Business Strategy in Pharma Industry - Essay Example

Business Strategy in Pharma Industry Key Environment Issues facing the Organizations within the Pharma Industry 2/16/2008 Word Count: 2036 Please put your name here Abstract This paper provides a strategic review and analysis of the pharmaceutical industry; its origins, evolution, development and competitive environment within which it operates and the strategic issues facing the industry. The paper also provides an overview of the industry, its key players, their strategic outlook, the impact of technological developments and other strategic issues facing the industry. The Pharmaceutical Industry Industry Evolution The modern pharmaceutical industry is a highly competitive non-assembled global industry. The origins of the global pharmaceutical industry can be traced back to the nascent chemical industry of the late nineteenth century in the Upper Rhine Valley near Basel, Switzerland when dyestuffs were found to have antiseptic properties. A host of modern pharmaceutical companies all started out as Rhine-based family dyestuff and chemical companies e.g. Hoffman-La Roche, Sandoz, Ciba-Geigy (the product of a merger between Ciba and Geigy), and Novartis1 etc. Most are still going strong today2. Over time many of these chemical companies moved into the production of pharmaceuticals and other synthetic chemicals and they gradually evolved into global players. There are certain factors like the introduction of the penicillin during the late 1940s, its success and relative success of many other innovative drugs which actually institutionalized the efforts of research and development (R&D) in the pharmaceutical industry. The industry expanded rapidly in the sixties, benefiting from new discoveries and a lax regulatory environment. During this period healthcare spending boomed as global economies prospered. The industry witnessed major developments in the seventies with the introduction of tighter regulatory controls, especially with the introduction of regulations governing the manufacture of 'generics'3. The new regulations revoked permanent patents and established fixed periods on patent protection for branded products, a result of which the market for 'branded generics'4 emerged. PESTLE Analysis PESTLE analysis is a useful tool for understanding the "big picture" of the environment, in which you are operating, and the opportunities and threats that lie within it. By understanding the environment in which you operate (external to your company or department), you can take advantage of the opportunities and minimize the threats (RAPIDBI). Specifically the PEST or PESTLE analysis is a useful tool for understanding risks associated with market growth or decline, and as such the position, potential and direction for a business or organization. Technological advancements, tighter regulatory-compliance overheads, rafts of patent expiries and volatile investor confidence have made the modern pharmaceutical industry an increasingly tough and competitive environment. An analysis of the structure of the pharmaceutical industry using the PEST (political, economic, social and technological) model (Susanne, 2004) is given below. Increasing Political Attention Over the years, the pharmaceutical industry has witnessed increased political attention due to the increased recognition of the economic importance of healthcare as a component of social welfare. Political interest has also been generated because of the increasing social and financial burden of healthcare. Examples are the UK's National Health Service debate and Medicare in the US. Increased Economic Value During the year 2003, there were many high value mergers and acquisitions which were witnessed by the global pharmaceutical industry. With a projected stock value growth rate of 10.5% (2003-2010) and Health Care growth rate of 12.5% (2003-2010), the audited value of the global pharmaceutical market is estimated to reach a huge 500 billion dollars by 2004. Only information technology has a higher expected growth rate of 12.6%. Majority of pharmaceutical sales originate in the US, EU and Japanese markets. Nine geographic markets account for over 80% of global pharmaceutical sales these are, US, Japan, France, Germany, UK, Italy, Canada, Brazil and Spain. Of these markets, the US is the fastest growing market and since 1995 it has accounted for close to 60% of global sales. In 2000 alone the US market grew by 16% to $133 billion dollars making it a key strategic market for pharmaceuticals. The Social Dimension: Good health is an important personal and social requirement and the unique role pharmaceutical firms' play in meeting society's need for popular wellbeing cannot be underestimated. In the recent times, the impact of various global epidemics e.g. SARS, AIDS etc has also attracted popular and media attention to the industry. The effect of the intense media and political attention has resulted in increasing industry efforts to create and maintain good government-industry-society communications. Advancements in Technology: A modern, scientific and technological advancement in science is forcing industry players to adapt ever faster to the evolving environments in which they participate. Scientific advancements have also increased the need for increased spending on research and development in order to encourage innovation. Legal Environment: The pharmaceutical industry is a highly regulated and compliance enforcing industry. Ultimately, there are immense legal, regulatory and compliance overheads which the industry has to absorb. This tends to restrict the industry's dynamism. Yet, in the recent years, government has begun to request industry proposals on regulatory overheads to so as not to discourage innovation in the face of mounting global challenges from external markets. Porter's five forces model - Description: The effective formulation of a strategy needs a clear understanding of competition. Competition in an industry is determined not only by existing competitors but also by other market forces such as customers, suppliers, potential entrants, and the existence of substitute products. Understanding the level of competition is important because the level of profits depends to a large extent upon the level of competition. Understanding the sources of competition can help the firm to gauge its own strengths and weaknesses, and to perceive the trends in the industry so that it can position itself optimally for the best returns. Michael E. Porter of the Harvard Business School has developed a framework known as the 'Five forces Model' to help analyze the business environment. Threat of New Entrants - With respect to the pharmaceutical industry, the barriers to entry are very high. Additionally, the cost of R & D and patent limitations are also equally high. Bargaining Power of Buyers - Buyer power also acts to force prices down. The bargaining power of buyers in the pharmaceutical industry is comparatively low. Bargaining Power of Suppliers - This aspect also is similarly low as the bargaining power of the buyers in the pharmaceutical industry. The rivalry among existing players - The competition in the pharmaceutical industry is very high. Advantages are always gained by first mover advantage (patents). The threat of substitute products - The threat of new entrants is low as far as the patents are concerned but the same is medium after the expiry of the patent. Overall, the pharmaceutical industry shows an upward trend in its core markets. The industry remains highly valued has a favourable market position with strong financial make-up and strong earnings growth. Its future potential demand trend is positive and despite increased competition the industry still shows a continuing upward growth momentum. Data monitor's5 forecast of the leading 16 pharmaceutical companies for 2001 to 2007 suggests that combined sales will grow at a minimum rate of 5.2 percent based on the potential of their product pipeline. The Issues relating Strategy - Global Pharmaceutical Industry The following are some of the key strategic issues that are shaping the global pharmaceutical industry at present. Industry Consolidation: Merger activity has been intense within the industry in the last decade. Analysts believe that three firms namely, GlaxoSmithKline, Bristol-Myers Squibb and Merck are likely candidates to be directly involved in the next round of industry consolidation. Eli Lilly and AstraZeneca would make the best partners for GlaxoSmithKline, combining the latter's commercialization strengths with a partner's valuable portfolio and pipeline. Science and Innovation: Over the last decade the knowledgebase of the pharmaceutical sciences has changed dramatically and continues to change at a fairly high rate. As new technologies and bodies of scientific knowledge emerge, whole new sets of opportunities and threats are being introduced. Breakthroughs in science, innovation and technology continue to create novel opportunities for new products and processes. This has increased the pace of the industry and major players must keep up with changes else become vulnerable. Over the last decade, it so happened that companies that were not very effective in research and new product development were acquired. Competition - an abnormal increase: A major issue facing the industry is the high amount of competition and the changing face of the pharmaceutical market. The industry has seen a group of new market entrants, increased competition among key players and industry consolidation. A host of large-scale mergers and acquisitions have taken place over the last two decades. Competitive advantage within the industry is being constantly redefined and to maintain their presence, key industry players are being forced to revamp their organisational structure, overcome huge barriers in R&D, clinical trials simply to ensure continuity and maintain profitability. Consumer Profile - a dramatic change: The profile of the pharmaceutical consumer has changed. Consumers are now better informed and there are expectations on the industry to show that their products deliver better health and greater economic value. Also, in previous decades governments were either the sole or major purchasers of pharmaceutical products but the current trend shows that healthcare costs are being constantly being shifted away from the government, which acted as the traditional social purchaser, over to health insurance companies and common individuals. The increasing price sensitivity of the common consumer and financial muscle of healthcare agencies and health insurance companies is forcing firms in the industry to cut product prices thereby reducing margins. In the future, as government shifts more healthcare costs to the end consumer, consumers will increasingly pay more for access to healthcare and medicines and this will further increase their price sensitivity. SWOT Analysis of the Global Pharmaceutical Industry An outline SWOT analysis of the world's largest pharmaceutical firm follows next. Strengths R&D innovation with a broad therapeutic coverage Marketing strength in major geographical and therapeutic areas Existing Patent protection for a number of years on key products Opportunities Decreasing development time through favourable R&D collaborations and internal efforts Emergence of integrated global markets and globalisation for new products Co-marketing agreements with companies wishing to capitalize on the companies' marketing strengths, providing the players with strong products and therefore revenue growth Weaknesses Discontinuation of products in the latter stages of development Co-marketing agreements can limit global presence Increased size and operational complexity makes Pfizer a less agile company Threats Increased competition for core products like Viagra as its high cost encourages use of cheaper alternative treatments An increase in the number of safety issues surrounding Viagra Competition from products similar to Pfizer's in R&D that reach the market close to or before Pfizer's products The new economic potential of emergent China, India and competition in diverse regional markets. Conclusion The Pharmaceutical industry has a lot of untapped potential that is yet to be tapped and it is all the more sure that the industry would definitely mature in the long run. Undoubtedly, the long history and global expertise of firms like Pfizer, GSK and Merck will stand them in good stated to create and benefit from emerging global opportunities. Notwithstanding their strengths, complacency must be guarded against. This is because smaller, agile and innovative firms are on the prowl and all it takes for the small upstarts is a super drug that can change the entire face of the industry and this has happened in the Information & Communications industry. In all probabilities, the pharmaceutical industry may just be the next. Bibliography 1. Atlantic Trust. (2007). Global Market Reports. Atlantic Trust. 2. K-DOG Inc. (2007). Dynamic Notes. New York: K-DOG Inc. 3. Keerti, D. B. (2008, 02 02). Professor - ICFAI Business School. (R. V, Interviewer) 4. RAPIDBI. (2001, December 2). RAPIDBI. Retrieved December 5, 2007, from http://www.rapidbi.com/created/the-PESTLE-analysis-tool.html 5. Susanne. (2004). Pharmaceutical industry Analysis. London. Read More