Big Pharma

Q1: Drawing on the five forces model, explain why the pharmaceutical industry has historically been a very profitable industry.

Entry of potential competitors: It is not easy for a new company to enter into the pharmaceutical industry because:

➢? They have to invest lots of money in R&D, advertising and sales promotion.

➢? There are high costs & risks associated with developing a new drug & bringing it to market as out of every five thousand compounds tested in the laboratory by a drug company, only one of these ultimately make it to the market.

➢? They have to invest huge amount of capital which only very large companies can bear.

➢? There is a low success rate in pharmaceutical industry as in the last 20 years only two companies successfully enter the market.

Rivalry among existing companies:

➢? In Pharmaceutical industry there are only few companies that can pose strong competition. It’s easy to compete against few rather than more companies.

➢? Patent protected medicine allows practicing monopoly.

Bargaining power of buyer: Buyers bargaining power is low, because:

➢? Market leader enjoy monopoly pricing.

➢? Medicines are emergency drugs so they have to use.

Bargaining power of supplier: As the numbers of firms in the pharmaceutical industry are negligible the suppliers have less bargaining power. They have to satisfy the manufacturers and compete with other suppliers to remain in the industry.

Threat of substitutes:

➢? As most medicines are protected by patent law, competitors can produce drugs as effective as original one lowering the risk of better substitute.

➢ It is very costly to introduce a new drug.

Threat of entry: A number of barriers mute the threat of entry into the pharmaceutical industry. These include barriers both financial and intangible in nature, ranging from high fixed costs to stringent intellectual property protection.