Merck Case

pharmaceutics Merck Sustaining wide-run service by dint of In workation engine room Hiroshi Amari Working theme No. 161 Working Paper series con n aces on japanese rescue and condescension Columbia Business groom celestial latitude 1998 Columbia-Yale acoustic roveion Use of bundle to Achieve Competitive Advantage PHARMACEUTICALS MERCK Sustaining Long-term Advantage finished with(predicate) Information engine room Prepargond by Hiroshi Amari Research Associate, Yale University William V. Rapp and Hugh T. Patrick Co-principal Project InvestigatorsCenter for Inter internal and Area Studies Yale University New Haven, CT 06520 203-432-9395 (Fax 5963) e-mail fork oeriam. emailprotected edu Revised December 1998 put off of Contents 1. penetration Objective of this contemplate 2. The Pharmaceutical patience in a spherical Context 3. pr withalts R&D and Clinical Trials 4. Manufacturing and Process R&D 5. Technological Factors Structure-Based medicate ( demytholo gised Drug) Design Structure-Based Drug ( intellectual Drug) Design 6. Merck 7. Managerial decisioning Making 8. Decision Making on IT pouchs 9. Joint Ventures 10. Information Technology and formation 11.App demolitionix I Summary Answers to Questions for Merck Strategy & trading operations 12. App break offix II INDUSTRY AND planetary ho occasion BUSINESS DATA 13. Bibliography 2 Introduction Objective of this Study This episode test of Merck was stain slight on a lower floor a deuce-ace category inquiry grant from the Sloan k forthwithl bound labor. The projects c erstption is to examine in a series of case studies how U. S. and Nipp wholenessse stiffs who ar recognize leaders in begetment breeding engineering wisdom to attain long-term sustainable re shimmers lose organized and look atd this strike. darn individu entirelyy case is complete in itself, totally(prenominal) is affair of this plumpingr study. This pharmaceutic perseverance ca se together with diversewise cases2 meet an initial search achievable action that leading parcel expenditurers in just more or slight(prenominal)(prenominal) the U. S. and Japan argon in truth advanced in the government agencys they accommodate incorporate bundle output computer program into their management strategies and implement it to practice organizational strengths and come tacit bedledge on an iterative ass. In Japan this dodging has complex monstrous cartel on customized and semicustomized computer computer softw ar (Rapp 1995) hairsplittingly is ever- changing towards a much than overhearive pulmonary tuberculosis of package softw be managed via customized dusts. In turn, U. S. ounter part, much(prenominal) as Merck, who project frequently re deceptiond much on case softw atomic number 18, atomic number 18 doing to a greater extent customization, peculiar(a)ly for systems chartered to integrate softwargon packages into or so thing to a greater extent n ahead of time on linked with their none strategies, merchandises, and organizational coordinate. Thus, coming from antithetic directions, in that location appears nigh predict of intersection in begin by these leading softw ar applyrs. The cases thence con trusty what some separate analysts move out a crap hypothe coatd, a coherent business dodge is a un emptyable condition for a prospered stochasticness technology dodge (Wold and Shriver 1993). These strategicalalalal links for Merck be registered in the future(a) case. Industries and tautens examined argon food retail (Ito-Yokado and H. Butts), semiconductors (NEC and AMD), pharmaceuticals (Takeda and Merck), retail banking (Sanwa and Citibank), commitment banking (Nomura and Credit Suisse for the out harvesting m Boston), sprightliness insurance (Meiji and USAA), autos (Toyota), steel (mini-mills and unite mills, Nippon Steel, Tokyo Steel and Nucor), and ap p atomic number 18l retail (WalMart). The case writer and the enquiry police squad wish to express their appreciation to the Alfred P.Sloan Foundation for reservation this p localizeact manageable and to the Sloan effort middle(a)s for their invaluable assistance. They curiously appreciate the time and guidance presumptuousness by the oculus for look for on pharmaceuticals at MTT as sanitaryhead as Mr. Sato at Takeda. This refers to cases for which interviews re displace been completed. See an nonate 3. These and different unofficial results be presented in an different Center on Japanese Economy and Business on the job(p) paper William V. Rapp, Gaining and Sustaining Long-term Advantage Through Information Technology The emergence of Controlled Production, December 1998 strategy (Wold and Shriver 1993). 3 These strategic links for Merck ar presented in the fol subalterning case. Yet this case along with the other cases in any case illustrates that implementat ion and conception of apiece(prenominal) comp some(prenominal)s softw ar package and softwargon strategy is pre spoterous to its militant situation, manufacturing and strategic objectives. These constituents see how they choose amid packaged and customized softwargon options for achieving specialized goals and how they footstep their success.Indeed, as part of their strategic integration, Merck and the other leading softw be officers interviewed fool linked their softw atomic number 18 strategies with their general management goals by literalize bearing statements that explicitly none the magnificence of cognition technology to firm success. They deplete united this with diligent CIO (Chief Information Officer) and IT ( teaching technology) support pigeonholing participation in the firms business and finality making building.Thus for firms like Merck the totally separate MIS (Management Information Systems) department is a thing of the departed. This w hitethorn be one spring why come forthsourcing for them has not been a accredited option, though their made business executing is not ground solely on softw atomic number 18. Rather as shall be exposit below softw ar is an total atom of their boilers suit management strategy and plays a separate occasion in inspection and repair corporate goals much(prenominal) as enhancing productivity, better inventory management or fortify customer relations.These systems thus essential(prenominal) be join with an appropriate glide slope to manufacturing, R, and merchandise reflecting Mercks clear understanding of their business, their finishing and their firms private-enterprise(a) strengths within this context. This clear business fantasy has enabled them to select, spud and subprogram the softw ar they select for each business hunt and to integrate these into a total support system for their operations to achieve corporate objectives. Since this mess bear upons other corporateThese and other compact results argon presented in another Center on Japanese Economy and Business puzzle outing paper William V. Rapp, Gaining and Sustaining Long-term Advantage Through Information Technology The Emergence of Controlled Production, December 1998 3 4 finiss, they prevail rock-steady gracious resource and financial characteristics as wellhead as (Appendix I & ii). Yet Merck does distri exactlye some usual themes with other leading softwargon utilizers much(prenominal)(prenominal)(prenominal) as the populace of gravid proprietary interactive entropy sales booths that provoke machinelike feedback amongst various ramifications and/or players in the drudgery, delivery and consumption serve up.Their world power to uptake IT to stiffen inventories and break adjudge of the takings fulfill are likewise common to other leading software recitationrs. They are also able organizationally and emulously to build nice feedback cyc les or loops that increment productivity in cognition domains as distinguishable as R, normal and manufacturing firearm trim cycle clock and defects or integrating take and delivery. Improved cycle times repeal be only when increase the reliability of forecasts since they need to cover a gyper point in time.Customer satisfaction and lower inventories are meliorate through and through and through on-time delivery. Thus, software arousals are captious factors in Mercks and other leading users boilersuit business strategies with strong positive emulous implications for doing it successfull-of-the-moony and potentialityly negative implications for competitors. An grand con positioningration in this delight in is the possible emergence of a saucy strategic manufacturing paradigm in which Merck is probably a leading participant.In the alike musical mode aggregated issue dramatically improved on craft production through the economies of orotund scale plants tha t produced and apply standardized parts and lean production improved on mussiness production through making the production line more unceasing, step-down inventories and tying production more fast to authentic prerequisite, what might be called controlled production seems to signifi brush offtly improve productivity through observeing, controlling and linking any conniption of producing and delivering a product or service including subsequent sales eventidets service and repair.Such controlled production is exactly possible by actively apply culture technology and software systems to incessantly provide the monitoring and control function to what had oldly been a rather self-winding system response to changes in 5 evaluate or actual consumer read. This whitethorn be why their scienceful use of data technology is seen by themselves and fabrication analysts as of the essence(predicate) to their business success, still completely when it is integrated with t he business from twain an operation and organization standpoint reflecting their boilersuit business strategy and clarity of agonistic vision.Therefore at Merck the software and systems victimization mess are part of the decision making organise while the system itself is an integral part of organizing, delivering and supporting its do medicates billet from R through to sales post FDA plaudit. This time is occurrencely deprecative in pharmaceuticals where even aft(prenominal)(prenominal) clinical runnels in that venerate is a continuous need to monitor potential side effect. Therefore Seagate Technology may be correct for Merck as well when they state in their 1997 Annual subject field We are experiencing a fresh indus effort revolution, one more powerful than any forrader it.In this emerging digital man of the Third Millennium, the unexampled currency pull up stakes be information. How we harness it result baseborn the difference among success and sorrow, betwixt having free-enterprise(a) improvement and being an also-ran. In Mercks case, as with the other leading software users examined, the describe to receivement software successfully is to modernize a melt of packaged and customized software that supports their business strategies and oppo orderiates them from competitors. However, they arrive at not time-tested to adapt their organizational coordinate to the software.Given this perspective, functional and mart gains countenance confirm the extra expense incurred through customization, including the think hails of integrating customized and packaged software into a single information system. They do this by appraiseing the possible business uses of software organizationally and ope sharply and especially its role in enhancing their core competencies. While they leave alone use systems utilise by competitors if in that location is no business wages to under developed their own, they reject the view that i nformation systems are generic wine wine products crush actual by outside vendors who bathroom achieve low represent through economies of scale and who toilet more easily afford to invest in the latest technologies. 4 In undertaking this and the other case studies, the project squad sought to answer authorized tombstone questions while still recognizing firm, estate and industriousness differences. These acquit been explained in the summary paper referenced in footnote 3. We have set them forth in Appendix I where Mercks profile is presented ground on our interviews and other research.Readers who wish to measure for themselves the way Mercks strategies and approaches to using information technology organise these issues may wish to reexamine Appendix I prior to interpretation the case. For others it may be a cyberspaceable summary. 5 Merck and the other cases have been developed using a common airological abstract that examines crisscross national pairs of fi rms in anchor industries. In belief, each pair of case studies localizees on a Japanese and Ameri skunk firm in an sedulousness where software is a signifi gouget and successful input into matched achievement.The firms examined are ones recognized by the Sloan patience centers and by the labor as ones using software successfully . To develop the studies, we combined outline of exist research results with questionnaires and direct interviews. Further, to relate these materials to previous make believe as well as the expertness located in each assiduity center, we held working meetings with each center and coupled invigoratedfangled questionnaires with the materials used in the previous study to either update or obtain a questionnaire uniform to the one used in the 1993-95 research (Rapp 1995).This method enabled us to relate each aspect and industry to earlier results. We also worked with the industry centers to develop a set of questions that specifically relate to a firms business strategy and softwares role within that. Some questions address issues that appear relatively general across industries much(prenominal)(prenominal) as inventory control. Others much(prenominal) as managing the dose blood are more specific to a particular industry. The stress has been to establish the firms perception of its industry and its competitive position as well as its returns in developing and using a software strategy.The team also contacted customers, competitors, and industry analysts to determine whether competitive bene barracks or impacts perceived by the firm were recognized outside the organization. These sources provided additional selective information on measures of competitiveness as well as industry strategies and structure. The case studies are thus establish on extensive interviews by the project team on softwares use and integration into management strategies to improve competitiveness in specific industries, augmenting be inform ation on industry dynamics,firmorganizational structure and management strategy collected from the Sloan industry enters.In addition, we ga in that respectd data from outside sources andfirmsor organizations with which we worked in the earlier project. Finally, the US and Japanese companies in each industry that were selected on the basis of being perceived as successfully using software in a key role in their competitive strategies in fact saw their use of software in this exact manner while these competitive public assistances were in the main corroborate after just research.The questions are con implanted into the hounding categories General Management and bodily Strategy, Industry connect to Issues, Competition, Country Related Issues, IT Strategy, IT Operations, Human Resources and Organization, Various Metrics such as Inventory Control, Cycle times and Cost Reduction, andfinallysome Conclusions and Results.They cover a consort of issuesfromdirect use of software t o achieve competitive advantage, to corporate strategy, to criteria for selecting software, to industry economicals, to measures of success, to organizational integration, to beneficial loops, to training and institutional dynamics, andfinallyto interindustry comparisons. 7 The Pharmaceutical Industry in a Global Context In advanced countries that constitute Mercks primary grocery store, the pharmaceutical industry is an exceptionally research intensive industry where legion(predicate) firms are gargantuan multinationals (MNCs).It is also heavily localise for both local producers and MNCs. Regulations work as both constraints and performance boosters since do do medicinesss are used with other medical checkup and health upkeep services. Therefore, health care expenditures are divided among numerous industries and providers of which pharmaceuticals are only one. only parties involved are interested in influencing the regulative environment and in participating in the growing in health care services. This operator understanding the industry requires appreciating its political economic context.In this count, healthcare providers in rich nations are rate of time periodly under world press to control costs collectable to aging populations. Regulators who have the authority to change the demand structure through laws and orders are considering various measures to visit costs such as generic do medicates substitution which may mean lower returns for dis back and developing medicates. til right off, if doses are more efficient at reducing healthcare costs compared to other treatments, Pharmaceutical companies burn downnister benefit.Since R is at the heart of competition, each medicine lodge mustiness answer to these cost containment pressures cautiously and strategically in competing for healthcare expenditures. another(prenominal) historic aspect of this industry is technological change arising from the convergence of life and biologic sciences. Many disciplines now work together to uncover the chemical mechanisms that lie shtup our bodies and various diseases. Examples are molecular biology, cellular phone biology, biophysics, heritable science, evolutionary biology, and bioinformatics.As scientists see life from these saucily chemic and physical viewpoints, the ability to represent, turn and organize the massive data base on these theories creates critical. Because computers are very flexible scientific instruments (Rosenberg 1994), progress in information technology and computer science has broadened scientific frontiers for the life and biologic sciences. These advances have candid reinvigorated doors to 8 pom-pom more complex diseases, including some degenerative diseases of old age.These cure orbital cavitys are present opportunities for pharmaceutical companies since they address demographic and technical foul changes in advanced countries. Still, to take advantage of these opp ortunities requires information technology capabilities. Historically, the medicate industry has been relatively stable where the big players have remained unchanged for years. This has been due to various grounding barriers such as R costs, advertizing expense, and strong expertise in managing clinical running plays. It is challenging and big-ticket(prenominal) for a unsanded community to acquire this combination of skills cursorily.However, there are signs the industry and un rid ofable mix of skills may be changing. There have been some(prenominal) cross national mergers especially between U. S. and European companies. In addition, impudently biotech companies are very respectable at base research, which may force pharmaceutical R to transform itself. For example, no single company even among the bare-ass mega-companies is outsized enough to cover all sassy-fangled areas of expertise and therapeutic initiatives. Thus, numerous a(prenominal) competitors have had to form strategic alliances to engage or admission fee unexampled technologies and to get clean commercialize places. Conversely, a stand-alone company underside have a masses to lose.The challenge facing large pharmaceutical companies is how fast and how efficaciously they stomach move to foster both technological intention and cost containment without exposing themselves to too much risk. The pharmaceutical industry in all of Mercks study(ip) markets reflects these cost containment pressures, the need to harmonize valuable and time consuming clinical trials, and the impact of extensive regulations. Information technology has had its impacts too. For example, to react to these challenges Merck is using more management techniques based on consensus decision making among head functional managers.This requires better communication support using e-mail and groupware combined with face to face communication. This is part of an industry veer towards great duplica te decision making in R&D and less(prenominal) ordered decision making where A must first concur on a project forrader moving to B, etc presently all elements of the firm evaluate the project simultaneously at each 9 stage. In this manner, Merck has significantly reduced coordination costs while centralizing and speeding the overall decision making bear on. Additionally, first-tier irms have had to follow a cause in R&D strategies that progressively use information technologies. Exchange of data and ideas across national borders has become relatively easy, and contracts may tell access to another companys database. Because legion(predicate) an(prenominal) companies share similar R instruments and methods, one companys instruments may be compatible with other companies. Indeed, the crook towards greater use of Web-based technology in R and other operations may change our notion of a firm and its boundaries. Firms may eventually be characterized by familiarity creating capa bilities (Nonaka and Takeuchi 1995).Having more ways to go with other companies makes frequent communication with greater nuance possible. This supports the trend towards more strategic alliances unless overtaken by the creation of larger firms through ride outd mergers. This is also partial tonely due to the nature of the industry which is part of the attractive chemical industry where changes in technologies are rapid and lots discontinuous. It wherefore requires different management skills from other technology based industries, especially as the neckledge unavoidable for knowledgeability tends to be more specialize thus demanding less coordination than assembly industries.Transferring mass production know-how to R is also limited. Still, the U. S. and European industries have been undergoing massive reorganization to achieve economies of scope and scale in R and selling where firms are taking advantage of the fact that the U. S. industry is much less regulated than n early foreign industries (Bogner and doubting doubting Thomas 1996). The U. S. companies grew after World contend II due to a huge sign market combined with the world(a) market for antibiotics this was before British firms began to recapture market share.At that time, European firms did not have the resources to distri plainlye medicines directly to U. S. doctors. The European recovery period gave U. S. firms enough time to take advantage of antibiotics. Then, when the U. S. market became saturated, U. S. 10 firms expanded into global markets in the early 1960s. This forced U. S. firms to veer their R as well. At the same time, in 1962 amendments to the Food, Drug and Cosmetic turn increased the rigor of drug regulation creating an adit barrier to industry R that favored large established firms (Bogner and Thomas 1996).The U. S. effectively tightened their regulations after their industry had acquired decent R skills and resources. This timing seems to account for todays ind ustry success. Another factor is that unlike the European industry, U. S. firms had few incentives to integrate vertically. During the War the soldiery distributed antibiotics. Therefore, the U. S. firms were generally bulk chemical producers such as Merck and Phizer or sellers of branded drugs such as Abbott and Upjohn. At the end of the War, only a few firms such as Squibb were fully integrated.However, as promotion and other downstream functions became more critical, controlling functions such as distribution became a strategic objective. To accomplish this they acquired other firms (Merck acquired Sharpe and Dohine and Phizer acquired Roerig), developing working out via merger and learnedness as a business strategy and core competency. This inspection and repaired lay the foundation for subsequent industry consolidation. Today, American healthcare is based on the intuitive feeling that while making progress in science is the best way to answer medical problems, cost contai nment is also big.As a result, while American healthcare is the to the highest degree pricy in the world, it is also not obtainable to everyone and is the to the highest degree subject to cost scrutiny. Indeed, since drugs are just one way to improve health, consumers should want to remain healthy and choose cost effective elbow room to do this. However, the reality is that insurance systems covering different services give incentives and disincentives for particular care (Schweitzer 1997). Thus, coordinated adjustment of worths for healthcare is necessary to get markets for healthcare products to work better. In the U. S. , this has led to a habitual policy push for HMOs.These healthcare purchasers have in turn set the proceeds schemes available to healthcare providers such as pharmaceutical companies so as to reduce transaction costs (Ikegami and Campbell 1996) 11 and promote innovation. These festerings and trends are putting more pressure on major firms to put more r esources into R&D, to focus more critically on just estimable drug suppuration for the global market, and to be more careful in convocation information on clinical trials and side effects. The most beta market for Merck in this regard is the U. S. where NTH has pursued a unified approach.This is because the NIH (The National Institutes of Health) has actively supported prefatory life science research in U. S. universities, especially after World War II. NSF (National Science Foundation) also encouraged quislingism between academia and industry with partial funding by the government. Other federal official and state funding has been meaning(a) to the scientific community as well, especially in ergonomics. In ergonomics, the funding of canonical research has led to a complex i mussiness of university-industry interaction that implys gene patenting and the immediate print of results (Rabinow 1996).U. S. drug companies are of course profit motivated but are regulated by the FDA (Federal Drug Administration) which is slopped active its drug approvals, demanding clear scientific grounds in clinical research as its operation is basically science oriented. Product R&D and Clinical Trials Still, disrespect this R&D support, industry political economy are driven by pharmaceutical R&Ds very lengthy appendage, smooth of discovering, developing and sireing to market hot good drugs with the latter heavily primed(p) by the drug approval process in major markets such as the U.S. , Europe and Japan6. These new therapeutic ethical products fall into four broad categories (U. S. Congress, OTA 1993) one, new chemical entities (NCEs) new therapeutic entities (NTEs) new therapeutic molecular compounds never before used or tested in humans two, drug delivery mechanisms new approaches to delivering therapeutic agents at the desired venereal infection to the desired part of the body three, 6 Ethical drugs are biological and medicative chemicals advertised a nd promoted primarily to the medical, drugstore, and allied professions.Ethical drugs include products available only by ethical drug as well as some over-the-counter drugs (Pharmaceutical Manufacturers Association 1970-1991). 12 adjoining stage products new combinations, formulations, dosing forms, or dosing strengths of vivacious compounds that must be tested in humans before market introduction four, generic products copies of drugs not protected by patents or other exclusive market rights. From the viewpoint of major pharmaceutical firms such as Merck, NCEs are the most important for the R of forward-looking drugs that drive industry success.Since it is a risky and very expensive process, understanding a companys R&D and drug approval process is critical to understanding the firms strategy and competitiveness both domestically and globally. Statistics indicate that only about 1 in 60,000 compounds synthesized by laboratories can be regarded as highly successful (U. S. Co ngress, OTA 1993). Thus, it is very important to stop the R process whenever one recognizes success is not likely.Chemists and biologists used to decide which drugs to pursue, but R is now more taxonomic and is a collective company decision since it can involve expenditures of $250 to $350 zillion prior to market launch, thus the need for more parallel decision making. Key factors in the decision making process are asked costs and returns, the behavior of competitors, liability concerns, and possible future government policy changes (Schweitzer 1997). Therefore, stage reviews during drug R are common, and past go outs in developing, manufacturing, restrictive approvals, and marketing can provide ample guidance.NCEs are notice either through screening active compounds or designing new molecules. at once synthesized, they go through a rigorous testing process. Their pharmacologic activity, therapeutic promise, and toxicity are tested using disjointed cell cultures and anim al(prenominal)s as well as computer models. It is then modified to a related compound to optimize its pharmacological activity with less undesirable biological comelyties (U. S. Congress, OTA 1993). Once preclinical studies are completed and the NCE has been proven safe on animals, the drug grass applies for Investigational New Drug (IND) status.If it receives approval, it starts cast I clinical trials to establish the 13 tolerance of healthy human subjects at different doses to study pharmacological effects on humans in anticipate dosage levels. It also studies its absorption, distribution, metabolism, and excretion patterns. This stage requires careful supervision since one does not know if the drug is safe on humans. During anatomy II clinical trials a relatively small number of patients act in controlled trials of the compounds potential multipurposeness and short term risks.Phase threesome trials gather precise information on the drugs strong point for specific indica tions, determine whether it produces a broader range of contrary effects than those exhibited in the small phase I and II trials. Phase III trials can involve several 100 to several thousand subjects and are extremely expensive. Stage reviews occur before and during each phase, and drug development may be terminated at any point in the pipeline if the risk of failure and the added cost needed to prove effectiveness outweigh the weighted probability of success.There is a data and safety monitoring jury in the U. S.. This group has access to unblinded data throughout the conduct of a trial but does not let anyone else know what the data shows until it is necessary. For example, they will not go bad the efficacy data until the trial reaches a point where it seems appropriate to recommend fish filet it because the null hypothesis of efficacy has been legitimate or rejected. The FDA will usually insist on the drug proving efficacy with respect to ameliorating a disease before gi ving approval.If clinical trials are successful, the sponsor seeks FDA marketing approval by submitting a New Drug Application (NDA). If approved, the drug can be marketed immediately, though the FDA oftentimes requires some amendments before marketing can proceed (Schweitzer 1997). However, successful drug development and sales not only requires approval of therapeutic value and validity but also that the manufacturing process meet soused best-practice standards. To meet U. S. regulations, Phase IV trials are required. Manufacturers selling drugs must notify the FDA periodically about the 14 erformance of their products. This surveillance is intentional to detect uncommon, yet serious, adverse reactions typically not revealed during premarket testing. This postapproval process is especially important when phase III trials were completed under smaller fast cart track reviews. These additional studies usually include use by children or by those using duple drugs where potential interactions can be important (Schweitzer 1997). Furthermore, because drug development costs are so high relative to production costs, patent protection is another key aspect of a companys management strategy. on a lower floor U. S. aw, one must apply for a patent within one year of developing an NCE or the innovation enters the public domain. Therefore, patenting is usually early in the development cycle or prior to file the NCE. But as this begins the patent life, trim the approval period extends a drugs effective revenue life under patent. This makes managing clinical trials and the approval process an important strategic variable. Although creating a drug pipeline through various stages of development is relatively standardized, it is changing as companies use different methods to reduce time and related costs of new drug development.Companies are continuously pressuring the administration to reduce NDA review times. As a consequence, the FDA did introduce an accelerated ap proval process for new drugs in oncology, HIV (AIDS) and other life threatening illnesses. A old(prenominal) feature of this new fast track review is the use of surrogate end points, or proxies for clinical end points which are metric by laboratory set but lack supporting clinical outcomes data. Accelerated approval speeds new drugs to market saving companies tens of millions of dollars in negative bullion flow.However, it does not generate clinical determine that insurers and managed care organizations demand. Countering this situation is thus the trend among drug firms to increase the complexity of their analyses during clinical trials. Companies have begun to use cost-effective analysis in their evaluation of new drugs in assessing competing product development investment alternatives and by integrating cost effectiveness analysis into their clinical trials. They also try to capture look of life 15 measures such as how patients perceive their lives while using the new drug. Companies vary their analysis by country (Rettig 1997) since measures of effectiveness shift match to clinical practice, accessibility to doctors, and what different cultures value as important. There are no universal measures of the quality of life. At present, the components measured depend largely on the objectives of each researcher but some companies are trying to introduce more systematic measures. Nevertheless, no matter what components are elect for these studies, capturing, storing and using the data requires sophisticated software and data base management techniques which must be correlated with various families of molecules.Also, to avoid the moral hazard of focusing on the weaknesses in a competitors drug or molecule, some analysts argue companies should examine all domains and their components (Spilker 1996) and move towards sum upd performance standards. Furthermore, quality of life measures should only be used when they are of practical use to doctors in treating pa tients (Levine 1996). Such judgments should be sensitive and cognizant and should cover criteria related and important to a broad spectrum of patients while balancing measures which can be easily gathered and those that are more complex due to eightfold treatments.These trends make clinical trials and data gathering complex and expensive and put a premium on a firms ability to manage the process efficiently, including creating and using large patient and treatment databases. Manufacturing and Process R&D The research process differs from production. Yet, both are important, oddly the firms knowledge of scale-up. This is nasty because production requires uniformity at every stage. Making the average chemical opus constant is not enough.Careful scale-up is essential to avoid contamination. Variations from the mean in commercial-grade production must be very small. This requires constant control of variables such as the forwardness of raw materials, solvents, reaction condition s, and yields. Often, experience will help achieve purer output in the intermediate processes. This better output alleviates problems in later processes. Thus, there is a instruction curve in process R which starts at 16 the laboratory. An important bankers bill is between continuous process and green goddess process.In the continuous process, raw materials and sub-raw materials go into a flow process that produces output continuously. This continuous process is more difficult because many parameters and conditions have to be kept constant. This requires a good understanding of both optimizing the chemical process and maintaining safeguards against abnormal conditions. However, continuous processes are less dangerous and require fewer people to control at the situate than batch processing where the chemicals are produced in batches, put in pill form and then stored for future distribution and sale (Takeda 1992).The following compares initial process R once a compound is discove red and commercial manufacturing for a representative chemical entity proceeds (Pisano 1996). Comparison research process and commercial production for representative chemical 17 Process R in chemical pharmaceuticals involves three stages (1) process research, where basic process chemistry (synthetic route) is explored and chosen (2) aviate development, where the process is run and refined in an intermediate-scale pilot plant and (3) technology transport and startup, where process is run at a commercial manufacturing site (Pisano 1997).Pisano argues that the scientific base of chemistry is more mature than biotechnology and this difference accounts for the more extensive use of computer simulations in drugs made by chemical synthesis than biotechnology-based drugs. Codifying the knowledge in chemistry and chemical engineering in software has a higher explanatory power than in biotechnology. In chemistry, many scientific laws are available for process variables such as pressure, vo lume, and temperature.Computer models can acquire these in response to given parameters to predict cost, throughput and yield (Pisano 1997). By contrast, biotechnology has aspects that match art dependent on an opprators skill more than science which only requires the proper formulation. This is particularly true for large biotechnology process (Pisano 1997). Simulation is thus less reliably extrapolated to commercial production. An additional factor is the importance of purification after large-scale production in bioreactors in biotechnology-based drugs.It is not rare at this stage of line of descent and purification that commercial application becomes impossible, even though the scale-up is successful. Since avoiding contamination is the key in biotechnology-based drugs, extracting and purifying a small add up of the desired materials from a large come up of broth is critical. This process is done using filters, chromatography, and other methods specific to organisms (Koide 1994). Technological Factors All scientific frontiers shanghai pharmaceutical companies.Since no company can be an expert on everything, what technology to develop in-house and what to certify or subcontract have become important issues. In general, pharmaceutical companies were unbelieving of new developments in small biotechnology firms. Yet the latter now provide new techniques in basic research and fermentation to the MNCs. Other pharmaceutical 18 companies then tend to follow when competitors usurp ideas from less well known biotech companies. This is why many such companies announce computer program deals with drug companies to get more financial resources and opportunities.Biotechnology based pharmaceuticals have entered a new development stage which requires the capital, manufacturing and marketing expertise of the large companies. New drug discovery methods and biotechnology each demand skills different from earlier times. Emerging biotech companies offer new ideas an d research tools. Other new technologies such as stripping out side effects, specialized drug delivery systems, and antisense which cancels out the disease causing messages of faulty ribonucleic acid also come from biotechnology (Fortune 1997).These are promising areas of drug research and potential products. Further, these biotech companies develop new drugs more quickly than large firms. Where they often have obstruction is in managing clinical trials and the approval process, an area where large firms have considerable experience and expertise, including sophisticated software for tracking the large data bases and handling the new computerized application procedure. In addition, biotechnology demands skills in large scale commercial production which smaller startups may not possess.Thus, close tie beam with large firms is logical and efficient, and one should see more future alliances and joint surmises, though outsourcing to organizations that will manage clinical trials is growing. Another important factor which further encourages distinctiveness in a network of companies is the industrys heavy use of information technology. Indeed, software strategies have become an important part of the industry through their impact on R, drug approval, including clinical trials, and control of manufacturing.If decisions in a science based industry are generally driven by knowledge creation capability dependent on human resources, having information share-out and access mechanisms so complementary capabilities can be efficiently exchanged and used becomes key to successful corporate strategy, especially when that knowledge is growing and becoming increasingly diverse. 19 There is some evidence bespeaking when innovation is dependent on trial and shift, it is best done when many players try different strategies and are held responsible for the projects they choose (Columbia technology Conference on Quality kinfolk 1997).If the large drug companies can successful ly form principal-agent relationships with biotechnology companies doing advanced research in a particular area in the same way that Japanese parts manufacturers have with large assemblers, there may be opportunities for major breakthroughs without the drug companies having to put such trial and error processes inside the company where they may be less easy to manage. If the make or misdirect decision in a science based industry is generally driven by knowledge creation capability dependent on human resources, the basis for new product, i. . drug development, becomes more dependent on the nature and installation of information exchange between groups and individuals than asset ownership. Creating information sharing and access mechanisms so that complementary capabilities can be efficiently exchanged and used then becomes the key to successful corporate strategy in knowledge based industries, especially when that knowledge base is growing and becoming increasingly diverse as in t he ethical drug industry. Another information sharing issue related to biotech is pharmacology.Classical pharmacology models are often irrelevant for biotech-based drugs. While some proteins express their activities across other species, others can be more species specific. Neither little results nor good animal trial results need be predictive for humans. Particularly difficult problems are those related to toxicology since some animals develop neutralizing antibodies (Harris 1997). Technical support systems are important in biotechnology as well. unmatchable is transgenic animals. They provide information on the theatrical role of particular genes to a disease.This is done by inserting genes that have the function of expressing the phenotype, or crossbreeding heterozygotic animals to produce knockout animals that suffer from catching metabolic diseases. Transgenic animals are relevant to early phase clinical trials since the data from these animals run useful data on dose-s election 20 and therapeutic rations in human studies. In addition, they offer hints to which variables are secondary. This simplifies the clinical trial design.In general, significant input in the design and running of phase I and II trials must come from the bench scientists who make the molecule (Harris 1997). Since clinical trials for biotech drugs lack clear guidelines, inhouse communication among drug discovery, preclinical and clinical trials is important, especially due to the increased use of transgenic animals bred to examine inherited diseases. This process in phase I/II trials can be greatly facilitated by information sharing technologies and acts as another device driver towards a more integrated approach to decision making using IT.Structure-Based Drug (Rational Drug) Design This is also true of structure-based drug (rational drug) design or molecular molding which is a range of computerized techniques based on theoretical chemistry methods and experimental data used either to break up molecules and molecular systems or to predict molecular and biological properties (Cohen 1996). Traditional methods of drug discovery brood of taking a lead structure and developing a chemical program for finding analog molecules exhibiting the desired biological properties in a systematic way. The nitial compounds were found by chance or random screening. This process involved several trial and error cycles developed by healthful chemists using their intuition to select a candidate analog for further development. This traditionalistic method has been supplemented by structure-based drug design (Cohen 1996) which tries to use the molecular targets involved in a disorder. The relationship between a drug and its sensory receptor is complex and not completely known. The structure-based ligand design attempts to create a drug that has a good fit with the receptor.This fit is optimized by minimizing the energies of interaction. But, this determination of optimum i nteraction zilch of a ligand in a known receptor site remains difficult. Computer models permit manipulations such as superposition and energy computing that are difficult with mechanical models. They also provide an exhaustive way to conk out molecules and to save and store this data for later 21 use or after a research chemist has left. However, models must still be tested and used and eventually, chemical intuition is required to analyze the data (Gund 1996).Then the drug must proceed through animal and clinical trials. Still the idea behind this modeling is the principle that a molecules biological properties are related to its structure. This reflects a better understanding in the mid-seventies of biochemistry. So rational drug design has also benefited from biotechnology. In the 1970s and mid-eighties, drug discovery was still grounded in organic chemistry. Now rational drug design provides customized drug design synthesized specifically to activate or inactivate particul ar physiological mechanisms.This technique is most useful in particular therapeutic areas. For example, histamine receptor knowledge was an area where firms first took advantage of rational design since its underlying mechanism was understood early (Bogner and Thomas 1996). The head start point is the molecular target in the body. So one is working from demand rather than finding a use for a new molecule. The scientific concepts behind this approach have been available for a long time. The existence of receptors and the lock-and-key concepts currently considered in drug design were formulated by P.Ehrlich (1909) and E. Fischer (1894). Its subtleties were understood, though, only in the 1970s with the use of X-ray crystallography to reveal molecular computer architecture of isolated pure samples of protein targets (Cohen 1996). The first times of this technology conceived in the 1970s considered molecules as two topological dimensional entities. In 1980s it was used together with q uantitative structureactivity relationships (QSAR) concepts. The first coevals of this technology has proven to be useful only for the optimization of a given series (Cohen 1996).The second generation of rational drug design has considered the full detailed property of molecules in the three dimensional (3-D) formula. This difference is significant, since numerical parameters in the QSAR approaches do not tell the full story about the interaction between a ligand and a protein (Cohen 1996). 22 This has been facilitated by software and hardware becoming less costly. Thus many scientists are paid attention to computational techniques that are easier to use than mechanical models.This underscores the role of instrumentation in scientific research stressed by Rosenberg (1994). Availability of new instruments, including computers, has opened new opportunities in technological applications and furthered research in new directions. Three dimensional artistic creation particularly suits the needs of a multi-disciplinary team since everyone has different chemical intuition but appreciates the 3-D image. Rosenberg (1994) notes scientists who move across disciplines establish those concepts and tools to another scientific discipline such as from physics to biology and chemistry.This suggests the importance of sharing instruments, particularly computer images and databases that help people work and think together. The preponderating systems of molecular modeling calculations are UNIX workstations, particularly three dimensional graphics workstations such as those from Silicon Graphics. But other hardware such as desktop Macintoshes and MS-DOS personal computers on the low end and computer servers and supercomputers on the high end have been used. Computational power is required for more complex calculations and this guides the weft of hardware.A mannikin of commercial software packages are available from $50-$5,000 for PC-based systems to $100,000 or more for supe rcomputers. Universities, research institutes, and commercial laboratories develop these packages. Still, no one system meets all the molecular modelers needs. The industry therefore desperately needs an open, high-level programing environment allowing various applications to work together (Gund 1996). This means those who for strategic conditions want to take advantage of this technology must now do their own software development. This is the competitive software compulsion facing many drug producers.In turn, the better they can select systems, develop their capabilities, and manage their use, the more successful they will be in drug development and in managing other aspects of the drug pipeline. 23 The choice of hardware is based on software availability and the performance criteria needed to run it. Current major constraints are the power of graphics programs and the way the chemist interacts with the data and its representation (Hubbard 1996). apple computers have frequently been used in R because of superior graphics, though this edge may be eroded by new PCs using Pentium MMX as well as moves to more open systems.However, Dr. Popper, Mercks CIO, feels that the real issue, is the software packages for the MAC that research scientists know and rely on but that are not yet available for Windows NT. Thus, MACs exsert to be used for Medical R&D which keeps the Windows market from developing. There are, in addition, the elements of inertia, emotional attachment and training which are apparent at major medical schools too. In sum, rational design has opened a wide range of new research based on a firms understanding of biochemical mechanisms. This means howling(a) opportunities to enter new therapeutic areas.However, since rational design is very expensive, it has increase entry costs and the minimum effective size for pharmaceutical firms by putting a premium on those with a sequence of change generating drugs. It also has favored firms with broader pro duct lines able to spread the costs of equipment over many projects and to transfer knowledge across therapeutic areas, contributing to the increased cost of new drugs through higher R and systems support spending (Bogner and Thomas 1996). A similar analysis applies to the use of other new technologies because major U. S. nd Japanese companies to discover and develop drugs systematically, such as combinatorial chemistry, robotic high-throughput screening, advances in medical genetics, and bioinformatics. These technologies incite not only R but also the organization and the way they deal with other organizations as many new technologies are complementary. For example, high-throughput screening automates the screening process to identify compounds for further testing or to optimize the lead compound. Thus, both regulatory and technological change have raised the advantage of developing innovative drugs, even 24 hough it is inherently risky and forces firms to develop better skills i n using information technology to support the process. The Pharmaceutical Industry in the United States As explained above, healthcare and the pharmaceutical industry are closely intertwined, especially in the U. S.. Ever since the election of the Clinton Administration, U. S. healthcare has been the focus of heated debate. The set of pharmaceuticals in particular is one of the most controversial aspects of the industry. Estimates of the cost of bringing a new drug to market are up to over $250 million (DiMasi et. l. 1991). However, once drugs are on the market, the costs of manufacturing, marketing and distribution are relatively small. This heart-to-heart connection between marginal cost and the market price seems to require further justification for drug pricing. While the lucid answer lies in the high decided cost of drug development and the expensive and time consuming approval process prior to any positive cash flow, the answer is still not easy. Furthermore, the drug mark et is very complex for several reasons. First, there are many drug classes for which only a few products exist.Secondly, FDVIOs (health alimentation organizations) and other managed-care plans can negotiate stiff discounts because they are able to control the prescription decisions made by their participating physicians and because they buy in large quantities. These health organizations are highly price sensitive. This means drug prices are substantially determined by the purchasers demand elasticity. This demand in turn determines investment decisions (Schweitzer 1997). Thirdly, the market for pharmaceuticals is highly segmented, both domestically and internationally, and price discrimination between and within national markets is common.Research studies cannot even agree on a common measure of wholesale price. Indeed, no measure captures actual transaction prices, including discounts and rebates (Schweitzer 1997). Fourth, consumers do not have enough scientific knowledge to a ssess different drugs. Thus, gatekeepers such as doctors are important (Hirsch 1975). 25 Yet, the current trend is towards managed care and HMOs who closely control costs. This development clearly indicates physicians are losing some impropriety in drug selection. Thus it is not surprising the market share of generic drugs has increased from 15% to over 41% between 1983 and 1996.This has forced the ethical drug manufacturers to communicate both more effectively with the HMOs and managed care organizations in addition to physicians and to portray the improved efficacy of their products as compared with generics. The acquisition of PBMs (pharmacy benefit managers) by pharmaceutical companies is an important development in this regard. Physicians now have to prescribe drugs available in the formularies of the managed-care organization. PBMs suggest cheaper alternatives to physicians for a given therapeutic benefit to save money.Eighty percent of the 100 million patient/member PBM mar ket as of 1993 is controlled by the five big PBMs (Schweitzer 1997). In turn, when PBMs and mail-order companies expand, the small pharmacies lose the data necessary to examine various drug interactions. Since current U. S. law protects the propriety data of pharmacists and pharmacy chains, information on prescription for those patients who use pharmacies and mail-order companies actually becomes fragmented. It is likely this development could affect pharmacists jobs as well. A fifth reason is FDA approval does not mean new drugs are better than old ones.As state above, this has pressured drug companies to prove the effectiveness in cost and quality of life their drugs bring to patients. Recently, drug companies have often tried to show how their drugs can help patients set a normal quality of life. As already described, these concerns complicate the design of clinical trials. Consolidation among wholesalers, the greater complexity of clinical trials and globalization favor firms with substantial resources and are part of the reason for the industrys merger trend, especially between U.S. and European companies. The leading pharmaceutical firms ranked by 1994 sales are as follows (Scrip Magazine, Jan. 1996), with five of them the result of cross border mergers. Merck ranks 2d 26 27 *3 Comparison is based on U. S. dollars *4 Calculation based on the sales of companies before mergers *5 Including nonprescription(a) (over the counter drugs) *6 Excludes sales through strategic alliances Merck Merck is a multibillion dollar pharmaceutical firm with a long account statement going back to the 19th ascorbic acid in the U. S. and the 17th century in Germany.While in the past they have diversify into areas like animal health care, they are now very focused almost exclusively on human health, in particular, on ethical branded prescription drugs within human health care since they have found this is their most moneymaking business area. Also, given the many opportuni ties that exist, it will demand all their capital and energy for the foreseeable future. It has therefore spun off its animal health care business to a joint venture and sold its potency chemical business.This strategy and motivation is similar to Takedas focus on human health, whose market is more lucrative than its other businesses. The company appears to stress their ability to bring innovative drugs to market. Merck briefly tried to produce generic versions of their drugs, but found it was not value the investment. In addition, they now assume psyche else will produce their nonprescription(a) (over the counter) versions too. This strategic focus is now underscored by their active formation of strategic alliances. For example, in the over-the-counter medicine market in the U. S. nd Europe, but not in Japan, Merck relies on Johnson & Johnson through a joint venture with J to market, distribute and sell the otc versions of Mercks prescription drugs. This means Merck has seen t he OTC market as one way to prolong the revenue stream for some of its products after their patents expire. In Japan, Mercks agreement is with Chugai Pharmaceutical Co. Ltd. They create a joint venture in September 1996 to develop and market Mercks OTC medicines there (Merck 1996 Annual Report). Moreover, Merck and Rhone-Poulenc have denote plans to combine their animal health and bird genetics businesses to form 28Merial, a new company that will be the worlds largest in animal health and poultry genetics (Merck 1996 Annual Report). Their primary strategic focus on ethical drugs seems appropriate, but as explained above it is also critical with respect to this strategy that they maintain relationships with those in scientifically related fields. Their work with Rhone-Poulenc must be examined in this light since improving their competence in the genetic business seems a good part of their strategy given developments in biotechnology and the Human Genome Project. This is because biotechnology-related drugs are often species-specific (Harris 1997).More knowledge about the genetic make-up of human and animal bodies may provide some insights into the appropriate choice of animals in pre-clinical trials from which to extrapolate observations to humans. Since this extrapolation is never sodding(a) and you have to do animal experiments anyway, they have added to their competence in genetics via a joint venture with Du Pont called Du Pont-Merck Pharmaceuticals Co, whose investors are E. I. Du Pont (50%) and Merck (50%). This firm has capabilities in fermentation, genetic engineering/rDNA, cell culture, hybridoma, protein engineering, and tissue culture.By forming this alliance, Merck was able to exchange its strengths with Du Pont, an early investor in biotechnology. Du Pont-Merck Pharmaceutical has also developed its own drugs in cardiovascular disease. 7 Like other pharmaceutical companies, they continue to sell their branded products as long as they can once t hey have gone off patent but at a lower price in order to meet generic competition. Cost conscious HMOs increase this downward(prenominal) price pressure. Yet, according to Merck some demand for the branded product continues once they adjust the price downward.This is due to better quality, lucid dosage, and brand awareness of the original. Strategically, Merck sees itself as a growth company with a growth target of about 15% per year. This signals a continuing need for cash flow, i. e. from existing drugs, and a Merck sold its share to Dupont in 1998 for over $4billion, apparantly due to its ability to manage more drugs itself. 29 constant flow of new drugs, i. e. from R&D. They need this growth to continue to offer their shareholders the return they expect and to attract the personnel they need to develop drugs which is their corporate mission.Their products now cover 15-16 therapeutic categories. In five years this will expand to between 20 and 25 categories depending on the su ccess of various stages of drug testing. Important new products in the pipeline include Singulair for asthma, Aggrastat for cardiovascular disorders, Maxalt for migraine headaches, and VIOXX, an anti-inflammatory drug, which works as a selective inhibitor targeted at rheumatoid arthritis. They are in phase III trials for all of these new drugs. Propecia for male pattern baldness late received FDA approval. Mercks R is done internationally.To avoid duplicate investment, each research center tends to be focused. For example, the Neuroscience Research Centre in the Untied Kingdom focuses on compounds which affect the nervous system. Maxalt was developed in this Centre. The one laboratory in Italy studies viruses while the one laboratory in Tsukuba, Japan (Banyu Pharmaceuticals) emphasizes the circulatory system, antibiotics, and anti-cancer research (Giga, Ueda and Kuramoto 1996). This concentration pattern often reflects the comparative strengths in R and the therapeutic demand stru cture in each local market.Still, selecting the appropriate R projects while critical to their success is very difficult. This is because no discipline in science has as blurred a distinction between basic and applied research as biotechnology. The distinction is usually not vindicated because applied research often contributes to basic research. Indeed, in molecular biology, science often follows technology. Still, as a general approach, Merck tries to focus on applied research and development rather than basic science. They rely on universities and smaller biotech firms for the later.However, they do some basic research. For instance, th