Case Study

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. Q-2: After 2002, the profitability of the industry, measured by ROIC, started to decline. Why do you think this occurred?

Ans: The pharmaceutical industry has been historically a profitable sector. Its rate of return on invested capital (ROIC) was comparatively high than others like computer hardware industry, grocers, electronic industry & so on. Although it was a lucrative sector, its profitability has been declining of late. Reasons behind this are given bellow: ? Customers have become more conscious about the side effect of medicine, hence they use herbal drugs: Since there are some side effects in certain medicines, people now a days use herbal drugs that are said to be free from side effects. Anti-American, Europe campaign: In 2003 during Iraq war there was a protest in using American product. ? Failure to innovate new drugs: We know it takes almost 10 to 15 years to introduce a new drug, during these long period parasites create a defense mechanism against older drugs making them ineffective so they gradually lose their market. ? Unable to match customers’ needs: Now a day’s customers need drugs that take action quickly. ? Patent expiration: Market leaders lose their market share as their patent expired. People have become resistant to those drugs that they have frequently used. Q-3: What are the prospects for the industry in the future? What are the opportunities? What are the threats? What must pharmaceutical firms do to exploit the opportunities & counter the threats? Ans: Prospects: With the passage of time pharmaceutical industry is expected to increase its profitability. The reasons behind this are as follows: ? Innovating new drugs as people’s average life span, demand for better life is increasing. Increasing research in medical science accelerated the chances of introducing new medicine. ? Increasing investment on biomedical research. Opportunities: ? New technology opens the door to introduce new drugs. using new technologies the firms can minimize the cost and thereby maximize profits. ? Drugs for many diseases like Alzheimer, Cancer, heart diseases, & AIDS

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are not invented yet. The pharmaceutical companies can invest in medical researches to invent new medicines to cure these diseases. ? Increasing demand for increasing population. ith the increasing population the demand for drug is also increasing. hence the profitibility will increase if the firms are able to increase their market share. ? From past history, it can be said that new diseases can be break out in future like Swine-flue, Anthrax, etc offering pharmaceutical company to introduce drugs to check those. Threats: ? Patent risk. After the patents are expired the companies face competition as competitors are now free to produce the patented drugs. ? Pressure from politicians to lower price. Polititians are looking for ways to limit health care costs.

They are inducing the pharmaceutical industry to decrease the price. ? Price control on prescribed drugs. ? Aggressive competition from generic drug companies faced by proprietary drug companies in their patent & pricing techniques, as a result losing market share to them. ? Drugs that harm one organ in perspective of curing another must pull off. ? People are considering herbal products more effective than medicine. As people are becoming more conscious about their health they now prefer natural ways to cure diseases rather than powerful medicines. Exploit opportunities: Has to invest more in advertising, sales promotion etc. Health campaigns can be created to increase awareness. ? Generating new ideas; killing pain in minutes. ? Using new technologies. ? Introducing drugs for intractable for medical condition. ? More investment in R & D will accelerate the invention of new drugs. Counter threats: ? Having new drugs in pipelines. When the patents are expired the company faces intensive competition. Hence they should be ready to face this competition with new drugs that can be patented after the old ones are expired. Try to increase the period of patent. Long term patents can eliminate the threats for a long time, allowing the firms huge time to develop a new drug. ? Creating a position on customers mind in a way that they can never thought of switching. The firms should strive for making loyal customers for its products. ? Developing new competitive advantage. With different competitive strategies the firm can hold its market share for a longer period. ? Create awareness through health campaign.

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