The chapter that is the focus of the present assignment describes Genzyme Corporation, one of the largest biotech companies in the world. It explains the company’s choice of direction and focus that led it to claim its place at the top despite its humble beginnings. The company did so by choosing to concentrate its efforts on rare diseases and so-called orphan drugs that are used primarily for the treatment of those ailments. The medications earned their name because they were considered economically unviable, but Genzyme proved their competitors wrong and achieved significant success.
Competition and Bargaining Power
Initially, the orphan drug market had little to no competition, and Genzyme capitalized on that advantage. The chapter states that “developing a drug takes 10 to 14 years and costs $800 million to perform the research, run the clinical trials, get FDA approval, and bring a drug to market” (Schilling, 2008, p. 104). As a result, most pharmaceutical companies focus on developing drugs that are certain to generate a substantial profit, $1 billion and more, to cover their expenses and end up with a positive net balance.
The lack of competition also reduced the negotiating ability of the potential customers. Bargaining power is defined as the ability to secure another party’s agreement on one’s terms (Rojot, 2016). Genzyme was free to set their prices higher than they would be in the presence of competitors, and the customers were unable to protest because they did not have any alternatives. Furthermore, once the drug was developed, the Orphan Drug Act would provide it with seven years of market exclusivity on top of the time the company’s competitors would need to create an alternative, which helped Genzyme secure the market.
Orphan Drugs, Resources, and Capabilities
A significant difficulty with the development of an orphan drug is the typical inaccessibility of the necessary materials and information due to the esoteric nature of the diseases they are intended to treat. For example, the first product developed by Genzyme, Ceredase, required the extraction of proteins from human tissue, using 22,000 placentas per year for a single patient (Schilling, 2008).
This difficulty made the company construct a dedicated plant in France and collect massive amounts of tissue worldwide. While a recombinant form of the enzyme was developed in 1993 and removed the need for placenta collection, the old process still resulted in significant expenses.
However, the Orphan Drug Act recognizes the difficulty involved in the development of orphan drugs and provides the companies that work on them regardless with significant tax breaks on research costs. Genzyme was able to make a profit in spite of their larger-than-average expenses and small market size, as they got 4,500 lifelong customers, who paid about $170,000 a year for their medication, which resulted in an annual $800 million revenue from Ceredase alone (Schilling, 2008). The product was a resounding financial success that made other companies turn their attention toward the orphan drug market.
Long-Term Strategic Intent
Genzyme’s focus on orphan drugs was logical back when the company was starting out and it is logical now. The orphan drug market is still rapidly growing, and it will likely continue displaying double-digit growth figures in the future (Gautam et al. 2015). As Genzyme is one of the leaders in the field, it is a rational business decision to continue capitalizing on the company’s strengths.
It is difficult to determine whether Genzyme has a clearly defined long-term strategy from the information presented in the chapter. The corporation appears to be expanding and diversifying its fields of interest, which is a logical decision since the target population for its products is highly unlikely to grow significantly due to the rare and usually non-infectious nature of their diseases. Nevertheless, this expansion is a natural and logical growth, and Genzyme does not appear to strive towards a clear goal with a definite plan.
The Pros and Cons of Diversification
Genzyme did not remain focused on one area and chose to expand into other fields of medicine. Theoretically, this is an advantageous move as it allows the company to access new markets and select more profitable populations to address, as opposed to being limited to a single, possibly less lucrative set. Also, as each product is intended to be self-sufficient, each branch may eventually become self-sustaining, allowing the company to grow in different directions rapidly.
The disadvantages of the approach are the resulting lack of focus, which may negatively affect Genzyme’s competitiveness. Spreading resources to different fields means that companies with lesser resources but greater concentration on a target may match or even outpace the corporation’s progress on medications that target the same illness. Furthermore, while the idea may have more significant long-term merit than the avoidance of diversification, in the short term it would negatively affect the corporation’s performance.
Recommendations for the Future
Genzyme appears to be financially stable and prosperous and continually develops new medications. Its diversification also seems to have successful results, as the company has passed the stage where the effort would negatively affect its performance. Due to the Orphan Drug Act, Genzyme does not need to be concerned about competition for its new medications. In general, the company appears to have a strong position going into the future.
My advice to Genzyme would be to continue diversifying its fields of interest and develop new medicines. The market for orphan drugs is large, and each product only covers a small part of it due to the relative rarity and great variety of rare disorders. However, as a result of the low competition, more and more companies are moving into the field, and it is possible that most rare conditions will have cures developed for them in the foreseeable future. If Genzyme wants to continue growing, it would be prudent to start aggressively developing new medications and secure a large share of the market while it is still available to anyone.
Genzyme is a company that noticed the potential in the orphan drug market before most did and used the discovery to its advantage. It took the field many considered unprofitable and turned it into a fast-growing market, where it became one of the leaders. Furthermore, Genzyme is growing and developing, diversifying its areas of interest and helping numerous people. However, the market of rare diseases, while mostly unexplored, is still limited, and as more companies enter the field, competition will grow. I would recommend that the company strives to use the Orphan Drug Law to its advantage and take over a significant portion of the market before other companies have the opportunity to force it out.
Schilling MA, 2008, Defining the organization’s strategic direction, 2nd edn, McGraw-Hill, Boston, MA.
Gautam, R., Chauhan, I., Verma, M. and Yasir, M., 2015. Global orphan drug market: a review. International Journal of Pharmacology, 3(1), pp. 25-31.
Rojot, J., 2016. Negotiation: from theory to practice. Springer, Heidelberg.