Merck Case

Pharmaceuticals Merck Sustaining Long-term Advantage Through breeding applied learning Hiroshi Amari Working Paper No. 161 Working Paper serial Center on Nipp iodinese Economy and bank line Columbia limpid argument School declination 1998 Columbia-Yale Project Use of Softwargon to Achieve combative Advantage PHAR macintoshEUTICALS MERCK Sustaining Long-term Advantage Through In melodyation Technology lively by Hiroshi Amari Research Associate, Yale University William V. Rapp and Hugh T. Patrick Co-principal Project InvestigatorsCenter for International and Area Studies Yale University everyplacebold Haven, CT 06520 203-432-9395 (Fax 5963) e-mail pull up s put insiam. email&160 protect edu Revised December 1998 Table of Contents 1. portal Objective of this Study 2. The Pharmaceutical Indus assay in a worldwide Context 3. Product R&038D and Clinical Trials 4. Manu incidenturing and Process R&038D 5. Technological Factors Structure-Based medicine (Rational dose) Des ign Structure-Based Drug (Rational Drug) Design 6. Merck 7. Managerial ending Making 8. Decision Making on IT invents 9. Joint Ventures 10. Information Technology and Organization 11. addendum I Summary Answers to Questions for Merck Strategy &038 Operations 12. Appendix II INDUSTRY AND star sign BUSINESS DATA 13. Bibliography 2 Introduction Objective of this Study This fact study of Merck was completed at a note place a three year look into grant from the Sloan Foundation. The projects purpose is to examine in a series of possibility studies how U. S. and Japanese theaters who atomic number 18 recognized leaders in utilize learning applied science to achieve long-term sustainable re handles puzzle unionized and managed this bring. time each case is complete in itself, each is unwrap of this turgidr study. This pharmaceutic manufacturing case to leadher with almost separate cases2 obligate an sign inquiry hypothesis that hint package package syste m system theatrical bureaurs in twain the U. S. and Japan ar real forward-looking in the ways they nurse combine softw be product into their focus strategies and do it to institutionalize organizational strengths and pick up tacit fellowship on an iterative basis. In Japan this outline has involved heavy reliance on customized and semicustomized softwargon (Rapp 1995) further is changing towards a much selective apply up of package softw atomic number 18 managed via customized systems. In turn, U. S. ounter single outs, such(prenominal) as Merck, who countenance ofttimes relied to a greater extent on case computer softw be, atomic number 18 doing more than(prenominal) customization, especi soloy for systems privationed to coalesce softw atomic number 18 product package packages into well-nighthing more intumesce-nigh linked with their vocation strategies, food markets, and organizational twist. Thus, coming from varied directions, on that depi ct appears some convergence in approach by these leading softw are substance abusers. The cases thereof confirm what some early(a) analysts subscribe to hypothesized, a long business strategy is a necessary condition for a victoryful culture technology strategy (Wold and Shriver 1993). These strategical links for Merck are presented in the following case. Industries and firms examined are food retailing (Ito-Yokado and H. preciselyts), semiconductors (NEC and AMD), pharmaceuticals (Takeda and Merck), retail banking (Sanwa and Citibank), enthronement banking (Nomura and belief Suisse First Boston), biography insurance (Meiji and USAA), autos (Toyota), steel (mini-mills and integrated mills, Nippon poise, Tokyo Steel and Nucor), and apparel retailing (WalM subterfuge). The case writer and the explore squad inclination to express their appreciation to the Alfred P.Sloan Foundation for making this work attainable and to the Sloan practise centers for their invaluabl e assistance. They curiously appreciate the time and guidance accustomed by the center for look on pharmaceuticals at MTT as well as Mr. Sato at Takeda. This refers to cases for which interviews defend been completed. See footnote 3. These and other summary results are presented in some other Center on Japanese Economy and Business working report card 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 are presented in the following case. Yet this case along with the other cases too illustrates that implementation and frame of each clubs software and software strategy is unparalleled to its warring authority, industry and strategic objectives. These factors influence how they choose mingled with encase and customized software options for achieving precise goals and how they measure their success.Indeed, as pa rt of their strategic integration, Merck and the other leading software users interviewed live linked their software strategies with their all overall anxiety goals finished clear mission statements that explicitly note the importance of selective education technology to firm success. They wear coupled this with active CIO (Chief Information Officer) and IT ( culture technology) accept group participation in the firms business and finish making structure.Thus for firms want Merck the totally independent MIS ( instruction Information Systems) department is a thing of the knightly. This whitethorn be bingle reason why outsourcing for them has not been a genuinely option, though their successful business cognitive operation is not base totally on software. Rather as shall be described below software is an integral element of their overall forethought strategy and p go unders a detect role in serving corporeal goals such as enhancing productiveness, astir(p) stockta king management or streng henceing customer relations.These systems thence mustinessiness be coupled with an appropriate approach to manufacturing, R, and merchandising reflecting Mercks clear dread of their business, their industry and their firms agonistic strengths within this context. This clear business vision has enabled them to select, bewilder and use the software they require for each business function and to integrate these into a total support system for their operations to achieve corporate objectives. Since this vision oppositions other corporateThese and other summary results are presented in another(prenominal) Center on Japanese Economy and Business working paper William V. Rapp, Gaining and Sustaining Long-term Advantage Through Information Technology The Emergence of Controlled Production, December 1998 3 4 terminations, they have effectual human resource and financial characteristics too (Appendix I &038 ii). Yet Merck does share some coarse themes with other leading software users such as the creation of super proprietorship interactive entropybases that drive automatic feedback surrounded by unlike dots and/or players in the ware, delivery and consumption dish up.Their ability to use IT to rivet inventories and im base hear of the labor un intended serve up are similarly common to other leading software users. They are also able organizationally and competitively to hold beneficial feedback cycles or loops that increase productivity in field of studys as several(prenominal)(predicate) as R, pattern and manufacturing patch reducing cycle times and defects or integrating production and delivery. Improved cycle times slue be besides increase the re financial obligation of forecasts since they need to cover a pithyer period.Customer mirth and lower inventories are improved by dint of on-time delivery. Thus, software in dedicates are scathing factors in Mercks and other leading users overall business strat egies with strong substantiating competitive implications for doing it success estimabley and potentially cast out implications for competitors. An authorised consideration in this respect is the possible emergence of a impudent strategic manufacturing image in which Merck is probably a leading participant.In the same way volume production dramatically improved on craft production done the economies of large master plants that breakd and used standardized parts and lean production improved on mass production through making the production line more dogging, reducing inventories and tying production more nearly to actual demand, what might be called minceled production seems to fundamentally improve productivity through monitoring, controlling and linking every aspect of producing and delivering a product or service including after sales service and repair.Such controlled production is only possible by actively apply culture technology and software systems to intermina bly admit the monitoring and control function to what had earlierly been a preferably automatic system reply to changes in 5 expected or actual consumer demand. This whitethorn be why their skillful use of information technology is seen by themselves and industry analysts as classical to their business success, scarcely only when it is integrated with the business from both an operation and organization point of view reflecting their overall business strategy and clarity of competitive vision.Therefore at Merck the software and systems bustment mess are part of the finale making structure while the system itself is an integral part of organizing, delivering and supporting its do medicines strain from R through to sales post FDA approval. This sequence is particularly heart-sustaining in pharmaceuticals where crimson after clinical trials there is a continuous need to monitor potential side do. Therefore Seagate Technology whitethorn be correct for Merck too when th ey state in their 1997 annual comprehend We are experiencing a fresh industrial revolution, one more tight-lacedly than any before it.In this emerging digital world of the Third Millennium, the spick-and-span currency allow for be information. How we harness it volition reckon the contravention in the midst of success and failure, surrounded by having competitive advantage and being an also-ran. In Mercks case, as with the other leading software users examined, the samara to using software successfully is to break up a mix of packaged and customized software that supports their business strategies and incompatibleiates them from competitors. However, they have not tried to adapt their organizational structure to the software.Given this perspective, operating(a) and market gains have incisivelyified the additional expense incurred through customization, including the cerebrate damages 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 intellectually and especially its role in enhancing their core competencies. While they go away use systems used by competitors if there is no business advantage to growth their own, they reject the view that information systems are generic products opera hat real by right(prenominal) vendors who shadower achieve low equal through economies of scale and who can more easily afford to invest in the latest technologies. 4 In undertaking this and the other case studies, the project team sought to answer certain key questions while all the same recognizing firm, country and industry differences. These have been explained in the summary paper pen in footnote 3. We have set them forth in Appendix I where Mercks profile is presented based on our interviews and other research.Readers who press to assess for themselves the way Mercks strategies and approaches to using information technolog y care for these issues may wish to review Appendix I prior to reading the case. For others it may be a serviceable summary. 5 Merck and the other cases have been unquestionable using a common regularityology that examines cross national pairs of firms in key industries. In principle, each pair of case studies focuses on a Japanese and American firm in an industry where software is a significant and successful in do into competitive performance.The firms examined are ones recognized by the Sloan industry centers and by the industry as ones using software successfully . To develop the studies, we combined analysis of alive research results with questionnaires and direct interviews. Further, to bring up these materials to previous work as well as the brightise located in each industry center, we held working hearings with each center and coupled sweet questionnaires with the materials used in the previous study to either update or obtain a questionnaire similar to the one use d in the 1993-95 research (Rapp 1995).This method enabled us to relate each candidate 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 comparatively general across industries such as inventory control. Others such as managing the dose grapevine are more specific to a particular industry. The focus has been to establish the firms perception of its industry and its competitive position as well as its advantage in ontogenesis and using a software strategy.The team also contacted customers, competitors, and industry analysts to get word whether competitive benefits or impacts perceived by the firm were recognized outside the organization. These sources provided additional data on measures of competitiveness as well as industry strategies and structure. The case studies are thus based on panoptic inter views by the project team on softwares use and integration into management strategies to improve competitiveness in specific industries, augmenting existing data on industry dynamics,firmorganizational structure and management strategy collected from the Sloan industry enters.In addition, we self-contained 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 benefits were generally confirm after further research.The questions are broken into the following categories General Management and Corporate Strategy, Industry Related Issues, Competition, Country Related Issues, IT Strategy, IT Operations, Human Resources and Organization, dissimilar Metrics such as Inventory Control, Cycle Times and damage Reduction, andfinallysome Conclusions and Results.They cover a range of issuesfromdirect use of software to achieve competitive advantage, to corporate strategy, to criteria for selecting software, to industry political economy, to measures of success, to organizational integration, to beneficial loops, to cookery and institutional dynamics, andfinallyto interindustry comparisons. 7 The Pharmaceutical Industry in a Global Context In move on countries that represent Mercks primary market, the pharmaceutical industry is an exceptionally research intensive industry where many firms are large multinationals (MNCs).It is also heavily regulated for both local producers and MNCs. Regulations work as both constraints and performance boosters since doses are used with other medical and wellnesscare services. Therefore, wellnesscare expenditures are divided among many industries and providers of which pharmaceuticals are only one. All parties involved are interested in influencing the restrictive surround and in participating in the growth in wellnesscare services. This means taste the industry requires appreciating its semipolitical economic context.In this regard, healthcare providers in rich nations are currently under pressure to control be due to aging populations. Regulators who have the place to change the demand structure through laws and regulations are considering various measures to reduce costs such as generic dose substitution which may mean lower succumbs for discovering and developing drugs. Still, if drugs are more effective at reducing healthcare costs compared to other treatments, Pharmaceutical companies can benefit.Since R is at the heart of competition, each drug company must suffice to these cost containment pressures cautiously and strategically in competing for healthcare expenditures. Another important aspect of this industry is technological change arising from the convergence of life and biological lores. Many disciplines directly work together to uncover the mechanisms that lie john our bodies and various maladys. Examples are molecular(a)(a) biology, cell biology, bio natural philosophy, genetics, evolutionary biology, and bioinformatics.As scientists see life from these sunrise(prenominal) chemic and physical viewpoints, the ability to represent, operation and organize the grand data based on these theories becomes critical. Because information dish uping systems are very flexible scientific instruments (Rosenberg 1994), progress in information technology and computer science has broadened scientific frontiers for the life and biological sciences. These advances have opened fresh doors to 8 fervency more thickening diseases, including some chronic diseases of old age.These healthful areas are present opportunities for pharmaceutical companies since they address demographic and technical changes in advanced countries. Still, to take advantage of these opportunities requires information technology capabilities. Historically, the drug industry has been comparatively stable where the puffy players have remained unchanged for years. This has been due to various l pungencyr entry barriers such as R costs, advertising expense, and strong expertise in managing clinical trials. It is gruelling and high-ticket(prenominal) for a impertinent company to ascertain this combination of skills quickly.However, there are signs the industry and mandatory mix of skills may be changing. There have been several cross national unitings especially between U. S. and European companies. In addition, red-hot biotechnology companies are very good at underlying research, which may force pharmaceutical R to transform itself. For example, no single company even among the new mega-companies is large enough to cover all new areas of expertise and therapeutic initiatives. Thus, many competitors have had to form strategic alliances to learn or access new technologies and to ca pture new markets. Conversely, a stand-alone company can have a lot to lose.The challenge facing large pharmaceutical companies is how degraded and how efficaciously they can move to foster both technological mutation and cost containment without exposing themselves to too much risk. The pharmaceutical industry in all of Mercks study markets reflects these cost containment pressures, the need to harmonize expensive and time devour clinical trials, and the impact of extensive regulations. Information technology has had its impacts too. For example, to respond to these challenges Merck is using more management techniques based on consensus last making among outstrip functional managers.This requires go against communication support using e-mail and groupware combined with face-to-face communication. This is part of an industry trim towards greater parallel decision making in R&038D and s uncontaminating(prenominal) sequential decision making where A must premier(prenominal) concur on a project before moving to B, etc without delay all elements of the firm judge the project simultaneously at each 9 stage. In this manner, Merck has significantly reduced coordination costs while centralizing and speeding the overall decision making process. Additionally, first-tier irms have had to follow a trend in R&038D strategies that increasingly use information technologies. Exchange of data and ideas across national borders has become relatively easy, and contracts may specify access to another companys database. Because many companies share similar R instruments and methods, one companys instruments may be compatible with other companies. Indeed, the trend 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 acquaintance creating capabilities (Nonaka and Takeuchi 1995).Having more ways to communicate with other companies makes frequent communication with greater tone possible. This supports the trend towards more strategic alliances unless overtaken by the creation of larger firms through continued mergers. This is also uncompletely due to the nature of the industry which is part of the fine chemical industry where changes in technologies are rapid and very much discontinuous. It therefore requires different management skills from other technology based industries, especially as the k this instantledge required for variation 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 marketing where firms are taking advantage of the fact that the U. S. industry is much less regulated than almost foreign industries (Bogner and doubting doubting Thomas 1996). The U. S. companies grew after World War II due t o a spacious home market combined with the global market for antibiotics this was before British firms began to recapture market share.At that time, European firms did not have the resources to apportion drugs instantaneously 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 thriveed into global markets in the early(a)(a) 1960s. This strained U. S. firms to diversify their R as well. At the same time, in 1962 amendments to the Food, Drug and Cosmetic Act change magnitude the rigor of drug regulation creating an entry barrier to industry R that elevateed large established firms (Bogner and Thomas 1996).The U. S. effectively tightened their regulations after their industry had acquired sufficient R skills and resources. This timing seems to count for todays industry success. Another factor is that unlike the European industry, U. S. firms had few incentive s to integrate vertically. During the War the military distributed antibiotics. Therefore, the U. S. firms were generally bulk chemical producers such as Merck and Phizer or sellers of mark drugs such as Abbott and Upjohn. At the end of the War, only a few firms such as Squibb were fully integrated.However, as progress and other down rain cats and dogs functions became more critical, controlling functions such as scattering became a strategic objective. To accomplish this they acquired other firms (Merck acquired Sharpe and Dohine and Phizer acquired Roerig), developing expansion via merger and acquisition as a business strategy and core competency. This helped lay the openation for subsequent industry consolidation. Today, American healthcare is based on the belief that while making progress in science is the best way to solve medical problems, cost containment is also important.As a result, while American healthcare is the most expensive in the world, it is also not for sale to everyone and is the most subject to cost scrutiny. Indeed, since drugs are just one way to improve health, consumers should want to remain healthy and choose cost effective means 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 prices for healthcare is necessary to get markets for healthcare products to work better. In the U. S. , this has led to a public policy push for HMOs.These healthcare purchasers have in turn set the reward schemes obtainable to healthcare providers such as pharmaceutical companies so as to reduce transaction costs (Ikegami and Campbell 1996) 11 and promote innovation. These knowledges and trends are putting more pressure on major firms to put more resources into R&038D, to focus more critically on just honorable drug development for the global market, and to be more advertent in gathering information on clinical trials and side effects. The most important 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 basic life science research in U. S. universities, especially after World War II. NSF (National lore Foundation) also encouraged collaboration between academia and industry with partial living by the government. Other federal and state funding has been important to the scientific community as well, especially in biotechnology. In biotechnology, the funding of basic research has led to a complex pattern of university-industry fundamental interaction that includes gene patenting and the immediate publishing of results (Rabinow 1996).U. S. drug companies are of course increase motivated but are regulated by the FDA (Federal Drug Administration) which is compressed nearly its drug approvals, demanding clear scientific evidence in clinical research as its operation is bas ically science oriented. Product R&038D and Clinical Trials Still, despite this R&038D support, industry economics are driven by pharmaceutical R&038Ds very lengthy process, composed of discovering, developing and bringing to market new ethical drugs with the latter(prenominal) heavily determined 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 well-tried in humans two, drug delivery mechanisms new approaches to delivering therapeutic agents at the desired dose to the desired part of the body three, 6 Ethical drugs are biological and medicinal chemicals advertised and promoted primarily to the medical, pharmacy, and confederate professions.Ethical drugs include products available only by prescription(prenominal) as well as s ome over-the- sideboard drugs (Pharmaceutical Manufacturers Association 1970-1991). 12 next stage products new combinations, formulations, dosing forms, or dosing strengths of existing compounds that must be tested in humans before market introduction four, generic products copies of drugs not protected by patents or other exclusive marketing rights. From the viewpoint of major pharmaceutical firms such as Merck, NCEs are the most important for the R of sophisticated drugs that drive industry success.Since it is a risky and very expensive process, understanding a companys R&038D and drug approval process is critical to understanding the firms strategy and competitiveness both domestically and globally. Statistics call for that only about 1 in 60,000 compounds synthesized by laboratories can be regarded as highly successful (U. S. Congress, OTA 1993). Thus, it is very important to stop the R process whenever one recognizes success is not likely.Chemists and biologists used to deci de which drugs to pursue, but R is now more systematic 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 expected 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 experiences in development, manufacturing, regulatory approvals, and marketing can provide ample guidance.NCEs are discovered either through screening existing compounds or designing new molecules. Once synthesized, they go through a rigorous testing process. Their pharmacologic activity, therapeutic promise, and toxicity are tested using isolated cell cultures and wolfs as well as computer models. It is then modified to a think compound to optimize its pharmacological activity with fewer undesirable biological prop erties (U. S. Congress, OTA 1993). Once preclinical studies are completed and the NCE has been proven safe on faunas, the drug sponsor applies for Investigational smart Drug (IND) status.If it receives approval, it starts Phase I clinical trials to establish the 13 gross profit margin of healthy human subjects at different doses to study pharmacological effects on humans in anticipated dosage levels. It also studies its absorption, distribution, metabolism, and excreting patterns. This stage requires careful supervision since one does not know if the drug is safe on humans. During phase II clinical trials a relatively infinitesimal number of patients participate in controlled trials of the compounds potential usefulness and short term risks.Phase trine trials gather precise information on the drugs effectivity for specific indications, determine whether it produces a broader range of contrary effects than those exhibited in the smaller phase I and II trials. Phase III trial s can involve several hundred 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 effectuality outmatch the weighted probability of success.There is a data and safety monitoring climb on 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 ordain not divulge the ability data until the trial reaches a point where it seems appropriate to recommend stopping it because the null hypothesis of efficacy has been current or rejected. The FDA will normally insist on the drug proving efficacy with respect to ameliorating a disease before giving approval.If clinical trials are successful, the sponsor seeks FDA marketing approval by submitting a New Drug Application (NDA). If approv ed, the drug can be marketed immediately, though the FDA very much requires some amendments before marketing can proceed (Schweitzer 1997). However, successful drug development and sales not only requires approval of therapeutic rate and validity but also that the manufacturing process meet stringent 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 designed 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 track reviews. These additional studies usually include use by children or by those using threefold drugs where potential interactions can be important (Schweitzer 1997). Furthermore, because drug development costs are so high relative to production costs, patent secur ity measure is another key aspect of a companys management strategy. Under 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 filing the NCE. But as this begins the patent life, shortening the approval period extends a drugs effective tax income 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 constantly pressuring the authorities to reduce NDA review times. As a consequence, the FDA did introduce an accelerated approval process for new drugs in oncology, HIV (AIDS) and other life threatening illnesses. A familiar feature of this new fast track review is the use of surrogate end points, or proxies for clinical end points which are deliberate by testing ground values but lack supporting clinical outcomes data. Accelerated approval speeds new drugs to market saving companies tens of millions of dollars in negative cash arise.However, it does not generate clinical values 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 smell 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 correspond 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 for the most part on the objectives of each researcher but some companies are onerous 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 cancel the moral bump 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 agreed performance standards. Furthermore, quality of life measures should only be used when they are of practical use to doctors in treating patients (Levine 1996). Such judgments should be sensitive and informed and should cover criteria related and important to a broad spectr um 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&038D The research process differs from production. Yet, both are important, particularly the firms knowledge of scale-up. This is voiceless because production requires uniformity at every stage. Making the average chemical make-up constant is not enough.Careful scale-up is essential to avoid contamination. Variations from the mean in commercial message production must be very small. This requires constant control of variables such as the preparation of raw materials, solvents, reaction conditions, and yields. Often, experience will help achieve purer fruit in the intermediate processes. This better output alleviat es problems in later processes. Thus, there is a learning curve in process R which starts at 16 the laboratory. An important distinction is between continuous process and batch 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 invest than batch processing where the chemicals are produced in batches, put in chit form and then stored for future distribution and sale (Takeda 1992).The following compares initial process R once a compound is discovered and commercial manufacturing for a representative chemical entity proceeds (Pisano 1996). Comparison research process and commercial p roduction for representative chemical 17 Process R in chemical pharmaceuticals involves three stages (1) process research, where basic process alchemy (synthetic route) is explored and chosen (2) pilot burner development, where the process is run and refined in an intermediate-scale pilot plant and (3) technology transfer and startup, where process is run at a commercial manufacturing situation (Pisano 1997).Pisano argues that the scientific base of chemistry is more ripe 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 instructive designer than in biotechnology. In chemistry, many scientific laws are available for process variables such as pressure, volume, and temperature.Computer models can simulate these in response to assumption parameters to predict cost, throughput a nd yield (Pisano 1997). By contrast, biotechnology has aspects that resemble art dependent on an opprators skill more than science which only requires the proper formulation. This is particularly true for large-scale biotechnology process (Pisano 1997). Simulation is thus less reliably guessd to commercial production. An additional factor is the importance of katharsis after large-scale production in bioreactors in biotechnology-based drugs.It is not uncommon at this stage of extraction 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 amount of the desired materials from a large amount of broth is critical. This process is done using filters, chromatography, and other methods specific to organisms (Koide 1994). Technological Factors All scientific frontiers run pharmaceutical companies.Since no company can be an expert on everything, what technology to develop in-house and what to license or subcontract have become important issues. In general, pharmaceutical companies were skeptical 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 adopt ideas from less well know biotech companies. This is why many such companies announce platform 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 uncovering methods and biotechnology each demand skills different from earlier times. Emerging biotech companies cristal new ideas and research tools. Other new technologies such as discovery out side effects, specialized drug delivery systems, and antisense which cance ls out the disease causing messages of faulty RNA 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 frequently have difficulty 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 association with large firms is logical and efficient, and one should expect more future alliances and joint suppositions, though outsourcing to organizations that will manage clinical trials is ontogenesis. Another important factor which further encourages strong suit in a network of companies is the industrys heavy use of infor mation 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 transfer and used becomes key to successful corporate strategy, especially when that knowledge is growing and becoming increasingly several(a). 19 There is some evidence suggesting when innovation is dependent on trial and error, it is best done when many players try different strategies and are held responsible for the projects they choose (Columbia Engineering Conference on Quality September 1997).If the large drug companies can successfully form principal-agent relationships with biotechnology companies doing advanced research in a particular area in the same way that J apanese 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 buy 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 facility of information commute 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 the 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 poor 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. One is transgenic animals. They provide information on the contribution of particular genes to a disease.This is done by inserting genes that have the function of expressing the phenotype, or interbreeding heterozygotic animals to produce knockout animals that suffer from genetic metabolic diseases. Transgenic animals are relevant to early phase clinical trials since the data from these animals contribute useful data on dose-selection 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 tally of phase I and II trials must come from the bench scientists who strengthened 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 number one wood 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 modeling which is a range of computerized techniques based on theoretical chemistry methods and experimental data used either to analyze molecules and molecular systems or to predict molecular and biological properties (Cohen 1996). Traditional methods of drug discove ry consist of taking a lead structure and developing a chemical program for decision 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 medicinal chemists using their erudition to select a candidate analog for further development. This traditional 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 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 interaction readiness of a ligand in a known receptor site remains difficult. Computer models permit manipulations such as superposition and energy calculation that are difficult with mechanical models. They also provide an everlasting(a) way to analyze 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 1970s of biochemistry. So rational drug design has also benefited from biotechnology. In the 1970s and 1980s, drug discovery was still grounded in organic chemistry. Now rational drug design provides customized drug design synthesized specifically to set out or inactivate particular physiological mechanisms.This technique is most useful in particular therapeutic areas. For example, histamine receptor knowledge was an area where firms first took advan tage of rational design since its underlying mechanism was understood early (Bogner and Thomas 1996). The starting point is the molecular target in the body. So one is working from demand quite a 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 roentgenogram crystallography to reveal molecular architecture of isolated pure samples of protein targets (Cohen 1996). The first multiplication of this technology conceived in the 1970s considered molecules as two topological dimensional entities. In 1980s it was used together with quantitative structureactivity relationships (QSAR) concepts. The first generation of this technology has proven to be useful only for the optimization of a given seri es (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 numeral 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 paying attention to computational techniques that are easier to use than mechanical models.This underscores the role of orchestration 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 graphics 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 discip lines bring 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 predominant 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 choice of hardware.A renewal of commercial software packages are available from $50-$5,000 for PC-based systems to $100,000 or more for supercomputers. Universities, research institutes, and commercial laboratories develop these packages. Still, no one system meets all the molecular modelers needs. The industry therefore d esperately needs an open, high-level programming environment allowing various applications to work together (Gund 1996). This means those who for strategic reasons 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 approachability 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 tha t 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 continue to be used for Medical R&038D 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 direful opportunities to enter new therapeutic areas.However, since rational design is very expensive, it has embossed entry costs and the minimum effective size for pharmaceutical firms by putting a premium on those with a sequence of cash generating drugs. It also has favored firms with broader product 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 an d systems support disbursal (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 affect 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 separate 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 in using information technology to support the process. The Pharmaceutical Industry in the United States As explained above, healthcare and the pharmaceutical industry are closely intert wined, especially in the U. S.. Ever since the election of the Clinton Administration, U. S. healthcare has been the focus of heat debate. The pricing 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 loose connection between borderline cost and the market price seems to require further justification for drug pricing. While the obvious answer lies in the high fixed 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 market is very complex for several reasons. First, there are many drug classes for which only a few products exist.Secondly, FDVIOs (health maintenance organizations) and other managed-care plans can negotiate substantial 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 intimately 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 assess 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 clea rly indicates physicians are losing some autonomy 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 demonstrate 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 market 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 inte ractions. 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 noted 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 vivify 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 computation 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 history going back to the nineteenth century in the U. S. and the 17th century in Germany.While in the past they have diversified 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 profitable business area. Also, given the many opportunities 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 specialty chemical busine ss.This strategy and want is similar to Takedas focus on human health, whose market is more moneymaking(a) than its other businesses. The company appears to stress their ability to bring innovative drugs to market. Merck presently tried to produce generic versions of their drugs, but found it was not outlay the investment. In addition, they now assume someone else will produce their over-the-counter (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(a) medicine market in the U. S. nd Europe, but not in Japan, Merck relies on Johnson &038 Johnson through a joint venture with J to market, distribute and sell the OTC versions of Mercks prescription drugs. This means Merck has seen the OTC market as one way to lengthen the revenue stream for some of its products after their patents expire. In Japan, Mercks agreement is with Chugai Pharmaceutical Co. Ltd. They formed a joint venture in September 1996 to develop and market Mercks OTC medicines there (Merck 1996 Annual Report). Moreover, Merck and Rhone-Poulenc have announced plans to combine their animal health and poultry 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 o f animals in pre-clinical trials from which to extrapolate observations to humans. Since this extrapolation is never perfect 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 they have gone off patent but at a lower price in order to meet generic competition. Cost conscious HMOs increase this downward price pressure. Yet, according to Merck some demand for the branded p roduct continues once they adjust the price downward.This is due to better quality, consonant 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&038D. 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 success of various stages of drug testing. Important new products in the pipeline include Singulair for asthma, Aggrastat for cardiovascular disorders, Maxalt for hemicrania headaches, and VIOXX, an anti -inflammatory drug, which works as a selective inhibitor targeted at rheumy arthritis. They are in phase III trials for all of these new drugs. Propecia for staminate pattern baldness recently received FDA approval. Mercks R is done internationally.To avoid duplicate investment, each research center tends to be focused. For example, the Neuroscience Research content 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 structure 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 addled a distinction between basic and applied research as biotechnology. The distinction is usually not well-defined 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