Delimitation and Characteristics of the Pharmaceutical Industry

Report 1

“Delimitation and Characteristics of the Pharmaceutical Industry”

By:

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XXX

14th March 2007

Index

Introduction to the Report 3

Definitions 3

The Pharmaceutical Industry 3

Delimitation of the Industry 4

Characteristics of the Industry 5

Patents 5

Marketing 6

Structure-Conduct-Performance 7

Structure 7

Theory: 7

Case: Pharmaceutical Industry: 8

Conduct 9

Theory: 9

Case: Pharmaceutical Industry 10

Performance 10

Theory: 10

Case: Pharmaceutical Industry 11

Competition 11

Porters Five Force Model 11

Theory 11

Case: Pharmaceutical Industry 13

Final Remarks 14

References 15

Introduction to the Report

This report is the first of a series of three reports for the course Strategy, Design and Market (41085). The reports analyse a chosen industry with the use of theoretical tools, which will be covered throughout the course. This first report introduced the chosen industry in terms of its delimitations, structure, degree of product differentiation, entry barriers, and strategies.

Definitions

To begin with, the theory behind industrial economics will be introduced, so that a background can be set for this analysis. As opposed to organisations, markets use a price system as the co-ordinating device for exchange transactions. In an ideal market, price is the only deciding factor. The governing laws are those of “Demand and Supply”. These state that, “the total demand of a product will go up if the price goes down” and that “the supply will go up as the price goes up”. This is a very simplified form and the reality is much more complex. This is also due to the fact that the real world does not consist of ideal markets. Industrial economics studies the policies which are present within companies in regards to both their actual/potential competitors and their companies. As we will see, this adds a different perspective to the laws of Demand and Supply.

The Pharmaceutical Industry

The object of study is the pharmaceutical industry. The pharmaceutical companies which comprise this industry are commercial businesses which are licensed to research, develop, market and distribute medication in the context of healthcare.

The largest companies in the industry today were mostly started during the late 19th, early 20th century, where key medical discoveries such as insulin and penicillin were mass-manufactured and distributed. Their development continued throughout the 20th century and the pharmaceutical industry today is said to be the most profitable industry. It has been subject to many criticisms, which will be commented later on in the report.

The US and the UK are the most dominant countries in the industry but important companies are also to be found in Switzerland and France.

Delimitation of the Industry

The pharmaceutical industry covers the whole world in the sense that some few international companies control the industry and distribute their products all over the world. It is difficult to divide the companies geographical due to their “world coverage”. Here is a list of the top ten pharmaceutical companies according to sales for the year 2004.

Rank 2004 Company Country Revenue (million $) R&D

(million $) Net income/ loss (million $) Employees

1 Pfizer USA 52,516 7,684 11,361 115,000

2 Bristol-Myers Squibb USA 47,348 5,203 8,509 109,900

3 GlaxoSmithKline UK 37,318 5,204 7,886 100,619

4 Sanofi-Aventis France-Germany 31,615 4,927 6,526 96,439

5 Novartis Switzerland 28,247 4,207 5,767 81,392

6 Hoffmann-La Roche Switzerland 25,163 4,098 5,344 64,703

7 Merck & Co USA 22,939 4,010 5,813 62,600

8 AstraZeneca UK-Sweden 21,427 3,803 3,813 64,200

9 Abbott Laboratories USA 19,680 1,697 3,236 50,600

10 Johnson & Johnson USA 19,380 2,500 2,388 43,000

These companies sell different types of products. They are:

• Prescription medication: This medication can only be sold to the patient if a prescription has been written out to that specific patient by their doctor (either general practitioner or specialist).

• Non-prescription medication: This medication can be sold “over-the-counter” to patients without the need of a prescription. They are used to treat medical conditions which do not require a doctor’s care beforehand.

• Nutritional supplements, beauty-related products and alternative medicine: These products do not require prescriptions and can be purchased not only in pharmacies but also in different health/beauty stores. They have become more and more popular as people have become more and more health conscious.

Some companies might chose to develop and sell several of the types of products mentioned above whilst others might choose to concentrate