Research Paper on "Roche Corporation"

Research Paper 12 pages (3606 words) Sources: 7

[EXCERPT] . . . .

Roche Corporation is a global developer and marketer of medicines and diagnostic equipment to the health care industry. Based on Switzerland, Roche operates around the world, with the revenue emphasis on developed markets. The company has three main lines of business -- pharmaceuticals, diagnostics and products for researchers. The company is therefore subject to a variety of demand influencers in its many different markets. Health care is one of the most highly regulated industries in the world, and the vastly different systems create different supply and demand dynamics to which Roche must adapt. This paper will analyze the dynamics that affect Roche and the company's reactions to those dynamics. Although Roche breaks down their world scope into six unique geographies, the emphasis for this discussion will be on their major markets of the U.S. And Western Europe.

The Health Care Industry

Health care is one of the world's largest industries. In the United States alone, the health care business will be worth an estimated $2.6 trillion in 2010 (Minter, 2010), representing around 16% of the country's total GDP (Financial Forecast Center, 2010). Figures for the size of the industry are similar in other countries, if perhaps slightly lower (the U.S. has the world's highest level of per capita health care spending). Costs in the industry are focused on drugs, care costs, research and infrastructure costs.

There are a number of demand drivers in the health care industry overall. A major influencer of demand is the payment structure. In most Western nations, health care is covered through some form of government insurance scheme. In the United States, the government covers a sizeable portion of health care through Medicare and Medicaid; the rest is covered through private insurance or cash payment. The different payment systems can impact demand on certain products, in particular pharmaceuticals. Many government-sponsored plans, for example, favor generic drugs when available whereas private insurance companies favor name brand drugs as they simply mark the product up and pass that cost along in the form of premiums. As a result, the demand drivers for the U.S. And for countries with public health care are different with respect to the ability of pharmaceutical companies to market high margin branded drugs over lower-margin generics. Some governments also cap the amount that they will pay for drugs, reducing the dollar value of the demand for drugs in those countries.

Another key factor in the demand for health care is the age of the population. This is a significant factor in most major Western markets today because populations throughout the developed world are aging rapidly. The United States, Canada and Australia in particular experienced massive baby booms in the 1950s, and that cohort today is entering its senior years. This has caused a surge in demand for health care in these countries, and in other Western nations to the extent that they experienced a baby boom of their own. Demand for health care is projected to expand in the Western world significantly over the course of the next 30-40 years as the baby boom cohort passes through its senior years (Hennessey, 2009). The number of Americans 65 and over is expected to increase by 36% in the next ten years alone (Aker, 2008), resulting in the creation of 3.2 million new jobs. Ten of the top twenty fastest-growing corporations are in the health care industry (Bureau of Labor Statistics, 2010). Demographics will be the major driver of demand in health care for the foreseeable future.

Where demographics and government policy intersect in the U.S. is that citizens over the age of 65 are entitled to benefits under Medicare. This entitlement program is covered by the American taxpayer. The demographic shift will put an increasing number of citizens on the Medicare program while an increasingly smaller percentage of the population is in the workforce to foot the bill. The result will be strong pressure on politicians to address the issue. The current health care reform process is the first step in addressing this issue. While an aging population indicates increased aggregate demand for medical services, the dollar value of that demand may be subject to a variety of caps if the U.S. federal government finds that medical spending is impacting its other ventures or if the country's deficit begins to spiral out of control.

Another key demand driver for health care is the relative healthiness of a population. Healthiness affects demand in two key ways. As health improves, people need less medical care, particularly during their younger years. In general, the health care industry benefits from an unhealthy population. However, as health care improves, people live longer. This in general increases health care demand over time, because the percentage of the population that is elderly increases. In most of the Western World, the general trend is towards healthier populations, as reflected in rates of diseases and in increasing life expectancies. In the U.S., life expectancies are still increasing, albeit slowly. Perhaps of more significance is that younger generations are faced with more health problems that were their parents. Obesity rates have ballooned, so to speak, and the result is that rates of diabetes and other weight-related illnesses have increased in the past several years in the United States. This has contributed to the overall increase in the demand for medical care.

Roche Corporation

Pharmaceuticals make up 79% of Roche's revenues. There are specific drivers to this industry. One of particular interest in terms of microeconomics is the incidence of disease. Roche saw Tamiflu sales increase to 3.2 billion Swiss francs in 2009, a direct function of fears surrounding the H1N1 virus outbreak. These sales accounted for 6.5% of the company's total revenue. Tamiflu sales in 2008, by contrast, were around 1 billion francs (2009 Roche Corporation Annual Report).

Overall, technological development has a strong impact on the demand for products in the pharmaceutical and diagnostic fields. When new medicines receive their approval from the relevant government agencies, and these medicines represent an improvement over existing treatments, the result is a spike in revenues for the firm. This is especially true where the new drug offers dramatically superior performance to generics or treats conditions untreated by generics. In such a situation, the sales spike would also include the socialized medicine countries, not just the United States. Roche's pharmaceutical division, for example, saw its sales growth spurred by ophthalmology drug Lucentis and a slate of improved cancer drugs.

For many drug products, marketing is a key demand driver. Pharmaceutical companies often find themselves in direct competition, with little to differentiate the competing products in terms of performance, or with products so vastly different in function but roughly the same in terms of impact. In such situations, marketing becomes a key demand driver. Drug companies aim their marketing at three distinct markets. The first are the physicians. It is doctors who ultimately must prescribe the drugs, so convincing each doctor to prescribe your company's drug is key to generating sales demand.

The second group to whom pharmaceutical companies aim their marketing is the consumer market. Consumers can enquire with their doctors about specific drugs and can create demand for drugs if they have a greater awareness of those drugs. As a result, recent years have seen an influx of pharmaceutical marketing aimed at consumers. The third group to whom the pharmaceutical industry markets is the insurance industry. Insurance companies must cover drugs under their plans, as a large segment of the health care system is financed by the insurance companies. Without their support, a drug will have very little demand.

For a company like Roche, demand is driven in a number of ways. Three key decisions result in a sale- the decision of the insurance company to cover a product, the decision of the patient to request a product and the decision of the doctor to prescribe it. While demographic, competitive and regulatory factors contribute to aggregate demand, ultimately these three choices will result in demand for any specific product, along with the product's attributes and the effect of any public health situation.

Demand factors in diagnostics are similar, but without the consumer element. The microeconomics of demand for diagnostic products is focused on the physicians. For any given diagnostic, there may be a number of different techniques. As a result of this, information marketing is directed by diagnostics companies at both the physician level and the wholesale level. With the consumer element removed, the emphasis becomes much more on performance of the tests and equipment. Demand is driven as much by the quality of the product as by the intensity of the marketing effort. Doctors and purchasing departments at health care institutions are both involved in the demand process. Diagnostic equipment is also subject heavily to the factors in the macroenvironment -- demographics and the healthiness of the population especially.

Elasticity of Demand

There are a number of ways in which these broad drivers of health care manifest. The first is with regards to elasticity of demand.… READ MORE

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