The Global Pharmaceutical

Industry
Robert Hinge

Undertake a PESTEL analysis to identify the key forces of

change in the global pharmaceutical industry as depicted in
the case. What have been the key problems recently
affecting leading drug companies like AstraZeneca?
PESTEL is an analytical framework or tool used to analyse and monitor key
macro-environmental factors impacting an industry or organization: (Political;
Economical; Social; Technological; Environmental; Legal)
This analytical tool can be used to ascertain the attractiveness of a certain
industry or may be used as a strategic planning tool for organisations firms
are able to:
-

Ascertain current maco-enviornmental factors affecting the

organisation
Identify and analyse external factors which may change in the future
To create a strategy to exploit these changes or defend against them

The industry that this framework is to be applied to is the global

pharmaceutical industry which is responsible for the development, production
and marketing of medications worldwide. It is a huge and growing industry
with attractive attributes and a combined global revenue of nearly $1 Tn
dollars the equivalent to the GDP of Mexico or Spain

olitical drivers of change refers to the level of government

intervention within an industry . Due to the nature of the
pharmaceutical industry synergistically aligning with the
governments agenda of protecting its electorate, the resultant effect
is an unusually high level of government intervention and monopsonistic
power.
A monopsony refers to a situation when there is one major buyer in a market
and many sellers. Due to government intervention and pharmaceutical
spending often falling into the remit of the public sector governments are
often the largest force of change within this industry. This is illustrated by the
extensive changes to pharmaceutical regulations and legislation following the
thalidomide epidemic in the 1970s. This illustrates the huge power that the
government and political sphere has over the industry.
This shift in regulations and legislation has left a situation whereby
80% of pharmaceutical products fail to recoup their initial R&D investment

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and products take, on average, 10-15 years to reach market from NCE (new
chemical entity) declaration stage.
In addition to this, governments will often alter levels of spending based on
current attitudes and the state of the economy. As such, many governments
have targeted the pharmaceutical industry as a politically easy target to
control rising public sector costs: many have introduced price of
reimbursement controls. The pharmaceutical industry lacks the political or
public support to resist these changes. This creates a degree of uncertainty
within the industry and puts a large portion of its revenues (80%) in the remit
of government.
Another way by which the importance of government intervention is
illustrated is by the huge increase in parallel trade in recent years: reaching
$5.1Bn by 2010. This is due to mediators in the free market purchasing
pharmaceuticals in low priced countries and distributing them in countries
where they will fetch a higher price, circumnavigating any price controls in
place.

conomic drivers of change refers to any changes in the macro

(exchange rates, GDP) or micro (disposable incomes, how they are
spent) economy and the impact that these have on the
pharmaceutical sector.

One of the key drivers for change within this sphere is the GDP of the country
in question. The article states that pharmaceutical market growth is strongly
aligned with GDP growth this is because of the aforementioned reason
regarding government spending. A positive GDP growth rate injects more
confidence into an economy resulting in higher allocation of spending to
areas such as the public health sector and pharmaceutical spending. A low or
negative GDP growth rate will result in cuts in these areas to save money
There are two major examples that illustrate the tight link between GDP
growth rates and pharmaceutical industry growth rates: USA: growth
collapsed in 2010 due to patent expiries, fewer new products but most
importantly reduced consumer demand following the global recession in
2008; and Japan: the second largest pharmaceutical market in the world
collapsed in 2011, largely due to tax revenues falling following the global
recession coupled with treating the worlds most rapidly ageing population
(over 65s consume 4x more medicine)
The main link between the economy and the pharmaceutical industry is more
specifically between GDP growth rates and government public sector
spending.

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ocial drivers of change refer to shared beliefs and attitudes of the

population and include such attributes as population growth, age
density, career attitudes etc. Such variables as age density and
population growth can put significant pressure on pharmaceutical
industries.
Ageing populations can exhibit a large amount of pressure on pharmaceutical
industries as over 65s typically consume 4 times as much medicine than
under 65s. This issue is hugely prevalent in Japan which holds the most
rapidly ageing population in the world. Price controls limited market growth to
an average of below 4% between 2007-2011 and it is predicted to be
contractionary from 2012-2017.
Another hugely prevalent issue which is putting pressure on the
pharmaceutical industry is the huge rise in chronic illnesses in recent years.
Namely, diabetes, which is the nations fastest growing disease, closely linked
with rapidly rising obesity rates across the nation. Epidemics such as these
create unsustainable situations whereby universal coverage systems such as
that in the UK were/are unable to keep up with consumer requirements. This
forces the government to control supply-side and demand-side spending.

echnology has been instrumental in shaping the current face of the

pharmaceutical industry and integral in providing a platform for
recording and safely providing the huge array and variety of
medications and pharmaceuticals on offer today.

Technology refers to new ways of producing, distributing, or communicating

information surrounding and related to the pharmaceutical industry.
Technological developments have provided a platform and database for
medicines to be safely documented, regulated and tested. Following the
thalidomide epidemic in the 1970s tests are now carried out regarding
efficacy, tolerability, stability etc with information being stored on an online
database.
The rise of the internet has possibly been the most instrumental development
in the last century, not only in the pharmaceutical industry, but in the world.
This has provided a platform for information to be shared by anyone and
everyone across the world who has access to the WWW (world wide web).
It has created an all-encompassing online encyclopaedia for almost
any academic discipline and has disintegrated the barrier of asymmetric
information between practitioner and consumer. This has created an
important shift in the pharmaceutical industry away from the state of affairs
such as in the 19th century - where power was in the hands of medical
practitioners and the purchasers (the government) and the consumers (you
or I) had very little information regarding the subject matter and had to trust
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in the professionals knowledge, leading to issues surrounding amoral

motivations for selling specific medicines.
Technological developments have also lead to a situation whereby consumers
are able to request such things as real world evidence for medications and
not just statistics from clinical trials which many believe may be
unrepresentative of the wider population. It also provides a platform where by
this information is checkable and verifiable.

nvironmental aspects refers to any development of issues

surrounding or relating to ecological aspects of the pharmaceutical
industry. The environment has become an ever-more pressing issue
and every company and person is affected by ecological issues in one
way or another. Or more importantly, the environment is affected by every
company and person!
Although the article does not note many prudent issues surrounding
ecological problems, each company, and indeed the industry as a whole has
a collective social responsibility to minimise damage to the environment. In
lake Michigan, the most common drug that is found in specimens of the water
is metformin (a diabetes drug) which has leached into the lake through
various means. This is a common problem:

A 2014 global review of pharmaceuticals in the environment,

commissioned by Germanys environment ministry, found
that of the 713 pharmaceuticals tested for, 631 were found
above their detection limits. They are found all over the world
in 71 countries across all of the United Nations five
regional groups[1]. They were found mainly in surface waters,
such as lakes and rivers, but also in groundwater, soil,
manure and even drinking water.
Pharmaceutical Journal. (2016). Pharmaceuticals in the environment: a growing problem. [online]
Available at: http://www.pharmaceutical-journal.com/news-andanalysis/features/pharmaceuticals-in-the-environment-a-growing-problem/20067898.article
[Accessed 4 Nov. 2016].

It is therefore prudent to suggest that issues such as this will shape future
developments surrounding ecological safety with respect to the
pharmaceutical industry.

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egislative changes in the pharmaceutical industry are closely linked

with the political sphere. The government will decide certain policies
to enact and then they will pass legislation in the house of Commons /
Lords in the UK or the house of Representatives and the Senate in the

US.

The most prevalent force for legislative change within the pharmaceutical
industry in the last 50 years was the enactment of the patents act 1977. This
put a fixed expiration of patents filed for NCEs of 20 years (dependable based
on classification of the drug). This time period began from the moment of
NCE declaration, and once expired, the active ingredients of the drug can be
manufactured and distributed by any other generic manufacturer.
This has created a bleak outlook for pharmaceutical companies across
the nation: faced with a patent cliff, rising R&D costs, and huge lead in
times for NCE development the industry is left with a less than incentivising
motivation to continue the search for new and beneficial medicines.
Given the nature of the industry and the monopsonistic power of the
government it would be prudent to suggest that the political and legislative
sphere have been the strongest force of change within the industry: with the
power to reshape the entire face of the industry through minor legislative
changes and more stringent regulations, the political sphere remains
intrinsically linked with the pharmaceutical industry; closely followed by
developments within the technological industry.
Key developments in the aforementioned spheres have created significant
issues for large pharmaceutical companies such as Pfizer, AstraZeneca and
Novartis. Companies are facing what is being coined as a 'patent cliff
whereby previously exclusive products are nearing the end of their patented
life, allowing for generic companies to begin manufacturing drugs with the
same active ingredient and snap up market share.
This is best illustrated by the fact that the top 10 pharmaceutical
companies were projected to lose over $100 billion in sales from 2013 to
2018 due to generic erosion, with nearly $70 billion to be borne by Pfizer
alone. When this hugely prevalent issue is combined with rising R&D costs,
increased lead-in times for NCE development, a barren pipeline of NPD and
the market becoming increasingly more saturated it is clear that top
pharmaceutical companies are fraught with significant issues, rendering the
market unattractive for new entrants.

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Briefly identify the main sectors and key competitors making

up the global pharmaceutical industry. Using Porters five
forces model, analyse the industrys competitive structure
The global pharmaceutical industry can be broadly categorised into the
following groups:
Branded medicines these are pharmaceuticals of which a company or
person owns the IP (intellectual property), giving them exclusivity to
manufacture and distribute said drug until the patent expires (20 years after
NCE declaration). An example of branded medication is Viagra (active
ingredient: Sildenafil Citrate)
Generic medicines These are medicines that contain the exact same
active ingredients as its branded variant yet it may not use the brands name.
These drugs are typically 60% cheaper than their branded variants
Branded generics these are brands which have lost patent protection for
specific drugs yet continue to produce them, alongside generic versions,
giving the added value that the drug has come from a trusted brand and has
been manufactured in safe conditions.

Ethical Medicines these are medicines which can only be obtained with a
prescription from a qualified medical practitioner
OTC medicines Over-the-counter medicines can be obtained without a
prescription
The key competitors which make up the global pharmaceutical market are:
Company

Country

Market Share

Pfizer

US

6.6%

GlaxoSmithKline

UK

6.0%

Novartis

CH

4.7%

Sanofi-Aventis

Fr

4.6%

AstraZeneca

UK

4.3%

Roche

CH

4.1%

Johnson & Johnson

US

4.0%

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Merck & Co

US

3.2%

Abbott

US

3.0%

Lilly

US

2.8%

Porters 5 forces model is an analytical framework or tool used to ascertain

the level of competition within an industry with respect to business strategy
development. It was developed by Michael Porter in 1979. The theory is
based on the concept that there are five forces which determine the
competitive intensity and attractiveness of a market:
1.
2.
3.
4.
5.

Supplier power
Buyer power
Competitive rivalry
Threat of substitutes
Threat of new entrants

Supplier power refers to the level of bargaining power of those companies

who supply raw materials to companies within the pharmaceutical industries.
In this case it would be chemical precursors. Large pharmaceutical companies
place a particular emphasis on supply chain management as small
disruptions may have disproportionate effects on supply and profits. In the
case of supplier power, it would be prudent to suggest that suppliers hold
little power in this industry. This is due to the ease of manufacturing many of
the chemical precursors that are used. Supplier bargaining power: low
Buyer power refers to the level of bargaining power that purchasers hold i.e.
how easy it is for buyers to drive prices down. This is driven by: the number
of buyers in the market, the importance of each individual buyer to the
organisation and the cost to the buyer of switching from one organisation to
another. Due to governments often holding monopsonistic power it would be
prudent to suggest that buyer power is high within the pharmaceutical
industry. With the ability to change regulations and legislation regarding the
supply and manufacturing of medications, the government remains a strong
force. In addition to this, there is a low opportunity cost of switching from one
organisation to another (providing that they are not seeking branded
medications, in which case the buyer would hold little power). Buyer power:
medium/high
Competitive rivalry refers to the fierceness of competition within the
market place this is often closely related to the number and capability of
competitors in the market. In the pharmaceutical industry a few key players
occupy a large chunk of the market with the top 10 companies holding 43.3%
of the total global market. The size of these key players make for fierce
competition. Fierce competitive rivalry has led to large company mergers

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such as Pfizer with Wyeth in 2009 or Glaxo Wellcome with SmithKline

Beecham in 2000. Competitive rivalry: high
Threat of substitutes refers to availability of alternate products which will
satisfy the same consumer wants and needs. Where close substitutes exist
consumers will switch to alternatives if there are increases in prices (they
hold elastic price elasticity of demand) This reduces the power of suppliers
and the attractiveness of the market. The pharmaceutical industry is varied in
its level of substitutes as it is largely dependent on whether the IP has
expired yet for the drug in question, allowing for generic manufacturers to
produce and sell alternatives. For example, Azilect (a parkinsons medication)
is patented and can only be manufactured and distributed by Teva because
of this there are not any close substitutes for this particular drug. Although
for drugs such as Nurofen which is now not protected under a patent,
consumers may seek out generic alternatives. In addition to this, consumers
are looking towards healthy alternatives such as nutraceuticals (produced by
Nestle) or homeopathic medicines. Threat of substitutes: varied
(medium)
Threat of new entrants refers to the potential risk and barriers to entry of
new companies entering the market place. High levels of new entrants erodes
profitability and can only be prevented through barriers to entry such as
patents, economies of scale, government policies etc. In the pharmaceutical
industry there is a relatively low threat of new entrants because of key
players dominating the market. There is also a high level of intellectual
property that is a deterrent for new companies to enter the market place. In
addition to this large companies will benefit from economies of scale
unbeknown to smaller companies trying to get a foot in the market;
conversely there is scope for new companies to fill gaps in the market
regarding the manufacturing of generic medications as major drug patents
expire: for example, between 2013 and 2017, more than $78 billion in annual
brand drug sales are at risk for losing patent protection. Threat of new
entrants: low/medium

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Fig 1.0 Radar graph illustrating weighting behind Porters 5 forces in the
pharmaceutical industry
From this we can ascertain that the industrys competitive structure is varied
and diverse: on one hand the market may seem very unattractive for new
entrants, if trying to take on key players in their home fields. Conversely, if
drug manufacturers wish to penetrate niche sections of the market such as
filling the $78 billion gap in the market due to patent expiries then the
market suddenly becomes much more attractive. Given the high levels of
costs associated with entering the market combined with huge R&D costs
with developing new drugs it would be prudent to suggest that the
attractiveness of entering the global pharmaceutical industry is low.

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REFERENCES
Anon, (2016). Branded drug expirations. [online] Available at:
http://www.centerlighthealthcare.org/images/uploads/Brand_Name_Drugs_with_Patent_
Expirations_2013_-_2017.pdf [Accessed 9 Nov. 2016].
Pharmaceutical Journal. (2016). Pharmaceuticals in the environment: a growing problem.
[online] Available at: http://www.pharmaceutical-journal.com/news-andanalysis/features/pharmaceuticals-in-the-environment-a-growingproblem/20067898.article [Accessed 4 Nov. 2016].
Porter, M. and Levison, J. (1980). Michael Porter. Cambridge (Northampton St.,
Cambridge CB3 OAQ): Kettle's Yard.
Topic Gateway Series. (2016). 1st ed. [ebook] Strategic analysis tools, p.All. Available at:
http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_strategic_analysis_t
ools_nov07.pdf.pdf [Accessed 6 Nov. 2016].
Uriona Maldonado, M., Dias, N. and Varvakis, G. (2016). Managing Innovation in Small
High-technology Firms: A Case Study in Brazil.

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