Porter Five Forces Analysis of US Pharmaceutical Industry

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Pharmaceutical is one of the biggest industries in the US. The industry is characterized by excessively high-profit margins, and
profitability exceeding costs. These are also some of the richest companies in the world with most of them having production
set ups in many other countries and having strong distribution channels that completely cover the globe. Porter Five Forces
Model can be used to look at the competitive arena of this industry and how the various forces can impact the industry
structure and the profit margins of the companies in the industry.
Following is a detailed Porter Five Forces Model Analysis of pharmaceutical industry of US:

Competitive Rivalry – High

The pharmaceutical industry is one of the most competitive industries in the world. Most of the players in the industry have
been here for a long time and are well recognized globally. The profit margins are high, there are a large number of small and
large sized player, and strict government regulations make it a very competitive industry. There is no room for making errors.
Another reason is the recent trend of mergers and acquisitions where large industries have absorbed the smaller players.
Technological advancements in biotech and generics have further increased the competition as companies no option other
than to adopt the new technologies. Thus, there is a constant pressure to innovate. Some of the major competitors are Sanofi,
Pfizer, GlaxoSmithKline, Merck, and AstraZeneca. Thus, the overall competitive rivalry in the US pharmaceutical industry is
high.

Threat of New Entrants – Low

The threat of new entrants is low for the US pharmaceutical industry. There are extensive costs associated with establishing a
manufacturing set up, research and development, marketing sales, and distribution. There is also a high risk of no return on
investment if a company fails to produce the required new drugs on time, causing losses in millions (Sands, 2013).  The
existing players have developed economies of scale, leading to increased profits. Another reason is the lengthy process of
approval from regulatory authorities. Established brands and product differentiation are also a cause of the low entry threat of
new entrants. A new entrant will also have a tough time getting access to distribution channels. Most buyers go for drug brands
they have already tried. So, a new entrant will have a tough time grabbing market share. Another reason is that most drugs are
patented so new entrant will have to start from scratch. Thus, the threat of new entrants is low.

Bargaining Power of Suppliers – Low

The US pharmaceutical industry only requires the raw material for the drugs as the drugs are manufactured in house. The
second requirement is technology for the manufacturing and production plants. The third element the suppliers provide is the
packaging material (Gaudi, 2013). All of these are supplies that a number of suppliers are willing to provide. Thus, they are in
no position to bargain or attempt to influence the market prices. Some of the suppliers include BASF Corporation, Nexeo
Solutions, and Wako Chemicals (Pharmaceutical Resource Directory, 2017). Thus, the suppliers in the pharmaceutical industry
in the US have very low bargaining power.

Bargaining Power of Buyers – Medium

Patents of new drugs last for twenty years, allowing the manufacturer to dictate the prices for this time period. After which,
generic production begins and prices become more competitive. Similarly, large customers such as hospitals do possess a
certain bargaining power but individual customers have very little to none. Another factor is the brand name. That further
reduces the bargaining power of the buyers. Buyers today have access to the internet which allows them to further do research
on drugs in addition to the prescription of their doctors, giving them more bargaining power. Thus, overall the bargaining
power of the buyers or customers is medium.

Threat of Substitutes – Medium / Low

If the drug is still in its patent period, there is no substitute for that drug. However, once the patent period expires, its generic
production begins and a number of substitutes develop. The second threat is alternative medicines and treatments to these
drugs. This is more common in the eastern nations. These include yoga, meditation, and various other therapies. Also,
homeopathic and herbal treatments are a substitute for drugs made by pharmaceutical industries. Promotion of a healthier
lifestyle such as balanced diet, exercise, and other physical activities are substitutes to many drugs. Thus, the threat of
substitutes is from low to medium.

References
Gaudi, L., 2013. Porter’s five force pharmaceutical industry analysis. [Online] Available at: https://prezi.com/omuyw9ttmkrs/porters-five-force-pharmaceutical-
industry-analysis/ [Accessed 13 June 2017].
Pharmaceutical Resource Directory, 2017. Pharmaceutical Resource Directory. [Online] Available
at: http://www.pharmamanufacturingdirectory.com/category/chemicals-raw-materials/ascorbic-acid[Accessed 13 June 2017].
Sands, R., 2013. Porters 5 Forces – Pharmaceutical Industry. [Online] Available at: https://prezi.com/h5l8wrg2f6rr/porters-5-forces-pharmaceutical-
industry/ [Accessed 14 June 2017].