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PEST and 5 Forces Analysis of the

Pharmaceutical Industry.
PEST and 5 Forces Analysis of the Pharmaceutical Industry
3.1 Political Environment
Spiralling healthcare costs resulted in increased political intervention in the industry affecting
strategy within the industry, including tighter regulatory and pricing legislation. The first
concern is the move by the British government in 1985 to introduce a blacklist of certain
patented drugs that it would no longer fund. The strategic implication is that, as the major
purchaser, the government are forcing the manufacturers of delisted drugs to seek new ways
to market; Roches decline from a top ten firm to the forties when two of their major products
were delisted demonstrates the implications for firms operating in a market with such a
powerful purchaser. However, legislation fixing the patent length allows other, smaller firms
to introduce generic drugs, effectively copies with little differentiation, as patents expire.
With little R&D investment required, generics are available at a cheaper price than the
branded original. Prudent government purchasing is holding down demand at launch and
flattening the product life cycle resulting in the need for High Compression Marketing
(HCM). Regulatory bodies demanding increased clinical trials lengthen the lab-to-market lag
but measures such as the European Medicines Evaluation Agency (EMEA) aim to limit this
by coordinating trials so that one country provides the approval for all. However, the issue of
regulatory bodies remains a complex issue strategically with each body differing. This is
epitomised by claims that Japanese people metabolise drugs differently from westerners.
Therefore this blocks HCM, as it can prove difficult to coordinate a product launch globally.
A further development is the growth of parallel trade due to greater European integration.
However government imposed price differentials have resulted in profit losses for
pharmaceuticals as the parallel importers benefit. This opens a strategic opportunity for the
main players to acquire these importers and gain presence in low fixed-cost countries such as
Spain. EU concerns over this allow pharmaceuticals to gain strength politically as they
influence EU policy.
3.2 Economic Environment
Although the industry seems recession proof, economic recession affects the industry in
countries with welfare systems and high healthcare spending as a proportion of GDP such as
the UK and Korea (between 7 and 8%), as healthcare provisions decrease in times of
recession. Arbitrage through tax minimisation can be obtained through manufacture in low
tax countries such as the Republic of Ireland and Puerto Rico; combining with opportunities
for parallel trade through the Single European Market. The US and Japanese markets remain
the largest worth $133 billion and $51 billion respectively. Along with Japan, Latin America
is the other emerging economy in the industry. 80% of all pharmaceutical trade was
conducted in just nine strategic economies allowing HCM.
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 80s, 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%. 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.