Pharmaceutical Industry, Research Paper Example

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Research Paper

Executive summary

This research paper describes and analyses the pharmaceutical industry markets and the forces that influence the competiveness of the products in this industry. The paper will first give a general description of the market for pharmaceutical products including key figures of the industry then followed by the competitive structure of the market. Michael Porter’s five forces model will be used for this purpose and it will be described first before it is applied to pharmaceutical industry.  This will be a detailed qualitative analysis that is aimed at exploring the competitiveness of firms in the pharmaceutical industry. This paper also offers a hypothetical and statistical analysis of the market competitiveness of firms in the pharmaceutical industry as compared to other firms in different industries. This will be followed by an interpretation of the research findings. This forms the apex of this research project. It is my hope that this findings will be of much help especially to those planning to venture into the pharmaceutical industry.

Introduction

USA office of management and budget (OMB) established the standard industrial classification (SIC) to tract the flow of goods and services within its economy. According to Banahan and Kolassa (62), the pharmaceutical industry was classified number 283 and was further categorized into four 4-digit SCI codes consisting of:

  1. Medicinal and botanicals (SIC 2833)
  2. Pharmaceuticals preparations (SIC 2834)
  3. In-vitro and vitro diagnostic substances (SIC2835)
  4. Biological products, except diagnostics (SIC2936)

For the purpose of this research paper we shall concentrate on pharmaceutical preparations (SIC 2834). As defined by the SCI code pharmaceutical industry consists of the establishments that are majorly concerned with the processing or fabricating medicinal chemicals and pharmaceutical products. Generally pharmacological preparations industry category consists of companies that are involved in manufacturing, fabricating and processing raw materials into pharmaceutical preparations for human and veterinary uses. Finished products from the industry are sold in different forms or various dosage form that include; capsules, tablets, ointments, solutions, suspensions, and powder. Pharmaceutical industry products face competitive pressures in the market place. This has forced many companies to restructure and form mergers and strategic alliances. Increasing competition in this industry from both local and abroad firms forces to small sized and large pharmaceutical companies to form merges to be able to survive in the market. Because of this generic competition, some brand mane companies are becoming more creative and are buying existing companies enabling them to set up their own generic drug ventures or forming partnerships. In so doing, the majority of the companies put into consideration Porter’s ‘five forces model’ to venture into the market and compete effectively with other companies products. The forces described by Porter may be intense causing other companies not to make profits or earn attractive returns on the investment (Banahan and Kolassa, 72).

Michael porter’s Five forces that shape the industry competitions are; the threat of new entrants, the bargaining power of the suppliers, the bargaining power of the buyers, the threat of substitute products, and finally the rivalry among existing competitors. Porter’s five forces will be discussed in details in this paper and state how they can be applied in pharmaceutical industry just like other industries to make this industry focused and strategically positioned to compete with the rest of the firms (Porter, 67).

Literature review

Pharmaceutical industry can be divided in many ways. They can be classified according to type of prescription, form type, mode of action and etc. The major distinction that is noticeable is the difference between over the counter (OTC) drugs and prescription drugs. Prescription drugs are solid exclusively through pharmacies and are dispensable only under the prescription from a qualified medical personnel. On the other hand, OTC drugs are sold anywhere, but are normally solid through pharmacies and drug stores mainly for self-medication purposes (Pereira et al, 115). With OTC, the buyer of the drug does not require the prescription of the doctor.  Divisions in original brands distinguish further pharmaceutical products, brands identified as original are the ones that are patented or protected against reproduction of the same products. Within the class of patents, there are two classes which include innovative and me-too products. The innovative products are also called breakthrough products and they provide a remedy for or treat the diseases, which could not have been treated. “Me-too” products are developed by an innovative company and they offer marginal improvement if efficacy and defects as compared with the already existing products. The products can be placed on the same pharmacokinetic process but would not have the same chemical structure because the patent protects it (Pereira et al, 116).

The second part of the generics are the exact copy of the existing products. They are produced once the patent of the original products have expired. The generic products are sold highly as compeered with the original price of the patented products. Because of this, the prize of the patented product tends to decrease as the number of the generic products begins to erode the market bringing stiff competitions. This causes a threat to the original producers of the drug.  This has made many manufactures of the original brands to engage in producing generic version of their products prior to the expiry of their patent. Such moves grants them a fair chance to capture large market share of their generic product before the other companies could be allowed to sell the same product (Ilene and Christian, 70).

Porter’s five forces model

Porter’s five forces model is a very popular model for analyzing forces that affect and influence the performance of firms in a given industry. It can be applied almost in all firms irrespective of their size, age or industry speciality. Although Porter does not take into consideration the effects of technology and government policies role in the industry, this has not reduced the importance of this model in business circles. According to Porter’s model, the five basic forces model can be used to determine the occurrences at pharmaceutical industry. These five forces are:

Threat of new entrants: This highly depends on the extent to which barriers to market entry exist. Porter provides the following as entry barriers into the market; economies of scale, capital requirement for entry, access to technology, government policies among others. All this depends entirely on the kind of industry the company is operating (Porter, 211).

Rivalry among the existing firms: Competitors are keen and are concerned with the degree of rivalry between them in the industry. Actually, the number of direct competitors is an indication of the extent of rivalry. The more the firms the more the rivalry and vice versa is correct.

Threat of substitute products or services: This threat can take diverse forms, for instance it can involve a product substituting or replacing the other or a similar product coming into the market and gain popularity than the already existing product in the market.

Bargaining power of the suppliers: Powerful supplies will take a good portion of the value of the products being produced. When accompany is dependent so much on a certain ingredient from a single supplier, the supplier gains more power over the company. The suppliers control the dependent company over the supply of the need. The power may include increasing of the price, which ultimately reduces a firm’s revenue.

Bargaining power of the buyers: this force deals with the power the customers or end-users of the product have over the company. This force when collectively combined, determines the structure and the profitability of the industry in the end. It is also important to mention that buyers can be individuals, groups or even companies (Porter, 211).

Porter’s five forces model and the Pharmaceutical industry

Rivalry among the existing firms

Pharmaceutical industry like all other industries experience the force of rivalry from existing companies within the industry. Rivalry among the listing firms within pharmaceutical industry can be analyzed in two perspectives; at the industry level and at the product market level. To begin with, an analysis at the industry level is tackled first followed by an analysis of the product level (Hitt, Ireland, and Hokinson, 202).

Rivalry at the industry level

Market power of the companies in an industry is measured by the use of concentration ratio. This is best measured by comparing the sales of top four or eight manufactures with the overall volume of the market. The concentration ratio is represented by c4 and c8 respectively. The competition in the market is more intense when the rations are lower. These ratios are computed on different levels for instance in pharmaceutical industry they can be computed at the levels of  total market, therapeutic class, and product level. The pharmaceutical industry is highly fragmented given that the report of total markets derived from public records (IMSdata, annual reports, script magazine) stood at 0.12 and 0.23 in 1994. The mergers are shaping rivalry among the pharmaceutical companies. This has helped in reducing the internal rivalry.

Another force that is experienced at the industry level is the emergency of Japanese pharmaceutical companies to the USA and UK markets. European and USA multinationals who were the first to discover the drugs. These giants still dominate modern pharmaceutical industry. However, the dominance of these multinational in the market is rivaled by the emergency of Japanese multinational companies such as Takeda and Sankyo that have emerged to be among top 20 pharmaceutical companies in the world. The rivalry intensified when Yamanouchi pharmaceutical company acquired Brocades pharma in 1991 thus giving this Japanese company easier and better access to the European market. Japanese pharmaceutical companies are small and fragmented. Until recently, they have relied on the west to provide for them the drugs to sell. However, a number of signs exist that reveal that Japan will onetime be the world’s major force in pharmaceutical industry (Miyagawa & Yoshida, 65).

Rivalry at the product market level

Pharmaceutical products compete at the market level over two – tier structures that are original brand and generics. The brand competes on non-price benefits as long as it is patent protected. However, the cost conscious healthcare environment of today has many issues on the brand. On the other hand, generics compete over the price benefits (Banahan and Kolassa, 208).

Original brands

The original brands, which account for the greatest share in the market, compete in different ways depending on the types of customers. For some customers market competitive warfare relies on the therapeutic value whose main attribute include, efficacy, safety and patient compliance. Second competition focuses on sales force efforts. The sales force efforts may be through journal advertising, samples, mailings and even mass media which influences greatly the demand levels of a given product.

Generics

These drugs are marketed under their chemical name without rebranding or further advertising. Rival of firms under this category is even fiercer because of this factor. Therefore, it is difficult to establish a good brand name or even differentiate your products with those of rival firms. Therefore, for a firm to survive or make profits it should look for different ways of attaining competitive strategy like pricing or market segmentation (Banahan and Kolassa, 208).

Threat of new entrants

New entrants are new players in the industry, which may come with entirely new product or with the same product but differentiated in one way or another. In every market, new entrants are always coming but in the pharmaceutical industry, it is even more common.  With the entry of new player, it means decrease of profits hence this poses many challenges to firms in their bid to survive in the market. The threat of new entrants is even worse if there is no any barrier to entry or if restrictions are few. This is what characterizes the industry of pharmaceuticals (Kotler, 88).

As far as pharmaceuticals are concerned, it is difficult to lock out or even reduce the number of new entrants in the market. This is because technology in the pharmaceuticals keeps on changing day in day out and these catapults in new players in the industry. Another factor is the development of very new products, which may bring in new competition. This coupled with patents and royalty issues posses great danger to existing firms in the market. Alternatively, this may work on the side o the firm if it is the one that has come up with a new product in the market. Therefore, threat of new entrants in the pharmaceutical industry is a very real factor to be taken seriously if we have to achieve any meaningful presence in the market.

Another factor that makes threat of entry a very strong force in pharmaceutical industry is the low switching costs that customers face in their decision to buy a product from one company and not the other. For instance if a customer wants a pain killer, all he need to do is to choose which best suits him/her from the many that are available using OTC dispensation. There is no barrier that restricts him to switch from one product to the other.

Threat of substitute products or services

Each product that is in the market place has its own substitute, and the pharmaceutical products are no different. Therefore, this places a lot of pressure on the existing firms since any slight move by one firm is bound to get counter reaction from the others that may work for or against the incumbent. Substitute products in the pharmacy include diet supplements, herbal medicine, and in-vitro diagnostics among others (Kotler, 88).

Elvin-Lewis (92) holds that among all this substitutes, herbal medicine deserves a special mention. This is because in the recent past there has been tremendous growth of this alternative medication. Some of the reasons that have been cited for this include affordability, little or no side effects at all, they are natural and readily available. This has really challenged many firms in the pharmaceutical industry because the herbal products have been proven to equally cure just like the conventional medicine if not better. This is especially true in less developed or developing economies like Africa where the issue relating to cost are of vital concern.

Additionally the low switching costs that a consumer faces when making a consideration between a product and its substitute poses great challenge to pharmaceutical firms. For example, switching costs between branded drugs vs. a generic type is very low. This makes customers who are cost conscious to switch to generics and leave alone branded. This places a lot of strain to firms that have used a lot of money in research to come up with new drugs.

Bargaining power of suppliers

Suppliers are the other businesses, groups of individuals or even individuals who are involved in supplying the business with the necessary raw materials, components, or semi finished products necessary for making the final product. One supplier can serve several businesses and equally one business can have several suppliers (Nick, & Peter, 71).

According to Porter (187), suppliers have more power if the players in the industry face higher costs in switching suppliers, the suppliers are more concentrated than the industry that they are serving and if the supplier does not entirely depend on the supply business for survival. When suppliers are powerful, it becomes very disadvantageous in that they can charge exorbitant prices and thus squeeze a lot of revenue that would have otherwise gone to the industry players.

Turning to the pharmaceutical industry, we can say bargaining power of suppliers is not that high. This has been attributed to a number of reasons. First, one is that there are many suppliers to choose from hence it becomes easier for a firm to easily switch supplier without incurring extra costs. Secondly, most of the suppliers depend a lot on revenues from these businesses to survive hence this greatly limits their bargaining power. Therefore, as far as bargaining power of suppliers is concerned, players in the pharmaceutical industry do not experience a lot of pressure. This has made industry participants to use this fact for their own advantage.

This force has also been known to work for the better of pharmaceutical firms. This occurs when they themselves are suppliers. For example, a company that is supplying a hospital with patented drugs has more power over such hospitals that they can use to their advantage to reap huge profits. It is just amazing how a threat can turn out to be an opportunity, it all depends on the strategy a firm uses in it operations. Therefore, this force works for the good of companies in pharmacy industry.

Bargaining power of buyers

Buyers are the final consumers of a given product in the market. Buyers power can be powerful or weak, depending on a number of things. Some of the most striking reasons as stated by Porter are: if they are relatively few or constitute larger percentage from a single vendor, face little or no switching costs and if they have ability to produce the product themselves. This is especially prevalent if you are dealing with a corporate client/buyer.

In the pharmaceutical industry, the bargaining power can be said to be average. It also depends on a number of factors that are involved. For instance if a pharmaceutical firm is producing a product that is sold directly to corporate, it means there are few and hence their bargaining power over firm becomes higher. On the other hand, if a firm is selling directly to clients (like in the case of OTC drugs), the bargaining power of customers becomes limited. This then means the producer can charge a price that best suits him to be profitable. Other factors that come in include market concentration, demand of the product and even economic trends in a given market (Nick, & Peter, 78).

This force is powerful if the firms involved deal with a standardized goods or products. This makes buyers to have power over them because they can easily switch between buyers to their own advantage. This is because the products are more or less the same and hence customer chooses the best vendor majorly on price criteria. The best way to overcome this challenge is to encourage differentiation and develop different market strategies.

Another issue with this force arises when a company is dealing with corporate clients. Due to the power they posses in their buying behavior of purchasing in bulk, they pose great threat to a firm when they threaten to switch for whichever reason. A good example is when a pharmaceutical firm has been awarded a tender to supply drugs at a given period and price. If within the period economic issues like inflation and foreign exchange rates change and the firm finds it hard to supply at the initial agreed cost, it becomes hard to charge a higher price. If it threatens to do so the buyer may also threaten to change supplier citing breach of contract. Thus, buyers enjoy more power if they buy in bulk and are corporate.

Bargaining power of individual consumers in the pharmacy industry is quite limited and has not been known to bring about any major challenge as far as this market force is concerned. In fact, the payers in this market are the one that have used this force to their own advantage. Given the fact that medication is a very basic human need, consumer’s ability to bargain becomes minimal.

Works cited

Hitt, M. A., Ireland, R. D., & Hokinson, R. E. (2005). Strategic management Competitiveness and globalization, concepts and cases (6th Ed.). New York: South-Western Publishing.

Pearce, J. A. II, & Robinson, R. B., Jr. (2003). Strategic management: Formulation, implementation and control of competitive strategy (8th edition). New York: McGraw-Hill Higher Education.

Miyagawa, M., & Yoshida, K. (2005). An empirical study of TQM practices in Japanese-owned manufacturers in China. The International Journal of Quality & Reliability Management. 22(6), 536-554.

Nick. R., & Peter, H. (1997). Supply-chain management and time-based competition: The role of the supplier association. International Journal of Physical Distribution and Logistics Management, 27(3-4), 210-225.

Banahan Bf, 3rd; Kolassa, EM (1997). A physician survey on generic drugs and substitution of critical dose medications. Archives of internal medicine 157 (18): 2080–8

Pereira JA, Holbrook AM, Dolovich L, Goldsmith C, Thabane L, Douketis JD, Crowther M, Bates SM, Ginsberg JS. (2005). Are brand names and generic warfarin interchangeable? A survey of Ontario patients.

Kotler Philip (1998). Marketing Management – Analysis, planning, Implementation, and Control, 9th Edition, Englewood Cliffs: Prentice-Hall.

Michael E. Porter. (2008). The Five Competitive Forces that Shape Strategy, London, Harvard Business Review. pp. 86-104.

DePamphilis, Donald (2008). Mergers, Acquisitions and Other Restructuring Activities. New York: Elsevier, Academic Press. pp. 740.

Ilene Sue Ruhoy, Christian G. Daughton. Beyond the medicine cabinet: An analysis of where and why medications accumulate. Environment International 2008, Vol. 34 (8): 1157-1169

Elvin-Lewis M. (2001). Should we be concerned about herbal remedies? Journal of Ethnopharmacology 75 (2-3): 141–164.

Bradley, J. (1993). Methodological issues and practices in qualitative research. Library Quarterly, 63(4), 431-449.

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