A Recent History Of The Pharmaceutical Industry - Based On All Five Forces
August 2007 (The New Business Road Test)
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This case study is a recent history of the pharmaceutical industry based on all of Porter's five forces. If you would like to try this assessment on your own business then try out our Porter's 5 Forces Assessment
In the 1970s and 1980s, the average profit margin (as a percentage of revenues) of the Fortune 500 pharmaceutical companies was two times greater than the median for all industries in the Fortune 500. Each drug introduced between 1981 and 1983 ‘made at least $36 million more for its investors, after taxes, than was needed to pay off the costs to develop it . . . Such profitability was two to three percentage points greater than for comparable industries, even after factoring in the risks of new drug development’. Nearly two decades later, in 1999, the industry was still a star. The pharmaceutical industry ranked at the top in all three of Fortune magazine’s measures of profitability: return on sales, return on assets and return on equity. What made the global pharmaceutical industry so profitable for so long? Why has its profitability remained so strong, and will the industry remain so attractive?
Threat of entry
For an entrepreneur, high barriers to entry make it more difficult to launch a venture. But happily, for those who are somehow able to enter, these same barriers serve to protect their ventures once they have joined the party. Thus, while barriers to entry can be considered obstacles for the entrepreneur, they also serve to keep competitors out of the industry. A number of barriers mute the threat of entry into the pharmaceutical industry. These include barriers both financial and intangible in nature, ranging from high fixed costs to stringent intellectual property protection. Let’s look in some detail at conditions in the pharmaceutical industry in the 1980s.
Heavy expenditure on research and development were (and still are) required for the arduous processes of drug discovery, development, manufacturing, and approval through the various regulatory bodies, such as the Food and Drug Administration (FDA) in the USA and the Committee on Safety of Medicines (CSM) in the UK. The process of developing a drug was time-consuming, expensive and precarious. During the 1980s, it took an average of 12 years and $194 million to bring a drug to market. And the long and tedious process, which included research and development, clinical trials and government approval, did not guarantee favourable results, as more than 50 per cent of all development dollars were spent on products that never reached the market. The sheer size of an investment like this, coupled with the great uncertainty of whether there would be a payoff, was a powerful barrier to deter those who might have entered the industry.
Research and development were not the only exorbitant costs. Sales and marketing costs were also substantial, as pharmaceutical companies spent large sums promoting their drugs to hospitals and doctors. To compete effectively against the industry’s leaders, a new company had to spend millions of dollars annually on large salesforces and other marketing and promotional activities.
Substantial as these financial barriers were, they paled in comparison to the protection...
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