1. The Global Pharmaceutical Industry
Sabena Ahmad
Iveta Smincakova
Dawn Bradbury

2. Porter’s Five Forces Framework
Johnson et al, (2006), Exploring Corporate Strategy, 7th Ed, Essex: Pearson Education Limited, p.80

3. Introduction
Application of the framework at strategic business unit level (diversity in operation and marketing)
Understanding the connections between competitive forces and the key drivers in the macro-environment is essential
Forces are not independent of each other
Competitive behaviour may be concerned with disrupting these forces
Johnson et al, (2006), Exploring Corporate Strategy, 7th Ed, Essex: Pearson Education Limited, p.79-80

4. The Threat Of Entry
Depends on the extent to which there are barriers to entry
Barriers entry include:
Economies of scale
The capital requirement of entry
Access to supply or distribution channels
Customers or suppliers loyalty
Experience
Expected retaliation
Legislation of government action
Differentiation
Barriers of entry: Factors which new entrants need to overcome in order to compete successfully.
Economies of scale - pharmaceutical environment is rapidly dynamic. The industry is characterized by intense competition therefore innovation (using intellectual capital) and development of new drugs (R&D) plays an extremely important role. (industry R & D spending exceeded $60bn in 2006).
The capital requirement of entry – purchase of expensive high technology in order to keep with the competition, the cost of developing and commercialising a new drug is estimated at over $800m (440m;€640m), (industry R & D spending exceeded $60bn in 2006); cost structure at ethical pharmaceutical companies comprises manufacturing of goods (25 %), R&D (12% to 21%), administration (10%), and sales and marketing (25%). The branding is supported through marketing and advertising (DTC advertising in the USA $4.5bn by 2006).
Access to supply or distribution channels – Manufacturing and distribution efficiency was far more important for generics manufacturers. Branded OTC drugs use direct-to-consumer approach to sell their products.
Customers or suppliers loyalty – Aging population (65 +) consumes four times as much health care as consumers below 65.
Ten key countries contributing over 80% of the global market, the USA is the largest one by volume and value ($250bn in 2005), the industrial in 2005.
Experience - USA launched two thirds of sales of drugs in 2001, Mexico become top ten in 2005 in purchasing branded drugs due to wealthy consumers. R & D investment in China and India are nowadays offering lower cost opportunities. The blockbusters’ enable rapid dissemination (Glaxo went from being a small player at the beginning of the 1980 to a top-tier global company).
Expected retaliation – the entry to pharmaceutical market is risky due to existing large multinationals, the barrier of entry will low if company with weak sales and marketing will merge with a company owing a strong pipeline (e.g. Glaxo Wellcome & SmithKline Beechams = GlaxoSmithKline (UK))
Legislation of government action – Food and Drug administration (FDA) in the USA, institute for Clinical Excellence (NICE) in the UK. Managed Care Organisation (MCOs) asked consumers for increasing co-pays on branded versus generic drugs and implemented other cost-control measures. There is Single European Market ( free movement of goods across EU therefore controlled by the government=‘parallel trade’)
Differentiation –Five broad types of industry player (ethical- branded prescription drugs necessitate Extensive R&D and global sales marketing infrastructure, generic- concentration on cost leadership, biotech –attraction and preservation of intellectual capital , OTC – marketing strategies and Vaccine companies- ability to negotiate with government and major health care providers)

5. The Threat of Substitutes
Forms of substitution:
Products-for-products substitution
Substitution of need
Generic substitution
Substitutes: alternatives of products which consumers can switch to
Products-for-products substitution – generic medicines appeared on the market as a substitute for the original branded drugs (generic medicines contain the same ingredients as the branded drugs but are price competitive). Consumers nowadays are choosing them as first treatment option (volume generic for 40% and volume decline of 4% for patented drugs).
Substitution of need – the technology enabled to print prescriptions on cheap generic version compare to more expensive brands. Switching from prescription-only to OTC is more costly at the beginning but it provides defence against generic competition and may prolong the product life cycle.
Generic substitution – competition for business with branded OTC drugs and cheap generic medicines.

6. The Power of Buyers & Suppliers
Buyer power depends on:
Concentration of buyers
The cost of switching
Threat of the supplier being acquired by the buyer
Supplier power depends on:
Concentration of suppliers
The switching cost from one supplier to another
Possibility of the supplier competing directly
Buyer power-
Concentration of buyers – When Allegra lost 84% USA sales in just 12 week due to patent expiry in 2006 the competition was able to manufacture the hay fever drug for lower prices and made it available for buyers to make a choice.
The cost of switching - Buyers will have considerable choice if they want to buy Paracetamol there is little risk to the consumer to purchase Paracetamol from Supermarket or local Chemist so they have lots of choice and it is lower risk. Therefore the buyers power is high. in contrast a patient or doctor looking to switch a patient’s cancer treatment may have little choice as there are fewer suppliers specialising in such treatment. For example Roche’s global strategy is based on manufacturing biopharmaceutical drugs to treat unmet medical needs e.g. cancer. A patient with cancer has less choice and the risk is higher therefore the buyer power is low.
Threats of the supplier being acquired by the buyer – mergers and acquisitions e.g. Warner-Lambert gave Pfizer full marketing rights to the cholesterol-lowering agent Lipitor, which Pfizer then built into the world’s best-selling drug with sales of $12bn in 2005.
Supplier power:
Concentration of suppliers –$10bn worth vaccine market has five global players which account for 85% of the market share. Therefore, the supplier has power as there is little choice for the consumers.
The switching cost from one supplier to another – Japan when compared to the EU or the USA, demands higher regulatory requirements and the market also lacks generics. Some companies are prepared to meet the requirements of the Japanese regulators as Japan is the second largest market for pharmaceuticals ($60bn). However, not all pharmaceutical companies will be able or prepared to meet the tight specifications met by the Japanese regulators – as a result Japan has less choice of suppliers and the cost of switching supplier will be higher.
Possibility of the supplier competing directly - Unable to find a direct example from the case study but an example would be - Warner-Lambert selling the active agent Lipitor to Pfizer but also Warner-Lamber trading the drug for themselves in direct competition with Pfizer.

7. Competitive Rivalry Factors affecting rivalry:
The extent of balance between competitors
Industry growths rates
High fixed costs
High exist barriers
Differentiation
Competitive rivals: Organisations offering similar products and services targeting the same consumers
The extent of balance between competitors –the companies are competing directly but they are looking to specialize in the areas different to other pharmaceutical companies e.g. AstraZeneca in biopharmaceuticals, Roche in unmet medical needs such as cancer
Industry growth rates – competitive behaviour will be highest when a patent expires. If a drug is patented for 20 years and as described in the case study it can take 12 years to get to market – a company will only have 8 years to make as much as possible on the drug before the patent expires. When the patent expires, generics will be manufactured and the original brand will face fierce rivalry from the generics as they attempt to make as much money on the drug in its maturity phase of the business cycle.
High fixed costs-The manufacturing cost of drugs is usually tiny compared with the amortised costs of R&D that led to the discovery. Therefore setting higher prices to cover the R&D expenditure in comparison with the very low prices that can be charged for generics seems unethical.
High exist barriers - where R&D and specialised manufacturing costs are high due to investments in equipment, technology and skilled employees – the cost of exiting is high when the product fails to reach the market. For example AstraZeneca lost 3 phase 3 drugs in
Differentiation – the organizations’ effort to differentiate brand and achieve competitive edge was attained through DTC advertising , the companies expected if through advertising the consumers will be able to require a drug by name, this would create effective marketing strategy.