2.2 Modern history – an evolution
So, what is modern about ‘modern medicine’? Several key scholars – notably Schwartzman (1976), Gambardella (1995), Galambos and Sturchio (1996) and Henderson et al. (1999) – have detected a pattern in the recent development of the industry which may help address this question. According to these scholars, the modern history of the industry can be analysed as an evolutionary process. This may involve changes, which are self-created, or adaptation to discrete technological or institutional changes, which may be regarded as ‘shocks’. Viewed in this way, the modern history of the industry arguably started around 1850, and can be divided into the following three epochs.
Epoch No. 1 (c. 1850–1950) This was characterised by relatively little new product research, which in turn was based on relatively primitive methods and organised in an informal way.
Epoch No. 2 (c. 1950–70) By contrast, this was characterised by relatively rapid rates of new product development based increasingly on formalised in-house research and development (R&D) programmes. These new active pharmaceutical ingredients are usually known as APIs, although the terms ‘new chemical entities’ – NCEs – or ‘new medical entities’ – NMEs – are also used.
This epoch was heralded by early successes in the large-scale development of penicillin during the Second World War. Well into the second half of the twentieth century, doctors would prescribe active ingredients and pharmacists would make up powders, pills and liquids which met these instructions before supplying them to patients with guidance on how much to take and how frequently. However, as the century progressed, manufacturers increasingly pre-formulated products into capsules, tablets, sprays, etc. (and pre-packed them, often as weekly dose sets) with a degree of quality control that a local pharmacist would find difficult to achieve. Thus, the pharmacist's role changed from making up products to stocking them and advising the patient.
During the earlier part of the second epoch, the industry relied largely on so-called ‘random screening’ as a method of discovering new drugs. This involved naturally and chemically derived compounds being randomly screened for their therapeutic effects, first in test-tube experiments, and then on laboratory-based animals. The pharmaceutical companies synthesised APIs and kept a record of them but the numbers were – by later standards – low. Other types of organisations also synthesised APIs: agrochemical businesses often synthesised considerably more. One reason for this was that the agrochemical businesses’ screening systems were somewhat cruder and cheaper to run. These compounds would then be subjected to a process of multiple screening to enable researchers to home in on a promising substance. Random screening worked extremely well for many years. This was partly because of the so-called ‘target-rich’ environment, whereby ‘shots in the dark’ or a ‘scatter-gun’ approach often meant results in the fight against disease and malady. It was also partly because of the absence of a better alternative: there was very little detailed knowledge of the biological underpinnings of specific diseases.
This random approach gave way to a more rigorous science-guided approach to new drug discovery in the 1970s. Both the ‘guided’ and the ‘designed’ approach to research methodology owed much to advances in pure science, notably in the realms of molecular biochemistry, pharmacology and enzymology.
Epoch No. 3 (post-1970) Sometimes referred to as ‘drug development by design’, this is characterised by the use of genetic engineering in the discovery and production of new drugs. In 1973, Stanley Cohen and Herbert Boyer (at the University of Stanford and the University of California in San Francisco respectively) demonstrated that a single gene can be moved from one species to another. This is commonly acknowledged as the key scientific discovery that led to modern biotechnology.
There are at least three separate strands in this third epoch:
the pharmaceutical companies experienced a period of consolidation;
a totally different kind of company emerged to work with biological products and systems rather than using chemicals – i.e. biotechnology companies;
pharmaceutical companies largely ignored biotechnology for about 20 years and they have only really interacted since 1995.
Figure 1 depicts the three epochs, including some of the milestones along the evolutionary path of innovation. These scientific epochs were paralleled by organisational developments as early small companies grew, changed, amalgamated and then were acquired or broken up. Your reading of the article by Holland and Bátiz-Lazo will have identified some of the key features of this organisational – and commercial – history.
This is one history that stresses the process of scientific development; there are others. One important feature of the life sciences sector is the effort to control and define the way it is perceived. We will show repeatedly that the companies in the sector attempt – with resources and resolution – to control the way the sector is seen by governments, patients and healthcare professionals. An example of this is how the sector defines and costs the process of discovery. So, any history of the sector is only one of several possible histories.
Many of the scientific, organisational, strategic and commercial elements of the recent history of the sector are revealed in Box 1. This story illustrates the situation for pharmaceutical companies towards the end of the second epoch – just as the first tentative steps in biotechnology were being taken.
Box 1 Fisons
This British company was founded in the first half of the nineteenth century to supply fertilisers to farmers in the East of England, where a high proportion of the country's cereal crops is still concentrated. Indeed, for many years the company's slogan was ‘The Farmer's Friend’. It was successful for a long time and took over literally dozens of smaller manufacturers so that it became, with ICI, one of the two leading UK suppliers of fertilisers, with its own manufacturing plants in Immingham, Avonmouth and Ipswich. In terms of Porter's Generic Strategies (Porter, 1980), it was a differentiator, rather than a least cost supplier, in the UK market (where freight costs militated against significant imports for most of the company's life). Diane Montagu has summarised the history of the company's involvement in the field in a book reviewing British agriculture (Montagu, 2000).
As spare cash was generated from the fertiliser business, the company also acquired small companies in other industrial fields (an example of diversification in the language of Ansoff's Matrix (Ansoff, 1965)). It acquired an agrochemical specialist – Pest Control – which operated a contract crop-spraying service in the UK and some other countries such as the Sudan. A horticultural business, selling fertilisers, peat, compost and pest control chemicals for use in house and garden, was established. It also purchased laboratory supply companies and a number of companies selling pills, tonics, shampoos and similar products. By the late 1960s, the company had been organised into three main divisions (Fertilisers, Agrochemicals and Pharmaceuticals) and had expanded its research efforts in both agrochemicals and Pharmaceuticals. Geographically, Fisons was still largely a UK company but it had operations of some size in many ‘British Empire’ countries, such as Canada, South Africa and Australia, as well as joint ventures with some large local companies in India.
By the beginning of the 1970s, both the research-based divisions had discovered APIs and were pursuing active development programmes to bring them to the market. The Agrochemical Division had a new herbicide for sugar beet (ethofumesate) and a new insecticide for public health and agricultural uses (bendiocarb), while the Pharmaceutical Division was working with disodium chromoglycate (DSCG), a new type of drug for managing asthma. DSCG was given the trademark Intal®. It was administered through a special device, known as a Spinhaler®, to apply the product to the deep lung regions. (You should note that similar drug-device pairings have become increasingly common and many other examples will be given elsewhere in the course.)
In seeking to commercialise Intal, Fisons faced several strategic problems. There were issues at the corporate level as well as at the business unit level, i.e. the Pharmaceutical Division. At the company level, it was recognised that the fertiliser business was becoming steadily more commoditised and the company was not the lowest-cost producer in the UK, let alone in Europe.
At the business unit level, the Pharmaceuticals activity was largely concentrated in the UK and the level of international exposure was low: the countries where there was experience (primarily the UK, Canada and Australia) accounted for only about 5 per cent of the world market for Pharmaceuticals. Moreover, the product range consisted of over-the-counter (OTC) products; there was no prior history of marketing a prescription pharmaceutical product (OTC products are advertised and stocked on pharmacy shelves while the scientific merits of a prescription medicine have to be explained to doctors).
At the same time, the Agrochemical Division was also expanding rapidly (and consuming cash) with operations in at least 12 overseas countries, and a newly formed Scientific Equipment Division was being built by acquisition.
You should now think about the strategic issues that Fisons faced during the 1970s, its strategic responses and the possible outcomes, before going on to the next section. Make notes on the strategic options that were available to Fisons at that time; think particularly about how the company might try to address the international introduction of Intal.
Separate your thoughts for the business unit level and for the corporate level; concentrate mainly on the former.
At the business unit level, it seemed essential to move rapidly to establish the product in the global market-place and this inevitably meant some significant steps. The first steps were needed in the countries where the business was established and these can be thought of in terms of adjusting the resources and capabilities it could deploy. This could then be followed by an international expansion, which can be considered using the Ansoff Matrix concept of market development.
So Fisons chose to:
dispose of a significant part of its older OTC ‘pharmaceutical’ products (raising cash);
retrain its quite large UK sales force to handle a prescription product and recruit some specialists with prior experience;
set up small sales and marketing organisations in selected European countries (France, Germany and Spain, for example);
seek partnerships in the USA and Japan.
In Japan, Fisons appointed the local company Fujisawa to market Intal on its behalf (this became a successful long-term partnership). In the USA, it decided to grant marketing rights to a company called Syntex, provided that the latter used its own brand name of Aarane®, while Fisons retained the right to use the name Intal and to make some sales itself through a small sales force of its own. (Syntex is famous for introducing the birth-control pill but is no longer an independent company; it was purchased in 1994 by Roche, the Swiss pharmaceutical giant, for US$5.3 billion.) However, the possibility of Syntex withdrawing from the arrangement some two years later (after loading the distribution chain) because it had other priorities was not anticipated; having to enlarge the US Fisons-owned business to replace that loss was costly. The costs of building sales forces in other countries and in maintaining a large R&D effort meant that there was a continual need for cash. Nevertheless, Intal was a considerable success as an asthma treatment and was very profitable. Fisons also developed the active ingredient for closely related allergic conditions affecting the nose and eyes in addition to its primary use in the lungs (the Ansoff Matrix concept of product development is relevant here).
At the corporate level, there was a determination to support the Pharmaceutical Division; it was perceived as the best chance to secure an international future for the group. However, the steady stream of earnings from the historical base business (fertilisers), which had fuelled the earlier acquisitions, was becoming less certain and there were also constant needs to refurbish old plant in that business. The concern was whether there would be sufficient financial resources available to cover the R&D costs of the other two divisions before they became really profitable and to support the building, by acquisition, of a fourth Division (Scientific Equipment). The strategic aim was to have a portfolio of four businesses (this was in the days when diversification, as in the Ansoff Matrix, was more common than was the norm later).
This was all happening in a broad UK economic context of high inflation, Government-imposed price and wage controls and low economic growth, which reduced the stock market valuation of many companies (with the consequence that it was difficult to raise new money). Moreover, the expected retirement of the Group's Managing Director from his executive role led to indecision about the managerial succession.
Although the company continued for several more years, surgery was required. By 1983, the Fertiliser and Agrochemical Divisions had both been sold (the former to Norsk Hydro and the latter to Schering; note that Bayer has since acquired all the agrochemical interests owned by Schering plus those owned by Hoechst and Rhone-Poulenc). Fisons’ remaining businesses continued, and grew quite rapidly, until the early nineties when support from the financial community was largely exhausted, not least because the flow of new drugs was considered disappointing. In the mid-eighties the acquisition of Pennwalt, a US manufacturer of pharmaceuticals, including some very successful OTC products, did not provide an answer. A rapid and complete disposal programme ensued in 1992/3 and the company effectively ceased to exist, although many of its products are still marketed by successor companies.
Before leaving the history of the life sciences sector we need to consider the future. For now, we shall simply note that, whatever this future (or these futures) hold, it is bound to require a balance or an accommodation among several powerful but very different forces, which are in varying degrees of opposition or tension. One force or trajectory is scientific development, which supplies the critical underpinning to the sector and operates at least through the areas discussed here: drugs, devices and diagnostics. Another key trajectory is the actions and attitudes of governments, not only as purchasers and regulators but also as bodies concerned about issues of public health. A third force is the economics of the sector: the performance of the companies and the strategies they adopt in the face of the pressures and opportunities that arise. The final force is public opinion.