The global pharmaceutical industry

SWOT
Strengths
High entry barriers Strong R&D departments Inelastic demand

Weaknesses
Most growth over the past decade has been in volume rather than new drugs

Opportunities
Biotechnology gives scope for new drug lines

Threats
Public opinion regarding profiteering in life saving drugs Expiry of patents allowing generic drugs to enter the market

5 Forces
Existing Competitors
Threat Level: Low Each product is protected by patents and introduction of a competing product would require a long period of R & D as well as a lengthy process for obtaining government approval. At the same time, this also means that no business can easily increase its market share.

Substitutes
Threat Level: High There is significant public opinion against making profits off potentially life saving drugs. This could lead to permission for generic drugs at competitive prices, by removing patent protection, leading to a huge loss of market share.

New Entrants
Threat Level: Low There are huge entry barriers as no competitor can enter the market without a new product, thanks to patents on existing drugs. There is a great deal of attrition in the R&D stage, with only a small fraction of potential drugs ever making it past the testing stage. These are then stringently tested by governments before being allowed to enter the market. On average, it takes over 11 years for a new drug to enter the market from patent application. Conversely, due to the huge initial outlay, potentials that fail to enter the market prefer to sell off their assets to existing businesses rather than to simply close shop.

Suppliers
Threat Level: Low Most active ingredients are produced by the companies themselves or by subsidiaries under strict guidelines. Other ingredients are commodities purchased from the wholesale market.

Buyers
Threat Level: High There is strong public opinion against profit making off life saving drugs. Governments in some countries assist in healthcare by supplying such drugs at reduced cost or for free. As a result, other than OTC drugs, the major potential profit making drugs have essentially only one buyer, the government, who can simply take over the ownership in the public interest by cancelling the patent.

Double Helix
The pharmaceutical industry started as small chemical research firms, (each with minor market share) that later grew and merged to dominate the global market. Due to the monolithic structure of the final products, the integration effect has dominated so far, with companies choosing to merge and grow in order to reduce costs.

Share within Global Retail

Pfizer, 10.30% GlaxoSmithKline, 7.00% Pfizer GlaxoSmithKline Merck, 5.00% Johnson & Johnson, 4.60% All Others*, 54.20% AstraZeneca, 4.50% Novartis, 4.10% Aventis, 3.60% Bristol-Myers Squibb, 3.60% Merck Johnson & Johnson AstraZeneca Novartis Aventis Bristol-Myers Squibb Roche All Others*

*individual shares negligible

Roche, 3.10%

The scenarios in 2002 and 2011 are shown above. The same companies dominate in both cases, but in 2011, the market share is reduced due to the entry of small biotech companies. Going by past trends in the industry, many of these will be acquired by the existing giants dominating the market. While we may also see some of the major 2011 units in order (%) corporations splitting off someMkt Share to concentrate on others, given that the major entry barrier to the market is patents held by these companies, this is extremely Pfizer unlikely, as the spinoffs would have to compete against cheaper generic versions, Novartis Pfizer, 6.6% once the patent expires. At that point, it would Novartis, 6.0% be more cost effective to probably Merck & Co Sanofi close them down. Merck & Co, 4.7%
As trazeneca Roche GlaxoSm ithKline Johns on & Johns on Abbott Teva Lilly Takeda Bris tol-Myers Squibb Bayer Schering Pharm a Am gen All Others * Sanofi, 4.6% All Others *, 46.2% As trazeneca 4.3% , Roche, 4.0% GlaxoSm ithKline, 4.0% Johns on & Johns on, 3.2% Am gen, 1.9% Bayer Schering Pharm a, 1.9% Abbott, 3.0% Teva, 2.8% Lilly, 2.8% Takeda, 2.1%

*individual shares negligible

Bris tol-Myers Squibb, 1.9%

Data from http://www.abpi.org.uk