The Chinese profile of pharmaceutical industry is low and it owns 20% of the worlds population and only 1.5% of the global drug market (Smith, 2005). However, the pharmaceutical industry in America is one of the fastest growing industry and many American companies are self sufficient in manufacturing drugs medicine and chemicals, medical devices, hygiene materials and pharmaceutical machinery (Jonas, 2003). As a result of growing efficiency in pharmaceutical industry, many Chinese markets now are approaching to have joint venture with other international pharmaceutical company. The pharmaceutical industry in USA is the most profitable industry in last few decades and it is the most rapidly growing sector in US economy. It is anticipated to expand more (Boussel, 1983).
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This paper aims to investigate the feasibility of joint business activity of Eu Yan Sang, a Chinese pharmaceutical company. The reason choosing an American company for joint venture is that American pharmaceutical industry has created a competitive advantage in US economy. In this paper, the focus is to analyze how far the business venture of Eu Yan Sang with a US base company Merck & Co., Inc. This joint venture is Franchising and Merging & Acquisition. This report project will analyze whether or not doing a joint venture with Merck & Co., Inc is good in terms of success and economical growth.
Industry Business Description
However, Chinese and countries of far eastern pharmaceutical market are highly inefficient. In 2007, they all have around 3,000 to 6,000 domestic pharmaceutical manufacturers companies and around 14,000 domestic pharmaceutical distributors. China is one of the major pharmaceutical market is the world. In 1996, the market value of Chinese pharmaceutical market was $ 10 billion and this number is forecasted to extend more. The rapid expansion of economy and government efforts to build China as an important player in the pharmaceutical industry is fueling the growth rate of pharmaceutical companies in China (Boussel, 1983).
Eu Yan Sang International Limited is listed on the Singapore Exchange as Eu Yan Sang International Limited. It is a global healthcare company with its main focus in Traditional Chinese Medicine. The company has dedicated its business operation to pursue the best natural healthcare products and services to its customers.
Eu Yan Sang was established in 1879, emerging from a small Chinese medicine shop. In 1999, the Group transformed its corporate and retail reputation, actively contributing in the transformation of the Traditional Chinese Medicine industry and homogeny of its Chinese medicine manufacture by cooperative research with academics and the government. The company is now an International Limited with the largest TCM manufacturer and retailer in Hong Kong, Singapore and Malaysia and sharing their inventive marketing concepts and strategies.
Eu Yan Sang is a pharmaceutical company that specializes and focuses in traditional Chinese medicine. The company currently operates more than 140 retail outlets in Hong Kong, Macau, China, Malaysia, Singapore and Taiwan. It also owns two factories in Hong Kong and Malaysia. The company also operates 20 TCM clinics in Hong Kong, Malaysia and Singapore and three Specialist TCM Centres in Singapore (http://www.euyansang.com/).
3.1 Type of Business
Eu Yan Sang is a retail and manufacturing company. It possesses a distribution network of 140 retail outlets in Hong Kong, Macau, Guangzhou, Malaysia, Singapore and Taiwan. The company’s some of products are also carried to pharmacies, supermarkets, stores, hospitals, health clubs and spas. Eu Yan Sang is also a manufacturer and has two manufacturing factories in Hong Kong and Malaysia. The Company’s manufacturing facility in Malaysia is operated by a completely possessed supplementary company, Weng Li Sdn Bhd. Eu Yan Sang has invested in a HK$110-million in a 130,000 sq ft (12,000 m2) industrializing plant in Yuen Long Hong Kong in 2006. This incorporation and extraction facility also has possessed its own laboratory facilities for research and development. The Company controls 20 TCM clinics in Singapore, Malaysia and Hong Kong. Moreover, there are three specialists TCM centres in Singapore and has trained practitioners in Chinese medicine. These clinics provide services such as acupuncture and dispensing TCM prescriptions (http://www.euyansang.com/).
3.2 Legal Structure
The company is group of companies operated in Hong Kong, Malaysia, Singapore and Australia by senior management of the company (http://www.euyansang.com/). In addition, in August 2010, Eu Yan Sang announced its joint venture of acquisition with ASX-listed Healthzone Limited, and the agreement to acquire 14.99% of Healthzone Limited. (Company Document available on URL  )
The company was founded in the 1870s by Eu Kong Pai also known as Eu Kong. He built up the first stone of the company after he realized that the locals were greatly reliant on opium as the most convenient way for instant relief for their medical requirements. Since the majority were ignorant and unaware that opium could be dangers to their health. Eu Kong applied his traditional knowledge of Chinese medicine to produce herbal remedies to treat their physical suffering and re-establishing the health. Eu Kong started his first Chinese medicine store in 1879 in Gopeng, with the name “Yan Sang” (Singapore business, 1993).
Eu Tong Sen, the eldest son of Eu Kong inherited the family business in 1890. Eu Tong Sen had been greatly concerned in tin mining industry of Malaya.
His views of tin in Kampar made him to start a second medicine store in Kampar, Perak in Malaya. At last, Eu Tong Sen enlarged the family business of traditional Chinese medicine and developed it to other parts of Malaya, Singapore, Hong Kong and China. The company name is Eu Kong is made up of the words “Yan” and “Sang”. The Yan means kind in Chinese while the Sang means birth or life (Asia’s 7500 largest companies, 1987).
The company’s vision is to become a global healthcare company and having products and services base on Traditional Chinese Medicine and other Asian health practices. In addition, the company has mission as its name is “Caring for Mankind” and its aims is to promote good health and good living through using the diffusion of Traditional Chinese Medicine knowledge and other Asian health practices. The company’s core values are to provide satisfactory product and services by ensuring 100 % quality, valuing the people by committing to provide them rewarding careers and highest standard of integrity. The Company also recognized itself as responsible community and maintaining the provision of highest standards of excellence in the products and services.
3.4 Company Principals/Ownership Structure
The Company is headed by a Chairman and a Board of Directors. The Board of Directors is comprised of 11 members and Chairman is responsible to the Board of Directors for using his rights. There are senior managements of the company that heads the operations of company in different countries.
Eu Yan Sang has concentrated on supplying Chinese medicine products of the premium quality to its customers. It offers 1,000 types of different herbs in its store and has 300 products under the brand of Eu Yan Sang.
Product/ Service Analysis
The company produced herbs and medicine majorly for human disease including for woman, infants, and man. The company has offered its products with different name such as Flagship Products and TCM Herbs. Moreover, it offers wide range of different products such as TCM Solutions and Health Foods. Through the products the Company has focused to deliver the best healthy products to the customers. Other healthy products including honey series, chicken series and tea series.
Customer Profile/Demand Analysis
The customers of the Company are located in the areas where the Company operates and supplies its product such as Singapore, Hong Kong, Malaysia and Australia.
Innovation: Global pharmaceutical companies are keen to have competitive advantage by developing innovative, differentiated products that can be developed with rapid process and marketed worldwide.
Sales and Marketing: Sales and marketing potentials are the increasingly significant source of competitive advantage. A pharmaceutical company that established an effective global franchise with its customers is able to maximize return on its in-house products and is in a better position to attract the more and more customers. Bristol- Myers Squibb established the global leading cancer business based on in-licensed compounds.
Strategic Responses: The international pharmaceutical market is relatively broken off into parts, and has very large numbers of domestic players; it is merged at the global level. In 2002, no company has more than 7.5 per cent market share, but in 2003, Pharmacia acquisition of Pfizer held over 10 per cent. The top 10 players of pharmaceutical industry accounted for approximately half of world pharmaceutical sales (Holland & Lazo, 2004).
A business environment is the environment where business operations are performed, and its operations, productivity and employment factors are affected by external environment. The external environment mainly includes all the important aspects of a business such as government regulations laws for a business could be different in different environment and can immensely affect the business functions. Other than this, different business environments are the major players that are significant to consider as an influential part of businesses.
Business Climate in USA
The pharmaceutical industry in USA has enjoyed a great economic improvement from the aging baby boomer population and aggressive R&D (Thomas, 1983) marketing and productivity struggles and now the opportunities are available in the global economy. In USA, the enhancing opportunities are available in pharmaceutical industry and at the same time challenges for innovation are tremendous. Revolutionary and innovative advances in technology have made the industry to unprecedented pharmaceutical discoveries (Slatter, 1977). Yet primarily concern of regulation by the FDA is to have low returns to investments in R&D; such as the rate of return in the late 1970s dropped by a third to its 1960 levels, moreover the price of exploring and producing new drugs increased 18-fold. However, during the 1980s (Swann, 1981), in USA the pharmaceutical industry had a development from the Reagan administration that increased the patents on prescription drugs and sped up the pace of approving common drugs to alternative for drugs with expired patents. The instant effect was observed in 1980s with the R&D expenditure in drugs that was about 10% of the sales industry, against 3% for all manufacturing industries. Moreover, the Center for Drug Evaluation and Research of FDA still operate the brand name of industry, a common prescriptions and OTC drugs, giving a long time delay on production. It takes almost double time of 1960s level to develop the new product. The recent trend developed now is 8.1 years in the 1960s, 11.6 years in the 1970s, 14.2 years in 1980s and a steady 14.9 years during 1990-1996.
Center of Drug Evaluation and Research claimed that in the mid-1990s the introduction of user free approach, according to which the applicant pays to the government for its review, they have two times increased the number of new drugs approved and divided the review time half.
The strategy for industry is to have an ample supply of projects of R&D and patents in the pipeline, to lobby Congress and have the extension of time on their patents so that able to recoup their investment price, to let the fastest approval of common drugs in order to alternative for drugs whose patent has invalid, and to provide drugs before its approval is possible in some certain cases such as in the HIV cases in South Africa.
In the United States, pharmaceutical industry is a pioneer in terms of the exploration of new and cost effective life saving drugs (Remington: the science and practice of pharmacy, 2005). Pharmaceutical industry is a free market and industry mainly focuses on research and development. In addition, USA pharmaceutical industry has emerged as leader in the global pharmaceutical industry. With the growing pharmaceutical market, industry also offers number of employment opportunities. 484,151 million Euros is the worth of total global pharmaceutical market, and USA with northern part of Americas and Canada has the largest share of 47.7% (Shippey, 1995). Recently USA pharmaceutical market has experienced a development and discovered 370 new drugs for different diseases of the heart and other organs. Moreover, other medicines for hypertension, Alzheimer’s disease, arthritis, Parkinson’s, cancer, depression and diabetes have also been developed (Bartfai, 2006). American pharmaceutical industry has served almost 50% of drugs demand across the world. However, recent new technology innovations have provided the US pharmaceutical industry s new way of exploration. Today, drug produced aims to remove the disease from the root. In this development, genomics has played an important role because genomics and innovative technology have been implemented together such as high-through-out screening for compounds substance which uses automated technology, laboratories on a chip for storing a large number of DNA fragments, molecular modeling, and laser-capture microscopes and X-ray crystallography (Hillier, 2006).
The current status of US Pharmaceutical industry is ever expanding industry with the investments of huge amounts. Most of its investments are used for research and development. The total investment in the research and development of US pharmaceutical sector grow five times higher between 1990 and 2006. Only in North America, the total sales of was 47.7% of the global sales in 2006. Some of the leading US Pharmaceutical Companies are Eli Lily, Pfizer, Bristol-Myers Squibb, Genzyme, Amgen, Genentech, Biogen and Johnson & Johnson.
In SWOT analysis, strengths, weaknesses, opportunities and threats that are related to pharmaceutical industry in the US are discussed.
STRENGTH of US Pharmaceutical Industry
There is no doubt that pharmaceutical industry in USA has grown very fast and has more potential to survive better than existing condition. US Pharmaceutical Industry has got some strength that actually fuels up the industry on the whole.
Cost Reductions: the manufacturing and developing of drugs and medicine requires going through a number of process and in order to gain the services company pays price. American pharmaceutical industry has great support of costs that eliminates their cost on other factors and consumes it for the quality production of drugs.
Global Presence: As a result of cost reduction, the American pharmaceutical market is developed and advanced; moreover, it has a global presence that provides the market players to access international market.
Improved R&D: American pharmaceutical industry has been successful for its improved and advanced research and development in the field of pharmaceutical products.
Economies of Scale: In US, many large pharmaceutical companies have access to larger market by allowing operating with large geographical approach. Therefore often American pharmaceutical companies are merging and acquiring other international companies. As a result of merger and acquisition, domestic market get maximum sales and applying new marketing force (Smith, 1991).
Strong Finance: The pharmaceutical industry in USA has strong financial base that provides the industry strong point to grow and expand.
Increased Market Share: Pharmaceutical industry in USA is one of those industries that occupies maximum market share in all industry. The rapid growth in the pharmaceutical industry is persuading many investors to invest their money in the industry.
Various Synergies: There are many joint ventures seen in the industry such as franchising, merger and acquisition. As a result of synergies, market acquires more opportunity for market and industry players.
Advantages of Clinical Trial: Clinical trials are one of the most important parts of research and development in pharmaceutical industry and little advantage decreases the clinical trials eliminating the success of drug. US pharmaceutical industry offers number of advantages for clinical trials making the research and development process smooth and successful (Austin, 2008).
WEAKNESS of US Pharmaceutical Industry
However, pharmaceutical industry in US is leading industry yet it has to face some negative side and they are brought about weakness of the industry.
High Employee Turnover: Pharmaceutical industry in USA has the highest employee turnover due to highest opportunities in the market. It creates vulnerability for the industry (Kovner, 2002).
OPPORTUNITIES of US Pharmaceutical Industry
Licensing: There is a good opportunity in American Pharmaceutical industry as new companies are issued license for legally inception in the industry following certain standards.
Joint Venture: Companies in pharmaceutical industry have trend to have joint ventures and most of such joint ventures are successful.
Further Merger: Pharmaceutical industry in USA has potential to merge with more than one or two companies. Therefore, it is seen that different companies like Merck Inc., Co which has joint venture with more than two and three companies and had merged with its competitor.
Organic Growth: The industry possesses the different business expansion as a result of increased sales output.
New Drug Development: As a result of huge investment in research and development industry is able to produce and develop new drugs products. The development of new drugs production has created opportunities for not only existing but also for new companies.
THREATS of US Pharmaceutical Industry
Besides the industry offers opportunities for companies but there are some factors that are creating threat for the not only existing companies but also threat the new companies.
Competition: The pharmaceutical industry in USA is very competitive due to frequent new entries, use of advance technologies and new drug in the market. Tough competition makes the other companies to struggle compete with new market and industry requirements.
Rising Drug Cost: The rise in costs of prescription medicines affects all sectors of the health care industry.
Growth in Generics Drugs: The growth in the consumption of Generic Drugs affects the sale growth of branded drugs. In USA market, consumer prefers to use generics drugs due to high cost of branded drugs. This factor threats the growth of branded drugs manufacturers (Douglas, 2005).
Drug Side Effect: In USA, drug is mostly abused and results as side effects. For this FDA has banned the general prescription of that particular drug which affect negatively on the sales of the company.
U.S is able to establish a better and competent pharmaceutical industry as a result of a sophisticated regulation systems featured by new advanced technologies, considerably consuming on biomedicine, moreover endorse new therapies in the form of government funding for research and big patient markets covered by third-party insurance. By the regulation program, government intends to make the distributors and manufacturers to follow the standardized rules and regulation that comes under states law.
Government Constraints in USA
In USA, government organization FDA (Food and Drugs Administration) charges millions of dollars. These charges are paid in the name of user fees that are charged to speed up the drug approval process. These fees or fund are now more than half the critical drug-review process of agency. These fees are changed after every five years after negotiation between industry group and FDA. There are high charges on the registration and labeling of new drugs by FDA (Douglas, 2008).
Government Incentive in USA
In USA, government has given many incentives to pharmaceutical importers and distributors. According to this, distributors and pharmacists in America are able to re-import drugs prescription in the United States as long as the drugs meet strict safety standards. Moreover, distributors and pharmacists are able to purchase drugs at the lower prices and after that can pass the big savings along to American consumers. Another law gives the pharmacist and distributors to have less expensive medicines from anywhere in the world by mail order. Now pharmacists and drug wholesalers are able to re-import FDA approved prescription drugs that is previously manufactured in the US. Government has also made it easier for individuals to import low price prescription drugs from other countries after rejecting a more sweeping proposal to permit huge imports by drug wholesalers and pharmacies. Moreover, importers are able to import drug from 25 nations where the same medicines are sold at a fraction of the U.S. prices. IF drugs are manufactured in USA, it could be imported or re-imported from Canada, Australia, Israel, Japan, New Zealand, Switzerland, South Africa, and European Union countries.
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The regulation of pharmaceutical means government responsibility to guard the public health by regulating the behavior of the private sector (Kovner, 1990). For this purpose, government must ensure the quality, efficacy and safety of medicine produced. The purpose of drug regulation is achieved through implementing such structure that functions as an organization to regulate the laws. In U.S., there has been an organization FDA (food and Drug Administration) that is responsible to address the matters of pharmaceutical industry. The U.S pharmaceutical industry has been recently facing the criticism of drug prices. However, laws and regulation of U.S government offers great opportunity to business of pharmacy to grow and establish well. The government of United States offer excellent measurements of similarity and difference that put light on the innovation to regulation. The role of the government as regulator has varied significantly, with the U.S. FDA centralizes safety regulatory authority.
FDA is responsible to create common regulations, and particular pharmaceutical approval requirements, implementation actions, and voluntary compliance activities. The United States Code of Federal Regulations defines the FDA. According to this, the FDA is obliged to make an effort to have sustainable transparency. Good Manufacturing Practice (GMP) regulations are issued for food, drugs, and medical devices. The entity regulated by FDA is not in the compliance with GMP’s and other requirements. Law of State also defines that there are different laws and regulation for importers and exporters of drugs. In USA, drugs manufactures are to follow different regulation according to which manufacturers or distributors are required to get registered paying a particular fee by FDA.
Pharmaceutical importers can be detained at the point of entry if they are not in the compliance. This is done by the cooperation between the FDA and customs officials of the Department of the Treasury. New drugs or medical device that is related to marketing approval, in such case FDA has right to decline or withdraw marketing authorizations of product as a means for enforcement. Moreover, it can also carry out the administrative embargoes of particular products that are considered to violate the law. For some certain violation there are money penalty. The compliance takes place by voluntary actions by dutiful firms, and the FDA has regulation guidelines that are applied on product recalls. Often legal undertaken with respect to GMP and safety is not required as warning letters and voluntary undertaken is usually effectively. Any drug that is prepared and packed under unhygienic conditions; the FDA blocks or bans the entry of such drugs into United Sates. Through this regulation, American government has endeavored to prevent any kind of unsafe drugs and compel the foreign companies to follow US requirement for drugs manufacturing.
According to States law, if a drug is eligible for commercial distribution within the States then it can be exported without any additional approval or involvement of FDA; these drugs must be registered and listed in the “Orange Book”. On the contrary, a drug unapproved or not allowed for commercial distribution within States, it can be exported. There are some certain criteria for the exportation of drugs from USA such as it must be according to specification of the foreign buyers, meet the requirements of the particular country, labeled on the outside of the shipping package, not distributed or sold in local market. In addition, exporter shipping from USA has to fulfill either the laws of FDA or of the importing country that can be comprehensive enough to assure the safety. Nevertheless, the laws of U.S. allow the exportation of unapproved drugs to very developed countries that presumably rely on the high quality evaluation of the listed countries. Those listed countries are Israel, Australia, Japan, New Zealand, Canada, Switzerland, South Africa, and the EU members countries and the European Economic Area (EEA). Yet there are certain criteria for unapproved drugs to be exported; those criteria are of FDA standards for GMPs. The high standard of exportation of unapproved drugs from USA is not applied for other drug regulatory systems. If a drug is developed for the use in developing countries, it is not necessary that it should be tested in developed countries.
The United States of America has the largest pharmaceutical, biopharmaceutical and medical device market in the world. Though there are enormous growth possibilities, yet in order to make the most of the advantages in this market, superior technology is the beginning point of this struggle. However, the pharmaceutical business in USA is highly profitable but it is much about the potential for risk looms large. To succeed in the American pharmaceutical market, there needs the right market strategy, use of resources and insight.
6.1 Product/Service Positioning
Product and service positioning is closely about the market segment of a products and services offered by a company. The creation of unique and consistent product image that is recognized by the customers is the positioning marketing prospects of products. In USA, there is restricted laws and regulation regarding the advertisement and labeling of pharmaceutical products. The regulation of FDA of medical products is based on science, state law, and public health considerations. The regulation of labels and advertisement revolves around the attitude, application, benefit, price and level of quality of products. However, this aims to target the specific market yet there is proportionate level of usage.
American pharmaceutical market intends to incorporate superb engineering and selling of products in America needs to be used effective strategic undertakings. In order to survive in the American pharmaceutical market, there should be a comprehensive knowledge of market culture because a lack of understanding market culture can cause an embarrassing failure. The most important part is the beginning point and awkward entry in US market can easily demolish the overall brand’s image. In terms of appropriate contacts, American pharmaceutical, biotechnology and medical device companies are frequently not easily accessible. Moreover, American buyers are naturally risk-averse and are likely to do business with well known and reliable technologies and suppliers.
The drug brand strategy in America is followed as setting up a physical presence base on the operations, establishing a direct point of contact that links the management to base operations, exploring the partnership relationship, implementing market program, recruiting and training the personnel and developing the specialized distribution channel. In USA, pharmaceutical industry seeks partnership relationship, and look for services. They need a group agreement and to test the product. Even the customer is reluctant to work with an unfamiliar supplier who holds no local presence and also has little or no experience in working with other American customers.
6.2 Pricing Strategy
Pharmaceutical industry which is largest industry in the world in terms of sales and also for per capita consumption, in 2005, the United States of America holds more than 40 % of the whole market share in this industry. There are some of significant factors in the industry that distinguish it from the other market in the world such as free pricing policy of medicines which is quite unusual in other markets, high consumption of medicines, intensive marketing activities, and intensive competition.
To enter into American market is likely to develop a new business, a new brand and get customers’ trust and get the key purchasing decision. On the other hand, despite America is one of the largest pharmaceutical industries in the world, there is no direct price control for non-government drug sales at present. Therefore there has been a great pressure on the growing cost of drugs. As a result of rise in cost of drug, the product and service positioning in pharmaceutical industry important players are apparently struggling to increase the sale of their products.
The United States of America has, unlike other developed countries, not extensively enforced reference-based pricing. The pharmaceutical policy makers considered its enforcement into the Medicare Modernization Act in about 2000-2003; on the other hand they eventually could not do so.
In spite of the lack of the enforcement on the federal level, the reference pricing has been included into the cost containment procedures in other organizations. In 2004, WellPoint announced that it used a reference pricing prescription drug benefit. In the beginning it was available for Blue Cross and Blue Shield of Georgia members and later expanded to Blue Cross of California and the Michigan Medicaid program also picked up a form of reference pricing. Conversely, a very little research has been seen in the use of reference pricing in the U.S. setting, as its use has not been widespread.
6.3 Distribution and Logistics
The Drug Distribution System in USA
The drug distribution system in USA is comprised of two class system. The two-class system in the United States gives the drug distribution system as a dynamic approach that ensures that consumers get access to all key medications. However, there are some medications and drugs that required doctor’s prescription; for others that holds a large margin of safety. Moreover, it can be employed correctly based on the information given on the label of medicine, and no prescription is required for this. The two-class system patent by prescription and nonprescription, or over the counter (OTC), medicines are the key stone of a scientifically thorough drug distribution model regulated by the Food and Drug Administration (FDA) of U.S. The two class distribution system of USA is quite different in the world’s
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