EASTERN INSTITUTE FOR INTEGRATED LEARNING IN MANAGEMENT

6, WATERLOO STREET, KOLKATA 700069.

SAMRAT BHADRA

Assignment for Advanced Strategic

Management

PGPM Roll no:

July13-June15/

PGPM 4th semester

3STH-050

The Pharmaceutical Industry

Q1: Drawing on the five forces model, explain why the pharmaceutical industry has historically
been a very profitable industry.
Ans:
Porters Generic Five Forces Model
Buyers Bargaining Power
Buyers bargaining power in the pharmaceutical industry was low because there were only a few good
and well-known companies, who were the sole manufacturers of some prescription medicines. These
medicines were protected by patents therefore; no other company was able to manufacture generic
drugs on the same formula. This restricted the buyers of this industry from opting to other companies
and as a result, companies sold their prescription drugs at premium prices. Spending on prescription
drugs was increased because
of the increase in older age population. For example, Pfizer was the only company at that time that
had a patent protection for a cholesterol controlling drug and customers were compelled to purchase
that drug because of unavailability of identical generic drugs.
Suppliers Bargaining Power
Suppliers bargaining power was low because a drug manufacturer needed to have different
components for manufacturing a particular drug. Suppliers were unaware about the exact formula
which had reduced their power.
Threat of Substitute
Threat of substitute was very low because every big company had protected its prescription drugs by
patents and its competitors were unable to produce the same formula to substitute the drugs. This also
enhanced the degree of competition and made the industry so successful for the leading firms.
Threat of New Entrants
Threat of new entrant was also low because of the high start-up costs and high costs and risk
associated with the manufacturing of new drugs. Out of every 5,000 tested compounds in a laboratory
of a pharmaceutical company, only five of them enter into clinical trials and only one get an approval
from the FDA to make its way to the market.
Industry Rivalry
Industry rivalry was moderate because prior to 2002, the industry was dominated by a few drug
manufacturers and one of them was Pfizer. Pfizer was the leading brand and it had generated 55% of
its revenues from just eight drugs.
After analyzing different forces of the pharmaceutical industry, it is clear that the industry has been
historically profitable because almost all the forces of the industry are low, which have created a very
powerful and effective environment for the existing firms.
Q-2: After 2002, the profitability of the industry, measured by ROIC, started to decline. Why do you
think this occurred?
Ans:
The pharmaceutical industry has been historically a profitable sector. Its rate of return on invested
capital (ROIC) was comparatively high than others like computer hardware industry, grocers,
electronic industry & so on. Although it was a lucrative sector, its profitability has been declining of
late. Reasons behind this are given bellow:
Customers have become more conscious about the side effect of medicine, hence they use herbal
drugs: Since there are some side effects in certain medicines, people now a days use herbal drugs that
are said to be free from side effects.
Anti-American, Europe campaign: In 2003 during Iraq war there was a protest in using American
product.

 Failure to innovate new drugs: We know it takes almost 10 to 15 years to introduce a new drug,
during these long period parasites create a defense mechanism against older drugs making them
ineffective so they gradually lose their market.
Unable to match customers needs: Now a days customers need drugs that take action quickly.
Patent expiration: Market leaders lose their market share as their patent expired.
People have become resistant to those drugs that they have frequently used.
Q-3: What are the prospects for the industry in the future? What are the opportunities? What are
the threats? What must pharmaceutical firms do to exploit the opportunities & counter the threats?
Ans:
Prospects:
With the passage of time pharmaceutical industry is expected to increase its profitability. The reasons
behind this are as follows:
Innovating new drugs as peoples average life span, demand for better life is increasing.
Increasing research in medical science accelerated the chances of introducing new medicine.
Increasing investment on biomedical research.
Opportunities:
New technology opens the door to introduce new drugs. using new technologies the firms can
minimize the cost and thereby maximize profits.
Drugs for many diseases like Alzheimer, Cancer, heart diseases, & AIDS are not invented yet. The
pharmaceutical companies can invest in medical researches to invent new medicines to cure these
diseases.
Increasing demand for increasing population. with the increasing population the demand for drug
is also increasing. hence the profitability will increase if the firms are able to increase their market
share.
From past history, it can be said that new diseases can be break out in future like Swine-flue,
Anthrax, etc. offering pharmaceutical company to introduce drugs to check those.
Threats:
Patent risk. After the patents are expired the companies face competition as competitors are now
free to produce the patented drugs.
Pressure from politicians to lower price. Politicians are looking for ways to limit health care costs.
They are inducing the pharmaceutical industry to decrease the price.
Price control on prescribed drugs.
Aggressive competition from generic drug companies faced by proprietary drug companies in their
patent & pricing techniques, as a result losing market share to them.
Drugs that harm one organ in perspective of curing another must pull off.
People are considering herbal products more effective than medicine. As people are becoming
more conscious about their health they now prefer natural ways to cure diseases rather than powerful
medicines.
Exploit opportunities:
Has to invest more in advertising, sales promotion etc. Health campaigns can be created to increase
awareness.
Generating new ideas; killing pain in minutes.
Using new technologies.
Introducing drugs for intractable for medical condition.

 More investment in R & D will accelerate the invention of new drugs.

Counter threats:
Having new drugs in pipelines. When the patents are expired the company faces intensive
competition. Hence they should be ready to face this competition with new drugs that can be patented
after the old ones are expired.
Try to increase the period of patent. Long term patents can eliminate the threats for a long time,
allowing the firms huge time to develop a new drug.
Creating a position on customers mind in a way that they can never thought of switching. The
firms should strive for making loyal customers for its products.
Developing new competitive advantage. With different competitive strategies the firm can hold its
market share for a longer period.
Create awareness through health campaign.

THANK YOU-----------------------------------------

------------------------------------------