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PEST and 5 Forces Analysis of the

Pharmaceutical Industry.PEST and 5 Forces Analysis of the Pharmaceutical Industry

 

3.1 Political Environment

 

Spiralling healthcare costs resulted in increased political intervention in the industry affectingstrategy within the industry, including tighter regulatory and pricing legislation. The firstconcern is the move by the British government in 1985 to introduce a blacklist  of certain

 patented drugs that it would no longer fund. The strategic implication is that, as the maor  purchaser, the government are forcing the manufacturers of delisted  drugs to see! new waysto mar!et" #oche$s decline from a top ten firm to the forties when two of their maor products

were delisted demonstrates the implications for firms operating in a mar!et with such a powerful purchaser. %owever, legislation fi&ing the patent length allows other, smaller firmsto introduce  generic drugs, effectively copies with little differentiation, as patents e&pire.'ith little #() investment re*uired, generics are available at a cheaper price than the

 branded original. +rudent government purchasing is holding down demand at launch andflattening the product life cycle resulting in the need for %igh ompression -ar!eting%-/. #egulatory bodies demanding increased clinical trials lengthen the lab0to0mar!et lag

 but measures such as the uropean -edicines valuation 2gency -2/ aim to limit this by coordinating trials so that one country provides the approval for all. %owever, the issue of regulatory bodies remains a comple& issue strategically with each body differing. This isepitomised by claims that 3apanese people metabolise drugs differently from westerners.

Therefore this bloc!s %-, as it can prove difficult to coordinate a product launch globally.2 further development is the growth of parallel trade due to greater uropean integration.%owever government imposed price differentials have resulted in profit losses for 

 pharmaceuticals as the parallel importers benefit. This opens a strategic opportunity for themain players to ac*uire these importers and gain presence in low fi&ed0cost countries such asSpain. 4 concerns over this allow pharmaceuticals to gain strength politically as theyinfluence 4 policy.

3.2 Economic Environment

 

2lthough the industry seems recession proof6, economic recession affects the industry in

countries with welfare systems and high healthcare spending as a proportion of 7)+ such asthe 4 and orea between and 8:/, as healthcare provisions decrease in times of recession. 2rbitrage through ta& minimisation can be obtained through manufacture in lowta& countries such as the #epublic of ;reland and +uerto #ico" combining with opportunitiesfor parallel trade through the Single uropean -ar!et. The 4S and 3apanese mar!ets remainthe largest worth <1== billion and <51 billion respectively. 2long with 3apan, >atin 2mericais the other emerging economy in the industry. 8?: of all pharmaceutical trade wasconducted in ust nine strategic economies allowing %-. 

3.3 Socio-demora!hic Environment

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The maor feature demographically is the greying population6 which is beneficial for theindustry as people over @5 consume four times as many pills as those under, suggesting thatfirms should focus #() on the aged mar!et. 7reater media coverage has raised awareness of the drugs available resulting in heightened )T advertising and increasing availability ofAT drugs and creating a pull6 strategy. onse*uently, patient e&pectancy has risen placing

the onus on the providers to deliver *uality and value for money. An a global scale, privatehealthcare systems such as in the 4S mean that poorer people are unable to afford *ualityhealthcare meaning that a portion of the mar!et is left une&ploited. ;ncreased awareness over

 personal issues such as impotence and obesity have led to the development of lifestyle drugs.%owever, cardio0vascular disease remains the biggest mar!et with 5.: of all sales. The2;)S epidemic in 2frica remains a mar!et under supplied with lac!ing funding in thecontinent. 2nother demographic concern is the different manners in which different racesmetabolise drugs leading to difficulties in the clinical trial stages, thus ma!ing %- strategydifficult to implement.

3." Technoloical Environment 

Technological advancements within the industry focus mainly on biotechnology and the%uman 7enome +roect. These have affected the industry by increasing the cost of #()whilst the discovery of new chemical entities has fallen. Strategically, the industry canincorporate functional genomics, which aims to develop drugs to meet specific targets. 2lso Pharmacogenomics, the study of why different populations metabolise drugs differently willallow drugs to aimed specifically at those who benefit the most. ; anticipate that the role0outof the above practices will reduce #() costs in the long0term. An the demand side, thegreater use of personal computers is improving methods of handling information includingformularies6 of available drugs, thus creating awareness of generic alternatives totraditionally higher priced branded originals, therefore all manufacturers must compete on

 price and differentiation. #elated to the + boom is the growth of ;nternet. This has greater effect in the 4S2 where 1: of households have access with health issues the second mostsearched subect on the ;nternet. %owever, uropean use is more varied with ust 1: accessin Spain and @5: in Sweden. Strategically, this offers the pharmaceuticals the opportunity to

 build )T direct to consumer/ advertising and thus awareness of the products available"5: of 4S users who search for health issues are li!ely to discuss their findings with thehealthcare providers, possibly as!ing for products by name.

".# Porters Five Forces Industry Analysis Period 1$%5 - 1$$5

 

".1 &arriers to Entry

 

#esearch based participants were the main players during this period with generics participants ust entering. ;ncreasing time to mar!et 01 years/ and increasing #() costs<5.C billion, 1981/ resulted in high ris!s for potential entrants. )uring this period mediacoverage and )T were not as significant meaning that entrants would struggle to find anaudience for its product.Brand loyalty was another concern with doctors and specialists dealing with muscle

marketing   salesmen. Such mar!eting techni*ues prove more costly for participants thanmedia methods employed during the latter part of the period. Success also remained

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responsive to macroeconomic performance as funded by ta&payer and dependence on onemain purchaser with the advent of AT drugs not yet developed. ".2 &arainin Po'er of Su!!liers

 

There is no real evidence of any supplier issues, which leads me to believe that the siDe of thelarge pharmaceuticals gives them the power over suppliers.

".3 Su(stitute Products

 

This period represents the early stages of generic products with drugs costing normally ust@?: of the launch price of the original. This re*uired participants to respond by attempting tocreate brand loyalty, compete on price and differentiation or face loss of mar!et share.

"." &arainin Po'er of Purchaser

 

)uring the 8?$s, governments demonstrated their power by targeting participants to cut thecost of healthcare as it became unsustainable for some welfare economies. The 4government created a blac!list in 1985 of drugs it would no longer pay for such as Ealium.This devastated firms such as #oche which had two of its biggest selling products de0listed

causing their decline from a top ten firm to the forties. )uring this era, the AT mar!et wasnot fully developed and the limited ways of communicating to mass audience such as lac! of ;nternet/ meant that governments proved the only real mar!et. 'ith the emergence ofgenerics as a substitute maor participants would be forced to rethin! their operations,

 building upon their well0established brand loyalty.

".5 Intensity of )ivalry

 

 Fo maor mergers or ac*uisitions too! place so the mar!et was constructed of many large

research based firms in direct competition on national and international levels. %owever, themar!et grew with net profit margins up from 1?: to 19:ψ . 'ith generic products emerging,

one can assume that competition began to intensify as no switching costs affected purchases. 5.# Porters Five Forces Industry Analysis Period 1$$5 - 2###

 

5.1 &arriers to Entry

 

Barriers to entry appear two0tier. #esearch based pharmaceuticals remains difficult to enter with #() unpredictable and costly around <@?? million per product/ and global spendingup estimated at <5? billion for ??1. The growth of costly and low productivity

 biotechnology is somewhat to blame. >egislation and increasing clinical trials ma!e lab tolaunch 1 years on average and more cautious purchasing and price controls from

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governments has flattened and shortened the product life cycle, resulting in huge ris!s for any potential entrant. onse*uently, the search for blockbuster  products is the aim but less than1: of all drugs can be classified a bloc!buster. %owever, opportunities through generics and

 parallel importers show lesser barriers for potential entrants to this field. 'ith less #()re*uired leading to lower pricing has resulted in wea!ened brand loyalty for the big players.

;n conunction with new formularies6 allowing doctors to elect cheaper alternatives via ;Tand growing media coverage and ;nternet, the traditionally large muscle mar!eting6 salesforces are unnecessary. There are also no switching costs from branded to generic. 5.2 &arainin Po'er of Su!!liers

 

There is no real evidence of any supplier issues, which leads me to believe that the siDe of thelarge pharmaceuticals gives them the power over suppliers.

 

5.3 Su(stitute Products 

7rowing relevance due to legislation allowing generics as patent e&pires and economicchange including uropean integration result in parallel trade from lower fi&ed costcompanies. Strategically, pharmaceuticals must lower prices or develop differentiation as the

 patent e&pires. 2lternatively, firms could focus mar!eting on products with longer patent protection. 2nother factor as astern mar!ets open to the big firms is hinese %erbal#emedies, which whilst remaining popular in such mar!ets are also growing in popularity inthe 'estern world.

5." &arainin Po'er of Purchaser

 

thical prescription/ drugs comprise 8?: of the mar!et and are purchased almost entirely bythe government. This gives them great bargaining power, as the main players cannot afford tomiss out. The legislations on fi&ed patent periods suggest that governments intentionallymoved to wea!en the position of pharmaceuticals in order to drive down prices throughgenerics. ;ndividual pharmacists are also controlled by government price controls as thereimbursement varies between products. This forces the drugs having to ustify both price and*uality more substantially than in the previous period. ;T growth offers doctors greater choicevia formularies of the cheaper generics. The concern for the industry is that brand loyalty has

 been destroyed and with no switching costs for consumers on both ethical and AT drugs.

7reater awareness through ;T and the media mean that patient e&pectations are higher thusmore willing to switch. onse*uently, pharmaceuticals must aim to switch users to drugswith greater patent protection prolonging product life cycle.

5.5 Intensity of )ivalry

 

7rowth rate in the mar!et remains high and profitability increasing particularly in genericfirms with the 4S mar!et the biggest growth mar!et 1@: in 1999/. 2 series of high profilemergers such as that of 7la&o'ellcome and Smithline Beecham forming 7S with salesof <. billion in ???/ intensified competition to a smaller number of more powerful global

firms. 'ith no switching costs for consumers and the growth of generics the rivalry hasintensified dramatically.