Team 4
Pharmaceutical ManufacturingJune 4, 2012
Qing Guo
Levi Marthis
Hillary Judd
Coleman Weiss
Phillip Warren
Executive Summary
The pharmaceutical industry develops, produces, and markets drugs licensed to use as medications. Within the industry they have an option to sell generic and/or brand medicines and medical devices to individuals who are in need.
To create this analysis of the pharmaceutical manufacturing industry, a compilation of many different types of data were required. The qualitative research sources that were identified provided a baseline for describing the industry and many of the challenges that companies in this industry face. A compilation of quantitative sources provided the necessary information about the financial undertakings that these companies must endure and how lucrative and profitable this industry can be.
The economic factor is arguably the most important factor in the pharmaceutical industry. Many companies are having a hard time developing new drugs for which to patent. This inability to earn a return on their R&D departments has led many companies to restructure their departments and to decrease funding. Instead many companies are finding it more beneficial to refocus their R&D into faster growing fields such as biotechnology. Biotechnology represents a lucrative investment because of difficulties to imitate and high cost that limit the amount of competitors available.
Macro natural environment affects the pharmaceutical industry from three major fields; geography, natural resources, and weather. These three factors keep to a certain extent, and keep a relationship that affects the pharmaceutical industry, but at the same time they also bring some great opportunities that allow the pharmaceutical industry to make more profits. Using Porter's Five Forces method to analyze the pharmaceutical industry helps to develop a sense of qualitative understanding. The threats of new entrants are low, increasing profits for existing companies. Bargaining power of buyers is also low because consumers usually do not have a choice of what is prescribed to them. The third force is rivalry among existing companies in the industry which is very high. Generic brands cause a high threat in substitutes which cause low profits for competitors. The financial force is bargaining power of suppliers and that is low because are various suppliers.
Table of Contents
Introduction.............................................................................................1
Industry Description................................................................................1
Research Methodology............................................................................3
Macro Environment.................................................................................4
Industry Analysis Framework...................................................................8
Summary of Findings.............................................................................10
Conclusion.............................................................................................10
References.............................................................................................11
Appendices............................................................................................12
IntroductionThe pharmaceutical industry represented more than $ 880 billion dollars of sales
globally in 2011, making it one of the largest industries in the world. According to Fortune 500,
the pharmaceutical industry has remained year after year the most profitable industry in the
U.S, reporting a profit of 18.5 cents for every $ 1 in sales. The industry is rapidly growing with
new drugs and treatments being developed yearly while still maintaining a necessary
commodity. This competitive nature has led to many companies trying to enter this lucrative
market and increased the importance of staying on the frontline of innovation. This report will
include an analysis of the macro and microenvironment of the pharmaceutical industry using
the Porter’s Five Forces model. The collection and analysis of data will identify the current state
of the industry along with its possible opportunities and threats.
Industry Description
Organic chemistry formed the basis of many products including drugs, petrochemicals,
and food. Organic chemistry also helped the pharmaceutical industry evolve during the 1800’s.
However, over the next century the industry really evolved with the introduction of new
technology and research. There is a lot of time and money that go into the research
development of a new drug in the pharmaceutical industry, and one of the industries that
changed the way of searching for new cures is the biotech industry.
With time and money today pharmacist can now mass screen, producing thousands of
pharmaceuticals, when at one time a researcher was lucky enough to synthesize a few new
chemical entities a year.
The discovery of the structure of DNA, by James D. Watson helps to tell what makes us
each an individual. This is important for pharmaceutical companies so they can alter products
to our genetic code (DNA). Some of the true leaders in the pharmaceutical area are from the
Native Indians who we learned the use of plants, herbs, and even tobacco. ("Pharmaceutical
industry overview," 2011)
Today, the pharmaceutical industry develops, produces, and markets drugs licensed for
use as medications. Industries can sell generic and/or brand medications and medical devices to
individuals that need them. They consist of establishments primarily in manufacturing biological
and medicinal products; processing, grading, grinding, and milling botanical drugs and herbs;
isolating active medicinal principals from botanical drugs and herbs; and manufacturing
pharmaceutical products intended for internal and external consumption in forms as ampoules,
tablets, capsules, vials, ointments, powders, solutions, and suspensions. ("32541 naics code,"
2012) Pharmaceutical manufacturers can produce synthetic and plant-derived (phytochemical)
preparations. The major portion of production is shared by seven countries—the USA, Japan,
the Federal Republic of Germany, Great Britain, France, Italy, and Switzerland ("Pharmaceutical
industry overview," 2011). The pharmaceutical industry has revenues reaching $266 billion as of
2010. Although, it is estimated that by 2015 the industry will be worth $347 billion. European
and Asia-Pacific markets are expected to grow to $260 billion by 2015, showing that the US is
the leading pharmaceutical manufacturer and seller.
The partnership of highly educated scientists at universities and private companies is
relied on with the drug development. The modern era of drug discovery and development
originated in the 19th century when scientists learned how to isolate and purify medicinal
compounds and developed large-scale manufacturing techniques. As the understanding of
biology and chemistry improved in the 20th century, drugs are now being extracted from plant
substances, while others are discovered and synthesized by techniques including combinatorial
chemistry (the rapid synthesis or the computer simulation of a large number of different but
often structurally related molecules or materials) ("Combinatorial chemistry," 2012) and
recombinant DNA technology (result from the use of laboratory methods [molecular cloning] to
bring together genetic material from many sources, creating sequences that would not
otherwise be found in biological organisms) ("Recombinant DNA," 2012). The pharmaceutical
industry has greatly aided medical progress, and many new drugs that have been discovered
and produced in industrial laboratories. Identifying new drug targets, attaining regulatory
approval, and refining drug discovery processes are among the challenges that the
pharmaceutical industry faces in controlling and eliminating disease. (Britannica Encyclopedia,
2008)
Research Methodology We will use a variety of research techniques. Most of our research will be secondary
research since we do not have a large amount of qualitative sources at our hands and since we
will do most of the quantitative research will be done when we select a company for our SWOT
analysis. We have identified a qualitative source that should give our group a different
perspective and an inside view of the pharmaceutical manufacturing industry; a family member
of Phil’s is a manager of Hollister Stier, a pharmaceutical manufacturing company. It is the
leading manufacturer of Allergenic antibiotics to North America.
We will draw the largest amount of our secondary research from credible websites.
Since pharmaceutical manufacturing is a competitive industry that moves extremely fast, much
of our research must be new to be relevant to the most current events. Using the Internet will
allow us to get up-to-date information on this industry. We will also draw some secondary data
from either ratings companies or individual firms for the economics portion of the macro
analysis.
We have prepared a questionnaire for the individual that works at Hollister Stier to be
able to get sufficient enough information to better grasp how the inner workings of this
industry thrives. A manager has data anywhere from the latest projects being worked on in the
lab to the company’s employment to the amount of production and revenue that the company
creates. Again this will not be our immediate focus since it is the entire industry that is under
examination and not just a single company. Since pharmaceutical manufacturing is a large
industry with a large amount of information available it will be a challenge to investigate and
find the data that will be most useful to our group.
Macro EnvironmentEconomic
In 2010, the U.S pharmaceutical industry experienced revenues over $267 million dollars
and an average annual growth rate of 4% between 2006 and 2010. Analyst now predict an
increase of annual growth from 4 to 5.5% or the market to increase to an estimated worth of $
347 million by 2015. With the U.S representing 36.2 % of the industry these statistics are an
accurate indicator of the global trend. (DATAMONITOR, 2011) The leading cause of these
projected statistics is the rapid growth of the emerging markets, led primarily by China. While
European and U.S industries struggle with debt crisis and austerity legislation, Asia is expected
to experience an annual growth of 8%, with China representing 28% of global sales by
2015(Standard & Poor’s, 2011). Meanwhile, in response to modest gains in the last few years
U.S and European companies have responded with cost reducing initiative and restructuring of
their marketing and R&D departments. While these changes have produced positive results in
2010 and 2011, the security of the big pharmaceutical companies is still at risk as the enter
what analyst are calling the, “patent cliff.”(Standard & Poor’s, 2011) By the end of 2011 -2012
six of the world’s largest selling drugs will lose their patent protection. Soon, popular drugs,
such as Celebrex and Plavix, will soon become available for generic drug companies to
manufacture and distribute leading to an estimated loss of $120 billion from 2011-2015.
(Standard & Poor’s, 2011) With R &D productivity relatively low in the last few years many
companies have moved to refocus their research departments in an attempt to over come the
looming patent cliff.
Technological
In response to the threat of increasing competition and declining profits we are
currently seeing a industry wide shift away from developed markets to more product
development inn newer and faster growing fields of medicine. Biotechnology has presented a
profitable opportunity for big companies with inventions such as human insulin and human
growth hormones. The complexity and costliness of biotechnical research ensures that it is not
beneficial for generic companies to attempt to replicate their products. Another growing tend
in the industry is the reinvestment of many companies into the development of orphan drugs.
Companies that develop orphan drugs receive major bonuses and tax exemptions from the
government. The orphan drug market itself is expected to expand from an $ 85 billion industry
to an 11.4 billion by 2014. (Standard & Poor’s, 2011) In 2011, the FDA approved thirty new
molecular entities. Of these 30, eleven where orphan drugs, seven were for the treatment of
cancer and, ten where biotech inventions. ( Standard & Poor’s, 2011) This statistic shows the
immediate shift transpiring within the pharmaceutical industry and what we can expect in the
next five years.
Environment
There are three major fields playing the key role: geography, natural resources and
weather. Every pharmaceutical manufactures or company will serious consider geography
when planning to build a plant. A good location can help pharmaceutical company reduce costs
and avoid lawsuits. If a pharmaceutical company builds a plant in a downwind district, it can be
affected by pollution from the upwind district. The same will be happening if the plant is
located downstream on a river. Pharmaceutical plants have strict requirements for geography
because the product they make will be related to human safety. An ideal location for
pharmaceutical industry should not have heavy pollution concentration: air pollution, water
pollution, and soil pollution. Desired locations are as far away as possible from coal steam-
electric plant, paper mill, railways, and any industrial that plant produce large amounts of
harmful gas and smoke, such as chemical plants, sewage treatment plant, and refuse processing
plant. All of these measures are necessary to ensure that pharmaceutical plants can produce
goods within an area free of environment pollution.
Another important geographical issue is transportation cost. Transportation expenses
of raw material and product will help determine how much profit the company can make. For
this reason, if a pharmaceutical plant is built where transportation is convenient and close to
the target market, the company can save lots of money on transportation cost. The resources
needed to supply the pharmaceutical industry are diverse. Small differentiation in medical
products creates a need for vastly different resources. For this issue, being close to the right
raw material origins influences the pharmaceutical industry
Since producing different drugs relies on a large source of different materials, the
availability natural resources is important in the pharmaceutical industry. Water is a necessary
natural resource for the pharmaceutical industry. Additionally, the water must be free of
pollutants. The pharmaceutical industry must guarantee the quality of the water that the
company uses in its production. Some pharmaceutical manufacturers might also require a
special kind of raw materials. For this reason, lots of pharmaceutical plants were built close to
the raw material producing area.
The weather affects the industry in two ways. First way they may affect people’s health.
For example, the weather changing between seasons, it can causes people to get such
sicknesses as the flu. During the usual yearly flu pandemic, the pharmaceutical industry will be
busy. Second, severe weather such as flood and drought will increase cost, delay the
production time and lower industry profits.
In general, the macro natural environment will affect the pharmaceutical industry.
Sometimes it will present opportunities to make profits, for example with H1N1 and bird flu.
Other times it will negatively affect the industry, such as environmental pollution.
Industry Analysis Framework
Threat of New Entrants
The threats of new entrants in the pharmaceutical industry are low. This industry is so
large and diversely spread across the world that small companies cannot enter with ease. The
research and development of new pharmaceutical products is the key to becoming a major
competitor in the industry. A company wishing to market its products must demonstrate that
its drugs are safe and effective, to the satisfaction of the national regulator and will need
significant up-front investments (Pharmaceuticals Industry Profile United States, page 18).
Although the threats of new entrants are low, patent expirations of pharmaceutical drugs are
always giving competitors a chance to produce generic products, creating decreased revenues
for competing companies.
Bargaining Power of Buyers
Consumers prescribed certain brands and types of medication by doctors typically do
not have a choice but to buy that drug at its particular price causing bargaining power of
buyers, consumers in this case, to be low. Brand name drugs are always more expensive, and
the consumer is unable to have an effect on the prices. “The ultimate source of funds for drug
purchases is in most cases a public- or private-sector health insurer or similar body. This
increases buyer power. Not only can such large purchasers exert monopsony market power,
but also it is very common for them to use one or more specific price control strategies
(Pharmaceuticals Industry Profile United States, page 14-15).”
Rivalry among Firms
“The US research-based pharmaceutical industry is dominated by several multinational
corporations, alongside smaller firms such as biotech players focused on a small number of new
products; generics companies are also present (Pharmaceuticals Industry Profile United States,
page 22).” In the pharmaceutical industry the rivalry among the market is very high.
Threat of Substitute Products
The generic brands of drugs have increased because of costs of name brand drugs. The
ability for customers to find generic brands is increasing because of the expiration of patents on
name brands drugs. “Manufacturers of generics can offer the same drug at a much lower price,
as they rely on the safety and efficacy data provided by the innovator product, and they
therefore do not have to conduct costly clinical trials (Pharmaceuticals Industry Profile United
States, page 20).” The threats of substitutes in the pharmaceutical industry are very high
because of different attributes of substitution.
Bargaining Power of Suppliers
Companies in the pharmaceutical market can purchase their raw materials from many
suppliers which helps to reduce their dependence on one particular company. “Over recent
years, larger pharmaceutical companies have turned to producing their own chemicals in a bid
to enhance profits, however smaller companies lack the resources required to do this and
remain reliant on active pharmaceutical ingredient manufacturers (Pharmaceuticals Industry
Profile United States, page 17).” The overall power of suppliers is medium.
Summary of FindingsThe Porter’s Five Force analysis shows aspects of the industry that are attractive and
repellent to customers, competitors, and investors. It is tough for new entrants in
pharmaceuticals to become a key player, generating even more profits for existing competitors.
Consumers have a low purchasing power, creating large profits for companies in the industry.
Rivalry among existing competitors is high which makes it tough for new companies to enter
the industry and gives companies the incentive to create new products. Patent expirations
create a high threat for substitute products at lower prices. The last of the Porter’s Five Forces,
bargaining power of suppliers, is low because of heavy driving force of large pharmaceutical
companies.
ConclusionTechnological advances have helped the pharmaceutical industry manufacture,
research, and develop new products. The modern era of drug discovery and development
allowed scientists to manufacture more efficiently and at a larger scale. These advancements
have helped the pharmaceutical industry to become highly competitive. Also, patent expiration
of brand name drugs has allowed small companies to produce generic drugs for inexpensive
prices. As well as geological location and natural resources which intertwine to help determine
prices. The pharmaceutical manufacturing industry is a highly competitive fast moving
organization that must quickly adapt to changes both in the market and the environment while
still maintaining innovation and efficiency to remain one of the most profitable industries.
References
Pharmaceuticals Industry Profile: the United States. (2011). Pharmaceuticals Industry Profile
United States, 1-46.
Standard & Poor's. (2012). Standard & poor's iq. Retrieved from
http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndust
rySurvey.do?code=hep
U.S Census Bureau. (2011, May 03). United states census bureau. Retrieved from
http://www.census.gov/econ/industry/products/p325412.htm
Pharmaceutical Industry. (n.d.) Britannica Concise Encyclopedia. (1994-2008). Retrieved June 3
2012 from http://encyclopedia2.thefreedictionary.com/Pharmaceutical+Industry
Corporation. (n.d.). Water Technologies for the Pharmaceutical Industry. Pharmaceutical
Capabilties . Retrieved May 26, 2012, from
www.water.siemens.com/SiteCollectionDocuments/Industries/Biopharmaceutical/
Brochures/Pharma_Capabilities.pdf
32541 naics code - pharmaceutical and medicine manufacturing. (2012). Retrieved
from http://naics-code-lookup.findthedata.org/l/510/Pharmaceutical-and-Medicine-
Manufacturing
Appendices
ReportLinker. (2010). Reportlinker. Retrieved from http://www.reportlinker.com/ci02257/Pharmaceutical.html
GBI Research. (2012, June 04). Contact pharma. Retrieved from http://www.contractpharma.com/issues/2012-06/view_features/oral-drug-delivery-market-report/