Pharmaceutical Industry Analysis

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Analysis of The Pharmaceutical Industry

Title: Analysis of The Pharmaceutical Industry. The pharmaceutical sector comprises of drug manufacturers, distributors and wholesale companies that handle the production of healthcare products. This industry largely focuses on medical as well as veterinary products, such as vitamins, biological compounds and other chemicals. Moreover, various diagnostic substance and devices are also included in the list of the products produced by these companies. The leading companies on the pharmaceutical sector are called as ‘Big Pharma’ that are responsible to generate almost fifty percent of the total revenue of this industry. The headquarters of these pharmaceutical leaders are mainly located in the west, however with the passage of time, the demand of medications is increasing in the third world countries consequently this drug manufacturing has become fifth most profitable industry in the world that is continuously growing. The following paper will illuminate various spheres of activities in this industry. It will be seen how these companies are surviving in a competitive environment and what it actually takes to become a pharmaceutical manufacturer.

Introduction

The pharmaceutical industry, as the name indicates is associated with the development, production and marketing of products that are intended to be used as medications. This industry comprises of various pharmaceutical companies that are legally allowed by the government of a country to deal in brand or generic medicines. There are various rules and regulations all over the world that are considered useful to ensure efficacy and safety during the marketing of pharmaceutical products as they are directly associated with the human life. This industry also largely relies on research and development activities and is the largest employer of scientists. Many new medicines are being developed in the world and with the discovery and identification of new drugs the future of pharmaceutical industry is becoming brighter (Michael, 2012).

The aim of this paper is to increase understanding about the global pharmaceutical industry and its role in the healthcare system of a country. It will also be seen how this industry contributes to the economy and what major players are there in the global pharmaceutical industry.

Background and History

The origin and development of pharmaceutical industry dates back to the early days when Greeks, Egyptians, Chinese and Indian people tried plant derived medicines. Morphine, codeine and pilocarpine are some primitive drugs. In 1940’s insulin, antibiotics and psychoactive medicines were brought into the market that received remarkable response from the users. The US first   introduced its food and drug administration act in 1906 and the UK drug regulatory rules were developed after World War I, since then these rules have faced various amendments regarding the marketing and distribution of drugs in these countries. Despite various conflicts between retailers, marketers, consumers and drug inspectors, this industry quickly thrived all over the world (Anderson, 2005).

Literature Review

Henske 2009 sheds light on the current situation of the pharmaceutical industry. He demonstrates that this industry is passing through some major structural changes. A lot of mergers, acquisitions (M&A) are underway in order to ascertain stability and success in the long run. Some major pharmaceutical companies are trying to generate higher revenues with these M&As. Although, bigger size of a company is not the sole reasons for its success but even then some important advantages can be achieved with such joint ventures, because bigger drug manufacturing companies invest more in their research and development procedure that finally allow them to diversify their portfolio (Henske, 2009).

For Instance, in 2003 a prominent acquisition took place between Pfizer and Pharmacia soon after which Guidant bought Johnson & Johnson in $25 billion. These acquisitions greatly helped both of the newly developed companies to enhance their market share in the US market. These companies further elaborated their research and development process.

These joint ventures are also not very uncommon in the UK, for example major companies in various states of the UK have developed after mergers and acquisition amongst two or more than two companies. For example:

  • Merger between SmithKline Beecham and GlaxoWellcome results in GlaxoSmithKline
  • Merger between Aventis and Sanoffi Synthelabo creates Sanoffi Aventis

Grieder undergoes the analysis of the major pharmaceutical players and shows that these are not diversified rather major source of revenue generation for these companies is their pharmaceutical products. Although some companies, such as Johnson and Johnson’s is involved in the production of other goods as well but in majority of the cases pharmaceutical industries have their focus on the manufacturing of consumer’s healthcare products and nutritional products (Grieder, 2007).

Statistical Analysis

Grieder 2007 demonstrates that there are some major players in the pharmaceutical manufacturing that actually dominate this industry globally. Following table shows the position of these industries in terms of sale and revenue generation. The financial data has been gathered from the annual reports of these companies to ease accurate comparison between all these companies; moreover, the data related to pharmaceutical manufacturers working outside the US has been converted into dollars using average currency rates in 2004.

Company Name Headquarter Annual Revenue Total Sales
Johnson and Johnson US                           22,190                              47,230
GlaxoSmithKline US                           23,434                              37,897
Pfizer US                           46,133                              52,506
Sanofi Aventis France                           17,861                              18,711
Novartis Switzerland                           18,497                              28,244
AstraZeneca UK                           21,426                              21,426
Abbott U.S.                           13,600                              19,680
Wyeth U.S.                           13,965                              17,684
Bayer Germany                             5,458                              37,013

Table courtesy: (Grieder, 2007).

The above data also reveals that the headquarters of major pharmaceutical companies lie in the US or other Western countries, such as France and Germany. Only a few international drug manufactures are there in Asia (Grieder, 2007). Following chart shows how these companies rely largely on Western markets for maximum profit generation.

Research and Development

Research and development activities are essential for the success of pharmaceutical companies and major players in this area put great focus on the development of new products. This phenomenon is not very simple because it needs a lot of hard work and investment from Big Pharma companies. Sometimes research process involving one or two drugs needs many years, moreover the investment of resources remains unclear until the end of the process that also involves the approval of newly synthesized drug for marketing, therefore, it can be said that rate of success is highly unpredictable in the pharmaceutical industry (Noack, 2007).

According to a report, it takes almost fifteen to twenty years for a company to develop a new pharmaceutical product and only one out of thousands of pharmaceutical products discovered by research teams become medically useful. Moreover, the introduction of these products into the market involves many legal issues (National Science Foundation, 2001).

Growth Perspectives

The drug manufacturing industry promises appropriate healthcare for the citizens of a country and in turn, these people directly or indirectly aid in the growth and development of pharmaceutical industry. The life expectancy is increasing in some developed countries of the world after which the population of these countries is becoming older and grayer. All these elderly people are buyers of life maintaining drugs and continuously demand the healthcare products sold by these Big Phrama companies.

Along with that, some countries of the world including various states of the US are going to introduce their new drug sale act (Drug improvement and modernization act) after which elderly people of these states will be able to have their access to some medicines that were previously unavailable for them. As a result their drug coverage will increase and the sale of relevant pharmaceutical products will also enhance (Aronovitz, 2005).

Situation in developing countries

The above literature review suggests that major pharmaceutical companies have their headquarters in developed countries of the world, but recently some pharmaceutical companies in developing countries have also shown prominent improvements in their research and development activities, after which it can be said that these companies have significant potential for future growth. Increasing solvency of population in Asian, South American and East European economies is making these countries very attractive for investment. However, further reformations in the rules and regulations regarding drug sale and patent protection are required in order to ensure safe and trial free business (Blumberg, 1999).

Pharmaceutical Industry
Pharmaceutical Industry

Despite being an attractive business, the pharmaceutical sector needs a lot of efforts from individuals who are involved in it. Opportunities are limitless but issues are also there that should be taken into account by the management before planning final strategies of their companies. In this regard the management needs to consider some key challenges that are there for them before taking the plunge into this sector, these challenges will be discussed one by one the following paragraphs:

Price Control Issue

The pharmaceutical sector needs to work in a highly regulated culture, although details are different but this culture is almost same all over the world. One important aspect of these rules is price control issue. For example in the U.S. Medication Protection and Modernization Act has resulted in severe price reduction pressure over this industry after which it becomes difficult for companies to support their research and development activities. This downwards pressure on prices is also very prominent in other countries such as Japan, France and Germany. Drug prices are subjected to strict review and they are solely controlled by the government (Lott, 2007).

Competition

The pharmaceutical industry currently operates in a very competitive environment. New rivals are merging for Big Pharma companies and this competition covers almost all segments of pharmaceutical marketing. Moreover, research oriented pharmaceutical companies also face severe competition from generic manufacturing companies. The price of generic manufacturers is much lower than that of their research oriented counterparts; finally they successfully achieve greater market shares (Roth, 2009).

Patent Protection

Research oriented companies can only be saved in a highly competitive environment by the introduction of patent protection rules and regulations because generic drug manufacturers start production of a patent protected analogue before a patent expires, consequently R&D companies face enormous financial loss.

Conclusion

The pharmaceutical industry has been an attractive business place for entrepreneurs and also for people involved in research and development activities, however, now the situation is changing fast. Immense competition is there for Maga Pharmas from generic manufactures and other healthcare companies that are involved in the production of pharmaceuticals. Therefore it must be stated that this industry sounds easy and attractive but must be difficult involving great risks. Companies that want to survive should keep a strong eye on the current market scenario in order to avoid loss and ensure maximum growth, moreover, mergers and acquisitions also turn out to be helpful for some companies because they augment their growth opportunities in the global pharmaceutical industry.

References

Anderson S., 2005, Making Medicines, Pharmaceutical Press.

Aronovitz G. L., 2005, Medicare Contracting Reform, DIANE Publishing.

Blumberg, 1999, Pharmaceutical Industry in developing countries, Conference Summary.

CPPR, Pharmaceutical Research centre, National science foundation.

Grieder K., 2007, Big Fix, Public Affairs.

Harper, 2002, Patent protection in pharmaceutical Industry, Forbes.com

Henske P., 2009, Mega Mergers cannot cure pharmaceutical industry, Business Week.

Lott R. J., 2007, Freedomnomics, Regnery Publications.

Michael J., 2012, The pharmaceutical industry, Michigan State University.

Noack A., 2007, Research and Development in pharmaceutical Industry, GRIN.

Roth T., 2009, Drug makers paying off to competitors, TPM Links.

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Steve Jones

My name is Steve Jones and I’m the creator and administrator of the dissertation topics blog. I’m a senior writer at study-aids.co.uk and hold a BA (hons) Business degree and MBA, I live in Birmingham (just moved here from London), I’m a keen writer, always glued to a book and have an interest in economics theory.

2 thoughts on “Pharmaceutical Industry Analysis”

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