3.3 Socio-demographic Environment
The major feature demographically is the “greying population” which is beneficial for the industry as people over 65 consume four times as many pills as those under, suggesting that firms should focus R&D on the aged market. Greater media coverage has raised awareness of the drugs available resulting in heightened DTC advertising and increasing availability of OTC drugs and creating a “pull” strategy. Consequently, patient expectancy has risen placing the onus on the providers to deliver quality and value for money. On a global scale, private healthcare systems such as in the US mean that poorer people are unable to afford quality healthcare meaning that a portion of the market is left unexploited. Increased awareness over personal issues such as impotence and obesity have led to the development of lifestyle drugs. However, cardio-vascular disease remains the biggest market with 5.2% of all sales. The AIDS epidemic in Africa remains a market under supplied with lacking funding in the continent. Another demographic concern is the different manners in which different races metabolise drugs leading to difficulties in the clinical trial stages, thus making HCM strategy difficult to implement.
3.4 Technological Environment
Technological advancements within the industry focus mainly on biotechnology and the Human Genome Project. These have affected the industry by increasing the cost of R&D whilst the discovery of new chemical entities has fallen. Strategically, the industry can incorporate functional genomics, which aims to develop drugs to meet specific targets. Also Pharmacogenomics, the study of why different populations metabolise drugs differently will allow drugs to aimed specifically at those who benefit the most. I anticipate that the role-out of the above practices will reduce R&D costs in the long-term. On the demand side, the greater use of personal computers is improving methods of handling information including “formularies” of available drugs, thus creating awareness of generic alternatives to traditionally higher priced branded originals, therefore all manufacturers must compete on price and differentiation. Related to the PC boom is the growth of Internet. This has greater effect in the USA where 71% of households have access with health issues the second most searched subject on the Internet. However, European use is more varied with just 12% access in Spain and 65% in Sweden. Strategically, this offers the pharmaceuticals the opportunity to build DTC (direct to consumer) advertising and thus awareness of the products available; 75% of US users who search for health issues are likely to discuss their findings with the healthcare providers, possibly asking for products by name.
4.0 Porters Five Forces Industry Analysis Period 1985 - 1995
4.1 Barriers to Entry
Research based participants were the main players during this period with generics participants just entering. Increasing time to market (7-12 years) and increasing R&D costs ($5.4 billion, 1981) resulted in high risks for potential entrants. During this period media coverage and DTC were not as significant meaning that entrants would struggle to find an audience for its product.
Brand loyalty was another concern with doctors and specialists dealing with muscle marketing salesmen. Such marketing techniques prove more costly for participants than media methods employed during the latter part of the period. Success also remained responsive to macroeconomic performance as funded by taxpayer and dependence on one main purchaser with the advent of OTC drugs not yet developed.
4.2 Bargaining Power of Suppliers
There is no real evidence of any supplier issues, which leads me to believe that the size of the large pharmaceuticals gives them the power over suppliers.
4.3 Substitute Products
This period represents the early stages of generic products with drugs costing normally just 60% of the launch price of the original. This required participants to respond by attempting to create brand loyalty, compete on price and differentiation or face loss of market share.
4.4 Bargaining Power of Purchaser
During the 80’s, governments demonstrated their power by targeting participants to cut the cost of healthcare as it became unsustainable for some welfare economies. The UK government created a blacklist in 1985 of drugs it would no longer pay for such as Valium. This devastated firms such as Roche which had two of its biggest selling products de-listed causing their decline from a top ten firm to the forties. During this era, the OTC market was not fully developed and the limited ways of communicating to mass audience (such as lack of Internet) meant that governments proved the only real market. With the emergence of generics as a substitute major participants would be forced to rethink their operations, building upon their well-established brand loyalty.
4.5 Intensity of Rivalry
No major mergers or acquisitions took place so the market was constructed of many large research based firms in direct competition on national and international levels. However, the market grew with net profit margins up from 10% to 19%ψ. With generic products emerging, one can assume that competition began to intensify as no switching costs affected purchases.
5.0 Porters Five Forces Industry Analysis Period 1995 - 2000
5.1 Barriers to Entry
Barriers to entry appear two-tier. Research based pharmaceuticals remains difficult to enter with R&D unpredictable and costly (around $600 million per product) and global spending up estimated at $50 billion for 2001. The growth of costly and low productivity biotechnology is somewhat to blame. Legislation and increasing clinical trials make lab to launch 12 years on average and more cautious purchasing and price controls from governments has flattened and shortened the product life cycle, resulting in huge risks for any potential entrant. Consequently, the search for blockbuster products is the aim but less than 1% of all drugs can be classified a blockbuster. However, opportunities through generics and parallel importers show lesser barriers for potential entrants to this field. With less R&D required leading to lower pricing has resulted in weakened brand loyalty for the big players. In conjunction with new “formularies” allowing doctors to elect cheaper alternatives via IT and growing media coverage and Internet, the traditionally large “muscle marketing” sales forces are unnecessary. There are also no switching costs from branded to generic.
5.2 Bargaining Power of Suppliers
There is no real evidence of any supplier issues, which leads me to believe that the size of the large pharmaceuticals gives them the power over suppliers.
5.3 Substitute Products
Growing relevance due to legislation allowing generics as patent expires and economic change including European integration result in parallel trade from lower fixed cost companies. Strategically, pharmaceuticals must lower prices or develop differentiation as the patent expires. Alternatively, firms could focus marketing on products with longer patent protection. Another factor as Eastern markets open to the big firms is Chinese Herbal Remedies, which whilst remaining popular in such markets are also growing in popularity in the Western world.
5.4 Bargaining Power of Purchaser
Ethical (prescription) drugs comprise 80% of the market and are purchased almost entirely by the government. This gives them great bargaining power, as the main players cannot afford to miss out. The legislations on fixed patent periods suggest that governments intentionally moved to weaken the position of pharmaceuticals in order to drive down prices through generics. Individual pharmacists are also controlled by government price controls as the reimbursement varies between products. This forces the drugs having to justify both price and quality more substantially than in the previous period. IT growth offers doctors greater choice via formularies of the cheaper generics. The concern for the industry is that brand loyalty has been destroyed and with no switching costs for consumers on both ethical and OTC drugs. Greater awareness through IT and the media mean that patient expectations are higher thus more willing to switch. Consequently, pharmaceuticals must aim to switch users to drugs with greater patent protection prolonging product life cycle.
5.5 Intensity of Rivalry
Growth rate in the market remains high and profitability increasing particularly in generic firms with the US market the biggest growth market (16% in 1999). A series of high profile mergers such as that of GlaxoWellcome and SmithKline Beecham (forming GSK with sales of $22.2 billion in 2000) intensified competition to a smaller number of more powerful global firms. With no switching costs for consumers and the growth of generics the rivalry has intensified dramatically.
Simultaneous worldwide launches, global branding and high promotion at time of launch aimed at creating rapid take off and high yield early in product life cycle.
Page 632, paragraph 4, line 2.
Exhibit 3 Health spending a % of GDP.
Manipulation in the slight difference in cost in different locations. Module Material – BUSAE3070 Managing the Global Organisation (P.S. Steer 2002)
US, Japan, France, Germany, the UK, Italy, Canada, Brazil, Spain.
Global R&D spending up from $5.4 billion (1981) to $50 billion (est. 2000)
51 NCE’s (1980), 32 NCE’s (1999)
ψ Page 632, Paragraph 4, Line 5.
Blockbuster – Generating over $1 billion sales per annum (Page 643, Paragraph 2, Line 2)
Industry sales $340 billion (1999 (up 11% on 1998). Growth 8% p.a. 1999 – 2004. Sales $500 billion (2004 est.).
4 main generics up from 10% to 65% Net profit
See Exhibit 7 of Case Study