table from Ernst and Young Report (2011)

MNCs have increasingly been using acquisitions as a strategy to increase their presence in the emerging markets and create production base for generic drug manufacturing. China and India have emerged as the top two destinations for acquisitions for MNCs with China accounting for 67% of all acquisitions made in the last six years (Ernst and Young, 2011). Indian and Chinese firms have strong market presence in their domestic market compared with local Russian and Brazilian firms and as a result have stronger bargaining power to negotiate with MNCs.

“Indian and Chinese firms have strong market presence in their domestic market compared with local Russian and Brazilian firms and as a result have stronger bargaining power to negotiate with MNCs.”

Table 2: significant acquisitions in last five years (Ernst and Young Report, 2011)

Firms from emerging markets are forming collaborative and licensing deals with MNCs involving all aspect of pharmaceutical value chain. These firms use acquisition routes similar to MNC s to create presence in advanced markets as well as production facilities. However, there are serious questions regarding long-term growth strategies of these firms as MNCs now have access to the same resource base as Indian and Chinese firms.

It is quite obvious that MNCs and firms from emerging countries are moving away from an integrated pharmaceutical value chain towards strategies focused on their core competence in one or more specific stages and covering remaining areas through collaborative relationships. The changing nature of market and emergence of new influential NGOs such as the BMGF has created a new ecosystem where all stakeholders are moving away from their traditional roles and activities. However, a big question remains as to whether these transformations will lead to development of a sustainable, appropriate, affordable and accessible healthcare system for poorer people of developing countries. This new ecosystem can have a disruptive impact on the industry players and thus demand non-traditional approaches to improve access and produce context specific healthcare. The existing industry players will have to adopt non-traditional approaches in the form of public– private Partnerships and adopt new organisation forms such as social technologies to achieve that difficult goal.

References:

1. IMS (2010) Pharmerging shake up – New imperatives in redefined world, http://www.imshealth.com/pharmergingreport2010.

2. Chataway, Hanlin, Mugwagwa and Muragiri (2009) Global health social technologies: Reflections on evolving theories and landscapes, Innogen Working Paper 76, http://www.genomicsnetwork.ac.uk/media/Innogen%20Working%20Paper%2076.pdf (last accessed 09/11/2011)

3. Ernst and Young Report (2011) India emerging: Pharma’s evolving models, http://www.ey.com/IN/en/Industries/Life-Sciences/India-emerging–Pharmas-evolving-business-models

About the author:

Dinar Kale is a Lecturer of International Development and Innovation at The Open University. He can be contacted here at the following email address: d.kale@open.ac.uk.

What transformations have you noted in the role of key stakeholders in pharmaceutical value chain?