Case Study

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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.


➢ 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 are not invented yet. The pharmaceutical companies can...
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