Porter’s five forces
Porter’s five forces help identify their attractiveness in the industry in terms of the five competitive forces which are:The threat of entry: Barriers to entry are the factors that need to be overcome by the new entrance if they are to compete in the industry. Many pharmaceutical companies are progressing in the market by shifting from traditional business approach to emerging new business approach. The new business technique includes contract research (drug discovery and clinical trials), contract manufacturing and co-marketing alliance.The threat of substitutes: Substitutes are products or services that offer similar benefits to industries products or services by different process. Substitute can reduce demand for a particular product as customers switch to alternatives.
The simple risk of substitution puts a cap on the prices that can be charged in an industry. Generic manufacturers do not incur the high cost involved in research and development and regulatory activities such as FDA approval and clinical trials.
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The power of the buyers: Buyers are the organizations immediate customers, where buyers are powerful they can demand cheap prices or products improvements liable to reduce profits. When buyers can easily switch between one supplier and another they have strong negotiating position. Pharmaceutical industry has one unique feature that the buyer is different from influencer who is a doctor. The consumer has no option but to buy drug as prescribed by physician. Therefore, the bargaining power of patient is very low.
The power of the supplier: Suppliers are those who supply the organizations with what they need to produce the products. Where just a few producers dominate supply, suppliers have more power over buyers. If it is expensive to move from one supplier to another the buyers become dependent and correspondingly weak.Competitive Rivalry: Due to increasing demand of high-quality drugs, low-to-moderate entry barrier to the new entrant, the presence of a number of large and small firm this market is highly competitive.2. The two external industry changes that might have affected company’s profitability within the Pharmaceutical industry are :Political Regualtions: The global pharmaceutical industry is currently in a dynamic state due to the rise in the number of partnerships, mergers, and acquisitions that have taken place in the past few years. Therefore the political changes across the globe are set to make things more uncertain.
This has a direct influence on the profits of a pharma company. The tax regulations, price control, drug regulations by government play a key role in deciding the profits of a firm.Economic Conditions: The well-being of the pharmaceutical industry is dependent largely on the economy. The main factor that affects the industry is employment because a majority of people receive health insurance through their employers. However, other economic factors such as the number of people who are uninsured or underinsured and the recent government stimulus plans also affect the industry.3. Pharmaceutical industry has always been an attractive industry.
When the challenge of affording prescription drugs is raised, pharmaceutical manufacturers often argue that steps to reduce prices will lead to less innovation in the future. This response presumably applies to policies that use the market, such as shortening periods of exclusivity and making approvals of generics more rapid, as well as regulatory tools such as price controls.Pharmaceutical innovation has produced an enormous amount of social value. The evidence on this point is strong and comes from multiple sources. Studies of disease-specific spending on prescription drugs, macro-comparisons in the United States, and international comparisons have all pointed to high social returns with respect to longevity and functional health outcomes.Those benefits from pharmaceutical innovation stem in great measure from patent policy and the granting of marketing exclusivity to new drug products.Drug company profiteering is also on display when it comes to off-label prescriptions, which according to Forbes accounts for nearly 20 percent of all prescriptions and brings in $40 billion in sales annually.
Surely, these companies would remain enormously profitable by simply sticking to FDA-approved uses for their drugs.