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Winners

Maruho Co., Ltd.

2007 7th Porter Prize Winner Pharmaceutical
Specializes in dermatology and topical applications. Achieves strategic positioning as specialty pharma.

Industry Background

img_2007_02_p.jpgLarge pharmaceutical firms focus on lifestyle-related diseases, cancers, central nervous system-related diseases, and immunity-related diseases, which have a sales potential large enough to allow for the recovery of expensive R&D costs. Only one out of 10,000 candidates will be introduced to the market, each of which costs ¥50 billion to develop. The size of the Japanese market for circulatory diseases (lifestyle-related diseases), metabolic diseases (lifestyle-related diseases), central nervous system-related diseases were respectively ¥1,300 billion, ¥630 billion, and ¥630 billion. Large firms are trying to produce at least two or three blockbuster drugs that will generate ¥100 billion in sales.

On the contrary, the best-selling dermatology drug in Japan is Maruho's moisturizing cream, with sales of ¥25 billion. The dermatology market is too small for large firms, which are pulling out of this segment. The size of the global market for dermatology in 2006 was $17 billion, which is only 3% of the overall pharmaceutical market. The size of the Japanese market for dermatology was ¥300 billion, or 4.3% of the overall pharmaceutical market.

Ointment is also a minor dosage form, comprising 3.4% of the Japanese pharmaceutical market. Oral medicines and injection drugs are dominant.

Maruho's sales in 2006 were ¥46 billion, ranking it 47th in Japan. Its sales were a mere 3.5% of the Japanese industry leader Takeda's total of ¥1.3 trillion. However, in dermatology, Maruho had the largest sales in Japan in 2006, and ranked 12th in the world.

Executive Summary

Maruho is the only company that specializes in dermatology in Japan. Maruho is also the only company that specializes in ointments in Japan. "Specialty pharma" or "boutique pharma" is not a well-established strategic positioning in the industry, and some industry observers are skeptical about its validity. Other examples of specialty pharmas in Japan are Santen and Senju, in the ophthalmic segment.

Maruho changed its product focus drastically from orthopedics to dermatology, even though 50% of its sales were from orthopedics and it had the best- selling drugs in their respective segments. Maruho considered that it would be difficult to achieve a competitive advantage because the orthopedics segment was crowded with many competitors, and it required various dosage forms such as oral medicine, injection drugs, and ointments. It started to consider a change in strategy, with a new focus on dermatology in 1997. It declared its decision to specialize in dermatology in 2002, after the Hawaii camp, which was attended by 623, or 90% of all employees.

Unique Value Proposition

Maruho focuses on dermatology and ointments, which is a dominant dosage form for dermatopathies. Maruho's product line in dermatology is the most extensive by far in Japan.

Maruho provides effective drugs that are comfortable to use, with fewer side effects. Although dermatopathies do not endanger lives, patients care about the drugs' effectiveness because the symptoms are visible. In general, customer satisfaction is low, which means that drugs can be differentiated according to their performance.

Maruho also provides product and medical information to dermatologists. Because there are no other pharmaceutical firms that specialize in dermatology, Maruho is recognized as a reliable source of information.

Maruho proposes new methods of treatment. Noticing an increase in sensitive skin, Maruho proposed that moisturizing should be part of the medical treatment. This proposal resulted in an increase in research papers by dermatologists discussing the effectiveness of moisturizing to cure some types of skin diseases (from 10 in 1990, to 500 in 2006). Maruho had successfully created a new market segment.

Unique Value Chain

Technology development
Maruho's R&D is not seeds-oriented but needs-oriented. Maruho does not conduct upstream research by itself. Rather, Maruho conducts joint-development with other pharmaceutical firms or accepts a license to finalize and sell compounds developed by other firms. In 2001 Maruho licensed in Oxarol from Chugai, who expected sales of ¥80 million. Maruho developed an ointment, and through its sales force it won the top market share irrespective of the fact that Astellas and Teijin-Pharma were four years ahead and had already established strong market positions. Maruho developed Oxarol into a ¥3.2 billion business, which is 40 times of Chugai's estimate. This success proved the effectiveness of Maruho's development and sales capabilities, and invited more license offers (88 offers between 1970 and 2001, compared with 180 offers between 2002 and 2006). Maruho has accepted 15 licenses since 2002. By not conducting the upstream R&D activities, Maruho's product development lead time was shortened from the industry average of 15 years to 5 years. Consequently, Maruho can respond to customer needs sooner. Also, Maruho decreased the risk involved in R&D. For those companies which conduct the entire R&D process internally, only one out of 11,000 candidates will be commercialized. In the case of Maruho, it failed with one out of 15 candidates for which it had obtained the license, which makes it one out of 15.

Maruho develops drugs that are already in the market by adding properties and dosage forms, and changing existing drugs in other forms into ointments. One example of property adding is its best-selling product Hirudoid, which was originally introduced to the market in 1954 and had since then stayed at a lower rank. With a recognition that a growing number of people are experiencing dry or sensitive skin and the realization that existing products are not good enough, Maruho, working in cooperation with "opinion doctors" (opinion leaders among doctors), successfully added a new property to this drug so that doctors could use it for people with sensitive skin. Sales of Hirudoid increased from ¥0.5 billion in the 1980s to ¥22 billion in 2005. Maruho continuously improved Hirudoid and added new forms of dosage such as a "softer cream" and a lotion. Sales of these products have been growing at a double-digit rate.

Maruho's knowledge in developing dosage formulations allows the company to develop effective ointments comfortable to use. To build on this knowledge, Maruho opened the Pharmaceutical Engineering Laboratory in 2006.

Manufacturing
Maruho manufactures its products in its factory in Shiga prefecture, while its competitors often outsource manufacturing. It is the only Japanese pharmaceutical firm that has a 2-ton class emulsifier, and its manufacturing capacity for ointment is 20% of the total production volume in Japan. In 2006, Maruho's manufacturing volume was largest in Japan.

Marketing and sales
Maruho has only 300 medical representatives (MRs), which is much less than a large firm's 1500-2000 and a medium-sized firm's 500. However, Maruho's MRs focus their activities on dermatologists. They know almost all the 7,800 dermatologists in Japan, and visit 85% of them in one month. This is not easy because the majority of dermatologists are private-practice doctors rather than hospital doctors, and sometimes there is only one clinic in a municipality. Other pharmaceutical firms will visit dermatologists at university hospitals but not those at clinics.

Maruho supports seminars and association activities to gain an understanding of customers' needs, to provide support and to develop relationships with dermatologists. A customer survey conducted by the independent market research firm LCA-J concluded that Maruho was the company most trusted by dermatologists.

After-sales service
Through its MRs, Maruho provides medical information extensively.

Human resource management
Maruho invests ¥300,000 per employee per year (this figure includes employees in the manufacturing department, and can not be compared against large pharmas, which often exclude the manufacturing department). All newly hired employees go to a camp and undergo training for four months. Instructors, who are managers at Maruho also spends four full months on a camp. Although Maruho has only 876 employees, 18 employees have already obtained MBA degree from U.S. or European business schools.

Firm infrastructure
Maruho is a privately-owned company, and does not want to be listed.

Sustainability

Even after the patent life, Maruho's products sustain sales against generics because generics are not as comfortable to use. Maruho continues to be a privately-owned company, which protects it from a hostile takeover. Maruho has growth potential in overseas markets, and it considers acquiring a sales company in Europe.

Innovations

  • Created a new market for the medical treatment of sensitive skin.

Trade-offs

  • Getting out of orthopedics.
  • Does not conduct upstream R&D.
  • Does not conduct R&D in dosage forms other than ointments.
  • Does not manufacture drugs other than ointments (there are a few exceptions in the case of oral medication, which can be manufactured using equipment the company possesses).

Profitability

Return on invested capital (ROIC)   (Unit = percentage point)
Difference from industry averag
over 5 year period
Difference from industry average, by year
2002 2003 2004 2005 2006
47.9%P 44.1%P 45.1%P 35.0%P 50.2%P 60.8%P
Return on inveted capital = Operating income / Average invested capital

Return on sales (ROS)   (Unit = percentage point)
Difference from industry average
over 5 year period
Difference from industry average, by year
2002 2003 2004 2005 2006
14.6%P 11.8%P 11.3%P 5.5%P 12.6%P 26.4%P
Return on sales =Operating income / Net sales

Activity System Map

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