STRATEGY MANAGEMENT

Case Study: The Global Pharmaceutical Industry: Swallowing a Bitter Pill



Case Study: The Global Pharmaceutical Industry: Swallowing a Bitter Pill

Attractiveness of the Industry

The pharmaceuticals market will be analyzed taking pharmaceutical manufacturers as players. The key buyers will be taken as hospitals and pharmacies, and providers of active pharmaceutical ingredients and clinical trial services as the key suppliers.

The pharmaceutical market is characterized by strong buyer power, with the ease of market entry strongly affected by legal and regulatory frameworks. In most countries, healthcare is provided by a mixture of public and private spending. Public spending may be funded through general taxation (the United Kingdom's approach, for example), and/or payroll contributions to a specific health insurance fund (as in the Czech Republic). Private spending may include private-sector health insurance companies, and also out-of-pocket expenditure by patients. The United States is an example of a system with a major contribution from private insurers. Private health insurance may be either voluntary or mandatory; the Netherlands uses the latter approach. The system may be 'free at the point of use', as in the United Kingdom, or involve full or partial reimbursement of costs by insurers.

It is quite common to find that healthcare insurance does not cover (or only partially covers) purchases of drugs from pharmacies in the community. This has been an issue in Russia, for example, where patients' out-of-pocket expenditure on drugs is a considerable proportion of private health spending.

Buyer power is strengthened by the oligopsony status and price control policies of state and private sector institutions that are ultimately the purchasers of drugs. Obtaining high quality materials, equipment, personnel, and third-party clinical testing services is vital to the business of pharmaceutical companies. New entrants must satisfy regulators that their products are safe and effective. Non-drug therapies are substitutes for many pharmaceuticals. In addition, research-based drugs that are no longer protected by patents may be substituted by cheaper generic copies.

Five forces analysis

Buyer Power

Pharmaceutical manufacturers may sell to drug wholesalers, which then sell on to pharmacies, or to healthcare institutions such as hospitals. Some wholesalers are themselves large companies. For example, in 2009, Pfizer generated at least 10% of its total revenues from each of the following wholesalers: McKesson Inc, Cardinal Health Inc, and AmerisourceBergen Corporation.

Except for OTC and similar drugs, prescriptions are generally required in order to obtain pharmaceutical products. Marketing of prescription drugs by their manufacturers is therefore largely directed at medical practitioners, with whom they wield a significant influence. In fact, with the notable exception of the United States, advertising such products directly to consumers is usually illegal. Depending on the medical condition, there may be several different drug treatments available and product differentiation in these cases weakens buyer power (Vida and Fairhurst, 1998, p. 51; Urban and John, 1993, p. 216; Simpson and Thorpe, 1995, p. 24). Such differentiation can include efficacy, ease of use, side effects, and cost-effectiveness. Conversely, where generic equivalents to a branded drug exist, differentiation is decreased and buyer power ...