Case study The global pharmaceutical industry - Essay Example

Table of Contents Environmental Forces Affecting Pharmaceutical Companies 2. Global Implications for Business Environment 3. Application of Tools:Developmental Analysis of Pharmaceutical Industry a. Potential New Entrants b. Buyers c. Suppliers 4. Financial Evaluation and Performance 5. References Environmental Forces Affecting Pharmaceutical Companies The pharmaceutical companies have played significant role towards global economic development. The industry has been able to secure financial fortune after investment of ample funds and manpower towards research development. The world is vulnerable to rising diseases, and the rising population of the world has proportionally influenced the development and expansion of this industry. It is noted that this industry has embarked upon financial profits since 1998 onwards. The scope of this industry includes "manufacturing, fabricating, and processing medicinal substances into finished pharmaceuticals for human and veterinary use" (Sarah, 2004). Previously the profits of this industry soared exponentially, however several ecological, technological and economic factors have trimmed the successful growth of this industry. The industry had exhibited "strong and consistent growth in the mid-single digits" (Florian, 2008), it is expected that the worldwide sales of the pharmaceutical products shall reach $310 billion by the end of 2010. This industry has global network, and opportunities are available all around. The economic, social and geographic factors have curtailed the progress of this industry; however the major factor which has influenced the agents of this industry is the competition within. The competition and struggle among the pharmaceutical companies is intense, every measures are undertaken to ensure that significant market shares are captured. The industry agents are working hard to ensure brand recognition of their product. As per research, the investment towards advertising budgets has soared significantly, and the intent of such investment has been promotion of "therapeutic benefits of their drugs in an effort to differentiate their products from competitors" (Michael, 2001). The pharmaceutical industry is research and development oriented results, the rising epidemics require sufficient research for the development of anti-bodies. However the wave of competition has caused shift in priorities, "many existing pharmaceutical compounds are standardized formulations that varies little in efficacy among manufacturers". The struggle for the differentiated product shall bring financial fortune to the agents of this industry, therefore major investment towards "advertising and sales force budgets have increased manifold in past years" (Sarah, 2004). As per research, less than 20 percent of the funds are allocated towards research and development expenditures. The investment towards research and development is further differentiated in terms of investment towards promising drug compounds in clinical human trials, which is less than 7 percent. The breakdown of the funds allocation is, "product introduction trials account for 5.8%; process development consumes 10% of research expenses' pre-clinical functions consumes 41%; extraction of chemical compounds for evaluation consumes 11.8%; and investment towards safety and toxicology consumes 5.4%". The new products consume more than 80% of expenditures of the research and development expenditures. The main environmental forces which has influenced the growth of this industry has been "expenditures towards research and development for each drug which typically last through a period of 10 to 15 years before a compound makes it to the market" (Michael, 2001). The approval from the relevant authorities essential for the public release of the product also dampens the growth of this industry; it takes more than 16 months for the specific product to get approved by the relevant authorities. The likelihood of clearances are also low, "only 1 in 5000 compounds will eventually be sold and less than one third of all marketed drugs will provide a return to recoup expenditures towards research and development". The industry on an average has to spend $500 million for launching the product in the market, "while the product life of a prescription drug averages 10 years" (Alan, 2000). This is severely impacted the financial growth of the industry, the decline in the financial growth has realised into restricted investment towards research and development. The largest customers of this industry includes "pharmaceutical distribution through wholesalers with hospitals, managed care organizations and retail pharmacies", more than 30 percent of the distribution accounts for the direct sales to physicians, retailers, hospitals. It is acknowledged that the "bulk purchasing practices have given large buyers considerable buying power as hospitals and managed care organizations continue to seeks reductions in expenses". This is severely influenced the performance of the industry globally (Sarah, 2004). Global Implications for Business Environment Several factors have supported the growth of this industry against the discussed constraining factors. The supplementary factors includes "aging of the baby boom generation and increasing life expectancy" (Hamel, 2000) have boosted the sales of this industry, and it is expected that this rise will continue for the next 25years. As per research, "population between the age group of 45-65 years will increase 41% by 2015; this rise in age population and life expectancy rates around the world and the level of pharmaceutical use by aging individuals, growth in the industry should remain in an upward trend" (Sarah, 2004). This gain has created competition among the companies to secure majority of the market shares, which is possible through heavy investment in advertisement and promotion sector. Unfortunately, the industry has focused its shift towards brand management, and significance of research and development has diluted. This has curtailed the expansion projects of this industry, and therefore the benefit on one side and transformed into liability for years to come. As per analysis, "increase in advertising budgets have increased overall demand for pharmaceutical products, the direct-to-the-consumer advertisement has soared to $20 billion, up from $163 million in 1993". The financial factors which have influenced the performance and growth of this industry can be countered. This industry is "relatively immune from the effects of economic cycles" (Sarah, 2004), however the current wave of economic recession on international scale has curtailed the banking lending capacity which shall result which shall curtail the investment of this industry towards research and development. The curtailment of the funds towards research and development will under-estimate the role and significance of the industry, and will severely affect its sales. By large this industry has higher expectations of growth, because demands for drugs are no likelihood of decline, "the demand for the industry's product remains constant in up and down economic cycles as market demand is a function of the overall health of the population". The areas of concern for this industry evolves in the form of risks associated with "foreign investments and exchange rates", the counter for such alarms and threats is possible if the industry "seek to minimize risks by using hedging practices such as foreign currency forward-exchange contracts, borrowing in foreign markets, and using currency swaps" (Sarah, 2004). It is important for the pharmaceutical companies to devise any strategy to secure its economic fortunes through proactive measures against the global implications faced by all industries. The pharmaceutical companies shall promptly seek intellectual property rights protection in developing companies; such measure will protect their existence in those parts of the world where development and sales of copy-cat drugs is common. The pharmaceutical companies shall concrete measures against this illegal practice, and shall develop strong affiliations with the governments of the developing countries, and shall struggle for the implementations of legislations which shall protect the rights and sales of the pharmaceutical companies. Such an action will improve the financial outlook of the industry, as the unaccounted lost profits shall be secured (Hamel, 2000). The pharmaceutical companies shall invest towards drugs which shall enhance life expectancy and shall improve the quality of the life. It is expected that the demands of such drugs shall amplify in the developed countries, and eventually it effect will translate in the developing countries. The pharmaceutical companies can generate good revenue, if ample research is conducted at early stage. The industry shall develop close association with governments of the under-developed and developing countries, and shall aware the population of the good health. The pharmaceutical companies have yet to broaden its market, till now more than 90 percent of its market shares are confined to North America, Europe and Japan. Asia and Africa can emerge as strong market for this industry, where health related issues are severe (Clifford, 2002). Application of Tools: Developmental Analysis of Pharmaceutical Industry The competition among the companies affiliated with pharmaceutical industry is high, there is fight among the major contenders to secure majority of market shares. It is known that "standardized formulations of drug compounds have increased price competition in categories such as the hypertensive and coronary care market", therefore differentiation strategies have been the focused area which shall reinvent the "the research for drug formulations in an effort to increase the product life of individual pharmaceutical products and extend their use to treatment of other diseases" (Florian, 2008). The competitors have secured good returns in niche market concentrations; however "the majority of manufacturers have an extensive assortment of products to offer users" (Sarah, 2004). The global economic recession and the depreciation of the foreign currencies, have mounted pressure upon the competitors to secure greater profits through operating efficiencies improvement centred development program, such an exercise will improve the profit margins to significant level. It has been realised that the pharmaceutical companies can focus upon the launch of substitute products, this shall offer relief to the customer, secure profits and market shares for the companies. It is known that there is rising demand of the generic products offered by pharmaceutical products, this shall be "a way to contain cost" (Florian, 2008). The compiled documentary evidence reflects that "44 percent of all prescriptions written were for prescription drugs with that figure expected to increase to 78% by 2009", from this perspective it is conclusive that the drug companies do not have investment towards research and development (Clifford, 2002). Potential New Entrants The possibility for the entrance of the new competitors in the market is low, therefore this has been regarded as the weak competitive force. With specific reference to the pharmaceutical industries of United States, there are significant numbers of barriers which shall be crossed for entrance in this market. It has been observed that the new investors are reluctant to invest against "years of research and development, government regulatory compliance and risk associated with the industry", where the possibility of success is low (Harold, 2004). Buyers The competitive level is moderate. There is strong pressure upon the pharmaceutical companies to curtail their product cost. The pressure has emerged from large bulk buyers such as managed care organizations and hospitals. The pressure has been nullified through increase in the prices of the alternatives, "generic drugs have reduced buyer's bargaining leverage, and therefore branded pharmaceuticals continue to be a cost-effective treatment" (Sarah, 2004). Suppliers The bargaining power of the suppliers has reduced due to controlled competition between the pharmaceutical companies. It is known that the concentration of the majority of the production is released from specific companies; therefore these companies have developed their monopoly against suppliers, if not among themselves (Florian, 2008). Financial Evaluation and Performance It is expected that the pharmaceutical companies have the best potential to benefit from "aging population and increasing life expectancy rates throughout the world" (Harold, 2004), the market for such products have expanded significantly, and it is predicted that by the end of current decade the concept of drugs for increase in life expectancy shall receive positive response in the poor countries of Asia and Africa, it this prediction comes out to be true than irrespective of the current wave of financial recession, this industry has positive scope towards financial development. It is known that the general understanding about health aspects is common in developed, developing and under-developing countries, therefore the sales of the pharmaceutical products shall not be confined to specific geography or class, and rather it is global business, having global outreach and market. As per research, "this business is attractive with operating profit margins exceeding 30% which is approximately twice the S & P Industrial Index and net earnings as a percentage of sales averaging 17.9% versus 5.4% for general industry over the last 5 years". It is known that the running cost of this business is relatively lower than others; the business has "lower interest expenses, raw materials costs, tax rates and general and administrative cost as a percentage of sales when compared with most industries" (Sarah, 2004). Therefore no implications shall bring down the growth and profitability of this industry. The profits for this industry have increased significantly, the comparison of the all the pharmaceutical industries against industries of other sectors shows that pharmaceutical business have achieved ample financial fortunes, and there lies no end to it. As per research, the sales of the pharmaceutical business have multiplied, the sales growth of this industry is more than 60 percent, and "overall the pharmaceutical industry sales growth is strong and is likely to continue, especially with the innovation of new drugs in the future" (Harold, 2000). It is evident that this industry is relatively better from financial aspects as compared to other industries; the profitability ratio is appropriate parameters for the evaluation of the relatively improved performance of the pharmaceutical companies. As per analysis, "the average gross margin for the four companies was: Pfizer with 81.88%, Abbott with 62.65%, Lilly with 78.12% and Merck with 61.84%", the gross margin for these companies is stable, and suggests good financial outlook for the industry (Harold, 2004). The average return on assets for these pharmaceutical companies has good outlook, "Abbott, Merck, and Pfizer were above the industry average with 17.64%, 14.4%, and 11.6%, respectively". The average return on equity for these companies has positive outlook, "Abbott, Merck, and Pfizer were above the industry average with averages of 24.4%, 38.9%, and 29.1% respectively". The comparison of the liquidity ratios of these companies also reveals good outlook for the industry, "Abbott, Lilly, Merck and Pfizer were 1.001, 1.27, 1.48, and 1.29, respectively" (Harold, 2004). The average debt to asset ratio of the pharmaceutical companies is relatively improved than other industries. This reflect that the global implications for this industry are controllable, and will unlikely to damper the achievements and gains of the company. The financial parameters including average fixed asset turnover and total asset turnover has positive outlook for 1.8 and 0.7 respectively (Harold, 2000). The current wave of global economic recession has however reduced the share value of pharmaceutical companies; however this phenomenon was on international scale and was not industry specific. References 1. Sarah Holland. and Bernardo Btiz-Lazo. The Global Pharmaceutical Industry. 2004. 2. Florian Heitzenberger. Characteristics of Alliance Portfolios in the Pharmaceutical Industry. Vienna University of Economics and Business Administration. 2008. 3. Hamel, G. Leading the Revolution. Boston, MA: Harvard Business School Press. 2000 4. McKinsey and Co. The War for Talent Survey, New York, NY: McKinsey and Co. publication. 1997. 5. Michaels, E., Handfield-Jones, H., & Axelrod, B. The War for Talent, Boston: Harvard Business School. 2001. 6. Harold Kerzner. Advanced Project Management: Best Practices on Implementation. John Wiley and Sons. 2004. pp. 213-223. 7. Clifford F. Gray, Erik W. Larson. Project Management: The Complete Guide for Every Manager. McGraw-Hill Professional. 2002. pp. 198-204. 8. Harold Kerzner. Project Management. John Wiley and Sons. 2000. pp. 98-104. 9. Alan Webb. Project Management for Successful Product Innovation. Gower Publishing, Ltd. 2000. pp. 178-198. Read More