Case Solution on the Pharmaceutical Industry
What are the prospects for the industry going forward? 1. Though the average level of profitability in the pharmaceutical industry has been declining over time (In 2002, the average ROIC in the industry was 21. 6%; by 2006, it had fallen to 14. 5%), historically, the pharmaceutical industry has been a profitable one. Because- Name of industry| Average ROIC(Between 2002 and 2006)| Pharmaceuticals| 16. 45%(large)| computer hardware| 12. 76%| Electronics| 3. 88%| 2. The prospect for the industry for going forward is very positive. Because the demand for pharmaceuticals has been strong and has grown for decades.
Between 1990 and 2003, there was a 12. 5% annual increase in spending on prescription drugs in the United States. Looking forward, projections suggest that spending on prescription drugs will increase between 10 and 11% annually through 2013. So these customers spending will increase the profit of pharmaceutical companies automatically. 3. The prospect for the industry for going forward is very positive. Because the proprietary drag companies like Pfizer has already eight Blockbuster drugs that usually enough to generate 55% revenue. Q3.
What are the opportunities, and what are the threats? There are also some big opportunities on the horizon for firms in the industry. New scientific breakthroughs in genomics are holding out the promise that within the next decade pharmaceutical firms might be able to bring to market new drugs that treat some of the most intractable medical conditions, including Alzheimer’s, Parkinson’s disease, cancer, heart disease, stroke, and AIDS. However, there are some threats to the long-term dominance and profitability of industry giants like Pfizer. 1.
Controlled price in future: As spending on health care rises, politicians are looking for ways to limit health care costs, and one possibility is some form of price control on prescription drugs. Price controls are already in effect in most developed nations, and although they have not yet been introduced in the United States, they could be. 2. Enough new drug prospects in companies’ pipelines to replace revenues from drugs going off patent: Twelve of the thirty-five top-selling drugs in the industry were to lose their patent protection between 2006 and 2009.
By one estimate, some 28% of the global drug industry’s sales of $307 billion would be exposed to generic challenge in the United States alone, due to drugs going off patent between 2006 and 2012. It is not clear to many industry observers, whether the established drug companies have enough new drug prospects in their pipelines to replace revenues from drugs going off patent. 3. Generic drug companies’ share of industry sales has been growing:generic drug companies havebeen aggressive in challenging the patents of proprietary drugcompanies and in pricing their generic offerings.
As a result,their share of industry sales has been growing. 4. Renewed scrutiny:the industry has come under renewed scrutiny followingstudies showing that some FDA-approved prescriptiondrugs, known as COX-2 inhibitors, were associated with a greater risk of heart attacks. Two of these drugs, Vioxx and Bextra, were pulled from the market in 2004. c Q3. What must pharmaceutical firms do to exploit the opportunities and counter the threats? Pharmaceutical firms can do voluminous things to exploit the opportunities like as follows: 1.
Invest more in R&D :Invest more in R&D especially for the development of new drugs that treat some of the most intractable medical conditions, including Alzheimer’s, Parkinson’s disease, cancer, heart disease, stroke, and AIDS. Because if they do so they can replace revenues from drugs going off patent. 2. Spend handful of money on advertisements and Promotional activities:Spend handful of money on marketing and promotional activities for launching new product. But here all companies can consider the cost of maintaining sales force.
By ensuring a sound profit every company in this industry should expense in these fields. To counter the threats Pharmaceutical firms can do- 1. Develop unique molecule: Develop unique molecule that cures better than other drugs so that any company can charge premium price for their drugs. 2. Develop new drugs for intractable medical conditions: Develop new drugs that treat some of the most intractable medical conditions, including cancer, heart disease, stroke, and AIDS. They can replace revenues from drugs going off patent by these new drugs. 3.
Before launching a drugs prescribed for curing one kind of disease, companies can test the new drags carefully so that the new drags will not be a reason for other diseases Q2. After 2002, the profitability of the industry, measuredby ROIC, started to decline. Why do you think thisoccurred? the average level of profitability in the pharmaceutical industry has been declining over time(In 2002, the average ROIC in the industry was 21. 6%; by 2006, it had fallen to 14. 5%). Reasons for declining: 1. Lose of patent protection: twelve of the thirty-five top-selling drugs in the industry were to lose their patent protection between 2006 and 2009.
So the companies have to develop enough new drugs in their pipelines to replace revenues from drugs going off patent. So investment in R&D will have to increase. It’svery difficult because Only very large companies can shoulderthe costs and risks of doing R&D. and most importantly Out of every 5,000 compounds tested in the laboratoryby a drug company, only five enter clinical trials, and onlyone of these will ultimately make it to the market. On average,estimates suggest that it costs some $800 million and takes anywherefrom ten to fifteen years to bring a new drug to market.
Once on the market, only three out of ten drugs ever recoup their R&D and marketing costs and turn a profit. 2. Large Marketing Costs for new companies: The firms inthe pharmaceutical industry spend large amounts of money onadvertising and sales promotion. While the $500 million a yearthat Pfizer spends promoting Lipitor is small relative to thedrug’s revenues, it is a large amount for a new competitor tomatch, making market entry difficult unless the competitor hasa significantly better product. 2.
Failed to bring a product to market: Although a large number of companies have been started in the last twenty years in the hope that theymight develop new pharmaceuticals, only two of these companies,Amgen and Genentech, were ranked among the toptwenty in the industry in terms of sales in 2005. Most havefailed to bring a product to market. So the overall profitability of the industry will decreased in near future. Q1. Drawing on the five forces model, explain why thepharmaceutical industry has historically been a veryprofitable industry. Forces| Ranking | Threat of New Entrants| High |
Threat of Existing Competitor| High| Bargaining Power of Suppliers| Low| Bargaining Power of Buyers| Low-Medium| Threat of Substitute Products| Medium| Threat of New Entrants high A drug company must spend large amounts of money on research, most of which fails to produce a product. Only very large companies can bear the costs and risks of doing so, making it difficult for new companies to enter the industry. For example: Pfizer spent some $7. 44 billion on R&D in 2005 alone, equivalent to 14. 5% of its total revenues. In the R&D spending, the incumbent firms in the pharmaceuticals industry spend large mounts of money on advertising and sales promotion. While the $500 million a year that Pfizer spends promoting Liptor is small relative to the drug revenues. It is a large amount for a new competitor to match. High Threat of Existing Competitor It is a mature, consolidating and highly competitive industry. Weak, small companies usually go out of business if they have no potential “blockbuster” in future pipeline. Generic drug companies have been aggressive in challenging the patents of proprietary drug companies and in pricing their generic offerings. As a result their share of industry sales has been growing.
A large number of companies have been started in the last 20 years but only 2 of these companies Amgen and Genentech were ranked among the top twenty in the industry in terms of sales in 2005. Most have failed to bring a product. Bargaining Power of Suppliers Low Suppliers generally have little room for negotiation. Large pharmaceutical companies generally enjoy significant buying power. They can dictate the price they want to buy or take their business elsewhere. Bargaining Power of Buyers Medium Low Generally consumers have very little bargaining power.
Most of the medication is prescribed by the doctors. Consumers will have to buy the drug at any given price if they need it. If the spending on healthcare cost rises, politicians are looking for ways to limit it by controlling price on prescription drugs. Then buyers bargaining power will be protected by the politicians. Threat of Substitute Products Medium * Threat from generic competition. * Customers can find substitute medicine if the original product has an expired patent. However, if it is a new product the consumer generally will have no choice for an alternative.
Get access to
Guarantee No Hidden