"In 1897, Felix Hoffmann created a new industry. He found a way of adding a cluster of two extra carbon and five extra hydrogen atoms to a substance extracted from willow bark. The result is known to chemists as acetylsalicylic acid. To everyone else it is known as aspirin. It turned Bayer, the dye-maker Hoffmann worked for, into the world's first modern drug company." Geoffrey Carr, The Alchemists, The Economist - Feb 19th 1998
Today's Pharmaceutical Industry is characterized by several important factors that influence the business environment in which each company operates:
·Severe competition from capitally strong competitors
·Strict government regulations
·Long approval wait time
·Technology as an important factor
·Lower levels of marketing and customer relations in comparison to other markets
- Sales share of the world's top 75 prescription medicines 2002
Industry Environment Analysis
In 1997, the $65 billion industry was composed of three strategic groups: patented prescription drugs, generic prescription drugs and over-the-counter drugs. Firms such as Merck, SmithKline, Eli Lilly and others produced various types of brand name drugs. Pharmaceutical companies spent huge amounts of money on development. The products produced by companies are very innovative. Many companies market up to ten (10) "blockbuster" drugs each year. These drugs have a patent life of seventeen (17) years. However, since it takes on average twelve (12) years to get the drug to market, manufactures have only five (5) years in the market to recoup their heavy research and development costs. After the patent expires we move to our next strategic group; the generic prescription drug makers.
Pharmaceutical R&D expenditure in the UK
Pharma R&D expenditure £ millionPharma R&D as a % of output1
Research and Development in UK Business (ONS)
UK Pharmaceutical R&D Expenditure, CMR International
Annual Census of Production (ONS)
Generic drug manufactures are usually first developed by the patented prescription drug makers (or they can even be developed by the over-the-counter manufactures). They have little to no research and development costs. They have little to no marketing budgets and much lower overall costs. As a result, generic drug manufacturers can sell their products at lower prices.
The third strategic group within the pharmaceutical industry is the over-the-counter drug manufacturer. These products have a very broad range. They include items such as cold medicine for a common cold, aspirin for a headache, and antacid relief for the stomach.
The three above-mentioned groups pursue different strategies and operate in different environments. Porter's five-force model can be applied to illustrate the differences between the groups. Below is a summary of each force and the corresponding strategic group:
Prescription: High, patents protect each company when a drug is first developed. However, production costs are high (over $6 million) and only 20% recoup their costs.
Generic: High, there is the generic brand versus the name brand. Why should we pay more for the same exact product? Many prescription drug plans have a higher deductible for name brand drugs than generic drugs. Keeping costs lower than your competition is key.
Over-the-counter: High, there is the store brand versus the name brand. Why should we pay more for the same exact product? Product differentiation is the key here.
Overall, threat of rivalry is high. The pharmaceutical industry is highly competitive. Companies are racing to launch new products before other companies release similar ones. In order for a company to recoup their R&D expenses they must patent their...
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