The number of firms in an industry determine the level of
competition and the attractiveness (or lack of it) of an industry in terms of
its profitability to new entrants. Michael Porter’s five forces help in
determining the overall level of competition. We’ll be discussing how the
following competitive forces specifically affect the Pharmaceutical Industry:
Competition from existing firms, threat from potential entrants, competition
from substitute goods or services, bargaining power of buyers and the bargaining
power of suppliers.
The pharmaceutical Industry is a well-established and
progressive one and profitability stems from being able to develop new drugs to
give firms the competitive edge. Continuing consolidation of customer base
makes it imperative for pharmaceutical companies to push their products to the forefront.
One may find for example that there are different drugs for depression but companies
may advertise their drug as working faster and better than that of another company’s.
pharmaceutical companies build size and scale by aggressive acquisition
strategy thereby providing leadership position in global market. Small
companies with strong R capabilities may be bought out by larger firms to
keep their product pipeline of new drugs robust
Threat from Potential
Threats from new pharmaceutical companies is relatively low
because if the high costs associated with entering the market. Most new
companies must enter the market with a new drug which would require but not
limited to investing in research, clinical trials, cost of equipment, channels of
distribution and advertising. Increasing government scrutiny in the US and
Europe may expose new companies to the threat of possible significant damages should
the drug not be approved. The size of the company or R budget does not guarantee
proportionate success. During decades, there have been several players (4300)
in pharma sector but only a small subset (261) seem to have tasted success.
Currently, only 12% of these companies are in existence while the remaining 88%
have disappeared from the scene or merged with other organizations.
Substitute Goods or Services
Patented drugs have a life time of about 20 years and part
of that time is factored into clinical trials. As a result of this there is
relatively little time left to recoup the investment which leads to such exorbitant
prices. Once a patent has expired, generic producers are able to produce the
drug for a fraction of the cost because they did not have to invest in R.
Lifestyle change is another competition to the pharmaceutical industry because
as people improve their health, they will less likely need to take medication.
Another competitor to the industry is alternative medicine which is popular in Asia,
Native Americans and Africa and of people of those descents. People generally
do not combine alternative medicine with scientifically derived cures.
Bargaining Power of
Due to the vastness of hospitals and health organizations,
they are able to exert some form of influence as a result of buying in bulk. Also,
when a new product is developed, in addition to advertisements pharmaceutical
companies depend on referrals from health professionals to get the drug to the market.
For this reason, health organizations hold some clout. When it comes to the individual
buyer, it is somewhat of a different story because they are secondary buyers.
The price has been set by the pharmacies very little can be done to alter the price.
Brand name drugs come at a higher cost than generic drugs and what little power
individual buyers do have is the ability to research a drug (be it a brand
name) for an alternative generic option. The individual’s little power comes
from the intent to keep individuals from completely writing off brand name
drugs thereby reducing the price to a certain extent.
Bargaining Power of Suppliers-Low
The bargaining power of suppliers is low since major firms
mostly produce their own drugs. With there being a handful of existing influential
pharmaceutical companies, there is little room left for the supplier to bargain.
Overall, the pharmaceutical industry is an attractive but
the hurdles to overcome to be successful are many. If a company is considering
entering the market, I would advise that they have some revolutionary drug such
as a cure for cancer or AIDS that has not being addressed directly yet to be
able to out rank the existing large companies.