An Analysis of the Pharmaceutical Industry using Porter’s

Today’s Pharmaceutical Industry is characterized by several important factors that influence the business environment in which each company operates: Severe competition from capitally strong competitors ;Strict government regulations ;Long approval wait time ;Technology as an important factor ;Lower levels of marketing and customer relations in comparison to other markets – Sales share of the world’s top 75 prescription medicines 2002 Source AIMS Industry Environment Analysis In 1997, the $65 billion industry was composed of three strategic groups: patented prescription drugs, generic prescription drugs and over-the-counter drugs. Firms such as Merck, Smithies, Eli Lilly and others produced various types of brand name drugs. Pharmaceutical companies spent huge amounts of money on development. The products produced by companies are very innovative. Many companies market up to ten (10) “blockbuster” drugs each year. These drugs have a patent life of seventeen (17) years. However, since it takes on average twelve (12) years to get the drug to market, manufactures have only five (5) years in the market to recoup their heavy research and development costs. After the patent expires we move to our next strategic group; the generic prescription drug makers.

As a result, generic drug manufacturers can sell their products at lower prices. The third strategic group within the pharmaceutical industry is the over-the-counter drug manufacturer. These products have a very broad range. They include items such as cold medicine for a common cold, aspirin for a headache, and antacid relief for the stomach. The three above-mentioned groups pursue different strategies and operate in different environments. Porter’s five-force model can be applied to illustrate the differences between the groups. Below is a summary of each force and the corresponding strategic group: RIVALRY Prescription: High, patents protect each company when a drug is first developed.

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However, production costs are high (over $6 million) and only 20% recoup their costs. Generic: High, there is the generic brand versus the name brand. Why should we pay more for the same exact product? Many prescription drug plans have a higher deductible for name brand drugs than generic drugs. Keeping costs lower than your competition is key. Over-the-counter: High, there is the store brand versus the name brand. Why should e pay more for the same exact product? Product differentiation is the key here. Overall, threat of rivalry is high. The pharmaceutical industry is highly competitive. Companies are racing to launch new products before other companies release similar ones.

In order for a company to recoup their R expenses they must patent their products to ensure cash flow. Also, generic companies are competitors. Generic companies do not bear R costs and, consequently, they can offer the products at very lower prices. The industry is in the maturity stage with relatively little growth. Providers wishing to increase market share must take it away from someone else. Switching costs are relatively low. Customers will shop around based on price, even in small communities. Admittedly, customer loyalty tends to be higher in smaller communities but this loyalty is shrinking as another factor, mergers and acquisitions, increase.

There is little relevant difference in products and the diversity among competitors is low. BARRIERS TO ENTRY Prescription: High, a company cannot manufacture a drug that has a patent on it. It must wait till after the patent expires to manufacture it. Especially if it was a big money maker for the inventing company). Over-the-counter: Medium, depending on the new entrant’s resources. Store brands will always be available. However, for small companies a name brand is a huge marketing expense. This will make it a barrier for them to enter this market. There are many barriers that can be created to prevent new entrants or to slow down their arrival.

In the pharmaceutical industry, a new entrant may be faced with various hurdles erected by established businesses, such as: ;economies of scale – manufacturing, R, marketing, sales, distribution product differentiation – established products, brands and relationships ;capital requirements and financial resources ;access to distribution channels: preferred arrangements ;regulatory policy: patents, regulatory standards ;switching costs – employee retraining, new equipment, technical assistance In the pharmaceutical industry, the barriers to entry are high. Companies have significant manufacturing capabilities that are hard to replicate; they have patents to protect their products and they invariably have big marketing budgets designed to protect their brands. SUBSTITUTES Prescription: Medium. However, the degree of their effectiveness certainly does vary.

Generic: Medium, a generic drug usually copies a patented drug after it expires. If a new product is introduced and patented, a generic cannot compete. Over-the-counter: High, many different types of medicine are available. A substitute is a healthy life style and exercise, a way of preventing the need for medicine! Generic brands are substitutes for original products and there are devices that can substitute for pharmacological treatments, like extents in thrombi-embolism disease. Nowadays alternative medicine, like homeopathic methods, can be regarded as a particularly in the area of genetics, promise vastly more information on how drugs operate, and how new ones might be created.

New technologies with names such as combinatorial chemistry, high-throughput screening and laboratories-on-a-chip offer better ways to turn that knowledge into molecules for testing. SUPPLIERS Prescription: Low, suppliers are usually the drug manufacturers. Generic: Medium, sometimes the drug manufactures make both the prescription and generic drugs in the same facility and Just label them differently. You either agree with the pricing policy of the manufacturer, or invest in your own plant, property and equipment to manufacture it yourself. Over-the-counter: Low, there are enough suppliers out there. This is not a problem. First, we have to consider who the suppliers to the pharmaceutical industry are.

They could be the providers of the raw materials and intermediates, the manufacturing and production plants, the overseas head offices who supply finished product, the local co-marketing partners who supply product and/or third party suppliers anywhere along the supply chain. Each company will have different suppliers depending on whether they are ETC, ethical, or generic businesses. It is important to remember that labor should be viewed as a supplier to industry. There are not many buyers and the supplier has little room for negotiation with individual buyers so the company itself has high bargaining power towards its supplier. The nature of their business does not force them, unlike other industries, to rely on suppliers.

Scientific tools, materials, computers, and testing equipment are highly specialized. With the amount of key ingredients being marginal it is the appliers who are bargaining for business with major drug companies. BUYERS Prescription: Low, doctor prescribes the medication and the insurance company or patient pays for it. Generic: High, there are many options. Over-the-counter: Medium, again there are a number of options. But drug stores will want to carry their own brand as well as leading name brands. In the pharmaceutical industry, the buyers are the patients, the family members, the ABACA, the PAPA, the finance departments, the hospital boards, the tender boards, the business. Their influence needs to be considered.

In various ways, buyers can affect a business by seeking price reductions, – demanding higher quality and demanding better service. A buyer is powerful in the following situations: 1 . When they purchase large volumes, 2. When they buy your products from other suppliers because they are standardized 3. When they are knowledgeable and make demands based on this knowledge. In short, buyers can exercise power by seeking price reductions and threatening to go to other suppliers to get their products. Powerful buyers demand costly service. The government requires an in-depth analysis that costs money, and consumers quire up-to-date and relevant medical information – another costly service.

An analysis of the pharmaceutical industry proves that suppliers do have some impact – but not a lot. Company’s generally own their manufacturing plants so suppliers don’t dictate prices and are unlikely to threaten to take business elsewhere. Buyers however can significantly influence the market, particularly as the government and health authorities consistently seek price reductions. Substitutes have some impact, but not a lot. There is much rivalry because companies have a limited amount of time to make enough money to cover their costs, before another company steps in with a substitute or better product. New entrants are not common, largely because of the high barriers to entry, especially R and manufacturing and marketing costs.

So overall, the competitive force that exerts the most pressure in the pharmaceutical industry is the buyer and there should be a focus on the competitive strategies associated with this group. However the competitive forces are different for each company and not all of the five will be equally important. BCC Manta Successful stars become cash cows eventually. However, investments are still armorial required to maintain growth and to defend the leadership position. Stars are frequently only marginally profitable but as they reach a more mature status in their life cycle and growth slows, returns become more attractive. The strategic options that the stars include are: Integration: forward backward and horizontal, market penetration, market development, product development and Joint ventures.

When taking individual products into consideration they will be in different categories in the matrix. PEST Analysts In order to better understand trends in the pharmaceutical industry, four segments f the macro-environment will be analyses: 1) political/legal; 2) economics; 3) socio- cultural; 4) technological. The current demographics of the world consist of an aging population, which consumes three times as many drugs than younger populations. An aging population leads to favorable conditions for pharmaceutical firms in which higher demand will increase profits. Also, in general the world’s population is growing at an enormous rate, which simply means more people will need more drugs.

Population Pyramid Summary Political A new battling trend in the industry arises under the political and legal realm of the environment. According to Pharmaceutical Research & Manufacturers of America (Pram) the average firm invests 12 to 15 years in developing a new drug. The FDA and other regulatory agencies slow down the process by lengthy and costly reviews. All companies involved in drug development are battling to reduce this time expenditure. Firms are now taking a proactive stance to communicate early on with agencies for ideas on how to design drug development. Those firms, which successfully plan with agencies, will have a quicker development time and be able to introduce their drug to markets faster, giving them a competitive edge.

Better planning also reduces wasteful spending on irrelevant processes, thus increasing performance. Economic Economic conditions such as interest rates and inflation have little impact on the profitability of the industry. The pharmaceutical industry appears to be immune to external economic conditions. Social and cultural trends include the heavy reliance on 21st century drugs and medicines by society worldwide. With modern emphasis on increasing life expectancy doctors will continue to prescribe drugs to patients and the public will become more and more accepting of drugs. Again this raises demand for heuristically, which leads to increased competition, which in turn may lower individual firm’s performance.

An emerging cultural trend within the industry seems to be consolidations and mergers to offer broader ranges of products, capital to expand and share of the costs of R. Such mergers can lead to competitive advantages over smaller capital based firms. Technological Technological trends seem to be an expensive one. With the breakdown of human DNA, firms are focusing on more complex diseases. To study and diagnose these complex diseases complicated technologies are needed and often require complete genealogical makeovers. The continuous trend to maintain state of the art technology continues to drive competition in the pharmaceutical industry. Overhauling expensive equipment may slow performance at first, but will serve to produce an overall increase in long run production.

An important global trend in the industry is the growing need to develop and market pharmaceuticals in developing countries. Overseas markets provide a vast, endless supply of costumers who are in desperate need of medicines. There are a great deal of trends emerging in the pharmaceutical industry that will affect competition and performance within the industry. It will be those firms that catch on early who will have the greatest chance of survival inside the industry. OPPORTUNITIES: As long as the human species remains imperfect, there will always be a need for medicines and health care. Many opportunities exist within the pharmaceutical industry that can produce unimaginable profits.

The aging population will continue to be a growing market for pharmaceutical firms throughout the industry. With the average life expectancy on the rise and growing population in general, there will always be a geriatric market in need of drugs. Accompanying old age is the breakdown of the body’s performance, which can lead to diseases, surgery, and general health problems that require the use of medications. Old age will continue to provide a profitable market for the sale of pharmaceuticals. The Human Genome Project is going to open many doors for extensive product development, with studies into areas never before possible. With a better understanding of human DNA, scientists will be able to research cures for untreatable diseases and illnesses. Installations is near infinite. The merging of firms will help the newly created many to decrease R costs by combining information, open up new markets with shared products and combine resources to form industry giants. There are many prospects within this highly demanded industry, which explains the flood of new small pharmaceutical companies. The U. S. Anti-allergic therapies market is on the brink of dramatic change. Patent expirations of leading prescription antihistamines and corticosteroids will result in the introduction of more generic and ETC products that will compete with incumbent brands, increasing patient usage but significantly pressuring prices.

Through 2010, sales growth in the ETC sector will rise but growth in the prescription antihistamine and corticosteroid sectors is likely to slow. This will result in shifting market share as patients switch from corticosteroids to antihistamines and ETC medications. During 2004 to 2010 the antihistamine, corticosteroid and ETC segments will continue to experience unprecedented change. Although Avenues’ Allegro and Pfizer Carter come off patent in 2003 and 2007, respectively, other products such as Ushering-Plough’s new Clarinet are expected to capture sales. This, coupled with the gig prices of antihistamines, will result in the category expanding its share of the overall allergy market from 73. Percent in 2002 to 76. 1 percent in 2010. The market share of key market segments is shown in Chart 1. Despite an opportunity rich industry, there exists a downside that must be carefully examined to maintain a competitive advantage. THREATS: In every industry there will remain dominant forces that will interfere with the success and performance of a given firm. That is to say, no industry is problem free. Within the pharmaceutical industry there are forces at work that could be the downfall of many businesses in the sector. First of these threats is the Human Genome Project (HAG), which mentioned above in the early stages was an opportunity.

However, once the project is complete, whether it is weeks or years from now, human engineering will become more prevalent. With the ability to correct genetic flaws before a person is born, the need for medication and drugs will become obsolete. With no more human imperfections there will be no need for producers of drugs, I. E. Pharmaceutical firms, anymore. The pharmaceuticals resistance to most economic conditions has a major drawback; it is highly sensitive to government regulations. Therefore political forces influencing policies in regulatory agencies can have a profound effect upon the pharmaceutical industry. For instance, under the Bush Administration the McCain-Schemer bill will make extending patents even more difficult for Brand-Name producers.

Many brand name producers’ patents will expire in the upcoming year (2004), opening up the The generic producers are able to price their drugs at significantly lower prices, competing at the price level. The generics thus gain a competitive advantage through price differentiation that appeals to many Americans and foreigners’ abroad. So even in the highly attractive industry of pharmaceuticals there still exist roadblocks to seizing opportunity and making a profit. It is important for the pharmaceutical firms to realize these threats and implement strategies to counteract them. Emerging Trends Motivated by high research costs and short patent life, companies today utilize “high compression marketing” to drive a new drug brand share higher and faster.

One result, a record $1 billion in revenue for Celebrate, in only 9 months after launch. The qualities that a drug must possess, and the marketing tactics that need be applied, determine the potential success of a quick-time blockbuster. Direct-to-customer marketing is on the rise as pharmaceutical companies have found that it has had a positive impact on sales. Doctors are likely to prescribe a prescription asked for by the patient, as long as the situation warrants it. Conclusion The Pharmaceutical Industry today faces profound challenges. Companies must continue to deliver shareholder value through growth and by increasing margins, decreasing the cost of R and launch timescales, and increasing product life.

They must anticipate, assimilate and exploit increasing globalization, deal with Rogers and acquisitions, and continue to meet ever-stricter regulatory requirements. And there are profound social, political and economic factors such as fundamental structural changes in the Healthcare Value chain and the, as yet unknown, implications of Pharmacologists. Bibliography Challenges facing the pharmaceutical industry – Dry Bianca Pushchair http://w. Nub. Felicities. Com/CB_DOLS/mamma/1634_280/85370544/up/a article. Jhtml? Term Industry Profile – Pharmacies Sector Statistics http://www. Ibex. Ii/sectors/FPC/FPC. NSF/Look-alikes/About_Industry The Alchemists – The Economist Print Edition 1998