Pharmaceutical industry presently undergoes a sluggish growth with the intensification of pricing policies, sluggish growth of prescription drugs. This trend led to increased competition in the generic drugs market. The global health market is expected to have a single digit market growth through 2014 (Zacks Equity Research, 2011). One reason for this is the flux in the industry that is expected due to loss of patent and emerging generic competition. Given this current state of flux in the pharmaceutical industry and thorough understanding of the environment of the industry and the competitive pressure that affect the industry is warranted.
Historically the pharmaceutical industry has undergone many changes. The structure of the industry has undergone numerous changes with the initial pharmaceutical companies being essentially chemical companies, who then migrated to become global players in pharmaceutical industry. Research and development became the corner stone of the industry since the early forties. The sixties era saw rapid development of drugs and new inventions and almost lack of regulation in the industry.
During this time, healthcare spending boomed globally due to rapid growth of global economy (Zacks Equity Research, 2011). However, in the seventies the regulatory control of over the industry tightened especially that on generic drugs. The regulatory system changed the system of permanency in patents and introduced the process of fixed time based patent for branded drugs that evolved the market for branded generic drugs.
Overall, the pharmaceutical industry is characterized by stringent intellectual property competition, risky and long R&D process, and severe regulatory pressure. Given this environmental brief of the industry, it becomes imperative to understand the environmental effect on the industry and the threats and opportunities it holds for the future of the industry. The paper aims to understand the changing environment and its effect on the pharmaceutical industry.
The report aims to understand the environmental condition of the global pharmaceutical industry through an environmental analysis using PESTLE. This will help to indentify the opportunities and threats that the industry faces. Then a Porter’s five forces competitive analysis will be done to understand the nature of competition and competitive forces acting upon the industry and the structure that the industry face due to these forces.
Environmental Analysis (PESTLE)
The pharmaceutical industry has undergone various changes from advancement in technology to tighter regulatory framework. The industry has been swept through incidents of patent expires, one of which is expected by analysts in 2012 (Zacks Equity Research, 2011), the present nature of pharmaceutical industry is that of intense competition. Therefore, to understand the structure of the industry and the nature of its environment a PESTLE (political, economic, social, technological, legal, and environmental) analysis is done in the following subsections.
Due to the increased importance of healthcare industry in public domain, the industry has enjoyed increased political attention. As healthcare is linked to a welfare society, political interest in the sector has increased due to the social and financial burden that it entails. This has resulted in increased regulation by government bodies on pharmaceutical industry in globally. Therefore, government intervention in maintaining quality of the products has become paramount. For example, US based government agency Food and Drug Administration (FDA) imposes thorough investigation and checking of quality and applicability of new products in market. Further, in many countries due to the monopolistic nature of the pharmaceutical market, political intervention in the industry becomes inevitable.
The main reason for increased government intervention in the industry since the 1980s is the increased concern over rising healthcare expenditure. For instance, in the US government got large concession from the industry for its Defense medical program and Medicaid program for the impoverished (Ault, 2000). Government imposed price control or reimbursements and the industry failed to get public or political support to resist such changes. Therefore, political pressure on the pharmaceutical industry is apparently high.
The pharmaceutical industry’s growth process had reached a stagnancy were the growth rate seemed to remain at single digits from 5 to 8 percent (Zacks Equity Research, 2011). According to future predictions, the products like Lipitor, Plavix, Zyprexa, etc. that has a present market value of $142 billion will face generic competition through 2016 (Zacks Equity Research, 2011). There were significant merger and acquisition activity in pharma in 2010 and the trend is expected to continue.
Most of the pharmaceutical companies face challenge from expiring patents and therefore companies are stepping up to indulge in M&A and in-licensing activity to make up for their loss in revenue. Some major M&A activities in the sector has been that of Johnson &Johnson and Micrus, a medical device maker, Pfizer and King Pharmaceuticals, Sanofy-Aventis and Celgene, etc. According to 2005 data, pharmaceutical sales has been maximum in North America ($267.7 billion) constituting almost 47 percent of global sales, $169.5 billion in Europe (30 percent of global sales) and Japan has 10.7 percent of global sales (Zacks Equity Research, 2011).
Some of the regions, which are expected to show greater growth potential where pharmaceutical companies are heading, are India, China, Brazil, and other emerging markets. The change in focus of the pharmaceutical market towards the emerging markets is due to the expected growth of the market through 2014 is 14 to 17 percent and the developed markets are expected to grow only by 3 to 6 percent (Zacks Equity Research, 2011). Clearly, the change in focus of the market towards emerging markets for pharmaceuticals will change the strategies taken by most companies in the industry.
Good health is a necessity today as it gains personal and social requirement. The need for a healthy society is paramount today. Especially with the increasing threat from epidemics like SARS, AIDS, etc. threatening society. These diseases have increased the need for pharmaceutical companies to become socially aware and understanding and create a potent industry-society connection.
Technological development through long term investment research and development is the potent path for growth and strategy for pharmaceutical companies. Pharmaceutical companies are among the top spenders of among industries in R&D (Laitner & Cookso, 2007). Therefore technology remains a cornerstone for encouraging innovation that is stimulated by increased investment in innovation.
Government regulations are high in pharmaceutical industry. This leads to a large number of legal and compliance processes that companies in the industry has to adhere to. These restrictions to a great extent are (Sood et al., 2009). For instance price control on drugs in the US resulted in a dip of revenue of pharmaceutical companies by 20.3 percent in 2008 (Sood et al., 2009). Generally, research has shown that most regulations reduce pharmaceutical revenue substantially (Sood et al., 2009).
Pharmaceutical industry must be concerned with the environmental impact of the manufacturing plants. Research shows that various compounds like anthelmintics used in veterinary medicine and certain antibacterial therapeutics can adversely affect organisms in the environment (Boxall, 2004). There are other possible effect that may occur to the environment through biologically active compounds or other breakdown products that may have unforeseen effect on the environment (Boxall, 2004).
From the PESTLE analysis the main issues that can be identified for the pharmaceutical industry are –
- The focus of the industry must shift to the emerging markets that offer greater growth potential.
- Political and regulatory control and legal hassles make the industry slow growing with innovation difficult.
- Pharmaceutical manufacturers have a great effect on the environment and increased environmental concern can make the industry prone to disputes over hazards and malpractice.
- Continued long term investment in R&D is the cornerstone for growth in the industry.
Opportunities and Threats
The emergence of the new growing market in form of emerging pharmaceutical markets in China, India Brazil etc. provides an opportunity for the industry. This is expected to reduce pressure on companies due to generic drugs competition and pricing pressure.
The threats that the industry faces are increased competition from generic drugs, changes in US health reform in 2011, and EU pricing policy. Further, lower sale of pandemic flu drugs are also expected to affect the performance of some companies like Glaxo and Sanofi (Zacks Equity Research, 2011). Further, in the US, FDA is making the introduction of new products more stringent with heightened safety and quality norms thus the norm seeking process is expected to become more time consuming.
Industry Analysis (Porter’s Five Forces)
The structure of the pharmaceutical company globally faces competition from different areas. This analysis will present a potent structure for the industry to show the competitive forces affecting the industry.
The barriers to entry in the industry are high. The reason being high cost of investment in infrastructure and R&D. Further, there is a regulatory hurdle in form of patents that may also make entry into the industry difficult.
As most of the companies are highly competitive, competition within the industry is high too. Therefore, there is always advantage for first movers in gaining patents.
The power of suppliers is low.
The power of buyers differs with some markets being monopolistic in nature with governments being the sole purchaser in some countries. However, in most cases the power of buyers is from low to medium with the former when drugs are patented and the latter after the expiry of the patent.
The pharmaceutical industry shows a slackening of growth in its strong markets in developed countries as in the US and Europe where growth rate has remained sluggish. However, new opportunities have emerged in new markets from India, China, and Brazil. Other than that, regulatory process makes the operation in the industry more difficult and increases industry competition.
Strategic Outlook of the Pharmaceutical Industry
A few issues that pharmaceutical companies face presently as can be found through the environmental and industry analysis are as follows.
Merger and Acquisitions
M&A activity in the pharmaceutical industry has been very dominant through which the industry consolidation process is going on. Since the last decade, this process has been very aggressive. The reasons for M&A are mainly to increase product portfolio or gain greater technological base in the industry. In other cases the reason has been to make their strategic position stronger. Analysts feel the M&A trend is expected to continue along with in-licensing activities. One reason for this is that development of a product from scratch involves a lot of cost that can be reduced to a great extent if the companies pick up promising development in the mid-pipeline. This provided opportunity to smaller companies to opt for in-licensing and collaborative association with larger pharmaceutical companies (Zacks Equity Research, 2011).
Innovation and R&D
R&D and continuous innovation are the sole source of strategic advancement of the companies in the industry. New technology and innovation are a definite source of opportunity for the highly competitive industry. Previous example shows that companies with lack of interest in new product development and innovation had been acquired.
Changing competitive scenario
With changing market structure due to large scale M&A activity in the industry would effectively change the nature of competitive environment within the industry. Further, with expiry of patents in next five years and increased competitive from generic drugs will also change the nature of competition. Therefore, the competitive advantages for companies are being constantly redefined as the industry is essentially innovation based.
The pharmaceutical industry is highly competitive in nature with a lot of pressure coming from within industry competition and regulatory forces. The strategy that helps companies is to change their innovation strategy constantly through new product development or acquiring new products. Nevertheless, constant revamping of the drugs is essential.
Ault, A., 2000. Still booming after alll these years. The Black Collegian, pp.76-82.
Boxall, A.B.A., 2004. The environmental side effects of medication. EMBO Reports, 5, pp.1110 – 1116. Web.
Laitner, S. & Cookso, C., 2007. Pharmaceutical groups top R&D spending scoreboard. Web.
Sood, N. et al., 2009. The effect of regulations on pharmaceutical revenues: experience in nineteen countries. Health Affairs, 28(1), pp.125-37.
Zacks Equity Research, 2011. Pharmaceutical Industry Outlook. Web.