Strategic Risk Evaluation of Global Pharmaceutical Industry

This report discusses the working of global businesses and conducts a strategic risks evaluation of pharmaceutical industry. In order to illustrate various risks and responses to manage those risks, the global pharmaceutical industry is discussed through examples of Glaxo Smith Kline (GSK), Pfizer and other such organizations. Commercial risks that are associated with this industry include poor execution of strategy and misalignment of objectives, whereas financial risks exist in the form of inaccurate asset valuation and currency exposure. Moreover, a global company is also exposed to country risks like corruption and cultural risks like communication gap. After explaining the risks, different strategies are discussed which can manage these risks. These strategies include global strategy, transnational strategy, multi-domestic strategy and adaptation strategy.

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Introduction

The pharmaceutical industry is a global industry that discovers, markets and produces drugs for the use of patients under the administration of medical professionals (Mittal, 2017). The market for this industry has continued to grow despite numerous hurdles because the demand for drugs has only increased. Especially in the post-COVID era, the pharmaceutical industry has emerged as one of the most important industries because it registered positive growth while most other sectors slowed down (Pharmaceutical Technology, 2020). However, a global pharmaceutical company not always earns profit but also records losses due to various strategic risks. The purpose of this report is to highlight various strategic risks that a pharmaceutical company may face while working internationally. Some of these risks include currency risk, country risk, cross-cultural risk and commercial risk. Furthermore, different responses to manage those risks are also highlighted in this report.

Primary strategic risks facing an international pharmaceutical company

Commercial risks

One of the commercial risks which a global pharmaceutical company can face is the poor execution of strategy. While launching its drugs, the international pharmaceutical company is at risk if it fails to ascertain its target public’s buying capability. Launching expensive medicines like Actimmune or Daraprim in an underdeveloped country where people have low buying power is a risk that negatively affects the profit margins of a global pharmaceutical company. For example, keeping this risk in mind, German pharmaceutical company Bayer did not sell cancer drugs in India because they believed the majority population of India would fail to buy this medicine (Balasegaram, 2014).

Another commercial risk encountered by international pharmaceutical companies is a misalignment of objectives and lack of trust among partners (Michels, 2019). Partnering with a local company allows the global company to target the public more easily. However, the risk of mistrust becomes apparent when a unilateral decision is taken. For example, Pfizer aimed to get in a partnership with AstraZeneca but went public about some details without the approval of AstraZeneca (Ward, 2014). This unilateral decision resulted in a lack of trust, and the partnership failed to succeed.

Moreover, a commercial risk that an international pharmaceutical company experience is wrong timing of entry in a market (Dickmann, 2019). Before launching a medicine globally, the pharmaceutical company needs to ensure that the product does not have harmful effects. Moreover, it needs to do a precise analysis of whether the opportunities for its products exist or not. For example, Pfizer failed to make a profit from a drug named Torcetrapib, even after spending significant money on its development (LaMattina, 2018). Hence, the drug was ultimately called-off because it was launched in haste, and the company did not spend ample time on testing.

Country risks

Country risks are those particularly associated with a target country, i.e. a state in which the international pharmaceutical company aims to launch a product. One of the country risks faced by international organizations is inefficient and corrupt bureaucracy (Jenkins, 2018). A global pharmaceutical company needs to abide by strict regulations before it can enter a country. It needs to pass any tests that the host country may take, and usually, pharmaceutical companies have the most stringent tests because of their direct effect on people’s health. Moreover, the pharmaceutical company is susceptible to bribery in corrupt countries. GSK was caught giving bribe to Chinese bureaucracy, and as a result, it suffered a severe financial loss because the company was fined 490 million dollars (BBC, 2014).

Currency or financial risks

The global pharmaceutical company is also prone to various financial risks. Financial risks are concerned with generating a profit and how assets are managed (Bente et al., 2017). One of the financial risks is currency exposure to various countries. Moreover, changing the political landscape also results in a change in currency value. For example, GSK faced losses due to recent devaluation of the British pound, mainly caused by Brexit. As the value of pound decreased, the shares of GSK in the USA, which comprises of 34% of the total turnover of the region, also resulted in a loss (Dominici et al., 2017).

Another financial risk that is associated with a global pharmaceutical company is inaccurate asset valuation. As illustrated by Miciuła et al. (2020), business valuation is a complex process involving different fields of science, so there is a considerable risk of incorrectness. A global pharmaceutical company has multiple drug stores and manufacturing plants across the world, and the value of each entity significantly differs from each other, which makes the process complex. Inaccurate asset valuation can result in a lower stock price, thus causing loss to a company and resulting in its inability to venture for new projects. For example, Pfizer has been declared as undervalued due to inaccurate asset valuation (Trefis, 2020). As a result, its stock price is only 38 dollars, thus prohibiting the company from earning accurate profit.

Cross-cultural risks

Cross-cultural risks exist for an international company because it works in different regions around the globe. Cultural risk is defined as a loss that may occur due to a poor understanding of an organization’s internal or external environment (Firsova et al., 2015). For example, GSK works in Middle-East, South Asia and Central Asia at once, thus exposing itself to significant variances between internal or external environment.

One of the cross-cultural risks is problems in the communication gap. A pharmaceutical company that fails to establish a coherent communication mechanism faces many issues. Variances in drugs characteristics occur when instructions fail to reach lower employees due to language and other barriers. Furthermore, the communication gap inhibits accurate transmission of teachings from leaders and managers to employees, which delays the completion of operations. For example, a survey at Sanofi pharmaceutical company found considerable communication gap among the organization. There was a great divergence between views of employees and employer with regards to benefits (Tatelman and Chen, 2016). Such a difference can cause employees to work in a different direction as compared to what the employer intended, which results in loss of time and money.

Another cross-cultural risk is disregarding religious considerations of the local region because religious backgrounds have a significant effect on the behaviour of global corporations (Esteban et al., 2019). A global pharmaceutical company which works in countries and targets people with varying religions needs to keep religious considerations while making decisions. For example, Green Star launched contraceptive pills in Pakistan faced a lot of resistance (Green Star, 2020). Many countrymen protested against contraceptive pills because they are considered haram by some Muslim clerics (McCarthy, 2011).

Management of risks faced by a global pharmaceutical company

Following are some of the ways in which strategic risks to a global pharmaceutical company can be managed:

Responses to manage commercial risks

In order to manage the risk of poor execution of strategy, a pharmaceutical company must do thorough work before making a decision. As illustrated by Mukerji (2013), the organization should have access to cutting edge information about the country it is going to invest in to execute its strategy accurately. The company should adopt a multi-domestic approach by collaborating with the government of the target country to obtain official information regarding the societal status of the general public. If the general public is wealthy with high GDP per capita, the company should focus on selling its expensive anti-neoplastic agents. On the contrary, if the living standard is low in a particular country, cheap and essential drugs like anti-microbial agents should be sold (Falagas et al., 2006).

For minimizing the risk of trust deficiency and objective variance between partners, techniques for collaboration must be promoted by adopting a global strategy (Economist Intelligence Unit, 2008). The global strategy would allow the organization to make its headquarters at one place and then coordinate with partners spread in geographically different locations. For example, GSK has offices in Brentford, United Kingdom from where it blends with its partners in four separate continents (GSK, 2020). Coordination with all partners from one headquarters improves collaboration because the collection and then dissemination of information are done from only one source.

To manage the risk of false timing of entry in the market, the global pharmaceutical company should adopt an international strategy for a more informed decision-making process. The international strategy promotes a widened scope of strategic decision making and allows the company to take into account rational factors like the list of already available drugs, psychological factors like fear of relocating among employees, social factors like political stability and cultural factors like the importance of spiritual healing before making a decision (Shahsavarani & Abadi, 2015). For example, Pfizer has decided to avoid central bureaucratic decision making and now follows a more informed and strategic decision making which allows consideration from all segments of the organization (Faigen, 2011).

Responses to manage country risks

Strategic risks due to corrupt bureaucracy in a country can be managed by adopting a multi-domestic strategy and forging a relationship with the local government. As highlighted by Galang (2010), if the pharmaceutical company aims to invest in a country with stringent and corrupt bureaucracy, then it should first gain political influence through collaboration with government and then argue for preferential regulatory rules. For example, Pfizer partnered with the Ethiopian government to provide free AIDS drugs (Ababa, 2004) which helped the company to develop a close relationship with the government, thereby allowing it to simplify regulations and drug tests and thus, minimizing the risk of getting harmed by corrupt bureaucracy.

Responses to manage financial risks

In order to manage the risk of currency exposure, the global pharmaceutical company should adopt a transnational strategy and sign a forward-exchange contract. This contract would save the company from momentary exchange rates because the amount will be fixed in one currency until a specific date (CPA Australia, 2009). For example, GSK signed multiple forward exchange contracts to ensure profit. According to its financial statements, in the year 2019 alone, GSK averted the financial risks due to currency exposure and ensured profit of 19 million pounds while investing in the forward-exchange contract (GSK, 2019).

Risk of inaccurate asset valuation can be managed by adopting the global strategy and selecting the appropriate method of valuation through specifying objectives of valuation, the situation of valued entity and specificity of the area of that entity (Miciuła, 2020). The global strategy helps the company to value all its assets with regards to their location and capabilities. For instance, GSK values its identifiable assets, liabilities and contingent liabilities according to conditions of the external and internal environment. By following this method, risk of inaccurate asset valuation was averted, and GSK’s assets were valued at 7812 million pounds (GSK, 2013).

Responses to manage cross-cultural risk

The risk of a communication gap can be managed by adopting a global strategy because it promotes integration by encouraging employee involvement through informal participation (Townsend et al., 2012). If employees are only engaged through formal communication, then gaps between managers and employees emerge, which inhibit employees from voicing their concerns out of fear. However, informal communication eases the atmosphere and allows employees to convey everything to their superiors. For example, Pfizer publishes employee engagement report every year to highlight the level of formal and informal communication among employee. According to the report, Pfizer exceeded the 75th percentile of external benchmarks on all engagement index questions, and employees expressed that they were allowed to communicate within the organization easily (Pfizer, 2018).

The risk of hurting religious sentiments can be managed through an adaptation strategy of a pharmaceutical company. The company should adapt according to the religious customs of a region or a country. Many global pharmaceutical organizations like Pfizer and GSK ensure halal certifications in medicines to attract Muslim population (Dinar Standard, 2013). Halal medicines do not use pig meat, alcohol or any other product impermissible to Muslims.

Conclusion

A global pharmaceutical company is prone to numerous strategic risks. These risks are categorized into the commercial, country, financial and cultural risks. Commercial risks include lack of trust and poor execution of strategy while country risks include rampant corruption and political instability. Moreover, financial risks exist in the form of currency exposure and inaccurate asset valuation while cultural risks include communication gap and disregard for religious values. The commercial and country risks can be managed through appropriate responses which include obtaining thorough information, promoting collaboration and developing a close relationship with the local government. Furthermore, to manage financial and cultural risks, the forward-exchange contract should be signed, and informal communication should be promoted.

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