Pharmaceutical Industry Analysis
Author
Jamila Awad
Rights Reserved
JAW Group
Date
August 2009
PHARMACEUTICAL INDUSTRY ANALYSIS
- Industry Life Cycle: The US pharmaceutical industry is highly mature; it accounts for more than one third of global pharmaceutical sales.
- Competition: There are three main forces driving competition in the pharmaceutical industry. Firstly, suppliers play a marginal role in the industry. However, if we include labor as a supply source a significant bargaining power might exist for specialized R&D personnel in attractive research areas. Secondly, potential entrants find the pharmaceutical industry to be highly attractive because it is in the top industries for return on investment. However, there are many barriers to entry such as strong intellectual property protection on products, R&D investments, marketing investments and company reputation. Finally, there is a great threat of substitute products or services. Overall, the US pharmaceutical industry is highly competitive. The main competitors against Pfizer are Johnson & Johnson, Merck, GlaxoSmithKline, and Novartis.
- Nature of the industry: The nature of the industry is highly defensive because the healthcare segment is producing goods that are necessary for consumers’ everyday life. In the US, the population aged 60 and over (15% of the population) represents 67% of drug spending, a phenomenon that leads to great demand of pharmaceutical products.
- Challenge in nature of the industry: The pharmaceutical industry is highly research-intensive which requires high capital investments since the output of every medicine company is driven by R&D. There are about 140 pharmaceutical firms in the US that engage a significant amount of basic and applied R&D. Furthermore, the innovators within the industry show highly developed economies of scale.
- Government Regulations: The U.S pharmaceutical industry receives significant regulatory oversight by the U.S Food and Drug Administration. The FDA is the regulatory organization that ensures the industry performs according to standards and that safe products are informatively provided to consumers. On the other hand, the government has little influence on the pricing of medicines and related products.
- The economic variables important to the industry: Interest rates are an important economic variable for the pharmaceutical industry since they require very large investments in their research and development. Foreign exchange rates are another factor that affects the U.S pharmaceutical industry because of their considerable export trade. Especially with the weakening American dollar and increasing number of international acquisitions and mergers, exchange rates will have an even bigger impact on the industry. Also, higher inflation will cause an increase in the pharmaceutical manufacturing costs.
- Financing requirement of the industry: Mergers and acquisitions are very attractive alternatives to gain market share and obtain valuable research and technology in this industry. The larger the investment cost, the greater the propensity is to use stock as the financing currency. Smaller acquisitions are most likely funded with cash. Due to the expensive processes involved in R&D and marketing, raising funds may be done through various ways, depending on each company’s financial strength. The use of bonds and convertible bonds are increasingly being used as an alternative. Also, private placement is another alternative. Through its political power and lobbying in political campaigns, the pharmaceutical industry advocates for higher levels of public funding. Therefore, the government’s fiscal budget will also have a big impact on the financing requirements of the industry (U.S Department of Commerce).
- Technological progress: Technological progress plays a vital role in the pharmaceutical industry. Advances in robotics, genomics, and information technology are transforming the individual processes of drug discovery and development. These technologies allow drug manufacturing makers to be more efficient in their processes, as well as test drugs more rapidly (U.S Department of Labor). Since innovation in the pharmaceutical industry is decentralized and highly competitive, new technologies are mostly acquired from smaller firms.
- Concerns about the environment: The labor conditions in pharmaceutical plants are better than in most manufacturing plants because of the necessity to keep the working environment clean. To avoid any contamination, an emphasis is placed on maintaining the workplace well-ventilated, properly lit and quiet. Only 3% of workers in the drug manufacturing industry are unionized (U.S Department of Labor).Pollution and waste, during industrial processing, have presented considerable environmental concerns, notably gas emissions and the exhibition of microbiological contamination in the manufacture of sterile bulk drug substances (U.S FDA).
- Industry trends:
- Worldwide prescription drug sales total $707bn in 2014 with 2.9% (CAGR) over 2009 – 2014
- Over $182bn of sales at risk from patent expirations in 2011-14 and Pfizer expects to maintain top position via Wyeth acquisition.
- Global pharmaceutical R&D spending to grow by 2.6% (CAGR) to $144billion by 2014Vaccines set to record highest growth of major therapy categories to 2014.
Paper: “Pharmaceutical Industry Analysis” (2009) Rights Reserved: JAW Group
Author: Jamila Awad JAW Group, 3440 Durocher # 1109
Date: August 2009 Montreal, Quebec, H2X 2E2, Canada
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