This case gives a percipient understanding on the pharmaceutical industry, the evolutions since 1940s through the evident expansions in 1960s and the environmental forces which influenced the growth. The case study gives an outline to understand the competitive advantage and an overview on the obstacles to be passed on each development stages of drugs from initial filing to end process of marketing and the strategies of organizations to sustain successfully in the competitive market like US, Europe, Japan, China and Mexico (Johnson et al. 2008).
Environmental forces and its influences (PESTEL Analysis)
Political agencies like Food and Drug Administration (FDA) have a great influence in the process of filing to launching the drugs in the market. Due to this, a competitive strategy has been implemented by pharmaceutical organizations to fasten the process with the smart moves in the political and legal areas. As per the Pharmaceutical Research & Manufacturers of America (PhRMA) the company will take minimum 12-15 years to develop and formulate a fresh drug (Johnson et al. 2008).
The FDA and other regulatory agencies slow down the process by lengthy and costly reviews. The organizations around the world are competing with each other to reduce this processing time to save the money and taking a proactive stance to communicate early on with agencies for ideas on how to design drug development which enables them quicker development time and to introduce their drug to markets faster, and reduces wasteful spending on irrelevant processes, thus increasing performance and giving them a competitive edge. (http://www.fda.gov/cder/regulatory/default.htm).
US perspective: Presently political parties or members are authorized to design and introduce various forms of healthcare coverage. Most of the states have seized the statewide universal plans but few of them were implemented. But at the same time the new rules have been invented to secure the ethics of the healthcare industry like patients’ privacy protection, abusive treatment, or coverage denial. (George B Moseley 2009).
Economic conditions such as interest rates and inflation have little impact on the profitability of the industry and it appears to be immune to external economic conditions. High prices on drugs were one of issues in the past and this was evident in places like Africa while dealing with the purchases of HIV drugs. Due to heavy appeal from both public and political side the major players have reduced the prices of most of the expensive drugs. Presently, Intellectual property Rights (IPR) has a high influence on the economic facts of pharmaceutical industry (Dr. Oelkers & Dr. Elsey 2003).
The scenario have changed in US recently that public tend to have more money to spend on healthcare and this is a motivating factor for organizations and this also lead to restrict more on limitations and re-imbursements even by the government funded organizations like Medicare and Medicaid. Due to the mergers, major market players have gained market share but their performance has remanded compared to the new firms and the dependability of larger firms on smaller firms on new drug development continued to be the same or increased to next level (George B Moseley 2009). Some of the recent studies states that acquisition of organizations increases the returns and this seems to be more evident in the case of smaller organizations than the larger ones (Hassan, 2007).
Social and cultural trends include heavy reliance on 21st century drugs and medicines by the society globally, especially in the US. With modern emphasis on increasing life expectancy, doctors continued to prescribe drugs to patients and the public became more and more accepting of drugs. A collective behavior was also shown by the public to seek brand new drugs which are high-priced, which lead to increased competition, which in turn may lower individual firm’s performance (Holdford 2005). Another fact which socially affected is the users’ agony of high expenditure on medicines. Few solutions were found when employers have started offering the insurance benefits to cover the medical expenses, but gradually most of the companies removed this facility partially or fully due to the trend of cost boom of drugs (Atim 1999).
The generalized belief of drug usage has also become stronger day by day through word of mouth, individual experience and media publicity and the suspension of solid drug practice by the public due to the authenticity of particular drugs (Holdford 2005). An emerging cultural trend within the industry seems to be consolidations and mergers to offer broader ranges of products, capital to expand and share of the costs of research and development (R&D). Such mergers leads to competitive advantages over smaller capital based firms (David, R 2005).
With the breakdown of human DNA, firms are focusing on more complex diseases. To study and diagnose these complex diseases and developing drugs through research required advanced technologies and often require complete technological makeovers. The continuous trend to maintain state of the art technology continues to drive competition in the pharmaceutical industry. Overhauling expensive equipment may slow performance at first, but will serve to produce an overall increase in long run production. Overseas markets provide a vast, endless supply of customers who are in desperate need of medicines. There are a great deal of trends emerging in the pharmaceutical industry that will affect competition and performance within the industry (Simango 2000).
It will be those firms that catch on early who will have the greatest chance of prolonged survival. Pharmaceutical companies are also in practice of implementing advanced technological and competitive strategies from innovative drug research and proactive partnerships in R&D, which fetches them to hold the market dominance. A great deal of web marketing also have influences the industry in the forms of information sharing, advanced branding techniques, communication devices, copyright protection etc. Companies have wider opportunities to promote using the technology especially through company information sharing, product service information, support services etc (Blaisdell 2000).
To be competitive in the market, the pharmaceutical organizations should diagnose and identify the environmental forces to find the present strengths and weaknesses which are related to the market and to devise the defensive strategies against the environmental forces like developing the firm to a strategic position through which the firm attains the best defense against the competition, or appropriate use of change management by implementing new strategies in the market before the competitors identifies it. For example, a pharmaceutical company’s production unit produces a uniformed product while the market demands variety. Forecasting similar changes in the demand is also an environmental force affecting the industry. Apart from these, one of the most important elements to be noted is the internal environment force. Even a strategy has been carried out to be defensive or to be effective against the external forces; an internal force could destroy the entire strategic planning (Smith et al. 2002).
While the government regulations stand as the major legal force, some deregulations helped the firms to become global. However, the industry is affected due to the price hike percentage regulation by the government to 4% compared to the scenario prior to 1992 when it was normally 10% a year. Deregulations helped the firms to go with the strategic alliances which again helped organizations to go global and this reduced the uncertainty of launching the new drug in the alien market (Lin & Darling 1999).
The European market was likely to be affected due to European commissions’ (EC) industrial policies like drug licensing control on price and profit, market licensing, and the state aids have affected the pharmaceutical industry and several argument have raised that EU market always runs behind the US market due to the policies which disturbs the growth of a strong and profitable industry (Earl-Slater 1997). Patenting: Authorities approve patents only after lengthy and stringent examining, which may takes up to 15 years, to the firm to potentially market the drug. Patenting is a strong legal force which allows the company to recoup the R&D costs through eminent profit from the branded drug. It is a usual practice that organizations implements strategic approaches to reduce the impact of patent arrest using promotional, pricing and product strategies and creative partnerships (Agrawal & Thakkar 1997).
Environmental forces and its influences (Porters’ 5 Forces)
The threat of entry
A new organization in the industry may face various problems by the existing organizations, like (a) economy scales – manufacturing, sales, marketing, and R&D (b) access to distribution – established brands, products, preferences, and relationships (c) funding requirements and sources of financial resources (d) regulatory policies: patenting, regulations (f) cost switching – retraining employees, equipments, technical requirements etc. Established organizations will have substantial manufacturing capacities which cannot be copied and will have secured there position with there patents and holds huge marketing budgets to protect their brands.
Prescription: High, a company cannot manufacture a drug that has a patent on it. They must wait till the patent expires to manufacture it. Generic: Low, once the patent is expired, everyone will want to manufacture the drug (especially if it was a big money maker for the inventing company). Over-the-counter: Medium, depending on the new entrant’s resources. Store brands will always be available. However, for small companies a name brand is a huge marketing expense. This will make it a barrier for them to enter this market (Gassmann et al 2008), (Smith et al. 2002).
The threat of substitutes
For humankind, a substitute of medicine is the way of healthy living, a way of preventing the need for medicine. Generic brands are substitutes (The degree of their effectiveness certainly does vary) for original products and copies a patented drug after it expires. However, once a new product is introduced and patented, a generic cannot compete. Generics are low in prices and due to this reason they are often a threat to the original product makers. Novartis, an original product maker found innovative ideas to stand against the threat of generics by introducing themselves to the generic market under a new name, Sandoz. Nowadays alternative medicine can be regarded as a substitute to already acknowledged methods. Compared to the original products, generics have a low market share as they have the low prices (Gassmann et al 2008), (Smith et al. 2002).
The power of buyers
The buyers include patients, medical doctors, hospitals, and pharmacists. Buyers can influence the business by demanding price drops, higher quality and better service. Forces to be considered are (a) purchase of large quantity; (2) switching purchases from one to another established brands; (c) awareness of the product advantages and disadvantages. To strengthen this threat, buyers have one more reason that government and health authorities support price drops. Generics have a wallop, but it’s slim. Briefly, the practice is that buyers have the highest influence in the industry and companies have to adopt competitive strategic plans to retain the faith. Prescription: Low, doctor prescribes the medication and the insurance company or patient pays for it. Generic: High, there are many options. Over-the-counter: Medium, again there are a number of options. But drug stores will want to carry their own brand as well as leading name brands (Gassmann et al 2008), (Smith et al. 2002).
The power of suppliers
Suppliers can be manufacturing or production plants who provides the raw materials, the units which comes anywhere between the supply chain process and companies who supplies finished products. There are not many buyers and the supplier has little room for negotiation with individual buyers so the company itself has high bargaining power towards its supplier. The pharmaceutical industry doest not depend suppliers much and the force is comparatively weak to the other forces. With the amount of key ingredients being marginal, it is the suppliers who are bargaining for business with major drug companies.
The common forces can be separated as, Prescription: Low, suppliers are usually the drug manufacturers; generic: Medium, sometimes the drug manufactures make both the prescription and generic drugs in the same facility and just label them differently. You either agree with the pricing policy of the manufacturer, or invest in your own plant, property and equipment to manufacture it yourself, over-the-counter: Low, there are enough suppliers out there and this does not affect much (Gassmann et al 2008), (Smith et al. 2002).
Considering the research facts, the top 20 companies in the industry controls the 60 % of the pharmaceutical market and none of these holds more than 9% of market share and every company competes with the other to launch the new drugs, first of its kind to get the patent and to recover the R&D. Generic companies are the bigger threats as they have no expenditure associated to R&D. The price factor is another force of rivalry and this is mainly depends on the customer loyalty and awareness. Buyers purchases mainly based on the price even in smaller communities. At the same time these force not affecting the industry while considering the facts of mergers and acquisitions in the market.
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 the 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 (Gassmann et al 2008), (Smith et al. 2002).
Scenario planning is the process of forecasting the future of an organization using the prevailing conditions to forecast the future sales based on the company’s sales objectives and if the forecast reinforces the objectives, it will be included to the marketing strategy to produce new tactics and resource allocation. If the forecast does not support the sales objectives, the forecasting will be revised to find where it can reach the sales objectives. At the end of sales period, the company will reach to a conclusion whether to apply the same forecasting methods or to revise it for the next tenure. The main 2 different types of forecasting are ‘break-down’ and ‘build-up’. Break-down is the method of forecasting the large future market. For example: Government’s plan of the healthcare spending for the year.
Build-up forecasting is planned for the next tenure based on the existing conditions of drug purchases, hospitalizations, and other medical sales data availed from the hospitals and related sources (Dogramatzis 2001). Pessimistic, average, and optimistic approach based on PESTEL and Porters’ 5 forces: Considering the present political stands, the organizations may have to face more lengthy political and legal processes in the near future. For an example: The new pan-EU drug licensing in the European region. The organizations which are already standardized and recognized may continue to rule the market based on their pro-active approach in legal formalities and drug development processes (Earl-Slater 1997). The fundamental policies of the industry from filing to marketing may evaporate the baby companies and the giants like Pfizer or Glaxo Smithcline (GSK) may continue to hold the power or may acquire more.
Pharmaceutical companies have enjoyed huge savings through switching the business processing to offshore locations for cost-cutting benefits. But due to the current financial crisis the government has imposed stringent rules to save the jobs for localities. Thus, US, the major pharmaceutical segment, will have adverse effects. Government regulations on cost control and the act of reinforcement of generic drugs will also have adverse effect in the branded industry. This scenario is more likely to be continued in the coming years as the consumers targets the low cost drugs. Other major change would be the heavy penalties for lack of disclosure in terms of phase 3 and 4 trials (Garland 2006).
The cost of health care is increasing and due to this public started moving to generic products which is cost effective. Due to the awareness of drug side effects, government may impose new rules to ensure the safety to protect public interest. More safety regulations may be imposed on the activity of medical representatives and the doctors. The increasing public awareness may pressurize the government agencies to monitor the process of drug more closely.
The government or the global agencies may give more impose regulation on industry to sell the drugs on a reduced cost in places like Africa. Major companies may switch to generic drug due to increasing costs of research and development and to avoid the extended processes of drug development. Due to the competitions in the market, the consumers can expect more effective and less cost drugs. Due to the 2008 financial break-down, many companies have sound chances of liquidation or acquisition. The crisis may also pressurize the companies to remove the insurance benefits which they use to offer to there employees.
A social point of view: The increasing population offers the pharmaceutical companies a bright future. The studies in human DNA may help the industry to come up with innovative drugs to prevent the present incurables. At the same time experiments on cloning and related activities may get criticized by the public and government may impose regulations in future. In the US, most of allergy drug’s patent is about expire and this will lead to a dramatically change in the market for new comers and for the public to experience the new drugs. The patented drugs markets’ share may fall in high risk due to the heavy demand of over-the-counter (OTC) drugs and generics.
Well recognized products like Allegra and Zyrtec have come to the patent expiry in 2003 and 2007 and the new product are launched to replace. Diagnostic equipments are falling in price and increasing in connectivity to the internet. The mergers may give a cost advantage to both companies in the process of R&D investment and also helps to find the shared market and to come up with more effective drugs using the added resources and skills (Nutt et al. 2007).
Prices of orthopedic services in US are expected to grow to a minimum level of 2% rate in the future (David 2005). So unquestionably, this is one of the most important industries in the world, yet, it is facing dramatic challenges. The political parties or members should have an outlook towards the industry’s problems while setting the regulations, instead of making complicated rules which might affect the chances of potential organizations’ entry. A legal issue like patenting and marketing approval of drugs has to be addressed to come up with better options to speed up the process. This will allow the companies to reduce the expenditures towards research and development which is actually considered to the strongest economic element affecting the industry.
The issues like cloning or genetic engineering should be keenly analyzed and addressed by the government while considering the sentiments of consumers and also government should come up with policies to provide medical support for the under developed countries. The goal of the firms has to keep the shareholder happy through gaining remarkable profits by increasing margin, cutting R&D costs, fastening the launch process and proper marketing. The firms should be well prepared to face any new rules or regulations using scenario planning and should be able to forecast the market well in advance to utilize the opportunities. A strong strategic management and planning will be a great account towards this act (Chandler 1995)!
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