CASE STUDY (50 Marks)

Genzyme’s Focus on Orphan Drugsa

In 2012, Genzyme (a full-owned subsidiary of Sanofi, which purchased the company in
2011) was one of the world’s leading biotechnology companies. It produced more than
twenty-five products sold in ninety countries. Genzyme’s products and services focused on
rare, inherited disorders, kidney disease, orthopedics, cancer, transplant and immune
diseases, and diagnostic testing.
Genzyme was consistently recognized as a leader across many dimensions of its
operations. In 2007, Genzyme received the National Medal of Technology, the highest honor
awarded by the President of the United States for technological innovation. The journal
Science had regularly named Genzyme a “Top Employer” in its annual survey of scientists,
and Fortune magazine named it one of the “100 Best Companies to Work For.” The
company had also won numerous awards for practicing environmental sustainability and
ethical responsibility.

Humble Beginnings
Genzyme was founded in Boston in 1981 by a small group of scientists who were
researching genetically inherited enzyme diseases. People with these rare disorders (e.g.,
Gaucher disease, Fabry disease, MPS-1) lack key enzymes that regulate the body’s
metabolism, causing sugar, fats, or proteins to build up in the body and resulting in constant
pain and early death. In 1983, the scientists were working out of the 15th floor of an old
building in Boston’s seedy “Combat Zone,” when they were joined by Henri Termeer, who
took the role of president and eventually chief executive officer of the company. Termeer had
left a well-paying executive vice president position at Baxter to join the 2-year-old start-up,
and many people thought he was crazy to do so. However, Termeer thought Genzyme was
well positioned to pursue a novel strategy in the drug industry: target the small markets
for rare diseases.
Focusing on rare diseases was close to heresy in the pharmaceutical industry.
Developing a drug takes 10 to 14 years and costs an average of $800 million to perform the
research, run the clinical trials, get FDA approval, and bring a drug to market.
Pharmaceutical companies thus focused on potential “blockbuster” drugs that would serve a
market that numbered in the millions. A drug was considered a “blockbuster” if it earned
revenues of $1 billion or more, and achieving this level required many thousands of patients,
with chronic diseases such as hypertension, diabetes, or high cholesterol. Genzyme, however,
challenged the notion that a firm needed a blockbuster drug to succeed. Genzyme would
focus on drugs that were needed by only a few thousand patients with severe, life-threatening
diseases.d Though there would be few patients for these drugs, there would also be few
competitors. Furthermore, the small number of patients and the severity of the diseases
would make insurance companies less likely to actively resist reimbursement. Both of these
factors suggested that drugs for rare diseases might support higher margins than typical
drugs. Additionally, whereas pharmaceutical companies typically needed large sales forces
and considerable marketing budgets to promote their drugs, a company focusing on drugs for
rare diseases could have a much smaller, more targeted sales approach. There were only a
small number of physicians specializing in rare diseases so Genzyme could go directly to
those doctors rather than funding a large sales force and expensive ad campaigns. Finally,
therapies with significant clinical value in smaller populations required much smaller clinical
trials (though it was more difficult to find the study candidates).

The Orphan Drug Act

Genzyme’s timing was auspicious. In 1983, the Food and Drug Administration
established the Orphan Drug Act to induce development of drugs for rare diseases. The act
provides significant tax breaks on research costs and 7 years of market exclusivity to any
company putting an orphan drug on the market. This market exclusivity amounted to
significantly more protection from rivalry than a typical patent. When a firm secures a patent
on a drug, that patent only prevents another firm from marketing the same drug; it does not
prevent another firm from marketing a drug that achieves the same or similar action through
other means. Thus when a firm introduced a patented drug that met an important medical
need, the race was on by competitors to introduce a different (hopefully improved) version of
the drug that could also be patented and compete with the original drug. Drugs for orphan
diseases would be shielded from such competition for 7 years, hopefully permitting them to
recoup their development costs and earn a rate of return that would make the venture
attractive.
To qualify for orphan drug status, a disease had to afflict less than 200,000 people
worldwide. Big pharma remained uninterested because of the small market sizes and high
risks of developing therapies for them. Even most biotech firms failed to see the opportunity
in the act that might suit their rapidly evolving technologies. Genzyme’s eventual success,
however, would ultimately attract their attention to this small but lucrative market.

The First Big Success

Genzyme’s first commercial product was Ceredase—a replacement protein designed
to treat fewer than 10,000 people afflicted with a deadly, rare genetic disorder called
Gaucher’s disease. Children born with this disease rarely live past their 10th birthday, and
adults who develop this fatal disease suffer from chronic liver, kidney, heart, and spleen
damage. Clinical trials for Ceredase began in 1984, and in March of 1985 the U.S. Food and
Drug Administration designated Ceredase an orphan drug. Genzyme was first allowed to
make Ceredase available to patients outside of the United States in 1990, and was approved
by the FDA to market Ceredase in the United States in 1991. Creating a therapy to treat
a patient with Gaucher’s disease required extracting proteins from human tissue, and the
most productive source of these proteins was found in human placentas. The expense and
difficulty of this provided a substantial barrier to competitive entrants. Not many experts
believed Genzyme could be commercially successful with this product. As Termeer noted,
“The
FDA thought we were out of our minds.” In an interview, Termeer explained, “The hurdles
to raise more finance for the trials were formidable. Not least was the fact that human
placentas were the source of the enzyme and to provide a year’s dose for just one patient,
more than 22,000 placentas were needed. To overcome this, Genzyme built a plant in France
to take unwanted placental tissue which would have otherwise been burnt and extracted the
enzyme. At one point 35 percent of all placentas from the United States were passing through
the French plant. Ceredase was the only drug made from placentas that the U.K. government
allowed to be used in Britain.e By 1991, Genzyme was collecting a million placentas a year,
and knew it could not produce enough of the enzyme to treat all the patients who needed it.
Fortunately, by 1993, Genzyme had developed a recombinant form of the enzyme,
Cerezyme, which obviated the need for human tissue and made efficient production possible.
In the meantime, Genzyme had also begun work on gene therapies and had begun
investigating potential treatments for another rare enzyme disorder, Fabry disease.

Remaining Independent
Genzyme also broke with industry norms in its decision to not work with large
pharmaceutical companies. Whereas most biotech companies license their technologies to
large pharmaceutical firms to tap the larger company’s greater capital resources,
manufacturing capabilities, and marketing and distribution assets, Termeer felt strongly that
the company should remain independent, stating, “If we worked with a very large
corporation, we would lose our strategic direction and be dependent . . . we’ve tried to stay as
self-sufficient as we possibly can.” Performing its own testing, manufacturing, and sales
would mean much greater risks to the company, but it also meant that the company would
keep all of the profits its drugs earned. To generate revenues to fund the research, Termeer
entered into a number of side ventures including a chemical supplies business, a genetic
counseling business, and a diagnostic testing business. He also took the company public in
1986, raising $27 million. Termeer’s gamble paid off: Patients taking Cerezyme paid an
average of $170,000 a year for their medication, and with about 4,500 patients committed to
taking the drug for life, this amounts to more than $800 million in annual revenue from
Cerezyme alone.

The Competition in Biotech

From 2000 to 2008, biotech companies were the fastest growing sector in the drug
industry. Global biotechnology product revenues were $153.7 billion in 2006, and were
forecasted to grow to $271.4 billion by 2011,h with the United States accounting for over
half and the balance from Europe, Japan, and Latin America and the rest of Asia. Globally,
there were approximately 4,400 biotechnology companies in 2007. Of those, nearly 800 were
publicly held, and had combined revenues of nearly $85 billion, up from $78.4 billion in
2006. Over half of that revenue, however, was earned by the 10 largest biotech firms: Amgen
($14.3 billion), Genentech ($9.3 billion), Genzyme ($3.2 billion), UCB ($3.2 billion), Gilead
Sciences ($3.0 billion), Serono ($2.8 billion), Biogen Idec ($2.7 billion), CSL ($2.1 billion),
Cephalon ($1.8 billion), and MedImmune ($1.3 billion). Genentech
was the oldest, formed in 1976; Amgen, Chiron, and Genzyme were established in the early
1980s. The remaining competitors were small, emerging companies with less than 500
employees. In fact, more than 50 percent of biotech companies had fewer than 50 employees.
Profitability had accrued to only a handful. The aggregate net loss for the industry was $2.7
billion in 2007.
Most biotech start-ups followed a similar path of evolution. The firms would start out
as a research and development firm, with employees coming from university science labs or
big pharma. If the start-up survived the lean years and had prospects for producing a
commercially viable therapy, the young firm would seek alliances with large pharma firms
for late-stage development, manufacturing, and marketing. For example, both Genentech and
Gilead formed relationships with Roche, and Amgen formed a relationship with Abbott
Laboratories. If a firm’s drugs achieved commercial success, it could negotiate higher
royalties and attract capital investment.
Genzyme differed from all its peers and from later biotech companies by being
profitable early on (Genzyme posted a profit of just over $20 million in 1991, losses in 1992
and 1993, and a profit of over $16 million in 1994), and remaining independent of partners.
“We wanted a diversified company that could use technology to make a difference for people
with serious diseases, and to get profitable so we can continue to develop new medicines,”
Termeer said. Even with the benefits offered under the Orphan Drug Act, most analysts
believed that no other developer was likely to pursue Genzyme’s strategic path. While both
Amgen and Genentech had produced orphan drugs, it was not their strategic focus.

Positioning for the Future

It is estimated that there are between 5,000 and 8,000 known rare diseases in the
world. In the decade leading up to 1983, only 10 orphan drugs entered the market, according
to the FDA. Since the act was passed, over 300 orphan drugs have been developed and
approved. Most were developed by biotechs and nearly all of them have been clinically
important.k Genzyme proved that a business could be built around small disease populations
and demonstrated its ability to profitably serve markets that seemed financially unjustified.
Since Cerezyme, it has introduced three more “zyme” therapies—drugs for genetic diseases
caused by enzyme deficiencies.
Aldurazyme treats 400 children and adults in over 30 countries who have MPS-1 in
what is referred to as an “ultraorphan” disease. More than 1,700 patients in over 40 countries
receive Fabrazyme for Fabry disease. In 2006, Myozyme was approved in Europe and the
United States for Pompe disease, a debilitating and often fatal muscle disorder that affects
fewer than 10,000 people.
In 2011, Sanofi (a French drug company) bought Genzyme for $20 billion. Both
companies argued that the deal expanded their reach: For Sanofi, Genzyme offered deeper
know-how in biological drugs and a greater research presence in the United States; for
Genzyme, Sanofi offered broader manufacturing and sales resources.

Questions:
1. How does Genzyme’s focus on orphan drugs affect the degree of competition it
faces? How does it affect the bargaining power of customers? (10 Marks)

2. How does focusing on orphan drugs affect the types of resources and capabilities a
biotech firm needs to be successful? (10 Marks)

3. Does Genzyme’s focus on orphan drugs make sense? Do you think Genzyme has a
long-term strategic intent? (10 Marks)

4. Why do you think Genzyme has diversified into other areas of medicine? What are
the advantages and disadvantages of this? (10 Marks)

5. What recommendations would you offer Genzyme for the future? (10 Marks)
Case Study (50 Marks)

GlaxoSmithKline is an interesting global corporation—it is headquartered in the United

Kingdom but operations are based principally in the United States. With 7 percent of the
world market in pharmaceuticals, it is a leader in the industry. GlaxoSmithKline’s mission is
“to improve the quality of human life by enabling people to do more, feel better and live
longer.” They do this by planning and implementing programs of research and development.
Founded in 1715 as Plough Court Pharmacy in London, GlaxoSmithKline has transformed
itself into a global presence through a number of strategic actions over the years. In the
1830s, John K. Smith and his brother George formed what became the leading drug
wholesaling company in the United States in Philadelphia. In 1842, Thomas Beecham
launched the Beecham’s Pills laxative business in England. The foundation of Glaxo
emerged in New Zealand under the direction of Joseph Nathan. From these three very diverse
beginnings, GlaxoSmithKline was formed when Glaxo well come and SmithKline Beecham
merged in 2000.
In part, the purpose of the merger was to improve R&D. To help ensure that the new firm
accomplished this in 2001, GlaxoSmithKline (GSK) reorganized its research and
development efforts into Centers of Excellence for Drug Development (CEDD), small
business units that emphasize flexibility, innovation, and therapeutic focus. Since the merger,
GlaxoSmithKline has been a leader in innovation in pharmaceutical development and
distribution. For example, GlaxoSmithKline has made a ground-breaking effort to provide
HIV/ AIDS drugs in developing countries at significant price reductions. Since the initial
merger, GlaxoSmithKline has developed leadership in pandemic flu readiness, and made
other treatments available at reduced prices to people in the poorest countries of the world.
Besides seeking to help with the treatment of the key diseases identified by the World Health
Organization, GlaxoSmithKline concentrates on medicines that treat asthma, viruses,
infections, mental health, diabetes, and digestive conditions. In addition, they explore
treatments for various types of cancer. In 2005, GSK was recognized by Bill Gates of the Bill
& Melinda Gates Foundation for the company’s commitment to R&D on malaria and other
neglected diseases.

GlaxoSmithKline Today
GlaxoSmithKline implements its strategies by employing 99,000 people in over 100
countries. Over 15 percent of GlaxoSmithKline’s employees work directly on research to
discover new medicines. They screen approximately 65 million compounds annually in their
search for new pharmaceuticals to cure the diseases focused on. GlaxoSmithKline’s
commitment to prevention is illustrated by the fact that they supply 25 percent of the world’s
vaccines. The strategies they pursue or use to frame their business planning and
implementation are summarized by three words—grow, deliver, simplify— and are
articulated as follows: Grow a diversified global business, deliver more products of value
Simplify the operating model.
Today, GSK performs the following tasks: Every second of every minute, they distribute
more than 30 doses of vaccine throughout the world. Every minute of every hour, doctors
write more that 1,000 prescriptions for a product of GSK. Every hour of every day, GSK
spends over $500,000 in research for new medications. In addition to its prescriptions drugs,
GSK produces consumer brands such as Gaviscon, Panadol, Nicorette, Ribena, Horlicks,
Tums, Aquafresh, and Sensodyne.
Building an Internal Innovation Foundation
The GlaxoSmithKline (GSK) internal research and development efforts formed the basis for
this extensive set of products and this innovative process for distributing pharmaceuticals to
the poorest countries. Consistent with this goal the firm spent over 10 percent of its revenues
on research and development in 2008. In addition, GSK is changing its R&D structure to
ensure that it can deliver new pharmaceuticals, vaccines, and healthcare products in the
future. One of the major problems facing GSK and other companies in this industry is patent
expiration. Because GSK has 30 patented drugs that are in the late stages of patent
protection, they are redefining the portfolio of drugs that they want to pursue—they are
concentrating their R&D on developing a higher volume of mid-size products in particular
patient populations. This will lower the risk of the portfolio of drugs because the revenues of
the firm will not be dependent on one or two major successes.
GSK also wants to ensure that the firm focuses on the best science. In 2008, approximately
75 percent of new products in the pipeline were entirely new compounds/vaccines. Thus, to
be successful in the future there is today a strong drive to be more innovative. To accomplish
this, the R&D area of GSK has been reorganized to improve efficiency and focus after the
merger. GSK focuses on eight therapy areas—biopharmaceuticals, immuno-inflammation,
infectious diseases, metabolic pathways, neuroscience, oncology, ophthalmology, and
respiratory. To address these areas the firm in 2008 created 70 Discovery Performance Units
(DPUs). Most of these units are inside the firm, but some are also external to the firm. The
sign of the success of this organization is that GSK completed or expanded 21 new drug
discoveries in the 2008 fiscal year.

Building Return on Investment in Innovation

In addition to hiring the individuals to conduct the research and to develop new products, the
firm has a culture and the processes that support innovation. The first part of these processes
is building a structure for innovation. As noted above, GlaxoSmithKline has identified eight
broad areas to focus its future growth on and in 2008 created DPUs within The Centers of
Excellence for Drug Discovery (CEDD). More detail on the DPUs is that they are to be
compact, fully empowered, focused and integrated teams, which have responsibilities for a
small part of the pipeline associated with the production of a drug. These teams are to be
cross-functional teams that include scientists, marketing specialists, and others from key
domains in the business to work on innovations.The firm encourages cross-fertilization of
ideas through building alliances and meetings among its own scientists where different
compounds and potential products are showcased. In these settings, R&D groups of
individuals gather, and learn about new products and processes. The firm also has policies
that support innovation.
GSK generates far more ideas and products than it can pursue during any given time. The
result is a need for a process to evaluate the different ideas and products so that judgments
can be made on which innovations to initiate support for or to continue support of. The
ability to justify the product at each step of the process is critical for the team promoting it.
The evaluation system is designed to be flexible as well as to avoid the continuation of
projects that are not meeting expectations.

GSK has a disciplined approach to how and where resources are allocated within R&D. More
than 35 percent of discovery projects have been terminated following the reorganization in
2008. After the elimination of these projects, the DPUs were given three year funding
guarantees. The certainty of funding helps the R&D group focus on providing the best
science and the best product for consumers but also gives them hard timelines to generate a
marketable product. The result of these innovation efforts is that in 2008 GSK received over
30 percent of its revenue from products that had been in existence fewer than three years. It
is worth noting that GSK’s extensive internal development efforts often lead to innovations
that do not fit with the company’s primary focus. However, the firm does not abandon those
ideas; instead, it develops external discovery teams with other firms or universities or
research labs. Thus, GlaxoSmithKline may yet gain a benefit from the innovation but is still
able to maintain its focus on its own strategic goals and its eight primary areas of research for
innovations.

Questions:-
1. What are the special planning needs for GSK?

2. What industry trends should a firm like GSK consider in its planning processes?

3. Based on GSK s past performance, what do you believe are the critical
implementation issues for GSK? Justify your answer.

4. Identify and explain the kinds of control systems you suggest GSK employ to manage
innovation?

5. What are the special evaluation needs for a company such as GlaxoSmithKline? What
characteristics of GSK do you believe have the most influence on how well it
evaluates progress toward stated innovation goals?