Analysis WITH THE Pharmaceutical Industry Economics Essay

The most significant definition of industry was given by Michael Porter in 1979: a "group of competitors producing substitutes that are close enough that the tendencies of any company affects each of the others either immediately or indirectly. " Later, Porter identified the term more exactly as "a group of companies offering products or services that are close substitutes for each other, that is, products or services that meet the same basic customers' needs. " This new explanation emphasizes the value of industry borders and industry's role as a market supplier or developer of goods and services, as distinguished from a market, defined as a consumer of goods and services.

Furthermore, inside every industry there are groups of companies that follow similar strategies, described by Michael S. Hunt in his unpublished 1972 Ph. D. dissertation as tactical groupings. Between these groupings there are differences in entry obstacles, bargaining electricity with potential buyers and suppliers and skills and resources. Tactical groups compete against each other within the industry therefore of these differences.

1. 2 Models to investigate the Industry and its own Environment

The books agrees that comprehension of the industry composition is vital to creating a firm's strategy and has a larger effect on the firm's performance than whether it is business-specific or corporate-parent. The comprehension of the composition requires analyses of the industry's life routine. In addition, it requires step-by-step politics, legal, technological, sociable and economical analyses as well as the five generating pushes of business, provided by Michael Porter. By utilizing these research techniques, additionally it is possible to assume changes in industry competition and profitability over time.

1. 2. 1 Industry Life Cycle Analysis

There are different phases through the development of a business. Every phases is seen as a a different conditions which make competition assumes different the form. Through studying the life circuit, the industry realizes its stake in the market and its affect on consumers. The industry life cycle model includes four different stages: introduction, progress, maturity and decrease.

The first phase, called launch, is characterized by a low demand, whereas prices are high as a consequence of firm's inability to understand economies of level. Because of this profits are low and loss are possible due to high amount of investments in new categories. Obstacles to accessibility are primary based on solutions and competencies. Strategy is focused mainly on R&D and creation, with the goal of boosting novelty and quality. Competition, seduced by the rising demand, try to replicate the new product.

In the second phase, growth, the utilization of the merchandise is expanded, demand grows, prices decline due to economies of range, barriers to accessibility are lower and the risk of new access is high. At this period the technology is usually not exclusive property of one or more organizations, and the principal a reaction to competition is marketing expenditure and initiatives; income are not very high because prices drop as competitors type in the market. There is a changeover period, or shakeout, between your second and the third phases. The shakeout involves finding and using all investment opportunities, because the market is near saturation and demand increases more slowly and gradually.

In the 3rd period, maturity, market expansion is low or nonexistent, and the emphasis shifts to attaining market share; demand is represented only by the substitution of products, investment in R&D lowers and there is little innovation. In this stage companies seek cost reductions, and competition is situated mostly on advertising and quality as a result of low differentiation between products. Big firms acquire smaller players, while some are obligated to exit. As the conseguence of high barrier to admittance, the threat of new entrants are low.

The last phase is drop, so called due to continued decline popular. Industries arrive at this stage for a variety of reasons. Included in these are a change in social conducts, demographic changes, international competition, technologies and increased customer knowledge. The buying process is based mainly on price somewhat than innovation. As a result, profit and income decrease, and the industry all together may be supplanted.

1. 2. 2 Infestations Analysis

The expression "PEST" means of several aspects that effect business activities at any given minute. An industry functions under Political, Economic, Social and Technological conditions. These conditions are identify and examined using the Infestation Analysis technique. Because of their independent effect on any industry, it is vital that each be considered individually.

The political facet of analysis encompasses various factors that affect business activities in a given country at several levels: national, subnational and supranational levels. These include trade procedures control imports, exports and international business lovers, government ownership of industry, frame of mind toward monopolies and competition and trade regulations. Hence, failure to consider these policies may cause loss of earnings due to fees or charges fees. Government stability is also very important, because it eradicates the potential risks associated with wars and conflicts. For an industry to thrive, political balance must be uncompromised; often, sales and business activities will be uncertain, and investors will eventually lose interest. The inner political issues in any country affect the operating of establishments. Politics predicated on race or religion may identify the course for certain industries, particularly if an industry falls short of politics goals. Elections and changes in authority also influence an industry's advantages and opportunities and thus should be considered during the examination. In addition to inner issues, international pressures and influences may have an effect on some industries, such as environmental degradation or product safe practices. Another factor is terrorism. Though unusual in many countries, poor or unpredictable governance may entice terrorist activities, vengeful or otherwise, which can have adverse effects on the companies operating in that country. Each one of these issues may affect industry and strong expansion and industry appeal from stakeholder's perspective.

The economic facet of evaluation includes many factors. The first factor to consider is the existing economic situation and developments in the united states in which the industry is based. Companies should please note inflation and economical decline so that whenever it comes to making an investment, they can don't be financially affected. Failure to do this results in an economically blind system that may cause the industry's immediate collapse. Another factor to consider in evaluation is taxation rates. When there are high taxation rates in a given country, price-based competition may affect a given industry in the international market. International monetary developments are also very important, because they identify forex rates, imports and exports. Other things to consider are consumer expenses and disposable income and, finally, legalities, including all trade legislation in confirmed country and other legal rules that inhibit or encourage extension of business activities. Also to be considered are consumer coverage laws, employment regulations, environmental protection laws and regulations and quality standardization laws. Industrial laws regulating competition, market guidelines and guidelines also play an important role in influencing industry's steadiness and future growth possibilities.

When taking into consideration the public aspect, factors including demographic changes, shifts in values and culture and changes in lifestyle are important to notice in order to strategize on extension and progress. Certain factors, such as mass media and communities, influence an industry's development and returns. Brand and commercial image are also very important in influencing expansion and returns since they shape customer commitment and shareholder investment. The media's views on certain industrial products should be designed into the research, as should consumer attitudes and sensibility to "green" issues, that is, conditions that affect the environment, energy intake and waste and its own removal. A company's information systems and internal and external communications should also be examined to ensure it keeps pace with its challengers. Other factors will be the plans regulating education, health insurance and syndication of income, which, over time, effect consumer use of products.

The technological aspect of analysis encompasses a variety of factors. In addition to developing technologies, all associated technologies, with their innovation potentials, velocity of change and adoption of new technology, should be analyzed for a proper evaluation of the industry. Other scientific factors are transportation, waste materials management and online business. The amount of expenses on R&D should also be considered in order to secure the industry's competitive position to avoid loss and collapse.

1. 2. 3 Porter's Five Competitive Forces Analysis

Porter's model, as detailed by Kay, can be an advancement of the Structure-Conduct-Performance paradigm conceived by Edward Mason at Harvard School in the 1930s and detailed by Scherer in the 1980s. , The model is designed to look for the power of industry competition, major issues in determining strategy and whether a business is of interest or not. Porter determined five competitive makes that action on a business and its own environment: threat of entry, depth of rivalry among existing competitors, risk of substitutes, bargaining electricity of clients and bargaining power of suppliers.

The first competitive power, threat of accessibility, identifies the threat of new entrants within an founded industry or acquisition to gain market share. Reactions of individuals and obstacles to access are the main factors used to establish whether the threat is high or low. Six major admittance barriers have been identified

capital required to compete on the market (especially in high-risk industry, such as advertising or R&D)

transitioning costs

gain access to to distribution channels

economies of scale

cost disadvantages unbiased of size, such as patents, access to know-how, access to limited resources, beneficial locations, federal subsidies or policies and learning or experience curves

product differentiation

expected retaliation from existing businesses contrary to the new entrants

Strong obstacles to the entry of new organizations allow a few firms to dominate the marketplace and thereby affect prices.

The second pressure is level of rivalry among existing rivals. Rivalry occurs when one or more firms in a industry make an effort to improve their position using practices such as price competition, new product release or new services. Rivalry depends upon several factors: amount and size of rivals, industry expansion, product characteristics (which determine whether the rivalry is based on price or differentiation), cost structure, exit barriers, diverse challengers, operative capacity and high tactical stakes. If an industry is inhibited, then firms will experience issues when endeavoring to expand. The progress of international competition and the corporate stakes should also be included in the analysis.

Threat of substitutes is the 3rd causes. Substitutes are those products produced by other companies but serving the same purposes as the original product. These replacement products cause the demand to drop. The implications are reduced revenue and reduced market command by the original capital investor. This is of particular importance when the customer has no transitioning costs and can simply compare products in conditions of price and efficiency.

Bargaining electricity of customers is the fourth pressure. High bargaining electric power positions weak companies inside the industry, forcing price down, boosting competition between industry players and leading to bargaining for top quality or services. This electricity is particularly high under certain conditions, such as few and specific clients, undifferentiated products, low switching costs, the possibility of backward integration and information about demand and the availability of selling price to the customers. Furthermore, bargaining vitality is high if product quality is not really a crucial factor of decision-making of course, if what the buyer is acquiring is a moderate small fraction of his total costs. Bargaining vitality is even higher when the customer is a merchant or a wholesaler in a position to effect the consumer's purchasing decision.

The fifth and last force is the bargaining power of suppliers. This can action on the industry in a number of ways: nurturing prices, minimizing quality or privileging some customers. Supplier power can be split into several elements. One of these elements is supplier focus. Suppliers are in a more powerful position whenever there are few suppliers, switching costs are high, the industry these are serving take into account a small small fraction of their business or their products are an important area of the buyer's business. The bargaining ability of suppliers is low or nonexistent when there are substitute products. Last but not least, purchase volume and the supplier's impact on cost are incredibly important.

2. Pharmaceutical Industry Analysis

A general summary of the pharmaceutical industry is the principal objective of this chapter. First, this chapther will establish the industry in order to identify the main players in the pharmaceutical market. Second, using the tools and models referred to in the first section, it'll highlight the main characteristics of the industry and the factors that influence it.

2. 1 Definition of Pharmaceutical Industry

The pharmaceutical industry is composed of companies developing, manufacturing and marketing products qualified for use as medications. Their goal is to avoid, diagnose or treat diseases. A medicinal product, also called a pharmaceutical, according to the EU, is an exogenous chemical or a combination of exogenous substances that may be organic and natural or inorganic, natural or artificial, and able, once inside the people or creature body, to modify physiological functions or even to make a medical medical diagnosis through physical, chemical substance or physicochemical action.

This industry is subdivided into two sub-industries characterized by different business models and players: prescription and OTC pharmaceuticals. Prescription pharmaceuticals, generally known as "Rx, " are medicines that are available to the consumers for sale in a pharmacy or medication store only with a prescription from your physician or given only in private hospitals. These medicines concentrate on specific diseases and, therefore, are recommended for and employed by one person only. OTC pharmaceuticals are instead used by several person which present the same symptoms in the same or in various time. These drugs are available to the consumer at whenever and the consumer don't need any prescription from your physician for purchase.

Furthermore, inside this industry there are two types of firms: Big Pharma and Biotech. Both of these types, despite being in the same business, change in a number of ways: IP, medication methodology, expenses and efficiency of R&D. The principal medicine R&D techniques utilized by Big Pharma organizations are chemoinformatics and in silico screenings. Biotech businesses are companies that use biotechnology in R&D. Biotechnology, according to the Firm for Economic Assistance and Development, is "the use of knowledge and technology to living microorganisms, as well as parts, products and models thereof, to alter living or nonliving materials for the development of knowledge, goods and services. " Generally, Biotech organizations generally have a strong academic culture, tend to be more risk treatment and spend not even half what Big Pharma spends on R&D; in 2004, Biotech companies spent $20 billion, versus $50 billion spent by Big Pharma. Generally, a Biotech product has multiple IP covering production, formulation and balance, as opposed to Big Pharma IP, which addresses only the product, allowing generics to be produced quickly. While they may appear to have the same phenotype, their genotypes are different, so much in order to be looked at two sectors, as explained by Arthur D. Levinson, Chairman and CEO of Genentech. Nevertheless, this distinction is not necessarily clear, as many Biotech and Big Pharma companies are hybrids to varying degrees.

The focus of the thesis are Big Pharma mixed up in development of prescription pharmaceuticals to treat and prevent real human diseases in the EU market.

2. 2 Evaluation of the Pharmaceutical Industry

The reason for this chapter is to provide a brief summary of the pharmaceutical industry lifecycle and check out the major force acting inside it.

2. 2. 1 Industry Lifecycle Analysis

People through the years have always tried out to find diseases causes and also to find remedies against it. The most satisfactory medical test, the Ebers Papyrus, is dated 1550 BC and it was compiled by Egyptians. However, the industrial development of drugs goes back to the entire year 1827 when Heinrich E Merck in Germany founded the first company for the production of cocaine and morphine. This event started the introduction period of the pharmaceutical industry in European countries. In European countries, this industry was created in various way, reflecting the different strategic groups inside it. Within the German-speaking countries, pharmaceutical companies were created as a branch of the chemical substance industry, with companies like Bayer and Hoechst in 1863, BASF in 1865 and Schering in 1871 in Germany, and CIBA in 1884 and Sandoz in 1886. Only Hoffman-La Roche in 1894 in Switzerland was originally a drug firm. Alternatively, in Italy, France and the united kingdom companies were created from small shop pharmacies, such as Glaxo which traces its roots to a pharmacy in Plough Courtroom in 1715. Through the 1800s many ingredients were already being isolated, but none of them was being synthetically produced. The first man-made medication was Phenacetin, produced by Bayer and commercialized in 1888. Ten years later Bayer commercialized Aspirin, which designated a milestone in the pharmaceutical industry. Many organizations rose to prominence in the 1920s-30s with these sorts of pharmaceuticals, but also with a fresh class of pharmaceuticals: vaccines and serums.

During the next World Warfare II the demand for drugs increased and mass development started, primarily with drugs such as antibiotics (penicillin, streptomycin and neomycin) and sulphonamide. The availability of these drugs drastically changed the quality and the average life-span of people. In this era the German pharmaceutical industry, a head along with the Swiss in pre-war times, was bought out by American firms who came up to Europe to taking benefit of the condition of the continent after the war.

The period 1950-60 was the beginning of the industry's growth phase, and this observed a proliferation of new drugs and high go back to drug finding. New drugs included tranquilizers such as MAO inhibitors in 1952, anti-tuberculosis drugs such as Isoniazid in 1952 and oral contraceptives in 1956. Other discoveries included Librium in 1960 and Valium in 1960. The latter was sold from 1963 and later became one of the most prescribed medicines in history before controversy surfaced over its connect to habituation and dependency.

In the 1950s, legislation was put in place to regulate the industry, mainly touching on labelling and authorization by health authorities as well as drawing distinctions between non-prescription and prescription medicines. In this apparently unstoppable procedure for pharmaceutical development and optimism the industry was stalled by the drama involving one drug sold in Europe and Japan, Thalidomide. This drug, synthesized in Germany in 1954, was launched to the market to treat the symptoms of morning hours sickness and nausea in women that are pregnant. Between 1954 and 1960, it induced around 5, 000 and 10, 000 severe deformities in babies. In fact, the drug was not sufficiently tested on animals to determine its safety, and after this revelation, in an attempt to better regulate the industry, drug oversight specialists were established to exercise control over the industry. THE GLOBE Medical Association fulfilled in Finland and given the Declaration of Helsinki, setting up the benchmarks for scientific research. Among other things, the declaration stated that pharmaceutical companies must prove the efficiency of a fresh drug in scientific trials before releasing it to the marketplace, and subject matter must consent to experiments done to check the effectiveness of drugs in scientific studies.

The industry continued to be small up to the later 1970s. Two events characterized the 1970s. First, chemical production for raw materials and early intermediates shifted out of European countries to low cost vacation spots such as India and China which later started producing dynamic pharmaceutical ingredients and finally non-patented pharmaceuticals. Second, there is the labor and birth of biotechnology. This new science had its roots many years before with the finding of the two times helix in 1953 by Watson and Crick, which adopted the improvements in molecular genetics, recombinant DNA technology, and molecular biology. Until then, drugs in commerce were produced by extraction from natural chemicals or substance synthesis. These new techniques of molecular biology proclaimed the beginning of a new industry which became a rival to and a substitute of the pharmaceutical industry. This new industry was pioneered by businesses like Genentech and Amgen which released groundbreaking drugs such as Epogen and recombinant individual insulin.

In the 1980s, legislation was passed in most Europe needing adherence to strong patents for both the pharmaceutical products and their creation processes. There have been also new laws including the introduction of the nice Clinical Practices, that have been guidelines regulating ethics and the dependability of professional medical studies. In Europe, several claims also initiated health maintenance organizations and supervised care in order to limit increasing medical costs, and a inclination for precautionary rather that curative medication required root.

As the industry moved into the 1990s, new discoveries and jobs, like the Human Genome Job 1990, changed the business enterprise environment. Also, there was a huge wave of M&A to develop on synergies. This included Ciba-Geigy and Sandoz forming Novartis, Hoechst and Roussel-Rhone Poulenc-Rorer forming Aventis and Glaxo Wellcome and SmithKline developing GlaxoSmithKline. In this way, the developing of pharmaceuticals had become concentrated in European Europe and THE UNITED STATES, with dominant businesses and some small companies that produced drugs in each country. The major Western european companies are still the dominating players not only in Europe but also in the global market. They include Novartis of Switzerland, Bayer of Germany, GlaxoSmithKline of the UK, Hoffman-la Roche of Switzerland and AstraZeneca of UK/Sweden.

As the Western european pharmaceutical industry joined the 21st century, indicators of the growth phase have grown to be even more obvious. It has been characterized by extreme marketing to health professionals and internet commerce. This, in part, has been facilitated by the liberalization of marketing rules requiring demonstration of risks as well as the advertising concept. Internet has enabled the direct purchase of recycleables by the manufacturers. The development of drugs has changed from the hit-and-miss method of research and prepared discovery. Alternative medications and lifestyle medications have provided new issues and opportunities and have raised the level of competition in the industry. The aging society in western European economies has increased opportunities for raising revenues. Actually, due to ageing population in the developed economies, drug consumption will increase since the aged have an increased rate of recurrence of contracting diseases than more youthful people. New epidemics, including the recent H1N1 flu outbreak, continue steadily to batter the globe people, and increased globalization makes them pass on more quickly than ever before.

As the industry innovations through the expansion period, companies are executing research and development initiatives both to develop new drugs and improve production functions. Further, the increased role of state-supported medical plans across Europe, and also other state-managed health programs across the world will greatly increase the reach of healthcare, increasing it to more of the center class and the indegent who constitute the larger area of the population in most countries. As the medical programs continue to gain efficacy, the sales of pharmaceutical firms are anticipated to grow. Furthermore, , the emerging economies like Brazil, Russia, India, China, Turkey, Mexico, and South Korea will add to potential consumer quantities in the industry for European manufacturers. Mutually, these countries constitute a huge percentuage of the world's inhabitants, meaning that their entry into the high income category will no doubt present a massive potential market for pharmaceutical products. In fact, the progress in these markets is likely to reach 14-17% by 2014, compared with only 3-6% growth in the developed markets. Thanks to agreements signed by the Asia-Pacific and European countries governments involving liberalization of the Asia-Pacific pharmaceuticals and ventures market, many companies have previously started to establish relationships with rising markets. An example is GlaxoSmithKline, who partnered in 2009 2009 with India's Dr. Reddy Laboratories. GlaxoSmithKline will distribute the drugs produced and given by Dr. Reddy in Africa, the Middle East, Asia-Pacific, and Latin America.

Even with these previous considerations, the Western pharmaceutical industry has only a limited chance of going into the maturity stage of the circuit. The barriers to accessibility are so great that they choke any new entrant in almost every facet of operation: in research and development, in product syndication, and in conformity with rules and regulations. In fact, this industry has sophisticated manufacturing capabilities that happen to be hard to reproduce, and are covered via patent, as well as huge consumer connection to preferred brands from specific companies, often enlightened by experience. Furthermore Europe general penetration is suprisingly low (less than 10% altogether). Thus the industry might stay in the growth phase for a considerable time.

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