28 Apr Globalization radically changing pharma, airlines, cars
A while back, I wrote about the similarities between the U.S. and global automobile market and compared it to some of the changes within the U.S. pharma industry.
These comparisons included:
1. The consolidation of U.S companies.
2. The entry of low-cost generics. In the U.S. car market, this means Korean cars with Indian and Chinese carmakers on their way.
3. The outsourcing of production to low-cost countries. In the U.S. car market, that has meant places like Asia, Mexico, and Latin America.
Still, there is another industry that has been in the national news recently. It’s almost as heavily regulated as the pharma industry and it’s also undergoing vast changes due to global forces worth talking about. It’s the U.S. airline industry.
The recent announcements of mergers between Delta Air Lines and Northwest Airlines to create purportedly the world’s largest airline – to be followed quickly by the proposed merger of United Airlines and Continental Airlines – mark not only years of industry consolidation but also the impact of globalization.
Like the pharma industry and the car industry consolidations of the last 20 to 30 years, the airline industry has also gobbled up the weaker players. In a Chicago Tribune article on April 20, 2008 headlined “Survival of the Fittest,” this consolidation is outlined:
The article also notes the disappearance of a number of well-known airlines over the years, including PanAm (1991), Braniff (1989), Aloha (2008), and Air Florida (1980s), as well as the emergence of a number of new airlines: JetBlue, AirTran, the new Frontier, and Virgin America.
Now you may ask why I’m suddenly interested in the airline industry. The reality is that I – along with a group of seasoned airline executives – dedicated a few years to starting up a new airline from 1982 to 1985.
This start-up airline (National Express) took advantage of the well-known name of the old National Airlines (which was acquired by PanAm) and the upstart People Express (the forerunner to Southwest’s cheap seats). It was the last U.S. airline to be certified to operate by the Civil Aeronautics Board (CAB), which was the prior U.S. government organization charged with regulating the airline industry.
When we received our certificate to operate jumbo jets for passenger and cargo, domestic, and international travel, we thought we were set to go. We were also one of the first airline to negotiate with Airbus for its new aircraft.
At that point, Airbus had sold or leased no aircraft in the U.S. market. That was almost 25 years ago. Another start-up airline (Northeastern Airlines) beat us to the punch. We shifted to leasing used and cheaper L-10LLs (the three-engine Lockheed jumbo jet) coming off the Delta and Eastern Airline fleets. Northeastern moved to the new Boeing 767s.
This ushered in a new era for airlines – the era of deregulation. Heavy regulation of the industry was coming to an end. The government previously had to approve each and every route an airline flew and the larger companies had virtual monopolies for years. As airlines don’t generally have patents to protect their day-to-day business, this activity was in essence the elimination of patent protection for the major airlines.
All this changed the industry dynamics overnight. This period was not unlike what’s happening in the U.S. and Europe today with biogeneric drugs.
In Europe, the European FDA (the EMEA) already has approved a biogeneric approval process that’s still under development in the U.S. When this does happen in the U.S., there will be a radical transformation of the U.S. biotech and pharma industry. Generic companies such as Teva will increase their worldwide, particularly U.S., market dominance.
The airline that most quickly took advantage of regulatory environment change was People Express while flying out of the old Newark airport. People Express put Newark on the map as an alternative New York City airport, but it expanded much too quickly and beyond its original concept and suffered the consequences.
Another start-up from Texas was a new and young company called Southwest Airlines that was only flying in Texas and some of the surrounding states. What struck our management team about Southwest was its unique strategy in a couple key areas:
1. They had only one type of aircraft: the Boeing 737. This meant vast savings and simplification as all pilots could fly all the planes, all mechanics could work on all the planes, and all plane part inventories were the same.
2. In essence, a plane is the factory of the airline industry. The more time it’s up in the air during a 24-hour period, the greater productivity you’re getting. A plane doesn’t produce money sitting on the ground. If you analyze Southwest’s flight-pattern strategy (point to point versus the traditional hub and spoke), Southwest gets its planes up in the air more hours per day than its competitors, and turns around these planes faster at the terminal.
3. In terms of employee infrastructure, Southwest avoided the traditional division of labor issues at airlines that made the pilots one class, the flight attendants and gate attendees another class, and the mechanics another class.
Around the rules
Today, while the U.S. pharma industry is regulated by the FDA, and the airline industry is regulated by the Federal Aviation Administration (FAA). The airline industry also has other regulatory issues that go beyond the FAA, including national security.
No U.S. airline is allowed to have more than 25 percent of its voting stock owned by a foreign company or airline. In recent years, we have seen companies (like KLM and Lufthansa) buy chunks of airlines (such as Northwest), but they have been unable to get around this rule. This rule also exists in many other countries as part of national sovereignty and security protection.
Another national security restraint is that foreign airlines aren’t allowed to pick up passengers in the U.S. and drop them off at another location in the U.S. They can have multiple stops in the U.S. but can’t “sell” tickets for transportation within the U.S.
To some degree, airlines have circumvented this with code-sharing agreements. These represent strategic partnerships with other airlines and allow them to be branded as the U.S. airline in the U.S. when in reality it is two different airlines. More recently, the three global alliances have created the concept of a “seamless airline network” around the world.
How seamless this service really is remains to be seen. There is a perception that it’s one interrelated giant airline conglomerate that’s circumventing national security issues.
Pharma and biotech
In the pharma and biotech world, similar alliances have been made. Still, there is no similar national security issue via mergers and acquisitions.
The last few weeks saw the Japanese pharma giant Takeda make three strategic moves to enhance its market position around the world:
1. It acquired Amgen’s business in Japan and the rights to some key Amgen products to enhance its product pipeline (up to 13 products). This more than $1.2 billion deal (a combination of cash in advance and ongoing milestone payments) solidified Takeda in its home turf, which is the second-largest pharma market in the world.
2. It finally dissolved its longstanding U.S. joint venture with Abbott Labs that’s known as TAP. This action solidifies Takeda’s position in the largest pharma market (the U.S.) as well as around the world and adds key products and personnel.
3. It acquired Millenium Pharmaceuticals, which is a top U.S. biotech company with a strong product portfolio in oncology and other key therapeutic areas. This will add further worldwide depth in Takeda’s product pipeline and make it a strong player in the worldwide oncology business.
Takeda is just borrowing a page from the strategy book of companies like Pfizer, GlaxoSmithKline, and Roche, which have been gobbling up companies around the globe. A major difference between the pharma and airline industries is in the area of R&D.
In pharma, it’s highly integrated into the industry. In the airline industry, the main “vehicle” used to transport people around the globe is actually owned and developed by another industry, the aircraft industry, which espouses companies like Boeing, Airbus, Embraer, and Bombardier.
The new technology that impacts the airline industry – the ability to transport people from one location to another comfortably, quickly, and economically – is controlled by the aircraft industry. Like the pharma industry, it takes a long time and a lot of money to develop a new aircraft and get it approved by regulatory authorities.
Just take a look at the struggles Boeing and Airbus have had to get their new aircraft developed and approved. Both are months, perhaps years, delayed.
I wonder if there will ever be an integration of both the aircraft (R&D) and airline (marketing, sales, and distribution) industries. In a way, this situation is replicated in the pharma world with the biotech industry as the R&D engine and the pharma industry as the marketing and distribution arm. The difference is that some biotech companies have grown sufficiently large to be players in both arenas.
The “generics” in the airline industry are represented by companies like Southwest, which have successfully grown by using price and service as a major lever to gain market share. Southwest has successfully stripped out of its cost structure any benefits, such as food and defined seats, on which consumers (pleasure travelers versus business travelers) don’t place high value.
The core consumer values that Southwest didn’t ignore include safe travel, on-time departure and arrival, frequency and proximity to major destinations (often using secondary airports but transforming them into modern facilities). The U.S. pharma and biotech industry is going to suffer additional shakeouts in the next four to six years due to patent expirations and the approval of biogenerics.
Some Big Pharma companies, particularly Novartis, have intuitively understood this and hedged their bets by getting into the generic business. The huge amount of pharma product sales at stake ($60 to $70 billion a year) will rapidly enable the Indian, Israeli, and possibly Chinese pharma industries to obtain major stakes in the U.S. and world pharma markets.
This “generic” activity has already happened in the airline industry in Europe as deregulation in Europe has opened up the market. Because of national security, the U.S. industry is still protected.
However, I don’t doubt there will be a testing of the waters by major foreign airlines to acquire significant chunks of U.S. airlines. Is there truly a global airline? While Delta, United, and American would purport to be, they are more international than truly global.
British Airways is much more global than either of them. Though the globalization of the U.S. and European pharma industries started some 20 years ago, in the next 10 to 20 years it will need to withstand the onslaught of the Japanese, Indian, and Chinese pharma industries (with countries like Korea in the wings).
See you soon!
Previous articles by Michael Rosen
• Michael Rosen: Biotech financing remains strong
• Michael Rosen: Canadian biotech: a profile of our northern neighbor
• Michael Rosen: A tale of two biotech cities: Chicago and Baltimore
• Get set because here come two Olympics, athletics and biotech
• Michael Rosen: 2007: M&As and IPOs continue in the Midwest life science sector
This article previously appeared in MidwestBusiness.com, and was reprinted with its permission. The article is not meant to be a stock recommendation.
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