Five Forces Analysis Factors Origins(1950- 1985) Recent Past(1985- 2005) Future(2005- 2012) Low Low Moderate Threat of potentia l 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 specializing in moving specific molecules along the value chain could be tomorrow's main competitors. Emphasis on high-priced niche drugs for high unmet
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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