SDA BOCCONI SCHOOL

OF MANAGEMENT
Introductory Term, Managerial Economics
Professor: Marco Ottaviani

Group Assignment

Market Analysis Report: The Pharmaceutical Industry

MBA 40:
Blue Class, Group 6
Berti Giovanni
Conzatti Narmina
Karthik Arun
Vartsou Marina
Yang Shanshan

Market Definition
The present analysis focuses on the market for insulin-based prescription drugs for diabetes, which
represent one of the most rapidly evolving and profitable segments in the pharmaceutical industry. This
market is identifiable in terms of its key product characteristics and geographical boundaries:
Products:
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!

Insulin injectibles & analogues

Oral anti-diabetes drugs (OADs)

These products are essential for type I and type II diabetics. Further to this classification, the two mostwidely used types of insulin are: human and modern. This study will focus on the insulin injectibles market,
as it captures the biggest share (85%) in the diabetic sales portfolio of the industry.
Geographical boundaries
The focus of this analysis will be the US market; the worlds largest pharmaceutical market. The rationale
supporting this choice is that the market for insulin-based prescription drugs for diabetes is highly
concentrated in the US, the pricing architecture and regulatory framework under which it operates is uniform
among all states and is very distinct from other countries.
The three dominant players of the US insulin market, but global dominators as well, are the following:
!
!
!

Sanofi
Novo Nordisk
Eli Lilly

In 2013 the global insulin market size reached $20.8 billion and the three aforementioned companies
accounted for 88.7% of market share. The US market totaled for over a third of the insulin sales globally that
year ($8.3 billion)[1].
The buyers in this market are identifiable in pharmacies and hospitals and purchase the drugs by the
manufacturing companies directly or through wholesalers.

Player

Market Share by Value

Rank

NovoNordisk

Market Share by
Volume
37%

33%

Sanofi Aventis

28%

33%

Eli Lilly

23%

26%

Other

12%

11%

[2]

[3]

[2]

Cost Structure
Figure 1 illustrates the typical cost structure of the pharmaceutical industry. This cost structure is
calculated based on the 2013 income statements of the U.S. market leaders in production and
sales of diabetic drugs, in order to accurately represent this industrys segment [2,4,5]. The
classification of costs (fixed/variable) is based on a short- term analysis (6 months).

COST STRUCTURE
6% 2%

21%

C.O.G.S.
MARKETING &
SALES

41%

R & D

30%

GENERAL &
ADMINISTRATION

Figure 1

As one can see from Figure 1, over 40% of the cost structure in the pharmaceutical industry is related to the
manufacturing costs, precisely all the costs corresponding to the activities of planning and sourcing
(variables), producing (fixed), assuring and delivering products to patients (variables). The manufacture of
insulin is highly complex, it differs from other pharmaceuticals because it not based on small molecules but
on living cells. It requires a large amount of expenses and investments in biotechnology and sterile
production. Moreover, manufacturing processes are heavily regulated by governmental health authorities
with stringent requirements that significantly drive up the costs.
Marketing and sales represent 30% of the cost structure. Such a high cost reflects the characteristics of the
sales channel, which is very specialized and needs a highly educated and trained sales force, expensive to
develop and to support compared to other industries (variable) [1]. Furthermore, the marketing campaigns
(variable) have a very important impact on the cost structure, especially for the drugs, which are no longer
covered by patents [4].
Research and Development (variable/fixed) accounts for over 20% of the cost structure. This activity is
predictably crucial for the industry and is aimed at identifying both successfully and cost-effectively the
development of new products that address unmet needs[5]. R&D is the main driver of business growth and
of replacement of sales loss due to competition and expiration of existing patents. The impact of the
expiration of a patent is very important in the industry, as illustrated in figure 2 [6]. This industry is
experiencing a low productivity in R&D and as a result there is a tendency to reduce the R&D budget and to
seek interesting opportunities on the market through partnership and M&A.

[6]

Finally, General and Administration expenses (fixed) account for the 6% of the cost structure; these include
legal costs as well.
Economies of scale in the pharmaceutical industry are crucially important. Industry efforts to manage costs
within manufacturing and the supply chain have focused on merging to increase the scale of their operations.
This industry has been one of the most active in the M&A market in the last years [7]. Driving the M&A rush
is also the decline on research and development productivity and the desire by pharmaceutical companies to
reach economies of scale in this department and to buy products aligned with their strengths, selling noncore
businesses and replenishing their new drug pipelines.

Demand drivers
Given that insulin prescribed drugs are an essential necessity for the diabetics, the indisputable and evident
demand driver is the condition of diabetes per se. In fact, insulin is the only treatment for type I and later
stages of type II diabetes. The identifiable demand drivers of the insulin market are strongly correlated to the
diabetes and are the following [8,9].

High prevalence of diabetes (8% of the population/ 27 million people)

Spiraling aging population

Increasing obesity

Presence of high patient disposable incomes (51,796 million USD GDP per capita)

Health conscious consumers

Low rates of undiagnosed diabetes cases

Sophisticated healthcare infrastructure

The below serves as evidence strongly correlating to the above statement:

!

There are no substitutes for insulin injectibles for Type I and later stages of Type II diabetic
patients. As diabetes is a non-stable condition, in the early stages of type II diabetes, some cases
can be treated with a combination of insulin and OAD; but this depends on specificities of individual
patients and it is not an optional choice.

Medical foods, functional foods & drinks and nutritional supplements serve as complements. As
demand increases for insulin injectibles, the medical foods portofolio increases in a similar manner.

Consumer preference as such does not exist, however within the market there has been a gradual
shift from human to modern insulin, as it is more convenient and safe because it is injected
through a pen. There is significant potential of market penetration in modern insulin [10].

Diabetic Insulin is covered by insurance in the US. Only 15% of the American population is
uninsured and this figure is expected to drop significantly, as a result of the Affordable Care Act.
Insurance coverage extension to more patients is positively correlated to an increase in the
demand of insulin in the US.

Considering all the above and the fact that regardless of how much the price of insulin increases, people with
diabetes will still need it and will end up paying the price for it. The diagram below indicates a linear positive
relationship between the 3% increase in the diabetic population of the US and a corresponding 15-20%
increase in the price of insulin [11]. This is reflective of the inelastic demand of insulin in the US market.

[11]

Competitive situation
HHI Index: 3,464 (35%)
The U.S market is highly concentrated and oligopolistic in nature. Dominated by the three market leaders:
Sanofi-Aventis, NovoNordisk and Eli Lilly. We calculated an equivalent HHI Index, based on the market
shares by both volume and value of these three companies.
Pricing Rivalry
Price levels in this market are highly correlated to patents. A representative example of this is the expiry of
the patent in 2015 for Sanofi-Aventis best-seller product Lantus. Sanofi increased the price of its Lantus
insulin twice in 2013, by 15% in total without incurring any sales drop[11], reflecting the power of
pharmaceutical companies over price-setting. The result of a patent expiration is a significant and rapid
reduction in sales for the insulin patented products, because generic manufacturers typically offer their
unpatented versions at sharply lower prices.
U.S. manufactured insulin drugs are also protected from parallel imports, as FDA prohibited the importation
from Canadian pharmacies, further consolidating the dominant players power and pricing strategy[12].
Threat of new entrants
There are high barriers to entry due mainly to:
!
!
!
!
!
!

Magnitude of economies of scale: complexity and highly-regulated production.

Strict regulatory policies and standards
Lengthy approval procedures (FDA)
Patent system
High switching costs: sticky consumers (close to 95% of patients stay on their current therapy from
year to year)
Risk-averse physicians

There is no guarantee that the investment by potential rivals associated with R&D to produce commercially
viable new products will pay off and that is a risk which cannot be hedged by most of the potential aspiring
entrants in this market.
Overall, there is a minimal likelihood of de novo entrants in this industry.

Conclusion
The U.S diabetic population is already large and is forcasted to grow by 4% year by year, thus
there is significant potential for future increase in sales.
Pharmaceutical industry is seeking efficiency in production by enlarging its operations and efficacy
in R&D through M&A. Moreover, the existing firms tend to horizontally integrate with related market
segments, such as the manufacturing of insulin pens, pumps and blood glucose monitors in order
to offer a a more all-inclusive diabetes portfolio and hence capitalize on their resources.
The nature of demand dictates that prices will be sustained at a highly profitable level and large
investements in R&D and high barriers to entry consolidate the firms pricing and market position.
Thus, the insulin market segment will remain one of the most profitable within the industry and will
offset the drop in profitability in other less inelastic segments.

References
1. http://www.cnbc.com/id/102045945
2. http://www.novonordisk.com/investors/annual-report-2013/default.asp
3. http://www.statista.com/statistics/219612/leading-companies-operating-in-the-us-insulinmarket/
4. http://files.shareholder.com/downloads/LLY/3563217665x0x736237/30C56C84-78DA4D16-97F7-A51284E56A51/English.PDF
5. http://en.sanofi.com/investors/events/corporate/2014/2014-02-06_Results_2013.aspx
6. Statista The StatisticsPortal
7. FT Journal
8. World Helath Organization
9. http://www.grandviewresearch.com/industry-analysis/insulin-market
10. http://www.medpagetoday.com/Endocrinology/Diabetes/47603
11. http://insulinnation.com/treatment2/medicine-drugs/understanding-insulin-sticker-shock/
12. http://www.rxrights.org/the-rising-price-of-insulin