Introduction

InJuly2018,oneoftheUSpresident'stweetscreatedturmoilamongmanagersofpharmaceutical companies: "Pfizer & others should be ashamed that they have raised drugprices for no reason. They are merely taking advantage of the poor & others unable to defendthemselves,whileatthesametimegivingbargainbasementpricestoothercountriesinEurope&elsewhere".

Thissoundedlikeathreat,whichitwas presumablyintendedtobe.However,onlyweeksbefore,thepicturelookedrosierforPfizerInc.anditschiefexecutiveofficer(CEO),IanRead.In the fiscal year 2017, Pfizer had successfully maintained its positon as the leading globalpharmaceuticalcorporationintermsofitsrevenuesfrompharmaceuticalproductsofUS$52.8billion. Nevertheless, in the last few years, Pfizer had had many setbacks other than thosegenerated by the president's threat.For example, a comprehensive planned merger withAllergan Plc had to be stopped, and competitors were closing in on Pfizer's leading position.Inaddition,drugpatentswereabouttoexpire,andthecompany'sentranceintonewemergingmarkets was creating many problems. However, the entire pharmaceutical industry, not justPfizer, was being challenged by various issues. While corporations were recording decreasingglobal average returns on investments (10.1% in 2010 and 3.2% in 2018), they were alsoexperiencing increased research and development costs ($1.2 billion in 2010, and $2.0 billionin 2017). Furthermore,companies fromother industries -such as theelectronicdeviceproducer, Philips - were entering the market, and some emerging market companies werebecomingunexpectedlystrong.

Pharmaceutical Industry

The pharmaceutical industry was complex, with some important trends. Globally, in 2018,pharmaceuticalsrepresentedmorethan16%ofhealthexpenditures.In2017,globalsaleswererecorded at $1.2 trillion and the demand for pharmaceuticals was rising. Historically, the UShasbeenthecountrywiththehighestspendingonpharmaceuticals,withanaverageper-personof$1.162in2017.Viewedwithrespecttoglobalpharmaceuticalsalesin2018,theUSwasthebiggestmarketwithashareof48%.Europe(includingRussiaandTurkey)accountedfor22%;Japan accounted for 8%; Latin America accounted for 5%; and the regions of Africa, Asia(excludingJapan), and Australiaaccounted for17%.

Healthcarespendingwas knowntobeincreasingforavarietyofreasons,andthisincreasesuggestedthatdemandfor pharmaceuticals waslikely also to be rising.First, anagingpopulationledtoincreaseddemand.Second,thesupplyofbiologicshadincreasedsubstantially, accounting to 25% of the total pharmaceutical market in 2017. Biologics werehighly effective drugs for certain classes of disease such as cancers, rheumatism, infectiousdiseases such as HIV and hepatitis, diabetes, and neurological disorders. They represented averyexpensiveformoftreatment,usuallylastingaroundayearandwithcostsaveraging

$25.000 per patient. Biologic drugs were produced using animal cells or microorganisms, andthemoleculesizesweremanytimesthoseofconventionallysynthesizeddrugs.Astudybytheconsultancy company McKinsey concluded that the development and production costs forbiologics, as well as the complexity of a biologic drug, equated with those of building abusiness jet. Due to their efficacy, biologics were in high demand. Third, globally increasingawarenessoftheimportanceofearlyhealthchecks,theuseofprophylacticdrugs(e.g.

vaccinations), and better information availability had all further increased demand. Finally,favorable growth rates in pharmaceutical product purchases had been predicted several yearsago for developing markets. However, the road to success in developing countries had in factbeenbumpyforWesternpharmaceuticalcompanies.Localproducers(mainlygenericsproducers) often retained a higher market share and more power in these developing marketsthan Western pharmaceutical companies. Furthermore, relatively weak patent law, slowingeconomicgrowth,intenselocalcompetition,andgovernmenteffortstoreducehealthcarecosts(orat leastto preventtheirgrowth)had reducedcompanyexpectationsofrapidsuccess.

IndustryCompetition

In general, the pharmaceutical market could be divided into main categories: prescriptiondrugs, which could only be prescribed by doctors; and over-the-counter (OTC) drugs, whichcould be purchased without prescription because they were considered comparatively safe interms of self-diagnosis and self-medication. The latter included products such as painkillers,nasal sprays, food supplements, and vitamins. Under some jurisdictions, these could also besold in supermarkets and drugstores. In the US, OTC's made up 16% of the total market in2013, similar to the percentage in other major markets. Within the prescription drug market, afurther distinction was usually made between "innovative' drugs (also called branded drugs)and"generics".InnovativedrugsunderwentextensiveR&Dprocessesandclinicaltrialsusinghumansandanimals.IntheUS,oncetheywereapprovedbytheFederalDrugAgency(FDA),innovativedrugswerepatentprotected,givingthedeveloperfirmtheexclusiverighttomarketthe product for several years (20 years in the United States). In rare cases, extensions wererequested; for instance, if a molecule had been substantially modified. Patents protected theparticularchemicalstructureonly.Otherinnovativepharmaceuticalcompaniesthathaddeveloped a different drug treating the same disease could thus apply of a distinct patent, andthis resulted in "between-patent competition". As soon as a firm lost patent protection for adrug (i.e., for the active ingredient), other firms could market a product based on the sameactiveingredient,aslongasFDAapprovalandbioequivalencestandardsweremet.Suchdrugswerecalledgenerics,andtheyresultedin"within-patentcompetition".Genericsweremarketedunderdifferentnamesfromthoseoftheoriginalbrandedproducts.Genericcopiesofbiologicswerecalledbiosimilar;duetothespecificsofbiologicmanufacture;itwasnotpossibletocopythem precisely (as could be done relatively easily in the case of conventional or syntheticdrugs).Copyingbiologicscould onlyresultin similar, butnot identicaldrugs.

TheRolesofDoctors andPatients

Because self-medication with prescription drugs was illegal, patients needed to go to doctorsorhospitalstoobtainthem. Inmosthealth-caresystems,doctorswererelativelyfreetodecideon treatment and medication. They normally had the choice between different substances andwould suggest a particular drug depending on availability. To save on costs, many countriesencouragedtheprescriptionofgenerics.In2017,thesemadeuponly10%oftotalprescriptionsales(in $),butgenericshad been outgrowingbranded drugsformany years.

In general,doctorstendedtochooseproductsthattheyfeelprovidedthebesttreatmentforagivenpatient.Themarketpowerofexpensiveinnovativedrugswassustainedbythefactthat,in most countries, there were no regulations concerning cost cutting or a preference forgenerics.Moreover,dependingoncountryanddisease,patientswerefrequentlynotrequired

topayfordrugsbecausethestateorprivateinsuranceschemescoveredthisexpense.Asdoctorshadalargeinfluenceonwhichbrandwaspurchased,pharmaceuticalfirms'marketingactivitiestendedtobetargetedatdoctors.Moreover,dependingonthelaw,theextenttowhichdirect customer marketing of prescription drugs was permitted varied. Sales representativeshad always been the main communication channel between pharmaceutical firms and doctors,and firms invested in sales to such a considerable extent that doctors from time to timecomplained about over-marketing. Many firms, however, were not prepared to reduce the sizeof their sales forces unless the competition did the same: they were trapped in a "marketing-and-salesarmsrace."Asaresult,pharmaceuticalfirmshadinrecentyearsspentsignificantlymoreonprescriptionsalesactivities(includingexpenditureonsales,marketing,andadministrative costs) than on R&D. For instance, in 2017, Pfizer spent $7.6 billion on R&Dbutan enormous $45.4 billion on prescription sales.

In 2010, the US Congress demanded greater transparency in marketing activities in ordertoreducethenumberofcorruptionallegations.InresponsetothedemandsofCongress,PfizercutdownonpaymentstoUShealth-careprofessionalsby11%in2012,andreducedspendingon company sponsored dinners by more than half. Since 2014, firms in the United States hadbeen required to enter payments to doctors into a public database. In addition to these tighterregulations, doctors had become less welcoming towards sales representatives; they said theydidnotfeelwellinformedbythemandsothedoctorsinsteadtendedtofavoronlineinformation.Arecentstudyrevealedthat65%ofphysicianswereinterestedingettingclinicalinformation online. Doctors also generally lacked the time to meet with sales representativesbecausetheywereunderpressureto seeincreasingnumbers ofpatients.

In Europe, such marketing activities were also limited by governments. For example, inSwitzerland, each pharmaceutical company could only target a given doctor once a year. InSlovakia,thegovernmentintroducedalawthatstatedthatdoctorswererequiredtopaya19%taxonbothfinancialandin-kindbenefits(e.g.,meals,events,hotels)receivedfrompharmaceutical companies. Yet the need for marketing activities became more important, inparticular as the trend of self-medication was increasing. This was also related to the growingamount of information available online a source freqently used by patients in addition to, oreveninpreferenceto,theirdoctors'advice.Thiswasadelicateissueforpharmaceuticalfirmsbecause,inEurope,directmarketingcouldnotbetargetedatpatients.Pharmaceuticalcompaniescouldavoidsuchregulationsby using newdigitaltoolssuchaspatientandphysician portals and by promoting social-media posts. Extensive information about specificdrugs was offered online, and pharmaceutical companies also provided information duringdiscussions on various online health platforms. Nevertheless, when compared to some otherindustries, by 2018, pharmaceutical companies had not yet taken full advantage of social andotheronlinemedia.

RegionalDifferences

In 2013, state-supported compulsory health insurance existed in the majority of OrganizationforEconomicCo-operationandDevelopment(OECD)countries.Onaverage,58%ofmedication expenses in OECD countries were financed publicly (e.g., in Germany, 77 %; intheUnitedStates, 48%).Patients and/orprivatehealthinsurancefunded theother42%.

Health systems in Europe and the United States were different. In the United States, the greatmajorityofthepopulationwasprivatelyinsured,astherewasnoorlittlepublichealth

insurance. Moreover, until 2017 the US government had rarely commented on drug priceregulation.In2018,however,theUSpresidentannounced,whenmeetingwithUS-basedCEOsofpharmaceuticalgiants,"Wehavetoget pricesdown for alot ofreasons."

Traditionally, the US market had always been the most important market for thepharmaceutical industry worldwide, yielding high prices and margins. In Europe, state healthsystemsweretheprincipalpurchasersofdrugs,butthiswasbecominglessofapositiveforthepharmaceutical industry than it used to be. Due to increasing public health-care spending andtight national budgets, European governments had in recent years become active in the areasofpriceregulationandnegotiation.Forthepharmaceuticalindustry,thesemeasureshadtakenonvastproportions.TomMcKillop,theCEOofAstraZenecaPlc(AstraZeneca)from1999to2006,spokeofan"extortion-like"situation.FelixRaeber,atthetimeheadofEuropeanmediarelationsforNovartis,describedthesituationasonewherethepharmaceuticalcompanieswere"withoutcontrol"overpricing.

Oneregulationmethodinvolvedthestateandmanufactureragreeingtosetfixedprices.This meant lengthy price and reimbursement negotiations, which could delay product launchsignificantly.TheGermangovernmentin2005,forexample,becameinvolvedinpriceregulation and demanded sweeping price reductions. For example, Lipitor patients would infuture receive reimbursement up to a certain amount only. The government also asserted,however, that if the price of Lipitor were to be reduced by a further 38 %, patients wouldreceivefullreimbursement.Pfizerimplementedthepricereduction,whichhadadrasticeffecton its profits. It did mean, though, that the product could be kept on the market. Governmentsin Europe set prices by what was known as "referencing." Products with similar therapeuticeffects were grouped together, and a lower all-in price separately determined for each group.Thereimbursementsystemwasthenalignedsuchthatthepatientspaidforthedrugsifthepricewas higher than the reference price. Another measure taken by governments was known as an"all-inpricemarkdown"thatlimitedaproduct'sprofitmargins-onesuchwasthePharmaceutical Price Regulation Scheme system developed in the United Kingdom. In 2012,an average price range of 30 % over or under the EU average price existed. Each country setdifferent prices; hence price control within the EU resulted in parallel imports and lost profitsforpharmaceuticalscorporations.Governments,viatheirrespectivehealth-carereimbursementsystems,influencednotonlypricesbutalsoproductdemand.Usually,patientswouldgetdrugsexpenses paid for only if the drug was classified as reimbursable by their national health-caresystem. Many countries established so-called "positive lists," where all products on the listwere normally reimbursed, and/or "negative lists," where all products on the list would not bereimbursed. When a prescription drug was not reimbursed, the demand for this drug wasthereby automatically limited - as patients would shy away from drugs they had to finance outoftheirown pockets.

Pfizer'sChiefExecutiveOfficers

In 2010, Ian Read became chief executive officer (CEO) of Pfizer. In January 2007, JeffKindler,hispredecessor,hadimplementedseveralmajorstrategicchanges.Kindlerannouncedtheredundancyof10,000employees-aroundatenthofPfizer'stotalworkforce.Thiswasveryunusual in a such profitable industry. The layoffs included one-fifth of the sales force in theUnited States and Europe as well as the closure of five research centers and several factories.The R&Ddepartmentshad also undergonereorganization.Instead ofglobally dispersed"CentersofExcellence",researchactivitieswerenowstructuredaroundtherapeuticareas(e.g.,oncology,vaccines).Pfizer'sobjectivewastooffsetR&Dcoststhathadresultedfromthelate

identification of potentially long-term side effects of drugs such as Torcetrapib. Kindler alsoencouragedhis"traditionallyisolated"researcherstotakepartinmoreexternalcollaborations.He issued instructions to the effect that Pfizer should increase the transparency of its researchinitiatives and publish information that would serve to facilitate acquisitions and focusedcollaborations. In 2010, the company launched the Centers for Therapeutic Innovation (CTI)program,connectingacademiawiththedrugdeveloper.AnthonyColye,theheadofthecenter,said that CTI was "bridging the know-how for taking a great idea from these [academic] labsand turning it into something that looks and feels like a drug".This move was intended toenhancethediscoveryprocess,improvethequalityofearlyresearchstudiesandclinicaltrials,andreducecosts.PfizercompetitorssuchasNovartisandSanofifollowedPfizerandlaunchedtheir own programs.Finally, Kindler prompted a paradigm shift in the product portfolio,recognizing that the era of blockbusters was coming to an end: "We need to be as effective atselling a large number of $500 million drugs as we were at selling drugs with multi-billiondollar sales."Kindler also introduced the "String of Pearls" acquisition strategy; its goal wasto buy smaller, innovative companies with a focus on biotech. This approach, however, onlylasted until Kindler initiated a $68 billion deal with Wyeth, making Pfizer bigger than ever.After the Wyeth acquisition, cost-cutting continued, including in the R&D division, whereoutgoingstotaled afurther$9.5 billionby2010, evengiven thecostcuttinginitiatives.

When Read took over as Pfizer CEO in November 2010, his mission was clear. He wasexpected to lead Pfizer's R&D division back to success. He made it his goal to enhance the"ability to respond to market dynamics, greater visibility and focus distinctive capabilitiesoptimized to deliver value to patients and shareholders." In 2012, he stated that "Pfizer hasachieved the scale it needs, both in its science and in its global reach."Two months after hebecame CEO, Read's iron hand was already in evidence. He began the restructuring of thecompany into five core therapeutic areas, and he actively pursued the cost-cutting program ofhis predecessor: 20% of the staff were laid off. One year after Read took over, Pfizer's costswere the lowest they had been since 1980. The workforce was reduced by a further 38,500people, which was double the amount that Kindler had originally planned. Then, in 2012 and2013, Read decided to sell the health nutrition and animal health businesses in order to be"better positioned to focus on the core business," and went on to concentrate the company'sefforts into buying smaller biotech companies that fitted with Pfizer's R&D focus. In 2017,Read announced his intention to split Pfizer into its constituent businesses, something thatmimickedtosomeextenttheactivitiesofothercorporations.Astrategicmoveofthiskindhadbeen under consideration in 2013, but had subsequently been dropped. It seems that, by 2017itwas higherup on theagenda. Accordingto acompanypress release,

Pfizer Consumer Healthcare is a leading player in the largest OTCcategories, with iconic brands, robust retail partnerships, global reachand strong fundamentals . . . Although there is a strong connectionbetweenConsumerHealthcareandelementsofourcorebiopharmaceutical businesses, it is also distinct enough from our corebusiness that there is potential for its value to be more fully realizedoutside the company. By exploring strategic options, we can evaluatehowbesttofuelthefuturesuccessandexpansionofConsumerHealthcare while simultaneously unlocking potential value for ourshareholders.

However,Pfizerdidnot(again)finalizethesplit.From2010,PfizerexperiencedmanyupsanddownsoverthecourseofitsvariousM&As.Theplannedtakeoverin2013-14of

AstraZeneca'slate-stage,small-moleculeanti-infectivebusinesshadfailed.Pfizerhadin2016also planned a merger with Allergan in a deal worth $160 billion - potentially the biggestmerger to date in the pharmaceutical industry - the main intention being to move its corporateheadquarters and fiscal affairs to the more tax-friendly Republic of Ireland. This merger wasfrustrated by a recently implemented U.S. administration policy aimed at restricting mega-deals. The underlying purpose of the new policy was to prevent U.S. companies from movingmonetaryandfiscalresponsibilitiesabroad.ThefailureofthismergermayhavebeenavictoryforPresidentBarackObama(inofficeatthis time),but it wasnot soforRead.

In2018,TheforecastsforPfizer'sfuturecouldhavebeenbetter.Suchforecastswouldevaluatepharmaceuticalcompanies'researchpipelinesandtheprospectivevaluecreationfromrecentlylaunched innovative products. As a result, Pfizer was now viewed as having fallen behind itsmajor competitors Gilead, Novartis, Roche, and Johnson & Johnson. Yet, by July 2018, ReadfeltthattherewassomecauseforoptimismwhenPfizer'sstockpricereachedanewpeakof

$39.90.ButPfizerwasnottheonlycompany witharisingshareprice.RocheandNovartishadalso hit new price peaks.

CASEANALYSIS:

1. Examine and analyze the global external environment in which Pfizer is working, anddiscussthespecificchallenges, trendsandcomplexities.
2. ExaminethePfizerinternalenvironment,analyzeitsvaluechainandassessitscapabilitiesand core competencies to discuss its effects on value creation and sustainable competitiveadvantage.
3. CreateaSWOTmatrix withthecriticalfactorsidentifiedfrom youranalysis
4. Using Miles and Snow typology, can you identify Pfizer strategic orientation and explainwhyit takes such strategicmoves.