The pharmaceutical industry seems to be an intermingling of growth and expansion stage. This is mainly due to the fact that there are so much research and development (R&D) work being conducted in the industry, creating growth in the industry. At the same time, various players in this industry have started to acquire or merge with their respective competitors, in order to expand and diversify product line, market share, or new markets.
The worldwide pharmaceutical sales has continued to grow faster than most segments of the world economy – driven by strong demographic trends of the world population: aging population in many countries, lengthening of average life expectancy, and rising incidence of chronic diseases.
This industry is a non-cyclical industry, as the products, drugs and medication, are geared towards consumers and markets that are not prone to price changes, inflation, or economy fluctuations. Consumers in the market might lean towards product lines in the lower end of the affordability spectrum, rather than higher end – purchasing generic products in the market.
Pharmaceutical Industry Application of Porter’s Five Forces Industry Competitors and Intensity of Rivalry In general, the main competitors for the pharmaceutical industry are Pfizer ($45.2B in 2003 sales), GlaxoSmithKline ($35.2B), Merck ($22.5B), Bristol-Myers Squibb ($20.7B), Abbott Laboratories ($19.7B), and Johnson & Johnson ($19.5B). However, with the recent spur in mergers and acquisition (M&A) activities in various industries, the pharmaceutical industry had a significant merger in August 2004 between two France competitors – Sanofi-Synthelabo and Aventis – creating Sanofi-Aventis, one of the top three pharmaceutical companies with Pfizer and GlaxoSmithKline.
The rivalry among the current competitors in this industry is intense due to the competitive nature of product development and patent profitability. Each competitor is spending billions of dollars in their respective R&D efforts to discover new products and patents to continue the stream of prescribed and over-the-counter drugs produced and sold to consumers in the market.
The rivalry is also intense due to the regulation set forth by Federal Drug Administration (FDA) in US and other governmental regulators in various countries of the world, where stringent requirements and scarce allocation of patents are given out to companies developing new drug products. However, due to such intense rivalry, numerous companies have started to merge (like Sanofi-Aventis), or form alliances or joint-ventures in creating new products, to compete with other competitors. Bargaining Power of Buyers
In the world of pharmaceutical, the buyers are basically wholesale distributors such as Cardinal Health Inc., McKesson, and AmeriSourceBergen. These wholesale distributors play the middle-man role in selling and distributing all pharmaceutical products to various buyers like pharmacies, hospitals, HMOs, clinics, and mail-order companies. The concentration of buyers are high due to the fact that there are only a select few key buyers that make huge purchases from all the players in the pharmaceutical industry.
As such, buyers do have above average bargaining power that allows the wholesale distributors to dictate the price of the products. However, all the pharmaceutical companies have distributor agreements that help curb the bargaining from being overzealous. Bargaining Power of Suppliers
Suppliers to the pharmaceutical industry players are in abundance. The industry does not suffer from scarce resources as the raw materials (both active and inactive ingredients) are always available from various drug ingredient makers and distributors. As such, the suppliers are low in concentration and without much bargaining power. Most of the suppliers are similar and as such, easily interchangeable, without much risk or hassle. With the globalization of economy, the market of available suppliers is even bigger than it used to be – resulting in even lower concentration of suppliers and giving the pharmaceutical industry more power in bargaining for the prices of drug ingredients. Threat from Substitute Products
For the brand prescription drugs, the main substitute would be the generics or competitors’ similar prescription drugs. However, this internal threat between competing products does not change the dynamics of drugs that are produce in the safety of patent.
The larger threat that the pharmaceutical industry faces is from alternative medicine such as herbal medicine, acupressure, acupuncture, massage therapy, homeopathic medicine, and other growing fads of self-remedy. The effect of alternative medicine is limited however to the critical and chronic degree of the diseases and illnesses that could be treated or prevented. Threat of Potential Entry
The threat of potential entry for this industry at this stage (growth and expansion) is definitely low. This is mainly due to the enormously high barrier to entry in obtaining capital and resources for R&D efforts to produce patents. Due to the scarcity of patents and large amount of capital required for the numerous years of research and development, it is close to impossible for new smaller companies to enter this industry at this time.
Each of the players in this industry is spending billions of dollars each year just to conduct researches and perform studies, which hopefully will result in the development of an effective and efficient drug that can be patent. Other than that, there are also legal and regulatory obstacles that prevent new competitors, from the FDA and other governmental structures. Other Influencing Forces
Due to the nature of the drug products, there is intensive regulatory and legal implication that affects this industry. A good example of how the government and political environment influence and dictate the direction of the pharmaceutical industry is through various regulations by the FDA and Department of Health and Human Services (DHHS), involving patent protection, product approvals, pricing controls, and product liability.
The demographic evolvement in the world is another factor that should be considered. As the baby boom generation ages and life expectancy rises, demand for pharmaceuticals are soaring. In the US, seniors aged 65 and older currently represent only 13% of the population but account for 34% of all prescriptions written and more than 40% of drug sales. Approximately 80% of seniors in the US use prescription drugs on a regular basis. According to a United Nations study, the number of people worldwide aged 60 or older will grow from 593 million in 1999 to close to 2 billion by 2050.
Recent technological developments and breakthroughs have changed the way new drugs are discovered, how they are tested, the precision that it affects the diseases, and how the drugs are being delivered or distributed to patients. The recent development in stem cell research will definitely create more opportunity for growth in the pharmaceutical industry, especially in the European Union a