Historically the pharmaceutical industry has been a profitable 1. Between 2002 and 2006. the mean rate of return on invested capital ( ROIC ) for houses in the industry was 16. 45 % . Put otherwise. for every dollar of capital invested in the industry. the mean pharmaceutical house generated 16. 45 cents of net income. This compares with an mean return on invested capital of 12. 76 % for houses in the computing machine hardware industry 8. 54 % for grocers. and 3. 88 % for houses in the electronics industry. However. the mean degree of profitableness in the pharmaceutical industry has been worsening of late. In 2002. the mean ROIC in the industry was 21. 6 % ; by 2006. it had fallen to 14. 5 % .
The profitableness of the pharmaceutical industry can be best understood by looking at several facets of its implicit in economic construction. First. demand for pharmaceuticals has been strong and has grown for decennaries. Between 1990 and 2003. there was a 12. 5 % one-year addition in disbursement on prescription drugs in the United States. This growing was driven by favourable demographics. As people grow older. they tend to necessitate and devour more prescription medical specialties. and the population in most advanced states has been turning older as the post-World War II babe roar coevals ages. Looking frontward. projections suggest that disbursement on prescription drugs will increase between l0 and ll % yearly through 2013.
Second. successful new prescription drugs can be inordinately profitable. Lipitor. the cholesterol-lowering drug sold by Pfizer. was introduced in 1997. and by 2006 this drug had generated a astonishing $ 12. 5 billion in one-year gross revenues for Pfizer. The costs of fabrication. wadding. and administering Lipitor amounted to merely approximately 10 % of grosss. Pfizer spent close to $ 500 million on advancing Lipitor and possibly every bit much once more on keeping a gross revenues force to sell the merchandise. That still left Pfizer with a gross net income of possibly $ 10 billion. Since the drug is protected from direct competition by a twenty-year patent. Pfizer has a impermanent monopoly and can bear down a high monetary value. Once the patent expires. which is scheduled to happen in 2010. other houses will be able to bring forth “generic” versio N of Lipitor and the monetary value will fall-typically by 80 % within a twelvemonth.
Competing houses can bring forth drugs that are similar ( but non indistinguishable ) to a patent-protected drug. Drug houses patent a specific molecule. and viing houses can patent similar. but non indistinguishable. molecules that have a similar pharmacological consequence. Therefore. Atorvastatin does hold rivals in the market for cholesterol-lowering drugs. such as Zocor. sold by Merck and Crestor. sold by AstraZeneca. But these viing drugs are besides patent protected. Furthermore. the high costs and hazard associated with developing a new drug and conveying it to market restrict new competition. Out of every 5. 000 compounds tested in the research lab by a drug company. merely five enter clinical tests. and merely one of these will finally do it to the market. On norm. estimates suggest that it costs some $ 800 million and takes anyplace from ten to fifteen old ages to convey a new drug to market. Once on the market. merely three out of 10 drugs of all time recoup their R & A ; D and selling costs and turn a net income. Therefore. the high profitableness of the pharmaceutical industry rests on a smattering of blockbuster drugs. At Pfizer. the world’s largest pharmaceutical company. 55 % of grosss were generated from merely eight drugs.
To bring forth a blockbuster. a drug company must pass big sums of money on research. most of which fails to bring forth a merchandise. Merely really big companies can shoulder the costs and hazards of making this. doing it hard for new companies to come in the industry. Pfizer. for illustration. spent some $ 7. 44 billion on R & A ; D in 2005 entirely. tantamount to 14. 5 % of its entire grosss. In a testament to merely how hard it is to acquire into the industry. although a big figure of companies have been started in the last 20 old ages in the hope that they might develop new pharmaceuticals. merely two of these companies Amgen and Genentech were ranked among the top 20 in the industry in footings of gross revenues in 2005. Most have failed to convey a merchandise to market.
In add-on to disbursement on R & A ; D. the incumbent houses in the pharmaceutical industry spend big sums of money on advertisement and gross revenues publicity. While the $ 500 million a twelvemonth that Pfizer spends advancing Lipitor is little comparative to the drug’s grosss. it is a big sum of a new rival to fit. doing market entry hard unless the rival has a significantly better Merchandise.
There are besides some large chances on the skyline for houses in the industry. New scientific discovery in genomics are keeping out the promise that within the following decennary pharmaceutical houses might be able to convey to market new drugs that treat some of the most intractable medical conditions. including Alzheimer’s. Parkinson’s disease. malignant neoplastic disease. bosom disease. shot. and AIDS.
However. there are some menaces to the long-run laterality and profitableness of industry giants like Pfizer. First. as disbursement on wellness attention rises. politicians are looking for ways to restrict wellness attention costs. and one possibility is some signifier of monetary value control on prescription drugs. Monetary value controls are already In consequence in most developed states. and although they have non yet introduced in the United States. they could be.
Second. 12 of the 35 top-selling drugs in the industry were to lose their patent protection between 2006 and 2009. by one estimation some 28 % of the planetary drug industry’s gross revenues of $ 307 billion would be exposed to generic challenge in the United States entirely. due to drugs traveling off patent between 2006and 2012. it is non clear to many industry perceivers whether the established drug companies have adequate new drug chances in their grapevines to replace grosss from drugs traveling off patent. Furthermore. generic drug companies have in disputing the patents of proprietary drug and in pricing their generic offerings. As a consequence. their gross revenues of industry gross revenues has been turning. In 2005. they accounted for more than half by volume of all drugs prescribed in the United States. up from tierce in 1990.
Third. the industry has come under renewed examination following surveies demoing that some FDA-approved prescription drugs known as COX-2 inhibitors. were associated with a greater hazard of bosom onslaughts Two of these drugs. Vioxx and Bextra. were pulled from the market in 2004.
Case Discussion Questions:
1. Pulling on the five forces theoretical account ( Porter ) . explicate why the pharmaceutical industry has historically been a really profitable industry? 2. After 2002. the profitableness of the industry measured by ROIC. started to worsen. Why do you believe this occurred? 3. What are the chances for the industry traveling frontward? What are the chances. and what are the menaces? 4. What must pharmaceutical houses do to work the chances and counter the menaces?
( 1 ) cost-leadership. ( 2 ) distinction.
( 3 ) cost-focus. and
( 4 ) focused-differentiation.
Harvard Business School professor Michael Porter is a taking authorization on competitory scheme.
• Porter’s work during the 1980s suggested that five forces affect industry competition: |– | ( 1 ) |Rivalry among industry houses | |– | ( 2 ) |Threats of new entrants | |– | ( 3 ) |Threats of replacement merchandises or services | |– | ( 4 ) |Bargaining power of providers | |– | ( 5 ) |Bargaining power of purchasers |
1. Rivalry among existing houses
It is strong or weak by:
1. Concentration ( figure of houses )
2. Size of distribution Network of each house
3. Diverseness of rivals ( differences in ends. schemes. cost. construction. etc. ) if diverseness is low we can foretell their following move. if high that would be more hard. 4. Merchandise distinction ( by utilizing the quality. dependability. and specifications or distinction in the value concatenation by Targeting different sections ) 5. Excess capacity and issue barriers. High extra capacity means that rivals are unable to bring forth with their full measure. therefore they are non able to accomplish economic systems of graduated table. 6. Cost conditions ( if high that lead to stronger competition )
2. New Entrants & A ; Entry Barriers:
1. Capital demands ( strong distribution and strong publicity requiere high investing ) 2. Economies of graduated table: Mass production cut down unit cost. 3. Lack of absolute cost advantage ( Experience cut down cost by clip for bing firms-not available for new entrants )
4. Merchandise distinction
5. Entree to channels of distribution
6. Legal and regulative barriers.
7. Retaliation by bing houses ( sudden monetary value cut-increase of distributers committee )
3. Substitute: this force depends on two factors:
1. Buyers’ willingness to replace
2. The price-performance features of replacements
4. Dickering Power of SUPPLIERS
5. Dickering Power of Buyers
1. Buyer’s monetary value sensitiveness:
– Cost of purchases as % of buyer’s sum costs.
– How differentiated is the purchased point?
– How intense is competition between purchasers?
– How of import is the point to quality of the buyers’ ain end product? )
2. Relative bargaining power
• Size and concentration of purchasers relative to Sellerss.
• Buyer’s information.
• Ability to backward integrate
•If you are proving the market from inside you will see how the market environment variables is altering. and see what menaces or violative state of affairss are present or non. and harmonizing to the instance you can respond.
• If you are outside the market and fixing to come in to the industry. you have to mensurate the cost of leaping the barriers. and if it is excessively high. it would nonsense to use immense investings to get the better of the barriers. capitalise all the consequences expected. merely for this cost of come ining. • Defending your concern? you should seek to do it really hard to others to come in your market.
1. Cost-leadership scheme: maintaining costs and monetary values low for a broad market. •a. The cost-leadership scheme is to maintain the costs. and hence monetary values. of a merchandise or service below those of rivals and to aim a broad market. • B. This puts force per unit area on R & A ; D directors to develop merchandises that can be created cheaply. • c. Example: computing machine shaper Dell
2. Differentiation scheme: offering unique and superior value for a broad market. •a. The distinction scheme is to offer merchandises or services that are of alone and superior value compared to those of rivals and to aim a broad market. • B. Directors may hold to pass more on R & A ; D. selling. and client service. • c. An illustration of this scheme is the shaper of Lexus cars. •d. Companies use the scheme of distinction to make a brand—a distinctive image—that they hope will distinguish them from their rivals. • e. Examples: the trade name Pepsi Cola
3. Cost-focused scheme: maintaining costs and monetary values low for a narrow market. • a. The cost-focus scheme is to maintain the costs. and therefore. monetary values. of a merchandise or service below those of rivals and to aim a narrow market. • B. This is the scheme executed with low-end merchandises sold in price reduction shops. such as low-priced coffin nails.
4. Focused distinction scheme: offering unique and superior value for a narrow market. • a. The focused-differentiation scheme is to offer merchandises or services that are of alone and superior value compared to those of rivals and to aim a narrow market. • B. Examples: shapers of expensive luxury autos.