What Are the Industrys Dominant Economic Features - Research Paper Example

What are the Industry’s Dominant Economic Features? Market Size and Growth Rate The pharmacy industry comprises of establishments known as pharmacies and drug stores engaged in retailing prescription and non-prescription drugs and medicines. The pharmacy sector is the most strictly controlled and regulated sector in the world. The US is the world’s largest and wealthiest pharmaceutical market accounting for around 48% of the world total (PharmaMedDevice, 2009). Per capita expenditure on drugs was $1069 in 2006, which is almost double of that found in the rest of the world. It is expected that 60% of the growth in this sector would come from biologic products. In the 1990s, when the medical care industry in the United States was turbulent, the pharmaceutical industry experienced high rates of domestic sales growth (Berndt, 2001). Between 1987 and 1999, the annual growth rate in pharmaceutical sales was consistent but the composition of the spending changed dramatically. Pharmaceutical sales have grown from about US$45 billion in 1980 to about US$262 billion in 2004 (Golec & Vernon, 2004). Part of the growth has been attributed to pharmaceutical price inflation that has exceeded general consumer price inflation. The rest of the growth is attributed to utilization (Berndt, 2001). The retail pharmacy is poised for growth as the baby boomers enter into their fifties. In addition, the increasing life expectancy of the American population and the new Medicare endorsed prescription program, introduction of new drugs and the rate of inflation, all demonstrate towards increased demand for pharmaceutical products (Drug Week, 2006). Retail stores with pharmacies including chain drug stores and mass merchandisers, have a total annual economic impact of $2.42 trillion (Cook, 2009). There are about 39,000 chain pharmacies throughout the country and these stores dispensed over 2.5 billion prescriptions in 2007, which is about 72% of the total filled in the United States. Scope of competitive rivalry As the barriers to the pharmaceutical industry were reduced in 1984, generic drug companies would easily enter the market (Venture Navigator, 2007). Gradually biotechnology competitors also entered the industry suggesting that economies of scale were not very important. Venture capital fund also facilitated entry of new companies. Competitive rivalry was further intensified as the pharma sector in the US registered growth due to the growing strength of managed care. There are three layers of competition among the phrama companies. The big pharma companies compete among themselves and all of them are active in R&D and in production of drugs in the segment with highest potential – such as treatment of diseases in oncology, infectious diseases and cardiovascular problems (Davidson & Greblov, 2005). They also face competition from the generic drug manufacturers as the barriers to entry have reduced. The pharma companies also face competition from others in the healthcare sector. Due to high level of competition, the pharmacy industry is now experiencing consolidation. Competitive pressure in the industry is further enhanced due to new store openings, increased mail order, and import of drugs (Drug Week, 2006). Sales of generic pharmaceuticals continue to grow as a percentage of total prescription drug sales. The threat of patent expiry has led to an increase in the merger activity in the industry. Merger with other players helps to club the advertising and R&D costs (Lall, 2006). Number of Rivals The major competitors in the sector are Pfizer, GlaxoSmithKline, Abbot Laboratories, American Home Products, Bristol-Myers Squibb, Eli Lilly, Merck, Johnson and Johnson, and Pfizer (Lall, 2006). The global pharmaceutical sector is characterized by a high level of concentration with 15 multinational companies dominating the sector (Davidson & Greblov, 2005). The majority of the pharmaceutical companies are not diversified. Most concentrate fully on pharmaceutical products except for Johnson & Johnson which has revenue streams from products other than pharmaceutical products. Buyer needs and requirements The pharmaceutical industry has become highly competitive which enhances the importance of maintaining customer relationships. Structural changes in the industry such as direct sale of prescription drugs, well-informed patients, cost reduction initiatives undertaken by the government and the health-insurance providers, growing internet-based initiatives, have led the pharmacy organizations to focus on customer relationships (Alt & Puschmann, 2005). The pharmacy companies can no longer just sell to whole sellers like hospitals or physicians. They have to be in direct communication with the end consumers and personalizing the service has become a strategic imperative. Production capacity The United States, the European Union and Japan are the three major pharmaceutical markets that together represent 88% of the total world sales (Davidson & Greblov, 2005). All major companies concentrate their resources on the US market. However, the growth rate is much higher in the developing countries than the developed countries. China showed a 26% sales increases in 2004 and Thailand 16 percent. Other Latin American countries have also registered high growth rates and this shows that the big pharma companies can extend their production facilities overseas as the potential is enormous. The US has triple digit import of drugs from Europe, North America, Asia and Oceana. Africa is becoming a major exporter of drugs to China, Switzerland, Canada, USA and Japan. Pace of technological change The application of information technology has transformed the pharmaceutical industry. Hospitals have internal system and have introduced telemedicine. Patient record systems are better maintained and overall the hospitals have been able to work to the satisfaction of the patients (Alt & Puschmann, 2005). Because of internet proliferation, patients have better access to product and disease information. The entire online drug industry is set to grow significantly in the long-term. However, IT has brought about strategic opportunities while also creating competitive pressure. The existing and new players have developed websites and portals for customer interaction as well as for enhancing quality of care. The Internet has also enabled the pharma companies to enhance their interactions with new and existing customer segments. These emphasize Porter’s view that internet complements the existing interaction channels. To increase the visibility of drugs, the pharmacy sector applies the RFID technology to manage supply chain complexities which is beyond moving the manufactured drugs from the manufacturer to retail pharmacies (Caton, 2004). RFID users in the sector work with hardware and software vendors to create solutions that fit into the industry requirements. Technology is also being utilized to streamline the supply chain. RFID tags also help the drug companies to effectively execute drug recalls. Pharmacies can easily identify the lots on the shelves to determine if they have a product on hand that needs to be recalled. Vertical integration In the mid-1990s, the drug firms in the US Pharmaceutical industry had a major role in drug management. This strategy was based on either acquisitions or vertical partnerships. Vertical integration is meant to acquire activities along the value chain (Simonet, 2007). They look for competitive advantages like gathering information on the market. Vertical integration and acquisitions linked pharmacy benefit managers and drug manufacturers. This modified the structure of the market at that time. It helped the pharma companies to reduce he information costs by improving access to marketing and clinical information. Due to advanced technology this facilitated the extraction of patient records and medical information. This information is very useful in developing new products or improving upon the existing ones once they know the therapeutic effects. Merck acquired Medco which gave it access to a large database on drug use. It also enabled Merck to track down patients with chronic disease. Companies also share information as Pfizer, Caremark and Value Health did. This enabled them to improve capacity to gather information. Vertical integration in the pharmaceutical industry is essential to remain globally competitive. Large multinationals have to engage in vertical integration as it helps in drug development and research, and in quality control. It is also essential for marketing, sales and distribution. It also helps to reduce uncertainties. Product innovation The potential opportunities and challenges from innovation in the pharmaceutical industry are enormous. Technological advancement has led to unprecedented discoveries. However, regulations in the sector make it very difficult and time-consuming for new products to enter the market. The size of a firm influences its innovative activities. Product innovation does not necessarily occur within the firms. It occurs outside of the industry. Small firms are more likely to seize the opportunity to innovate. As soon as a new chemical compound is discovered and patented by a pharmaceutical company, many competitors step in (Lall, 2006). They try to improve upon the new patent discovered. This leads to non-price competition which is used as a tool by small firms who seek profit improvement by introducing new substitutes for the existing products. Degree of product innovation To enhance product innovation, there is emphasis on research and development. It usually takes about 10-15 years and millions of dollars to develop a new medicine (Davidson & Greblov, 2005). Half of all new medicines fail in the last stages of clinical trials and hence this sector has the highest expenditure in R&D. While there has been an increased understanding of biology and genetics, there has been a marked decline in the number of new molecular entities (NME) (Aitken, Berndt & Cutler, 2008). According to the Food and Drug Administration (FDA) new product arrivals between 1999 and 2001 was about 35 per year and this number fell to about 20 between 2005 and 2007. New products are approved in smaller numbers and this is the reason that vintage composition drug sales has matured. This has facilitated generic entry into the market. Many drugs are also losing patent protection. Economies of scale Structural changes have transformed the sector as most of the big pharma companies have been able to generate high returns. They have surplus cash to reinvest in the sector leading to further rapid growth – whether organic or through mergers and acquisitions. Due to economies of scale achieved in manufacturing, clinical trials and marketing, bigger companies can afford to invest further in research and development (Davidson & Greblov, 2005). This helps them to diversify their future drugs portfolio and attain stability in the long-run. The bigger companies have hence been active participants in mergers and acquisitions. The acquisition of Pharmacia by Pfizer and that of Guidant by Johnson & Johnson has allowed these two US based companies to solidify their place among the elite in the pharmaceutical industry. The bigger companies are also cooperating with competitors. For instance, Bristol-Myers Squibb of the US cooperated with Sanofi-Aventis of France which resulted in the production of Plavix which is one of the top-selling products for each of these companies. Learning and experience curve effects Counterfeiting of drugs is very common in the sector, in addition to theft and product recall (Caton, 2004). As drugs move from producers to consumers, these pose considerable amount of risk to the producers, distributors and pharmacies. Everyone involved in the supply chain is responsible for authenticity. New drugs are rare to come by as they are time-consuming as well as expensive. Conclusion The pharmaceutical industry is a mature industry with established players operating at the global level. New entrants can easily find market because of the potential of increase in the use of drugs. Generic entry is facilitated because of the non-approval of new patents. The rise in the percentage of baby boomers, the price inflation and the educated consumers – are the factors responsible for the growth of the sector. Competitive rivalry exists among the pharma companies as well as between them and other health-related firms. Major players have the bulk of the market share but in case of generic drugs, competition is intense. Vertical integration marks the sector as it helps in maintaining relationships with the customers as well as the suppliers. Very high degree of product innovation is not possible because of the delays in patent approvals. Economies of scale have enabled the drug manufacturing companies to invest in research and development although developing a new drug takes several years. Consolidation, mergers, acquisitions and cooperation in the sector has enabled the pharma companies to offer newer products. Technology has changed the way the drug companies interact with patients and collect information on diseases. Such information gathering has helped the pharma companies to improve upon their existing product as they know of the therapeutic effects of drugs. References: Aitken, M., Berndt, E.R., & Cutler, D.M. (2008). Prescription Drug Spending Trends In The United States: Looking Beyond The Turning Point. Health Affairs. Retrieved September 22, 2010 from http://content.healthaffairs.org/cgi/reprint/28/1/w151 Alt, R., & Puschmann, T. (2005). Developing customer process orientation: the case of Pharma Corp. Business Process Management Journal. 11 (4), 297-315 Berndt, E.R. (2001). The U.S. Pharmaceutical Industry: Why Major Growth In Times Of Cost Containment? Health Affairs. 20 (2), 100-114 Caton, M. (2004). Drug companies look to RFID. eWeek; 4/19/2004, 21 (16), 48 Cook, C.L. (2009). Pharmacies Significantly Impact Economy. Pharmacy Times; Jan2009, 75 (1), 36 Davidson, L., & Greblov, G. (2005). The Pharmaceutical industry in the Global Economy. Retrieved September 22, 2010 from http://www.bus.indiana.edu/davidso/lifesciences/lsresearchpapers/pharmaceutical%20industryaug12.doc. Drug Week. (May 26, 2006). PHARMACY MARKET ANALYSIS; Baby boom expected to drive retail pharmacy sales up 20% over next 3 years, report shows. EXPANDED REPORTING; Pg. 860 www.lexisnexis.com Golec, J., & Vernon, J. (2004). Measuring US Pharmaceutical Industry R&D Spending. Pharmacoeconomics. 26 (12), 1005-1017 Lall, R. (2006). GLOBAL COMPETITION AND THE UNITED STATES PHARMACEUTICAL INDUSTRY. Retrieved September 22, 2010 from http://www.allbusiness.com/government/4062804-1.html PharmaMedDevice. (2009). Industry Statistics. Retrieved September 22, 2010 from http://www.pharmameddevice.com/app/homepage.cfm?appname=100485&linkid=23294&moduleid=3162#Pharmaceutical Simonet, D. (2007). Evaluation of downstream integration in the US pharmaceutical industry. International Journal of Pharmaceutical and Healthcare Marketing. 1 (2), 143-158 Venture Navigator. (2007). A Recent History Of The Pharmaceutical Industry - Based On All Five Forces. Retrieved September 22, 2010 from http://www.venturenavigator.co.uk/content/154 Read More