Five Forces AnalysisFactors Origins(1950-1985) Recent Past(1985-2005) Future(2005-2012)

Low Low Moderate

Threat of potential entrants

Industry has fairly high entry barriers because of lead times for new drugs, high cost of R&D and clinical testing, large and expensive sales force required. 

The industry has already high entry barriers which are increasing. They associate with lead times for new drugs to be marketed increasing from 3 to 5years in the 1960s to12 years by the mid-1990s

Need for global return on costly R&D favors large firms and creates further barrier to entry.

Firms specializing in moving specific molecules along the value chain could be tomorrow's main competitors.

Emphasis on high-priced niche drugs for high unmet need diseases likely to support market entry by biotech

Five Forces AnalysisFactors Low High High

Power of buyers

The decision to buy was imposed by doctors on patients(i.e. final consumers). Doctors had no responsibility to contain costs.

In the US, a mail-order channel develops to help highly price sensitive patients (for instance, the elderly or the chronically ill).

Governments (EU) and managed health organizations (US) imposing systems to control prices/reimbursement and demand. Growth of parallel trade.

Harmonization of regulatory approval systems.

Rising patient expectations

Controls on pricing, reimbursement and market access continue to tighten (‘value for money’ is a top concern on both sides of the Atlantic).

Growth of managed care continues deteriorating the profitability of big pharmaceuticals regardless of the outcome of regulation.

Five Forces AnalysisFactors Low Moderate Moderate

Power of substitutes

Few substitutes. High profits associated with introducing products that greatly improved the quality of healthcare for many patients.

Lead times of 6–7years over competitors(time for rivals to produce ‘me-too’ drugs).. 

Cheap generics.

Reduced lead times for ‘me-too’ drugs from 6to 7 years to 18months;

Consumer suspicion of drugs leads to increasing use of alternative remedies.

Biological generics appear.

Diversification into generics protectsvolume share (but notthe profit) of big pharmaceuticalcompanies.

Functional foods preferred as safer alternative to drugs.

Five Forces AnalysisFactors Low Moderate Moderate

Power of Suppliers

Cost of drug ingredients are very low percentage of total costs.

Pharmaceuticals tend to be fully vertically integrated (from discovery to mass marketing).

Global sourcing leads to further reductions in the costs of raw materials.

Major pharma companies come increasingly to rely on in-licensing for new products, raising prices on such deals.

Emergence of China and India as key out-sourcing locations.

Cost of licensing deals drives companies towards more acquisitions.

Five Forces AnalysisFactors Low High High

Competitive rivalry

 Low concentration.

Large and expensive sales forces were developed on the back of brand recognition to target doctors.

Profitable, cash-richindustry but margins declining.

Mergers and acquisitions are expected to continue as they could lead to economies of scale, global sales and marketing and more efficient R&D efforts.

Intense rivalry within product classes.

Continued industry consolidation in static market results in fewer larger global companies, focused on specific franchises, with intense rivalry within therapeutic franchises.

PESTEL Analysis

• In many geographic markets there is effectively only one powerful purchaser, the government.

• types of controls used by governments are a reflection of deep-rooted cultural differences

• choice of strategy is also affected by the importance or otherwise of the national pharmaceutical industry as a contributor to GDP, balance of trade and employment

• Regulators have been challenged not to overburden new growth areas in biotechnology research.

• There are growing pressures arising from inter-country pricing disparities and parallel trade

Political Factors

PESTEL Analysis Economic Factors

PESTEL Analysis

• Final consumers are now better informed, have higher expectations and want greater say in their treatment.

• Significant differences for R&D and marketing amongst international trading blocs

• Fastest ageing population and plus the recent economic recession risked pushing health care system into bankruptcy

Social Factors

PESTEL Analysis

• Potential new ways to discover drugs• Increase in the number of medical trials• Internet could reinforce a trend to switch from

prescription to OTC drugs.

Technological and environmental Factors

PESTEL Analysis

• Intervention of health authorities key to determine the length of patent protection as well as approving new products to be marketed

• International harmonization of regulatory controls

Legal Forces

Characteristics

• Highly risky and lengthy R&D process• Intense competition for intellectual property• Stringent government regulation• Powerful purchaser pressures

Industry Evolution

• In late 19th century when dyestuffs were found to have antiseptic properties

• During 1940s and 1950s– Major discovery – Penicillin– R & D became firmly established

• In 1960s– significant new discoveries with permanent patent

protection– regulatory controls on clinical development and

marketing were light

Industry Evolution

• Decision making was in the hands of medical practitioners

• ‘Me too’ drugs to achieve satisfactory returns on investment

• In 1970s two important developments– tighter regulatory controls on clinical trials– set a fixed period (20 yrs) on patent protection

• Appearance of ‘generic’ medicines.

Industry Evolution

• In many countries , the pharmaceutical industry was subject to a ‘monopsony’

• In 1980s, new type of industry player appeared-small biotechnology start-ups

Industry Sector

• Based on drugs/ medicines– prescription-only or ‘ethical’ drugs

• conventional pharmaceuticals• complex ‘biological’ agents and vaccines

– ‘over the counter’ (OTC) medicines

By Value By Volume

Industry Sector

cost structure at ethical pharmaceutical companies

Industry SectorFour broad types of industry player

• Ethical– Strong R&D and global sales and marketing infrastructure

• Branded OTC– Direct-to-consumer marketing capability.

• Generics– Supply chain management and manufacturing cost leadership

• Biotechs– Create and defend intellectual property

Ethical OTC Generic Biotech

Strategic Capabilities

Industry Trends• Globalization

• Aging worldwide population

• Longer life expectancy

• Increasing demand from developing nations

• Outsourcing more activities

• Increase in Direct-to-Consumer Advertising

• Increasing drug prices

• Rising R&D costs

• Increase in mergers, acquisitions, and alliances

• Increasing size of the generics market

• Increased buying power of insurance companies

• Increase in licensing agreements with Biotech firms to improve drug pipelines

BUSINESS ENVIRONMENT

1950-1960: TRAGEDY PERIOD.

1980: EU urged for creation of single market.

1989: Plans began to develop for creation of global pharmaceutical regulator in WHO

conference.

1990: ICH was created.

WORLD PHARMACEUTICAL MARKETSales Growth Market value

$bn % %Emerging ROW2008 108 14 162007 87 13 142006 74 12 13Established ROW2008 271 5 392007 232 4 372006 211 4 37North America2008 310 2 452007 304 7 49 2006 284 7 50

THE CHALLENGES

• Continued pressure on the price of medicines. • Higher regulatory hurdles for new medicines

and new indications.• Competition from research-based and,

increasingly, generic pharmaceutical companies

RANK RANK GROWTH GROWTH MARKET SHARESALES

2008 2007 % % % $BNUS 1 1 1 7 42 291JAPAN 2 2 4 2 9 65FRANCE 3 3 4 5 6 43GERMANY 4 4 6 3 6 42ITALY 5 6 4 - 4 26UK 6 5 2 5 3 23SPAIN 7 7 8 8 3 23CANADA 8 8 8 7 3 19CHINA 9 9 27 21 3 18BRAZIL 10 10 12 10 2 13

WORLD RANKING BY COUNTRY(KEY MARKETS)