Strategic Practices in the Generic Pharmaceutical Sector: Creating Value from Someone's Else's Intellectual Property Rights


Abstract

Strategy is a management tool used by companies in order to gain a competitive market advantage and create value at each step of the value chain of an organization. In the generic pharmaceutical sector this value chain is modified, omitting many of the innovation, research, and discovery steps included in the traditional pharmaceutical company's value chain. However, companies that make generic pharmaceutical still need to develop strategies in order to create value and ultimately decide which products to produce. The purpose of this research study is to identify strategic practices as they relate to value creation in the generic pharmaceutical sector. Empirical data has been primarily collected through qualitative interviews with strategists within pharamceutical companies, and those who are unaffiliated with a specific company. Preliminary results indicate that companies have a toolbox of strategies that are used which can be applied to various industries. In the generic pharmaceutical industry this toolbox is used and is modified on an industry specific case by case basis.


1 Introduction and Background

Pharmaceutical companies make branded products based on knowledge and research. This knowledge is converted into patents and products which can be commercialized and/or monetized (Hine and Kapeleris 2006). The informational know-how that does into creating a product, process, or patent from research is known as intellectual property (IP) which is considered to be an asset to the company, and company's defend their IP through what is known as intellectual property rights (IPR). This IP is in turn used to create value for the company in their production of a product or process.(Pisano 2006) The value creation process is therefore viewed as the productive potential of intellectual property rights. (Macmillan 2006)

Generic medicinal products are products which have the same 'qualitative and quantitative composition and same pharmaceutical form as the reference' or branded product, and are generally launched after the branded product has already been on the market for 10 years and has reached expiration of its patent or what is known as data exclusivity in a market.(Edwards et al. 2007)

Pharmaceutical companies that make generic or non-branded products need to essentially devise strategies to survey the market potential of a product and decide which products to make and in turn create their own value.(Gassmann et al. 2008) The market and the business have co-evolved in that businesses need to create and define new strategies to deal with their competitors. (Teece, 2009) Therefore firms are mandated to design value-generating business practices such as the effective strategies in order to maximize value at every point on their value chain. (Gassmann et al. 2008)

The value chain of the pharmaceutical industry is built on a series of activities that create value at each segment. In the generic pharmaceutical sector this value chain is modified, omitting many of the innovation and research and discovery stages involved in the traditional pharmaceutical company's value chain. Although it should be noted that there are stages of research and discovery involved in the reverse engineering processes undertaken in the production of a generic product. (Hine and Kapeleris 2006)

1.1 Problem formulation

In the absence of many research and discovery steps involved in the development of a branded pharmaceutical product, companies which manufacture generic pharmaceuticals still need to develop strategies in order to create value and ultimately decide which products to produce.

1.2 Aim

The aim of the project is to study the key strategies used by generic pharmaceutical companies to create value on a pre-production basis of a pharmaceutical product.

1.3 Purpose and Research Question

The purpose of this research study is to identify strategic practices as they relate to value creation in the generic pharmaceutical sector. Therefore, the research question which the author aims to answer within this study is as follows:

What are some key value creation strategic practices used in the generic pharmaceutical sector?

1.4 Delimitations of the Study

This study will focus on strategies in value creation and not on methodologies noting that a strategy is defined as... whereas methodology is defined as ... and entails more ... techniques. Although there is overlap between strategy and methodology in that the former leads to application of the methods, as an overall contribution of knowledge...

Furthermore, strategy is cited as being a management method. (Gassmann et al. 2008)

1.5 Study Value and Aspirations

The purpose and aim of the project were designed in order to make a contribution to the knowledge of strategic practices in the life science industry. The value of the project itself lies in the study of the strategic planning that occurs in an organization. Moreover, the author wishes to understand the significance between value creation and strategy in the pharmaceutical industry, specifically in the generic sector where it was recognized by the author that there is minimal published information to date. Hence, with this study the author aspires to make a contribution to the body of knowledge in the area of strategic value creation practices in the generic sector.


2 Methodology

The aim of study is to understand which factors influence the value creation in the pharmaceutical generic sector. In order to achieve this aim, the interview/survey method to collect the information from key employees of the industry will be conducted.

Research Approach

In this research, a deductive approach will be used in order to develop a more precise understanding of key value creation and strategy of generics in the pharmaceutical sector. Unlike the inductive approach, the deductive approach tests a theory (Saunders et al., 2003). A hypothesis is drawn and expressed as measurable variables that can then be tested to either sustain the initial theory or modify it if the findings show a different angle to the set theory (Robson, 1993).

Research Strategy

It is important to gather as much information and different points of view as possible in order to ensure validity and to avoid bias. In this regard, the research has focused on creating triangulations with both qualitative and quantitative methods (Bryman and Bell, 2003).

Data Collection Methods

In order to collate the qualitative primary data, an early semi-structured interview was arranged with a few anonymous key employees in the generic pharmaceutical sector who are currently involved in generic creation activities.

The questions were open ended (Bryman and Bell, 2003). In most of the questions a number of alternative answers will be given from which the consumer is instructed to choose. They are quicker and easier to answer than open questions, as they require minimal writing and responses are easier to compare.

Type of data collection - Semi-structured interviews

There are three types of interview; structured, semi-structured and unstructured interviews (Bryman and Bell, 2003). For this study, semi-structured interviews were conducted The reasons behind the choice of typology of interview were that:

  • They are flexible and non-standardised - this allowed a natural flow in between the interviewer and interviewee, encouraging the interviewer to introduce spontaneous questions that may have risen from the interviewees answers and opinions on the planned questions.

  • They give the opportunity to discover issues that may have not been considered or known previously.

Type of data collection - Questionnaires

Following Chisnall (1997) criteria, this method of data collection allowed known characteristics in the population under survey represent in a certain proportion of the target audience. This, according to Zikmund (1997), aids in getting hold of the target audience that is most conveniently available ensuring a large number of questionnaires are completed in an economic way. This was an ideal solution to the lack of financial support and time-constrains for the research to be carried out.

Delimitations regarding the Methodology

Certain delimitations were taken into considerations when planning the methodology, these are listed below along with definitions and a synopsis of the focus of the study.

Although strategists and representatives from several companies were interviewed, respondents were not compelled through the wording of the questions to reveal their company's own strategy, therefore a company by company comparison will not be made. A review of common practices in the sector will be undertaken in order for these strategies to be applied to a specific case/company in the future.

Data collection

In the majority of the semi-structured interview cases, interview questions were given to interviewees ahead of time. The author spent some time at one company where interviews were carried out in person, both semi-structured and structured, whereas other respondents were contacted by e-mail, first requesting the interview, then sent the questions, then reserving a time to speak on the phone. For respondents that were contacted principally by e-mail, the interviewee made her identity, institution and purpose clear, and included contact information, making it clear that their participation would be voluntary and appreciated (Bryman and Bell, 2003).

For the theoretical data collection, the author first reviewed information from aforementioned Intellectual Property conference attended. This material included personal notes on given lectures and printed articles. A framework was assembled in order to construct a proposal and then modify it in terms of an issue tree and subsequent list of activities to complete the project.

Interviews

Question Types

Categories

Additionally, follow-up questions were posted to interviewees based on their answers to the main questions listed here, the answers to these are incorporated in the data and analysis sections, although the questions itself were more for clarification purposes and thus are not listed herein. Similarly, the author had planned on completing a thesis project on intellectual property and the case of Lipitor months before the start of the class, thus several interviews were carried out before these question categories were formally laid out, but with the same intention of gathering information for the thesis, this is the particular case of some interviewees from Company A.

Choice of respondents

In order to select the best people who would be able to provide data leading to a comprehensive answer to the research question, the respondents contacted all met the following criteria:

a)

b)

c)

For the purpose of getting a broad range of data from people with different perspectives based an experience and expertise, respondents were chosen who from diverse companies and levels and had different jobs, from corporate development positions to IP strategy advisors.

Anonymity

Due to the sensitive nature of industry strategic practices, the author has granted anonymity to all interviewees and companies involved in the collection of empirical data. No specific company was used as a case company, although a great deal of data was gathered from Company A and B, which are taken to be representative as they are major players in the global generic pharmaceutical market.

Furthermore, the author feels that this promise of anonymity granted prior to the answering of any questions allowed for more in-depth information to be gathered for the project as this created an atmosphere of trust and camaraderie between interviewee and the interviewer.

Sources of Error

Possible sources of error could step from several points in the data collection methodology of the project, although measures such as establishing interviewee criteria and pre-researching the company and questions were taken. The following sources of error have been identified:

a) Since interview questions were given to the interviewees ahead of the interview, scripted or biased answers could be a possibility. This was not seen as a disadvantage to the overall project, but rather an aid to data collection

because the author found that giving the questions to the interviewee ahead of time as a guide to the interview created a sense of ease and familiarity with the interviewee and since the study was voluntary on the part of the employees.

b) Additional error could come from the fact that many interviews were by phone, in this situation, the interviewer "cannot engage in observation" therefore much can possibly be missed in terms of non-verbal communication from the respondent, such as a conflict between facial expression and the answer given.

c) Regarding matching secondary data collection and desktop research with empirical data, there can always be personal bias on the part of the author, particularly as the project was conducted by a single author. Furthermore, various theoretical frameworks can be applied to the same type of data, and since the study was not exhaustive covering a longer study period, it is possible that the author was unaware of more matched theories to the data collected.

Company A

Multinational pharmaceutical company specializing in generics.

Subject A1

Title

Subject A2

IP title

Subject A3

IP title

Subject A4

Corporate Development

Company B

Multinational pharmaceutical company specializing in generics.

Subject B1

Subject B2

Company C

Multinational pharmaceutical company known for branded products, but also manufactures generics.

Subject C1

Category D - Strategists unaffiliated with a pharmaceutical company

Strategist D1

Strategist D2

Data Analysis

The data were analyzed as based on the interviews of the key employees in the industry.

Reliability

The data is reliable since it is the actual opinion or information taken from employees from these sector.

Validity

It is valid because it is primary data taken directly from people involved in generic creation and development in the pharmaceutical sector


3 Theoretical Framework

Firm strategy encompasses the assessment of assets within and outside of the firm (Teece, 2009)

The scope of this project is the generic development segment of the value chain. ---- Value Chain and how it has changed (Gassman et al, 2008).

The generics are caught between two models - the traditional manufacturing model and the patent protected R&D model. The major pharmaceutical companies business model is all about protected (monopoly) production granted by intellectual property rights. That protected market i needs to recoup the cost of R&D and commercialization (which can be higher than the R&D costs). Thus they are in an innovation/ research intensive -- always looking for the next protected product.The traditionally generics have been in the manufacturing model of efficient production -- they compete on cost rather than a protected product.

That model has previously been one of economies of scale -- the industrial era model. However, the newer model of efficient production has been based on process innovation - doing it better, faster, cheaper rather than economies of scale

As can be seen in Figure 1, the process of product innovation and technological innovation is important in the creation of value. Also, the non-technological innovation such as advanced management techniques, changes in corporate strategy, and changes in organizational structure are related in terms of terms improving operations as well as in the general development of corporations.(Hine & Kapeleris, 2006).


4 Data

It is additionally the intent to provide not only a "chronicle" of data within this project, but accompanying analysis and insights into the human and social process (YIN) associated with the methodology of strategic intellectual property value creation in this sector.

Summary Or Listing Categorization

Companies also use software algorithms to find track and chart pharmaceuticals that are off of patent. The results generated from these programs are periodically reviewed


5 Analysis

Key strategies, trends and common answers.

What type of work do you do regarding value creation and intellectual property? Do you work with generic pharmaceutical companies?

According to one of the interviewees, they do work with generic pharmaceutical companies particularly in patent strategy work as he stated:

"We do work with generic pharmaceutical companies and we do patent strategy work. So for generics, it is early launch, patent, revocations or avoidance, etc. (Interview with generic companies, 2010)."

In addition, one of them stated:

"known for their brand name/considering buying a generic company (Interview with generic companies, 2010)."

"All aspects of protecting and enforcing patents within Life Science/Medtech, such as patentability evaluations, drafting of patent applications, infringement investigations, freedom-to-operate, patent due diligence and advice regarding patent strategies, i.e. giving advice and practical help with increasing the strength of patent portfolios. No generics (Interview with generic companies, 2010)."

"Work from very early stages through growth to midsize and large company on strategy of protecting intellectual property through patenting and in other ways. Constant client counseling on all the issues around this, and then actually creating and prosecuting patent portfolios to implement strategy. No generics (Interview with generic company, 2010)."

Another employee stated:

"We work with various types of patent holders to help them evaluate various monetization strategies; including licensing, enforcement and outright sales (Interview with generic company, 2010)."

Furthermore, another informant said:

"For valuation, we go through an extensive statistical analysis to determine probability of success if the patent holder were to attempt to litigate their assets (Interview, April 2010)."

"We help set monetization strategy for patent holders. We assist the patent holders with selection of defendants, venue and attorneys. We continue to help the patent holders through trial...and assist in settlement negotiations. No Generics (Interview, April 2010)."

Another function of the people involved was counseling clients in the medical device field as he stated:

"Icounsel clients in the medical device field. While I don't workwith generics manufactures, my firm does. Icounsel clients in the medical device field. While I don't workwith generics manufactures, my firm does (Interview, April 2010)."

Another one interviewed was a specialist in venture capital and intellectual property rights. He said:

"I am a venture capitalist who specializes in situations with unique intellectual property opportunities. These include corporate spinouts, university spinouts, and companies who have strong IP which they are asserting for purposes of monetizing those assets (Interview, April 2010)."

Thus, the interviewees were qualified to discuss key value creation and strategy in this study.

How would you define/see value creation in the generic pharmaceutical sector?

One interviewee stated that his scope of activity is on focusing on contra generic/pro innovative drug activities and his job is to balance the message. As he stated:

"your scope is focusing on contra generic/pro innovative drug activities and we need to "do both" and balance our message (Interview, 2010)."

One interviewee defined value creation in terms of marketing segmentation, cost reduction and in terms of IP and the possible patentable approaches to new uses of generics as well as its combinations with other products. He stated:

"Marketing, segmentation of the market, cost reduction. In terms of IP, possibly patentable approaches to new uses of generics, combinations with other products, drug delivery concepts. Trademark. Copyright (Interview, April 2010)."

Another key employee viewed it as a monetization strategy for patents as he stated:

"We would use the same value creation and monetization strategy for any patent holder, including generic pharmaceuticals (Interview, April 2010)."

Another key employee viewed key value creation as being to produce safe and effective drugs at a lower cost. As he said:

"The purpose had long been to produce safe, effective drugs at a low cost since development costs were minimal (Interview, April 2010)."

Furthermore, another interviewee looked at is dependent on U.S. health care laws as he said:

"Very highly dependent on US Health Care laws (can pharma companies still utilize "pay to NOT play" strategies with generics?), US patent laws (hurdle rates for getting extensions), and FDA (for biologics specifically, will full Phase III clinicals be required for most / all biologics? (Interview, April 2010)."

What key factors have you seen companies focus on when determining value creation strategies, would you be able to elaborate on these strategies as they relate to the generic pharmaceutical sector?

A key factor is broad protection for reasonable costs and the freedom to operate. As one interviewee stated:

"Broad protection for reasonable costs, ensuring freedom-to-operate for present and future projects (Interview, April 2010)."

The key factors would also include product revenue covered by the patents, margin of those products, quality of the patent, etc. As one of the key employees said:

"Key factors remain the same regardless of industry. They include product revenue covered by the patents, margin of those products, quality of the patent, prior art, ease of work around, etc. (Interview, April 2010)."

According to another interviewee, proprietary drug manufactures create value by developing new drugs at high cost and they would also priced their products high while generic manufactures developed new products at lower cost and charged lower also. As he stated:

"Proprietary drug manufactures create value by creating new drugs at high cost and charge accordingly. The value of generics is lowcost development and the ability to charge much less (Interview, April 2010)."

What is giving generic pharmaceutical companies a competitive edge against patents and other forms of market protection for branded pharmaceuticals?

According to one interviewee, the generic pharmaceutical companies have an edge in terms of competitive edge against patents because of smart, multi-disciplinary teams they formed to create the products as well as they start much earlier compared to other firms. As he stated:

"Smart, multi-disciplinary teams. Starting very very early (Interview, April 2010)."

Another interviewee viewed the competitive edge in terms of getting the patent early. Also, the lower price and the lower cost is an advantage. As he said:

"The only competitive edge against patents is the abilityunder ANDA to get on the market quickly after patent expiration. Once on the market, the competitive edge is price and lower reimburse net for branded alternatives (Interview, April 2010)."

What trends do you foresee regarding strategy in the generic pharmaceutical sector, and how have these been affected by recent litigation regarding Pfizer's Lipitor patents and Ranbaxy?

According to one of the interviewees, the future game is about biological and finding ways to get close from a regulatory perspective. As he said:

"The Lipitor litigation is pretty old now in IP terms. The future game is all about biological and follow on biological and finding ways to get close from a regulatory perspective whiel avoiding patents (April 2010)."

Another interview thinks that generic manufacturers are acquiring proprietary drugs and proprietary manufacturers are producing generics. As he stated:

"Generic manufactures are acquiring proprietary drugs and proprietary manufactures are producing generics.Soon they will simply be pharmaceutical companies (Interview, April 2010)."

Another interviewee said that they must crack the code on how to do generic biologics in order to be successful in the long-run. As he said:

"They must "crack the code" on how to do generic biologics (large molecules) to continue to grow and succeed long term (Interview, April 2010)."


Links between strategy and value creation

Strategy is the basic framework of where the company is going and it is the master plan of the basic direction of the company. The basic strategy of generic companies is to produce quality products at lower cost which is fighting the high price/high cost strategy of proprietary manufacturers. Since the trend in the future is on generic biologics as well as proprietary manufacturers are going into generics, the generic companies have an edge over them in terms of experience in manufacturing generic products at lower cost. Value creation at lower cost with quality is linked with strategy and this strategy is based on market penetration based on lower cost/lower price.


6 Discussion

The major pharmaceutical companies business model based their strategy on patents and their legal protection on it. This legal right can be able to get back their research and development expenses. Thus they are in an innovation/ research intensive -- always looking for the next protected product.The generics manufactures based their strategy on lower cost model of efficient production -- they compete on cost rather than a protected product.

It used to be that their model is based on economies of scale -- the industrial era model. Today, however, the newer model of efficient production has been based on process innovation - doing it better, faster, cheaper rather than economies of scale.

How does strategy contribute to value creation?

The strategy of the major pharmaceutical companies contribute to value creation by developing high cost products sold at high prices which are protected by patents. The strategy of the generic pharmaceutical companies developed low cost efficient products and sold at lower prices and this contribute to value creation by producing quality products with prices that are acceptable and within the reach to most of the market/customers.


7 Conclusion

The interviews revealed that the generic manufacturers produced products that are lower in cost and sold at lower prices which generates value in the market since they are of high quality but at reasonable cost. The major pharmaceutical companies developed products at high cost and sold at higher prices with protection from patents.

Thus the strategy of high cost/high priced products based on patents by the major pharmaceutical companies create value through quality and high priced products while the generic manufacturers based their strategy on lower cost/lower priced products which are affordable in the market.

Strategy is the basic framework of where the company is going and it is the master plan of the basic direction of the company. The basic strategy of generic companies is to produce quality products at lower cost which is fighting the high price/high cost strategy of proprietary manufacturers. Since the trend in the future is on generic biologics as well as proprietary manufacturers are going into generics, the generic companies have an edge over them in terms of experience in manufacturing generic products at lower cost. Value creation at lower cost with quality is linked with strategy and this strategy is based on market penetration based on lower cost/lower price.


8 References

Edwards, L. D., Fletcher, A. J. & Fox, A. W. 2007. 'Principles and Practice of Pharmaceutical Medicine.'

Bryman, A. & Bell E. (2003). Business Research Methods, Oxford, Storbritannien, Oxford University Press.

Gassmann, O., Reepmeyer, G. & Zedtwitz, M. v. 2008. Leading Pharmaceutical Innovation. Berlin: Springer.

Hine, D. & Kapeleris, J. 2006. Innovation and entrepreneurship in biotechnology, an international perspective : concepts, theories and cases. Cheltenham, UK ; Northampton, MA: Edward Elgar.

Macmillan, F. 2006. 'New Directions in Copyright Law.' Edward Elgar Publishing.

Pisano, G. P. 2006. Science business : the promise, the reality, and the future of biotech. Boston, Mass.: Harvard Business School Press.

Teece, D. J. 2009. Dynamic capabilities and strategic management : organizing for innovation and growth. Oxford ; New York: Oxford University Press.


APPENDICES

Appendix 1 Interview Questions

- What type of work do you do regarding value creation, intellectual property, and strategy? Do you work with generic pharmaceutical companies?

- What key factors have you seen companies focus on when determining value creation strategies, would you be able to elaborate on these strategies as they relate to the generic pharmaceutical sector?

- What is giving generic pharmaceutical companies a competitive edge against patents and other forms of market protection for branded pharmaceuticals?

- What trends do you foresee regarding strategy in the generic pharmaceutical sector, and how have these been affected by recent litigation regarding Pfizer's Lipitor patents and Ranbaxy?

__

Questions for Companies

- What type of work do you do regarding value creation, intellectual property, and strategy?

- How would you define/see value creation in the generic pharmaceutical sector?

- What key factors have you seen companies focus on, or does your company focus on, when determining value creation strategies, would you be able to elaborate on these strategies as they relate to the generic pharmaceutical sector?

- What is giving generic pharmaceutical companies a competitive edge against patents and other forms of market protection for branded pharmaceuticals?

What trends do you foresee regarding strategy in the generic pharmaceutical sector, and how have these been affected by recent litigation regarding Pfizer's Lipitor patents and Ranbaxy?

Source: Essay UK - http://www.essay.uk.com/free-essays/medicine/strategic-practices-in-generic-pharmaceutical-sector.php


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