Pharmaceutical Industry: Business Organisation and Policy - Term Paper Example

 Business Organisation and Policy Introduction The pharmaceutical industry has undergone significant transformations since the tragedies of 1950, and 60s leading to development of a robust industry. The current report is concerned with the analysis of main environmental forces that have impacted the industry for the purposes of determining the changing trends in the industry. The report also includes a section covering scenario analysis of pharmaceutical industry with possible changes that might be experienced in the industry also being highlighted. The last section is dedicated to analysis of Porter’s five forces framework before a brief conclusion. 1. Main environmental forces, which affect the global pharmaceutical industry The PESTLE analysis is an important tool for understanding main environmental forces affecting global pharmaceutical industry based on data on political, economical, socio-cultural, legal and environmental concerns analysis provides. Political and legal concern Political factors affecting pharmaceutical industry are in most cases interlinked as governments work to establish regulatory frameworks to govern both state and international issues involved in the industry. Therefore, governments have introduced both formal and informal rules to manage the industry through measures that include taxation policies, trade restrictions and tariffs, political stability. Apart from providing an enabling environment through political stability, governments have supported this industry based on the understanding of the role of healthy citizenry to economic development of the country. Pharmaceuticals have therefore worked with governments in introducing drugs to different countries based on the understanding of their importance to the wellbeing of a country. Governments have also moved to create monopolies in the industry as powerful buyers of drugs for controlling expenditure in states’ health care systems (Smith, 2012). Therefore, political arena influences regulations concerning practices of pharmaceutical business and depends on government practices that supports healthcare as an important contributor to welfare of the nation. Political goodwill from the government is important for the pharmaceutical industry especially with regard to patent from period covering experiments to release into the market. Renewal of patents is a concern for manufacturers in the industry especially due to the long period it takes for manufacturers to conduct research, test, then release drugs for human consumption. Given that patents exist for approximately twenty years, political goodwill is necessary for the renewal of such contracts to allow manufacturers proceed with their functions. When governments have failed to provide this, there has been a rise in the number of generic drugs as manufacturers resort to releasing drugs into markets without undertaking the necessary clinical tests (Hatch, 2000). Therefore, the main political concern for players in the industry is continued pressure on healthcare authorities across the world as governments strive for savings across the board. This leads to fears surrounding pricing, sustainability of services, continued availability of some drugs and the impact of further harmonization of healthcare systems in various regions. Economic Several economic factors have implications on the pharmaceutical industry with factors such as global economic growth forecast, interest rates and exchange rates affecting purchasing power of potential customers and cost of capital investment for firms in the industry. Government price control has affected the economic performance of firms in the industry, as they have to operate within the required regulatory frameworks. Trade agreements such as parallel trade among regional and global partners have also had economic consequences for players in the industry. Such agreements have made it possible for importers and exporters to move products across international borders without paying tariffs therefore affecting prices. Some domestic manufacturers have therefore been affected as distributors choose to purchase drugs from low cost countries (Smith, 2012). Global pharmaceutical industry has been less affected by turbulence in the global markets as has been felt by other industries making it prime for foreign direct investment. However, there has been considerable economic impact due to slow rate of economic recovery by most of the EU countries especially in the areas of interest, taxes, inflation and exchange rates (Watson 2012). Research and Development is another area with financial implications on the activities of manufacturers in the industry. Significant portions of organizational budget have to be committed to R&D to ensure the manufacturer remains up to date with the changes in the industry. Organizations have undertaken a number of strategic policies to improve their adaption in different global markets while also cutting costs in R&D. Such polices includes mergers and acquisitions as seen in that of Ciba and Sandoz that resulted into Novartis company (Kumar, 2012). Additionally firms in the pharmaceutical industry have also taken advantage of increased government expenditure in the healthcare to strike important deals that have increased flow of revenue. Existing healthcare models such as homecare that has moved nursing services to private sector have also been important avenues for players in the industry to increase revenues as new avenues for business offering. Social / Culture Social factors influencing the industry cover cultural and demographic features of external macro environment that organizations encounter. Demographic and cultural aspects of a society are a concern in the industry as they affect needs of customers and size of markets. Therefore, industry players must always be aware of social factors such as health consciousness of people, statistics on age distribution, and projections on population growth rate and safety awareness within different markets (Pol and Thomas, 2000). Age related concerns for the industry covers consumption rate in the population as those over 65 years of age are likely to spend more on medication. Population distribution based on developed and developing countries is also an important area of concern for the industry especially since rich countries such as USA have the financial capacity to provide universal health cover to all citizens while societies in developing countries might not afford to meet the cost of new drugs. These factors also affect the usage of over the counter (OTC) medicines, which are more prevalent in developing countries (Lilja, Salek, Alvarez and Hamilton, 2008). Technological Technological factors have significant impact on the industry since it affects areas such as effectiveness of drugs and communication in the market. Technology impacts manufacturers in the industry by due to the effect it has on reduction of minimum efficient production levels and decisions related to outsourcing of various functions and facilities. Outsourcing becomes important for an organization that cannot afford facilities or possess required expertise to develop new drugs that will improve the fight against new and persisting infections. Technology also affects the ability of players to introduce new systems of therapy and service provision. Further, presence of online community has led to development of new communication systems for the industry such as social media for healthcare, advertising directly to patients and improvement in customized treatments (Watson 2012). Legal Legal issues surrounding the industry at a global level are as a result of various tragedies involving pharmaceuticals in 1950s and 60s leading to significant increase in the number of laws, regulations and guidelines addressing issue related to quality, safety and efficacy medicinal products. Standardization of global quality and safety regulations for medical products has also been a critical issue for the industry. Through collaborations of major industry players from countries such as USA, Japan and those in European Union, International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) was developed to as part of efforts to form global regulatory body. Safety measures in the industry are based on monitoring the toxicity levels and impurities in new drug substances and products while also introducing guidelines used in test procedures (Valverde, 2007). Environmental There is also concern over environmental impact of the industry as firms increase research on new medical products. The result of activities by pharmaceuticals is increased pollution especially in water where there is concern over the effect it has on aquatic life. A specific case of environmental pollution related to the effects of substances that disrupt endocrine chemicals in fish. These substances have been found in drugs such as contraceptive pill and result in feminization of male fish, which involves male fish forming female sexual characteristics including female reproductive anatomy. Consequently, there have been increased efforts to reduce such effects in the environment (Ankley, Brooks, Huggett and Sumpter, 2007). 2. Scenario Planning: Key drivers of change affecting industry in the future The pharmaceutical industry is faced by several key trends that have implications on the success of organizations in the industry. Such factors include the rapidly changing environment that presents players with opportunities resulting from factors such as harmonisation of regulatory requirements (Watson 2012). However, there are also threats in the market where buyers are increasingly demanding customized medical attention. There is also increased concern that the return from sales might to be enough to costs incurred on marketing capabilities and R & D. Therefore, the future prospects for the industry will depend on healthcare cost control with new products requiring unique benefits for premiums pricing. However, leakage of information will provide a challenge as are imitated by competitors. Developments in information technology will also have an important role to play in the pharmaceutical industry especially with regard to improvement in access to healthcare information; therefore, pushing forward the need to have cost-effective treatments (Lilja, Salek, Alvarez and Hamilton, 2008). However, there are a number of factors with high impact but are also characterized by greatest uncertainty including the ability of scientific advances to result in new drugs and efficiency in targeting of treatments. the prospect of further mergers and acquisitions which will result in more rapid concentration in the industry or vertical integration and future roles of conventional business models such as improved use of online platforms for Direct-to-consumer (DTC) marketing. Other factors with high impacts but with great uncertainty include the threat on intellectual property due to issues such as increased competition from generic drugs and HIV/AIDS crisis in Africa (Blackett and Robins, 2001). Therefore, based on the possible scenarios in the pharmaceutical industry, three possible outcomes might be experienced in future. Firstly, is possible to have a negligible change in the industry resulting in continued opportunities for pharmaceutical sales increasing for manufacturers and distributors in emerging markets. Further, such a situation will see reduced chances for new entrants into the industry in addition to reduced mergers and acquisition. The second scenario involves moderate change in the industry, which leads to further progress in efforts aimed at reduction of R & D expenditure, which will result in emphasis on making expenditure in clinical trials more cost effective. There is also a possibility for entry of new participants and consumers in the industry resulting in introduction alternative medicine for instance Ayurveda medical system, which intends to encourage good health practices and prolonged life instead of fighting the disease (Garodia, Ichikawa, Malani, Sethi, and Aggarwal, 2007). 3. Five Forces framework Threat posed by new entrants in the industry is low due to barriers resulting from high costs of investment especially related to research and development of new drugs. Manufacturers spend large portions of finances on research for new drugs many that do not actually reach the market. Regulatory barriers also exist due to the need to ensure high standards of products that meet quality, safety and efficacy requirements with various bodies set up to oversee compliance (Valverde, 2007). Intensity of competitive rivalry in the industry is high due to existence of major global pharmaceutical companies such as Bayer & GlaxoSmithKline, Eli Lilly & ICOS and Pfizer with financial muscle to invest in R &D and effective marketing strategies (Lilja, Salek, Alvarez and Hamilton, 2008). Buyers in the industry have medium power especially in relation to governments and other health care providers such as hospitals. These sections of buyers purchase products in bulk therefore gain substantial power to force pharmaceuticals to review aspects such as pricing policies. However, suppliers have low power due to their dealing with large pharmaceutical companies that have great influence on the industry. Threat of substitute products for this industry is high especially when considering existence of generic drugs. Majority of patients may prefer buying generic drugs as they are cheap yet contains the qualities in patented drugs (Hatch, 2000). These factors make the pharmaceutical industry unattractive for new entrants. Conclusion This report has highlighted a number of issues that have implications on attractiveness and long-term prospects for investors in the pharmaceutical industry. Multiple forces that have made it profitable for organizations that have established strong presence in manufacturing and distribution have influenced the industry. These firms will continue to exert strong control over the industry due to existence high barrier to entry. Although there is considerable competition from generic drugs, this does not pose significant challenges to manufacturers due to continued strengthening of regulatory frameworks. Consequently, players in the industry will continue to exercise high power in the industry into the future. References Ankley, G. T., Brooks, B. W., Huggett, D. B., & Sumpter, A. J. P., 2007. Repeating history: pharmaceuticals in the environment. Environmental science & technology, 41(24), 8211-8217. Blackett, T., & Robins, R. 2001. Brand medicine: the role of branding in the pharmaceutical industry. Basingstoke: Palgrave Macmillan. Garodia, P., Ichikawa, H. Malani, N. Sethi, G. & Aggarwal, B., 2007. From ancient medicine to modern medicine: Ayurvedic concepts of health and their role in inflammation and cancer. Journal of the Society for Integrative Oncology, 5(1):25-37. Hatch, O. G., 2000 Pharmaceutical Patent Issues.. Collingdale, PA: DIANE Publishing. Kumar, B. R., 2012. Mega mergers and acquisitions: case studies from key industries. Basingstoke: Palgrave Macmillan. Lilja, J., Salek, S., Alvarez, A., & Hamilton, D., 2008. Pharmaceutical systems: global perspectives. New Jersey: John Wiley & Sons. Pol, L. G., & Thomas, R. K., 2000. The demography of health and health care. New York: Springer. Smith, B. D., 2012. The Future of Pharma: Evolutionary Threats and Opportunities. Farnham: Gower Publishing Ltd.. Valverde, J. L. 2007. Key Issues in Pharmaceuticals Law. Amsterdam: IOS Press. Watson, P. 2012. Health care reform and globalisation: the US, China and Europe in comparative perspective. London: Routledge. Read More