Overview of the Pharmaceutical Industry

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Table of Contents

  • Introduction
  • The competitiveness of the pharmaceutical market
  • The various substitutes and complements available in the market
  • The formulation of a particular market strategy for pharmaceutical industry


The pharmaceutical industry is responsible to discover, develop, produce, and market drugs or pharmaceutical drugs for the use of medicinal purposes. Pharmaceutical companies may deal in generic or brand medications and medical devices. They are subject to a variety of laws and regulations that govern the patenting, quality control, testing, safety, efficacy and marketing of drugs.

The discovery, development and production of drugs is a very expensive process; of all compounds investigated for use in humans only a small fraction is eventually approved in most nations by government appointed medical institutions or boards, who have to approve new drugs before they can be marketed in those countries. In 2010, 18 NMEs (New Molecular Entities) were approved and three biologics by the FDA, or 21 in total, which is down from 26 in 2009 and 24 in 2008. On the other hand, there were only 18 approvals in total in 2007 and 22 back in 2006. Since the year 2001, the Centre for Drug Evaluation and Research has averaged 22.9 approvals a year. This approval comes only after heavy investment in pre-clinical development and clinical trials, as well as a commitment to ongoing safety monitoring. Those drugs which fail quality test incur huge amounts of losses which are usually the money spent on research and lab testing, while giving no return. Considering the cost of failed drugs, the cost of developing a successful new drug (new chemical entity, or NCE), has been estimated at about 1.3 billion USD (not including marketing expenses). Professors Light and Lexchin reported in 2012, however, that the rate of approval for new drugs has been a relatively stable average rate of 15 to 25 for decades.

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The high rate of entry to the pharmaceutical-biotechnology industry indicates that it is structurally competitive. To the extent that market power exists, it derives from patents that are legal grants of monopoly power to enable originator firms to recoup their R and D costs. Although patents bar generically equivalent products for the life of the patent, they do not prevent entry of similar products that may be therapeutic competitors. Thus, neither natural monopoly nor patents provide a rationale for regulating pharmaceutical prices.

The rationale for drug price regulation derives from pervasive insurance or third-party payment, which makes patients insensitive to prices, hence creating incentives for suppliers to charge higher prices than would occur without insurance. Patient co-payments are a weak antidote, if insurance is to retain its value as financial protection. For example, assuming linear demand, if patients have insurance with a 50 percent co-insurance rate, then firms would charge drug prices twice as high as if patients were uninsured. To counteract this supplier moral hazard that applies to all insured health services, including drugs, both private and public insurers limit the prices that they will pay for all insured health services. Private sector pharmacy benefit managers (PBMs) in the United States negotiate price discounts as a condition of preferred formulary status. Public payers in other countries limit either the price the firm may charge or the amount the public payer will reimburse, or both. The fact that a firm may launch an approved drug without price approval if it is unreimbursed confirms that price regulation of drugs is best viewed as a response to insurance. Drug price regulation differs across countries and is multidimensional in its structure and effects, making generalization hazardous. For example, some countries include a limit on aggregate annual drug spending, with a reduction in prices to offset any overshooting of target volume. Depending on the specifics of a drug price regulatory scheme, it may affect drug prices, availability, utilization, R and D level and location, and factor productivity.

The competitiveness of the pharmaceutical market

There are many competitors in a pharmaceutical industry. It causes the unstable rather eccentric fluctuations in the prices of the drugs that are used to manufacture various types of medicines. These help the companies with higher market capitalization to quench on these drugs and hence supply more medicines with more economical value to the open market. This could disturb the market neutralization of a particular industry and hence could help in describing who dominates in a particular industry.

The various substitutes and complements available in the market

As the medicinal industry is one of kind, the substitute of it as in a whole is a bit difficult task to locate. But there are various substitutes to various drugs which have low financial value in the raw market and hence could be proved profitable to these firms when they being sold to the common public in the open market. Also, there are various products available in the raw market that could enhance the durability and time period of a particular drug or a prescribed medicine. These complements increase the time period or expiry of a particular medicine hence hindering the opportunity cost to a particular firm and increasing it net income.

The formulation of a particular market strategy for pharmaceutical industry

There are different types of companies in a same sector that could have different type of approach towards the market. They could have different type of business, financial, capital or corporate strategies implemented according to their own research. The industry’s framework could be derived by the porter five’s forces. There could also be a significant effect on the strategy of an industry based on the substitutes available in the market. The equity of a particular industry also gets affected if a competitor in that particular changes their strategy like for example, from an economical to a corporate one. Sometimes advertising could also be an integral factor in a company’s profit and loss statements.

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