SECTOR ANALYSIS – PORTER’S FIVE FORCE MODEL

Sector 1- Pharmaceutical Companies

General Overview

India is the largest provider of generic drugs globally. Indian pharmaceutical sector supplies over 50% of
global demand for various vaccines, 40% of generic demand in the US and 25% of all medicine in the UK.
India enjoys an important position in the global pharmaceuticals sector. The country also has a large
pool of scientists and engineers with a potential to steer the industry ahead to greater heights.
Presently, over 80% of the antiretroviral drugs used globally to combat AIDS (Acquired Immune
Deficiency Syndrome) are supplied by Indian pharmaceutical firms.

According to the Economic Survey 2020-21, the domestic market is expected to grow 3x in the next
decade. India’s domestic pharmaceutical market is estimated at US$ 41 billion in 2021 and likely to
reach US$ 65 billion by 2024 and further expand to reach ~US$ 120-130 billion by 2030.

Porter’s Five Forces Analysis of the Pharmaceutical Industry

1. The Threat of New Entrant:

The probability of new entrants is small to moderate based on the following factors:

It has become very important for pharmaceutical companies to focus on research and development in
order to maintain their market position. The cost associated with research and development is very
high. There are also strict government regulations for the approval of new drugs, which act as a high
barrier. In addition, numerous other obstacles, such as the creation of suitable distribution methods, the
selection of the right goods, the anticipation of competition, among others, are restricting the entry of a
new barrier into the market.

Many pharmaceutical companies are making progress on the market by shifting from the traditional
business approach to the emerging new business approach. The modern industry strategy involves
contract testing (drug development and clinical trials), contract production and co-marketing
partnerships. Many new companies are entering the market without the burden of costly tasks such as
research and development, clinical trials and drug production. In addition, patent expiry is one of the
reasons that offers opportunities for a lower cost generic manufacturer in terms of greater market
access.

In addition, the government has increasing its emphasis on cutting healthcare costs. Pressure is being
exerted on the authority to allow the early introduction of low-cost drugs on the market. This, in effect,
poses a great opportunity for pharmaceutical companies with licensed facilities and a strong knowledge
of regulatory issues. Therefore, all of these factors are responsible for the high threat from the new
entrant.

2. The Threat of Substitutes:

The danger of substitution varies from low to high. The demand for generic drugs compared to branded
drugs has increased due to cost. Generic manufacturers do not incur high costs involved in research and
development and regulatory activities such as FDA approvals and clinical trials. These are the reasons
why they can offer their product at a cheaper price. This increases the threat of substitutes.

3. Bargaining Power of Buyers:

The bargaining power of the buyer is moderate. There are several companies on the market selling
similar goods. For this reason, consumers such as the hospital and other healthcare organizations have a
preference. They generally pressurize pharma companies to keep drug prices low.

In addition, the pharmaceutical industry has a unique feature that the purchaser is different from the
influencer who is a doctor. The user has no choice but to purchase the drug as prescribed by the
physician. The bargaining power of the patient is therefore very low.

4. Bargaining Power of Suppliers:

In the market, the bargaining power of suppliers is low. Pharmaceutical products require a variety of
organic chemicals. There are a number of chemical suppliers on the market. Instead of buying chemicals
at a high cost, pharmaceutical companies can switch from one company to another.

5. The Intensity of The Competitive Rivalry:

Due to the increasing demand for high-quality drugs, the low-to - moderate entry barrier to new
entrants, this market is highly competitive with the presence of a number of large and small firms. Being
a medicine-based industry – firms have to ensure they have a strong R&D. Like: Due to current covid
situation, each firm has intensive research in place, to identify a vaccine first.