Porter’s Five Forces Analysis of Pharmaceutical Industry

New Entrants

Sustainment of pharma industry is based on their focus on Research and development unit. The cost associated with R&D unit setup and its functioning is very high. Along with this the strict rules and regulations from the government on approval of new drugs have to lead to creating a huge barrier in terms of high capital investment. Beside all these various other challenges such as drawing up of proper distribution strategies, selecting the right products to research and invest upon, anticipating competition among others are limiting the entry in pharma industry market.

Many pharma industries are moving toward a new business approach. This business approach takes off the costly burden of research and development, clinical trial and manufacturing of drugs. One of the major reasons for opting this approach has been the expiration of patents on a large number of drugs which is offering golden opportunities for lower cost generic manufacturer in terms of greater market access and low capital investment. Moreover, the government has increased its focus on improving the healthcare facilities, which has led to increase pressure on the authority to allow the early introduction of low-cost drugs in the market. This, in turn, has created a big opportunity for pharma companies with preapproved facilities and sound knowledge of regulatory issues. Therefore, the shift in business approach is responsible for the high threat from new entrant.

Suppliers

The bargaining power of suppliers in the market is very low. Pharma industry depends upon several organic chemicals. Pharma being a well-established industry has led to a number of suppliers limiting their power to influence price through bargaining. Pharma industry takes in accounts chemicals as a commodity which leads to high switching rate between suppliers without incurring a high cost. However, supplies can go for forward integration and become a pharma company. Companies such as Sahsun chemicals and Orchid chemicals are an example of such forward integrations.

Buyers

Buying a product depends upon two categories of people, one is the influencer and other is a buyer. In many industries both buyers and influencers are same, but in pharma industry end user of the product is different from the influencer. Buyers are the patients, family members, the PBAC (Pharmaceutical Benefits Advisory Committee), the PBPA, the finance departments, hospital boards, tender boards, chief pharmacist along with a range of other buyers, depending upon the specific business and the main influencers are the doctor prescribing the drug. Influencer plays a very important role as consumers have no choice but to buy what the doctor says. There is some situation in which the buyer poses a strong hold over the pricing. Situations like when there is a large volume purchase or when there are multiple suppliers of the same product or when they are knowledgeable and make demands based on this knowledge. In short, buyers can exercise power by seeking price reductions and threatening to go to other suppliers to get their products. Powerful buyers demand costly service. The government requires in-depth analyses that cost money, and consumers require up-to-date and relevant medical information – another costly service.

Substitute Products

Availability of substitute products in the pharma industry is one of its greatest advantages. Demand for pharma products continue and the industry thrives.

Pharma industry faces a huge competition in terms of substitute product as the creation of generic products is very cheap. Customers can find a substitute medicine in terms of generic drugs if the original product has an expired patent. However, if it is a new medicine customer don’t have a choice for an alternative. Over the few years, generic drug manufacturers face excellent opportunities for utilization and volume trends. Generic companies are increasingly focused on establishing global operations in order to achieve a lower-cost of supplies, thus posing even more threat to non-generic drug manufacturers.

Rivalry

Overall the pharma industry is highly competitive due to the potential for very high return if new drugs can be created.

The rivalry between various companies in the industry is caused as all the various companies want to improve their position in the market. The rivalry between the companies is in the form of price competition, advertising battles, and product introduction.

Competition between industries has been increased since the adoption of a new approach in the pharma sector which has to lead to a very low entry barrier. Rivalry can be intense if companies are scrambling for market share, but if the overall market is in growth or the position of the company is protected through patents, then the rivalry is likely to be less intense. Weak, small companies usually go out of business (bankruptcy) if they have no potential “blockbuster” in future pipeline. Others that have some significant research or valuable assets will be bought by big and strong pharmaceutical companies.