Situation Analysis of R & D Activities: An Empirical Study in Iranian Pharmaceutical Companies

Document Type: Research article

Authors

1 School of Pharmacy Department of Pharmacoeconomics and Pharmaceutical Management, Shahid Beheshti University of Medical Sciences, Tehran, Iran. Pharmaceutical Sciences Research Center, Shahid Beheshti University of Medical Sciences, Tehran, Iran.

2 School of Pharmacy Department of Pharmacoeconomics and Pharmaceutical Management, Shahid Beheshti University of Medical Sciences, Tehran, Iran. Student Research Committee, Shahid Beheshti University of Medical Sciences, Tehran, Iran.

3 School of Pharmacy Department of Pharmacoeconomics and Pharmaceutical Management, Shahid Beheshti University of Medical Sciences, Tehran, Iran.

Abstract

As global competition intensifies, research and development (R & D) organizations need to enhance their strategic management in order to become goal-directed communities for innovation and allocate their resources consistent with their overall R & D strategy. The world pharmaceutical market has undergone fast, unprecedented, tremendous and complex changes in the last several years. The pharmaceutical industry is today still one of the most inventive, innovative and lucrative of the so-called “high-tech” industries. This industry serves a dual role in modern society. On one hand, it is a growing industry, and its output makes a direct contribution to gross domestic product (GDP). On the other side, drugs, this industry’s major output, are an input in the production of good health. The purpose of this study is to evaluate R & D activities of pharmaceutical companies, and also to highlight critical factors which have influential effect on results of these activities. To run this study a valid questionnaire based on literature review and experts’ opinion was designed and delivered to 11 pharmaceutical companies. Empirical data show there is not acceptable situations considering of the factors that should be taken in to account by managers including; management commitment, human resource management, information technology and financial management. Furthermore, we concluded some interesting results related to different aspects of R & D management. In conclusion, managers must be aware about their performance in R & D activities, accordingly they will able to take a comprehensive policy in both national and within the company.

Keywords

Main Subjects


Introduction

Pharmaceutical research and development (R & D) is the process of discovering, developing and bringing to market new ethical pharmaceutical products. Industrial research and development is a scientific and an economic process. Science specifies the opportunities and limitations, but economics determines which opportunities and scientific challenges will be addressed through industrial investigation (1).

If a pharmaceutical company wants to achieve market success with a new product brand, it needs to invest seriously on marketing and sales practices. Therefore, not surprisingly, we may come into this result that basic research and development together with marketing and sales practices are two of the most important practical and even more strategic priorities of the world pharmaceutical industry. Inevitably, the greatest investments of the pharmaceutical industry are done in all terms. So, innovator  pharmaceutical companies through the world, approximately 16% of their sales on R & D and even more, about 26% or more on marketing and sales practices, on average (2).

The pharmaceutical industry performs a dual role in modern society. On one hand, it is a developing industry and its output makes a direct cooperation to gross domestic product (GDP). On the other hand, prescription medicines, the major yield of this industry, are an input for producing good health. These products make an important cooperation to improve the population health as well as life expectation. Societies are interested in prescription medicines and pharmaceutical innovation in large part because of the potential health advantages which are obtained from medicines. But particularly in light of increased competition over the world, many countries are searching sectors in which they have a comparative advantage. Pharmaceuticals and biopharmaceuticals assumed to be more desirable in many countries which have higher incomes because of their reliability on high educated working forces and production may be less probably to be outsourced to countries in which common salaries are lower. This dual role has greatly increased the complexity of public-sector policy making (3).

The world pharmaceutical industry greatly has been changing in the last decade. Serious globalization, increased competitiveness and the fight for worldwide market shares which develop new challenges for pharmaceutical companies. Fast globalization certainly empowers the integration of pharmaceutical industry of the world. Coherence in forms of mergers and alliances prevail more and more as a strategic orientation for the world pharmaceutical companies. By coherency, they are going to develop strategic cooperation in order to be successful, competitive and continuous development cycles (2).

Global competitiveness is becoming increasingly important for the pharmaceutical industry. Companies are seeking for opportunities to increase the performance of the resources for benefit at all phases of the overall value chain from discovery research to production and logistics as well as sales and marketing issues. Particularly innovation is recognized as the infrastructure for competitive advantage and developed by strong investments in R & D (4). But drug development and commercialization is a costly, time consuming and hazardous process. Global studies which are published in 2003 report an average pre-tax cost of approximately US$800 million to bring a new medicine to the market (5, 6). It is estimated that when a novel drug is released on the market, an average of 12-13 years would have been passed since the synthesis of the new active pharmaceutical ingredient (API). Thereby, on average, out of every 10,000 materials synthesized in laboratories, only one or two will successfully pass all the phases to be marketable medicines (7). In developing countries, according to the lack of economic motivations, the pharmaceutical industry usually doesn’t invest on novel API. Moreover, according to low capacity of government for covering the cost of these prices of the pharmaceutical innovations, these innovations are limited.

According to literatures, the evaluation of R & D activities in industrial firms has investigated the issue from different perspectives. So, they have concentrated on some remarkable perspectives (8-10). Considering that the number of relevant contextual factors in this topic, we decided to confer a more specific and definite scope to our research. So far, in Iran, no scientific study has been conducted about assessment of current situation of R & D activities in pharmaceutical companies. Present study based on aforementioned critical factors, proposed the research question as follows:

(I): “How is current situation of R & D activities in pharmaceutical companies?”

To answer this question, there are some essential sub-questions which lead to find the final answer.

 “How is current situation of management commitment about R & D activities in pharmaceutical companies?”

 “How is current situation of human resource management about Rand D activities in pharmaceutical companies?”

 “How is current situation of financial management about R & D activities in pharmaceutical companies?”

 “How is current situation of information technology (IT) management about R & D activities in pharmaceutical companies?”

(II): “What is managers’ attitude about influencing factors in R & D activities?

To present the paper, this article is divided into two substantial sections, the first section depicts the summarized outline of the pharmaceutical industry particularly in Iran, it also incorporates literature review and research methodology of this study and the second section deals with analysis of the collected data besides conclusions and implications of the this study.

Literature review

Iranian pharmaceutical over review

Medicine and pharmacy are among the oldest sciences and disciplines in Iranian civilization. After Islam was introduced to Iran, it had a great impact on both sciences. The influence was so great that it drew a line in the history of pharmaceutics in Iran.  There are two different but continuous eras of medicine and pharmacy of Iran; before Islam and after Islam. The sciences of medicine and pharmacy were greatly improved during the reign of Islamic civilization. The Islamic pharmacists and physicians followed methods of Hippocrates and Galen. Among the most famous Persian physicians and chemists are Mohammad-ebn-e ZakariaRazi and Avicenna who both were living during Medieval era. The most popular book of Avicenna in medicine is “Ghanoon” written in five volumes. Two volumes of the book are devoted to pharmacology (11).

 Pharmaceutical companies in Iran

On the eve of the 1979 revolution, numerous domestic, foreign, and domestic-foreign private companies were active in Iran's pharmaceutical sector. By that time, the country's pharmaceutical sector had been transformed into a market that boasted a $300 million annual cash flow. There were nearly 4,000 kinds of pharmaceutical products available in Iran, 70% of which was provided by imports and the remaining 30% was produced domestically.  More than half of the latter market served the sales of products under the concession of foreign companies (12). Now more than 95% of the drug consumption is produced by domestic pharmaceutical companies (13).

 Generic system in Iran

The year 1981 witnessed the beginning of a roundup of actions aimed at adopting and implementing policies to modernize the Iranian pharmaceutical sector, which influenced this industry all the way up to 1994. These programs, entitled Generic Scheme, sometimes also called the Generic Concept, formed the foundation of the new pharmaceutical system in the country. In recent years, national pharmaceutical system was directed to the brand-generic and brand systems and, as a result, there is some competition in the industry. This provides good opportunities for future development of domestic pharmaceutical industry. The fact is that the domestic industry has not yet adequately developed to its full capacity and there are much potential capabilities for further growth and development. Domestic pharmaceutical industry is experiencing a substantial double digit growth in the recent years. Furthermore, in house production of hi-tech biological products is an emerging know- how in Iran’s pharmaceutical sector. In recent years some private firms have focused to produce biological pharmaceuticals, using novel biotechnology methods (14). The annual growth of Iranian pharma market value (2001-2009) is shown in Figure 1. The share of domestic pharmaceutical sale to total pharmaceutical sale in the year 2009 was around 60 percent (15).

 

Figure 1. Iranian pharmaceutical market (16).

 

   The entire R & D process is a highly regulated sequential procedure, starting with the so called research stage that covers the biological validation of the drug targeted and the subsequent chemical optimization of the potential drug candidate. Moving forward to early development, preclinical phase mainly comprises animal testing. Before entering the clinical phases an investigational new drug application must be submitted to the regulatory authorities. Following the previous stage, the compound is administered to healthy volunteers in clinical phase I to gather information about safety and dosage. In clinical phase II, application to a small number of patients is done to obtain proof of the concept. The next step of late development is characterized by clinical phase III studies that include a larger number of patients to ensure statistical significance. After successful completion, a new drug application is submitted to the regulatory authorities to be eventually admitted for market launch of the product candidate (17).

   If a pharmaceutical company wants to reach market success with a new product, it needs to invest seriously on marketing and sales practices. Therefore, not surprisingly, we may reach to this result that basic research and development (R & D), together with marketing and sales practices are two of the most important practical and even more strategic priorities of the world pharmaceutical industry. Approximately, world pharmaceutical companies invest 16% of their sales on R & D and even more, about 26% or more on marketing and sales practices. However, these proportions, especially the one of R & D investment, are even higher with the proficient, like biotechnology and pharmacogenomic companies, and much lower with the typical pharmaceutical companies. As stated, the world pharmaceutical industry structurally is not unique and pharmaceutical companies are varies according to their infrastructural mission, efficiency and strategic development. The world pharmaceutical companies could be categorized into three different classes (2); pharmaceutical companies which first and foremost are work on infrastructural research, development and marketing and sales of new brand, innovative, original pharmaceutical products (called originators); pharmaceutical companies which first and foremost are work on development and sales of generic products (called generic producers); and pharmaceutical companies which first and foremost are work on infrastructural research and development of biopharmaceutical and pharmacogenomic products and technologies of new delivery systems (called proficiencies).  

   As we are going to develop new product, changing the features of the world pharmaceutical industry environment is important issue which should be considered primarily including: increased globalization, changing structure of competition and increased competitiveness, lack of new products, increased investments on R & D practices, fast integration and focus of the world pharmaceutical industry, increased importance of strategic management, development of new remedy fields and technologies (biotechnology, pharmacogenomics), ageing of world population and introducing of new, not yet desirably covered remedy fields, and finally, fast development of the globe generic markets (18).

 

Key factors in R & D practices

   According to extensive literature review, some of critical factors which have substantial effect on outcome of R & D activities and potentiality affect performance of R & D activities were obtained, they are discussed as follows:

Management commitment

   World teacher of management, Peter Drucker, who has particularly emphasized the core importance of strategic marketing management for a successful and long-term highly competitive business efficiency of companies, has once said something about globalization and globalization management: “In the upcoming years, there will be two kinds of top managers: those who would be able to think globally with strong strategic marketing management engagement and those jobless”. Strategic marketing management with an emphasized global method of thinking, performance and management thus enables companies to put customers into the center of all their business practices and integrally concentrated all business practices to a common and final target – to be successful in satisfying customers’ needs and to be better than the competitors (2). However, changes provide new challenges as well as develop new business opportunities. Thus, it is important to react and act quickly and to be proactive.

   Success from innovation in the pharmaceutical industry is affected by a number of externalities containing universities, the government, financial institutes, local worker markets and industrial connection co-operators (19). These factors provide particular knowledge at multiple points in the value chain. Universities provide access to outstanding scientists, an easily available source of scientific labor and intellectual property (20). Industrial co-operators support investigating and utilization practices such as R & D, product development, FDA confirmation and sales through strategic connections (21, 22). The reasons offered for inter-company strategic connections in the pharmaceutical industry are as follows: access capitals for R & D, the decrease of risk in R & D, quality control in R & D, product development and producing for large scale researches, improvement of trustworthiness and reputation, marketing and distribution and acquiring the attention of third party investors (e.g. risk capital) (19). The key components in this business are knowledge, money and organizational support. The government, industry, and academic environments are joining together to improve the regulatory structure, industrial capacity and man powers that will be required. That supporting environment has been developed and backed by a science-based regulatory framework and fast growing industrial capacity and man powers (23).

   It is thus clear that some pharmaceutical companies are not able to satisfy long-term and ever-changing market needs and customers' expectations, to invest heavily into R & D and marketing and sales activities in the endeavor to bring new products to the markets properly. It can clearly be seen that this process enables the pharmaceutical companies for new development circles and their long-term development and growth. Strategic activities like alliances for maintaining long-term growth and competitiveness is today one of the most usable strategies in the world pharmaceutical industry. It can be argued  that pharmaceutical companies make alliances in endeavors to create common synergies and to better exploit their common assets, knowledge, product life cycle and, moreover, to improve their strategic market positions. Thus, the most important and strategic activities of creating common strategies for the pharmaceutical companies are: (i) products, to gain market shares and to drive the sales growth; (ii) research and development (R & D), to create new products; (iii) markets, to create geographic and market expansion; (iv) marketing and sales activities, to compete on the global markets and finally (v) financials, to create common cost reduction synergies and investment capabilities (2).

Human resource management

   The competitive position of leading pharmaceutical companies is strongly dependent on the ability of R & D scientists to develop new medicines. Certainly, within the industry there are very close connections between business success and scientific success. Therefore, scientific employees have been central to the achievements of the main pharmaceutical companies over the recent 10-15 years (24). There has also been a general move to give scientists a keener awareness of the commercial realities of R & D, although the efficiency of these initiatives is questionable. Accordingly, the human resource specialists understand  the  importance of employing R & D personnel with a strong  engagement to science (24).

   In the pharmaceutical industry, star scientists provide crucial connectivity to universities and other sources of upstream knowledge (25). Star scientists are important border spanners, because a difference in coding systems exists, specifically between large public institutes and academic institutions and other high-technology beginners. This mismatch develops the possibility of communication problems (26). It can be moderated, however, by the use of persons ‘who are capable of translating between two coding systems either by personal contact or knowledge of the literature, and who can act as bridges linking the organization to other organizations and workers in the field’ (26). The variations in coding systems between different knowledge communities is of concern because without border spanners that acted as translators, the institute would potentially be unable to incorporate tacit information into codified knowledge that can lead to future innovation (27).

    In addition, in high-speed knowledge environments, border spanners are not only able to keep the pulse of shifts in technology, but in many cases may actually hold main knowledge themselves (27). Considering the important role of manpower in this environment, accordingly, the relationship between industry and academic center considerably should be considered especially by governmental policy.

Information technology (IT) management

   Koenig’s research discovered that the more successful pharmaceutical companies showed greater openness to information, were less involved in protecting proprietary information, had a greater development of information systems, promoted use of information (including searching and serendipity) and taken benefit from greater technical and subject experience in their information (28). The pharmaceutical industry is a knowledge-based industry which shares many of its features with classical technology-focused industries, e.g. R & D severity and focus and the use of new scientific concepts (29, 30), but there are also some unique specifications such as the highly-regulated environment, the long development cycle and a high level of risk and cost during the research process (31). The R&D site is dependent upon applied research within many systems: medicine, organic chemistry, biochemistry, and pharmacology and medicine delivery. Work on a new medicine is often performed at a number of laboratories located in different countries (32). They are many systems need to work together in an efficient way in order to develop and share the knowledge leading to a new medicine (33).

Financial resource management

   Research and development for medicines is a time and cost-consuming and costly process. Although there is no general agreement about how to compute the cost for research and development in the pharmaceutical market and on the actual size of the cost, there is a general agreement that the mean R & D cost is accompanied with introducing a new prescription medicine is in the scope of hundreds of millions of dollars (6, 34). The high cost is assignable in part to the explicit criteria for medicine confirmation set by government agencies (35, 36). In most countries governments bound producers to display both safety and efficacy before a medicine can be approved for sale. Consequently, medical researches for effeicacy and quality control have become the most costly process in the development of a new medicine (3).

   Such researches and development for new medicine is a time-consuming and costly process and is globally accepted. Pharmaceutical institutes typically allocate a comparatively considerable share of their resources on R & D in comparison to do their counterparts in most other industries or relative to spending by the public sector. As instance, R & D spending as a percentage of GDP ranged from 2% to 3% in major developed countries such as United States, Japan, Germany and France during 1988–2002. By contrast, pharmaceutical producers of monopolized medicines consistently spent over 10% of their sales income on R & D during the recent two decades (3). Accordingly, as shown in figure 2 the scope of R & D expenditures and new medicine approval rate in this industry weren’t in same way (see Figure 2).

 

Figure 2. New drug approvals and R & D spending (37).

 

    If producers sell medicines at the incremental cost of production and distribution, they would have no way to pay back the cost of R & D