Financial Analysis for Pharmaceutical Industry

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Background and Business Strategy Section

Major firms of the world pharmaceutical industry

Pharmaceutical industry is characterized by high level of concentration. There are about dozen of multinational companies that dominate in industry. Most of companies are not widely diversified and more than 50% of revenues come from sales of pharmaceutical products. There are few companies in industry that have other large sources of income, for example Johnson & Johnson. The pharmaceutical industry has two distinct functions: research and development (R&D), and manufacturing. The largest and best-known pharmaceutical firms do both functions while some small companies do either of them. Another remarkable characteristic of the pharmaceutical industry is its vast investment in R&D to keep product innovation. The high rates of innovation in pharmaceutical industry result from high rates of return on investment in R&D also conversely create the incentives necessary to conduct this research. Consumer is sensitive to drug prices. If generic substitute is available it creates high pressure on pricing of product. On other side company is able to charge high premium on patented unique drug. As a whole, the industry is highly competitive, but individual products are less so due to the number of products that are substitutes for one another is constraint by different therapeutic classes. What’s more, the threat of new entrants is not significant. As it was discussed above R&D requires large funding and to compete in generic drug production you need large start up capital to reach required economies of scale. Bigger companies can allow investments in more research and development projects that diversify their future drugs portfolio and make them much more stable. Pfizer: Pfizer is one of the world's leading research-based biomedical and pharmaceutical companies. Although Pfizer is in the intensive competitive pharmaceutical industry and there are...
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