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Case Study: Pharmaceutical Company Genzyme

Introduction

In current paper, a discussion is presented regarding a Pharmaceutical Company called Genzyme. Its strategies of operations in the biotechnology industry are analyzed. Genzyme was founded in 1981 in Boston. It was started by scientists who researched genetically inherited enzyme diseases. In 1983, Henri Termeer, who took the role of the president and later became the Chief Executive Officer, joined the team. Termeer had a well paying job at Baxter but he joined the company as he thought Genzyme was well-positioned to pursue success in the drug industry by concentrating on small market for rare diseases. Here below follow the responses on the questions regarding Genzyme.

1. Genzyme’s focus on orphan drugs affects the degree of competition it faces in the

market. Genzyme is the only pharmaceutical company that focuses on orphan drugs. Orphan drugs provide treatment to diseases that afflict less than 20,000 people across the globe. The drugs are designed to contain effects of rare diseases that influence proportionately a small number of the world populace. They are called orphan drugs because many pharmaceutical companies do not invest their resources in research and production of such drugs for the reason of small markets. They concentrate on ‘blockbuster’, drugs that are manufactured in mass for cure of many common ailments, for example, drugs for hypertension and diabetes.

Genzyme’s focus on orphan drugs is a strategic decision to beat competition in the drug industry. There exists a stiff competition in the biotechnology business. It is reported that between 2000 and 2005 biotechnology companies were the fastest growing sector in the drug industry. Approximately 1,100 biotechnology firms were in business during the year of 2005. Abreast of it, Genzyme developed a strategy to beat the violent competition. Given that no firm had ventured into production of orphan drugs, Genzyme saw an opportunity to win a big share in the business.

The consumers of orphan drugs are few. It meant that Genzyme could employ a direct and targeted marketing strategy which would be more effective to reach potential customers. The severity of the diseases and the small number of patients imply that insurance companies would be less likely to reject reimbursements to patients. Genzyme beats the competition in the industry by focusing on drugs for rare diseases. A single producer or supplier enjoys monopoly status in the market (Vendemiati, 2010). The degree of competition is reduced drastically for Genzyme.

The bargaining power of customers would be hugely affected. In a market where there exists only one producer or seller of products, the bargaining power of customers or buyers would be affected negatively. Customers would not have options to make choices. Where there is only one supplier, customers would be forced to take what is available in the market. The customers would have low bargaining power because there is only one manufacturer and seller of orphan drugs.

2. Genzyme’s focus on orphan drugs has an effect on the types of resources and

capabilities a biotech firm needs to be successful. Immense resources are required to produce a drug. It takes approximately 10 – 14 years for a drug to reach the market. Stringent regulations must be met for approval to be granted to sell the drugs. The costs involved are substantially high. It takes an estimated amount of $ 800 million to undertake research, perform trials and receive the necessary consents.

The passing of the Orphan Drug Act by the Food and Drug Administration further made the conditions for a company seeking to venture into orphan drugs more challenging. It cushioned companies that have made discoveries against any research or invention of another drug that performs the same function for a period of seven years. The aim is to allow the company to recoup the costs associated with drugs production. It represents a barrier to entry into the market. The financial resources and time required to design and manufacture orphan drugs are immense. Firms desirous of joining the industry of orphan drugs production would require such resources in order to be successful.

3. Genzyme’s focus on orphan drugs is reasonable. Orphan drugs are meant to

provide medication for patients who suffer from rare diseases. Other pharmaceutical companies have avoided production of such drugs for reasons of low profit margins. Since the diseases are rare, it means that the demand for such drugs would be low. Low demand implies low sales leading to less income in revenues (Berezin, 2010). Firms in the drug industry, just like any other organizations in other industries, undertake operations for the aim of earning a return or profit. Therefore, firms would shun production of goods or drugs that would command low levels of income or demand.

In the event that all companies in the drug industry shunned the production of orphan drugs, the affected patients would have little hope for survival. People suffering from Gaucher disease, Fabry disease or MPS-1, have a shortage of key enzymes responsible for regulation of body metabolism. The conditions lead to build up of sugar, fats or proteins in the body that cause constant pain and early death. Research has found out that children suffering from Gaucher disease rarely live past their 10th birthday. It is further reported that in adults, the disease causes chronic liver, kidney and heart diseases and damage of the spleen. On grounds of ethics, it would be wrong to leave such patients suffer till death because no profit margins can be realized from production of such drugs. As a result, it is reasonable to manufacture drugs in order to save human lives.

Business or investment requires that sustainable models are designed in operations that lead to production of goods or services (Romer, 2005). Genzyme’s operations are sustainable. The immense success registered by the company indicates that its strategies are geared in the right direction. The journal science has regularly named the company a ‘top employer’. The company is also ranked 6th among 459 global biotechnology and pharmaceutical companies. Genzyme is also lauded for providing a ‘superior workplace environment for people and has in place a rigorous program for sustainable design’. Therefore, the activities of the company are very necessary. The company is one of the leading producers of orphan drugs, makes huge profits and embraces sustainable operations management.

Genzyme has a long-term strategic intent. It is indicated by the company’s decision not to follow the footsteps of the other leading pharmaceutical companies. It avoided being involved in any partnership programs and instead adopted an independent strategy. The company conducts its own testing, manufacturing and sales. The advantages accruing from such strategy include the enjoyment of all due profits. Diversifying of operations by the company also signals towards a long-term strategic intent. Genzyme has spread its operations to chemical supplies business, genetic counseling and diagnostic counseling business.

The investments made by Genzyme towards its operations in the industry also show that it has a long-term strategic intent. In order to manufacture Ceradase drug, proteins from human tissues were required. The rich source of the proteins was determined to be placentas from human tissues. Genzyme planned on construction of a plant for the storage and extraction of the tissues in France. It is reported that at one time, 35 per cent of placentas from United States passed through the plant. By 1991 Genzyme was collecting a million placentas annually. By 1993 Genzyme had developed a recombinant form of the enzyme that avoided the need for human placentas and led to efficient production. The foregoing shows strong strategic long-term intent by the company.

4. Genzyme’s decision to diversify into other areas of medicine is noble. The areas

where the company has ventured into include chemical supplies business, genetic counseling business and diagnostic testing business. The main reason for diversifying was to create more sources of revenue. The other businesses generate income to the company. The extra income could be utilized to fund the expensive exercise of research and production of new orphan drugs.

The other reason of diversifying was to ensure certain extent of autonomy and independence. Termeer had indicated their desire to remain independent and stick to their strategic objectives. By venturing into other related businesses, the company would be nearly fully equipped to undertake their business within the industry. It would make the company be in a position to offer a whole range of services in the medical field. Its customer base would grow and make more income.

There are various advantages and disadvantages of diversification. By diversifying, the pharmaceutical company would benefit from an extra source of revenue. Since production of orphan drugs has been observed to be an extremely expensive exercise, the company would gain from other engagements that bring income to the company. The money earned can then be used to fund the long-term investments of the firm.

Diversification reduces the risks associated with market uncertainties (Walsh, 2003). In the event that a certain failure occurs and the final products fail to pass the test, then the company would fall back to the other services or products that it offers. It ensures continuity in the event of an externality that threatens the existence of the company. The customers would also enjoy a wide range of services and products from one company. They would benefit from economies of scale due to purchase of various products from the same company.

There are also disadvantages associated with diversification. Diversification increases the scope of operations of a company (Romer, 2005). When handling large volumes of work, a company may lose control over its core business. Much attention may be dedicated to areas or departments that are supposed to be ancillary. The main area or core business may not get the kind of attention required. The consequence would be half-baked products unable to meet customers’ needs. Poor quality would lead to low demand and low sales. The company would end up incurring losses due to lack of attention and specialization in a particular area of production.

Diversification also introduces new risks. To undertake any operations leading to production of goods or services, resources are required. Sales from the production bring the income that would cover all associated costs. In the event that the product fails to command a substantial demand and sales volume, losses would be incurred. Other risks involve threats posed from the external environment. Adherence to regulations laid down by the authorities is mandatory (Dixon, 2008). In the event of failure by the company to observe the regulations, either through omission by a worker or ignorance, the company would either way be fined. Therefore, diversification of a company through offering of other services or production of related products, leads to increased threats or risks.

5. Genzyme’s current operations are reported to be sustainable and profits are

flowing. To ensure the profits are maintained or register further growth, the following recommendations are worth to be implemented. Expansion of the scope of operations forms the first step towards maximization of revenue (Acker, 2012). Currently, the company’s facilities are in 30 countries. It implies that the products of the company are not provided for the other parts of the world. An expansion strategy would ensure that the services are spread in major parts of the world with the intention of ensuring reach by many patients or customers. That would increase the market for the products. Sales would increase thereby further cause high return to the pharmaceutical company.

Increased funding for research into the numerous rare diseases would increase the quantity or range of orphan drugs produced and services offered by the firm. It is reported that there are between 5,000 to 8,000 known rare diseases in the world. In the decade leading to 1983, only 10 orphan drugs had been discovered and available in the market. After the passing of the Orphan Drugs Act, 269 orphan drugs have been marketed. The message here is that there exists an opportunity to research and introduce more orphan drugs. Genzyme could exploit the opportunity and earn more than it currently does.

Conclusion

Genzyme is one of the leading pharmaceutical companies. It focuses on drugs that treat diseases which affect less that 20,000 people in the world. The drugs are commonly referred to as orphan drugs. The company has adopted a strategy of maintaining its independence and pursuing the route that many leading pharmaceuticals try to avoid due to estimated low demand. By following the strategy, the company has faced the benefits of low competition and favorable laws that encourage research of drugs for rare diseases. For the company to ensure it remains vibrant and profitable in the long-run, expansionary policies are recommended to ensure that its products and services are reached by the other people in the world who may be in dire need of them. An appropriate implementation of the recommendations would ensure that sustainability is achieved.

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