Profitability And Regulation Of Pharmaceutical Industry

Five forces analysis of Pharmaceutical Industry

Discuss about the Profitability and Regulation of Pharmaceutical Industry.

The pharmaceutical industry refers to an industry which discovers, develops & produces drugs used to heal illness. Pharmaceutical companies generally deal with either generic drugs or branded rugs & medical devices. Pharmaceutical industry is ruled & controlled by various laws posed by government in order to regulate testing, safety, efficacy, patents & marketing of the drugs. Pharmaceutical industry deals in high levels of research & development (R&D) to discover & develop the drug.

Drug discovery refers to the process of designing or development of the drug. The cost of innovation association with drug development and discovering the drug is quite expensive. It is seen that, compounds investigated to be used for human purpose only handful are approved by the medical council to market a particular drug in certain countries (Gupta & Bansal, 2015). In the year 2010, 18 new molecular entities were approved by the FDA whereas; only 18 approvals were made in the year 2007 & 22 in 2006. The research & development (R&D) of the pharmaceutical industry has reached more than $65 billion in the year 2009 (De Kluyver & Pearce, 2009). Based upon a study done by Bain & Company, the cost of developing, discovering & launching a new product in the market has risen to five year period to $1.8 billion in the year 2003. Based upon Forbes, the development cost of the drug were in the range of $2 – $10 billion per drug (Syafriont, 2011).

Porters five forces analysis refers to a marketing too which is used in order to analyse the industry as well as determine what is to be done in order to attain competitive advantage as well as determine how attractive a particular industry for new entrants. The porter’s five forces model consist of the following forces. The five forces analysis if Pharmaceutical industry is as follows:

Bargaining power of buyers: It shall be seen that, the bargaining power of buyers in case of pharmaceutical industry is medium. Hospitals & health care organizations buy medicines in bulk and hence exert pressure on the pharmaceutical companies to keep a check on the prices of the drugs (Smith & Becker, n.d.). Regular patients do not pose any bargaining power due to an increase in the prices of the generic drug. In case of pharmaceutical company, a particular drug is cherished by the customer. Therefore, they tend to pay more for that one product (Goncharov, Mahlich & Yurtoglu, n.d.).

Profitability of pharmaceutical industry

Bargaining power of suppliers: The barraging power of suppliers in the pharmaceutical company is relatively low. It shall be kept in mind that, sales of pharmaceutical industry is concentrated in handful of large players which has decreased the bargaining power of the same (Santoro & Gorrie, 2010). High levels of competition amongst the suppliers will tend to reduce the prices of the drug producers. This will have a positive impact on the pharmaceutical industry.

Threat of new entrants: The threat of new entrant in pharmaceutical industry is very low. It shall be seen that, high sunk cost makes it very difficult for any company to enter the new market (same goes in case of pharmaceutical industry). High sunk costs have a positive effect on the pharmaceutical industry. A strong distribution network is required in case of pharmaceutical industry (Research and development in the pharmaceutical industry, 2006). Building a strong distribution network has positive affect on this industry. There are high entry barriers associated with research & development (R&D) of new drugs. Patents help the new entrants not to enter the pharmaceutical industry. Patents make it difficult for the new entrants to enter in same.

Rivalry amongst the existing competitors: The degree of rivalry from the existing firms is very high in the pharmaceutical industry. The rivalries amongst the existing competitors pose high competitive force (Grice, 2008). For example, in case of erectile dysfunction GlaxoSmithKline claims that Levitra works faster as compared to Eli Lily & ICOS which works faster and is ling lasting Viagra by Pfizer. It shall be seen that, policies & regulations can dictate the level of competition within the pharmaceutical industry (Præstegaard, 2010). When they limit competition, it has a positive effect on this particular industry.

Threat of substitute products: The threat of substitute products in the pharmaceutical industry is very high. The cost of switching from one product to another is high. Customers cannot easily switch from one brand to another. Demand for generic as compared to the branded drugs has increased due to the cost associated with it (Nahler & Mollet, 2013). Generic drugs do not involve high research & development (R&D) as compared to new drugs and hence, it helps them to sell the drugs at a cheaper price. People tend to buy cheap drugs as compared to the branded drugs as they involve same salt concentration

For the past many decades, pharmaceutical industry has been referred to as highly profitable. The recipe to earn such profits is to discover a molecule or a chemical which deals with some of the common problems i.e. hyper-tension, diabetes, erectile dysfunction and make billion dollars. But, it is not easy to earn such high levels of profits (Mancuso & Grenada, 2011). It takes billions of dollars to develop & discover a chemical which might be used by humans to heal their illness (Jo?rn, n.d.).

Factors driving profitability of the pharmaceutical industry

It is seen that, the pharmaceutical industry is highly profitable. In the year 2000-2003, the average rate of return on capital for the firm in the pharmaceutical industry was estimated to be 25% (Leahy, 2011). This means that, for every dollar invested, the average pharmaceutical firm generated 25% of profit. The high profitability of the pharmaceutical industry can be understood by taking into consideration the following factors. They are as follows:

The demand of the pharmaceutical industry is very strong and has been on rise for many decades.

In the year 1999-2003, the annual rise of pharmaceutical industry was estimated to be more than13% (Gupta & Bansal, 2015).

The strong demand for medicines is due to the favourable demographics.

As people grew old, they are in need of medicines to be stable and perform their daily chores (Mulinari, 2016) .

The new and branded medicines are highly profitable. For example, Lipitor a drug to lower the cholesterol levels sold by Pfizer was introduced in the year 1997. By the end of 2003, this drug had earned revenue of more than 60 billion. The cost of manufacturing, distribution & marketing for the same accounts to not more than 7% of the total revenue earned. This drug is protected from direct competition and hence Pfizer has temporary monopoly for the same and can charge any price as possible (Griffin, 2009).

Pharmaceutical companies invest billions of dollars to discover & develop a medicine which would provide an effective treatment for the humans. In this process, they tend to make investment & make huge profits. It shall be taken into consideration that, the role of industry has grown and so are the risks. The level of expectation from this industry is very high & competitions amongst the generic drugs are stiff (Maria & Bogdana, 2014).

Some of the factors that drive the profitability of the pharmaceutical industry have been listed as follows:

Government Regulation: The degree of regulation levied by the government also plays an important role in driving the profitability of the pharmaceutical industry. It shall be seen that, the federal government administration regulates this industry at different stages. It shall be kept in mind that, countries such as Canada & Germany tend to control the price on the medicines sold at their borders (Griffin, 2009). The government of U.S. and FDA puts a pressure on how to control pharmaceutical advertisements along with the claims as to what the drugs can and cannot do. Based upon the study conducted by Cato Institute, 85% of the pharmaceutical cost goes by complying with the FDA regulations, thereby using the amount in further medical research.

Insurers & managed care: In United States (U.S.), prices are set by a free market system, customers rarely pay full price for prescription drugs which are paid by the third party insurers. It shall be seen that, third party insurers are able to negotiate for the prices of drugs, thereby leading to decreasing the level of profits along prices of the same (Smith & Becker, n.d.).

Research & Development (R&D): Intensive research & development (R&D) plays an important role in driving profitability of pharmaceutical industry. With the help of R&D, treatments for complex disorders have also come into place. The industry’s expenditure on R&D for new therapies is estimated to be $68 billion in the year 2010. It shall be taken into consideration that, the role of pharmaceutical industry has increased significantly thereby leading to so many risks (Research and development in the pharmaceutical industry, 2006).

Consumer demand: In the past many decades, the demands for generic drugs as well as maintenance therapy along with lifestyle drugs have grown tremendously. The increase in the consumer demand for the same has been referred to as the main factor that drives profitability in the pharmaceutical industry. Some of the drugs which have high consumer demand & are highly advertised are Viagra, Lipitor and Claritin. Based upon the study conducted by Medical Marketing & Media, the direct consumer advertising spending has reached its highest point i.e. $6 billion dollars. The branded drugs are going off patients & sales of generic drugs are increasing amongst the consumers (Smith & Becker, n.d.).

Some of the factors that might change the future of pharmaceutical industry and its effect on industry profitability have been discussed in this section of the assignment. They are as follows:

Change and current success: It is quite a difficult task to accomplish the business and make a drastic change in the middle of the success. It shall be seen that, there were times where the companies who were once on the top are now non-existent as they were unable to make changes in the long run (Maria & Bogdana, 2014).

Food & Drug Administration (FDA): The Food & Drug administration (FDA) once approved the first medicine to control high cholesterol known as PCSK9. Many experts say that, it has been referred to as one of the costliest drug ever. Companies are developing more such drugs as compared to generic ones in order to make billion dollars.

Expectation of the health care industry has changed drastically. The expectation of the consumers is to deliver high quality drugs effectively and efficiently at affordable prices. It is seen that, on an average a family pays approximately $25,000 every year on availing the medical facilities (Maria & Bogdana, 2014).

Transformation and innovations in the health care industry: The transformations in the health care industry have helped the companies to think proactively and provide services in the best of manner. Innovative treatments in the health care sector have helped this sector to be one of the successful industries (Grice, 2008). Companies who think proactively on their pricing will have a better life as compared to those who are less innovative.

Generic reference pricing (GRP): In this case, the regulators tend to fix a price i.e. a particular level above which the consumer will not be reimbursed the cost of the drug. The reference price of the drug is equal to the level of lowest priced generic equivalent. In case the generic drug has a price which is higher than the reference point, then the patients are required to pay for the same (Goncharov, Mahlich & Yurtoglu, n.d.).

Profit control: The regulators tend to impose certain limits on the levels of profits generated by the pharmaceutical company. For example, in UK the market is not required to exceed its profit levels by 17-20% till 1998 and by 23% afterwards (Carroll, 2009).

Conclusion

Hence, it can be concluded that pharmaceutical industry has been referred to as one of the highly profitable industries. Pharmaceutical companies generally deal with either generic drugs or branded rugs & medical devices. Pharmaceutical industry is ruled & controlled by various laws posed by government in order to regulate testing, safety, efficacy, patents & marketing of the drugs (Goncharov, Mahlich & Yurtoglu, n.d.). Pharmaceutical industry deals in high levels of research & development (R&D) to discover & develop the drug.

According to the fiver forces porter’s model, the bargaining power of buyers is medium, bargaining power of seller is very low, threat from new entrants is low, threat of substitutes is very high & rivalry amongst existing competitors is very high. For the past many decades, pharmaceutical industry has been referred to as highly profitable. The recipe to earn such profits is to discover a molecule or a chemical which deals with some of the common problems i.e. hyper-tension, diabetes (Carroll, 2009). There are four main factors which drive the profitability of the pharmaceutical industry i.e. government regulations, consumer demands, research & development (R&D) and insurers & managed care.

Lastly, it shall be taken into consideration that it is quite a difficult task to accomplish the business and make a drastic change in the middle of the success (De Kluyver & Pearce, 2009). The expectation of the consumers is to deliver high quality drugs effectively and efficiently at affordable prices. The transformations in the health care industry have helped the companies to think proactively and provide services in the best of manner.

References

Carroll, J. (2009). The pharmaceutical industry. 1st ed. Detroit: Greenhaven Press.

De Kluyver, C. and Pearce, J. (2009). Strategy. 1st ed. Upper Saddle River, N.J.: Pearson/Prentice Hall.

Goncharov, I., Mahlich, J. and Yurtoglu, B. (n.d.). R&D Investments, Profitability and Regulation of the Pharmaceutical Industry. SSRN Electronic Journal.

Grice, J. (2008). Global pharmaceutical marketing. 1st ed. London: Pharmaceutical Press.

Griffin, J. (2009). The textbook of pharmaceutical medicine. 1st ed. Chichester: Wiley-Blackwell.

Gupta, M. and Bansal, P. (2015). Firm Size and Profitability: A Study of Indian Pharmaceutical Industry. LBS Journal of Management & Research, 13(1), p.35.

Jo?rn, A. (n.d.). Pfizer and the Challenges of the Global Pharmaceutical Industry. 1st ed.

Leahy, A. (2011). The Determinants Of Profitability In The Pharmaceutical Industry. American Journal of Health Sciences (AJHS), 3(1), p.37.

Mancuso, D. and Grenada, I. (2011). Pharmaceutical industry. 1st ed. Hauppauge, N.Y.: Nova Science.

Maria, D. and Bogdana, I. (2014). The analysis of the influence factors affecting the performance of pharmaceutical companies. Theoretical and Applied Economics, 11(7), pp.23-42.

Mulinari, S. (2016). Regulating Pharmaceutical Industry Marketing: Development, Enforcement, and Outcome of Marketing Rules. Sociology Compass, 10(1), pp.74-86.

Nahler, G. and Mollet, A. (2013). Dictionary of pharmaceutical medicine. 1st ed. Wien: Springer-Verlag.

Præstegaard, L. (2010). Pharma – to brand or not to brand?. 1st ed. Frederiksberg.

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Santoro, M. and Gorrie, T. (2010). Ethics and the pharmaceutical industry. 1st ed. Cambridge: Cambridge University Press.

Smith, M. and Becker, R. (n.d.). Principles of pharmaceutical marketing. 1st ed.

Syafriont, S. (2011). FACTORS AFFECTING THE MANUFACTURING COMPANIES’ FINANCIAL PERFORMANCE. Journal of Economics, Business, and Accountancy | Ventura, 14(2).

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