essay

Students Name Essay # Date Driving Forces In The Pharma Industry

The pharmaceutical industry is capital and research intensive a great deal of resources

goes into producing these drugs and the pharma firms must recover their investment to remain a

viable entity. They have to contend with the bargaining power of its customers who appears to be

the dominant force in this industry. When we think of drugs, most Americans think they are

priced very high and as a consumer we don’t really have a much power in dictating the prices of

these drugs, however organizations such as the Medical Care Organizations(MCOs) can exert a

great deal of power over the pharma industry. With the MCOs buying 75% of drug products

produced in the US, pharmaceutical firms cannot charge excessively high price or MCOs might

look to other alternatives that are available in the industry. Furthermore, membership in the

organization is critical. If a particular drug is not included in the organization list of approved

drugs that firm will lose roughly 75% of its profits. We can think of the MCO as cartels that set

the market price and firms have to negotiate with the cartel if they want to raise their prices. The

cartel can effectively lower the firm’s profit by placing an embargo on the firm’s product.

Therefore the firm in the long run with high R&D cost cannot achieve sustainability without the

support of the customer. We should note that we are only analyzing the US pharma industry, and

the power of the customer might differ around the world, however the US has the most

expensive drug prices and therefore higher profits for the firms.

Let us now turn to the other forces in the industry and analyze their importance in the

pharma industry. While drug companies have to consider competition, the threat of new entrants

does not seem to be particular important in this industry. As previously stated the industry is

highly capital and research intensive, with these high cost new drug firms are less likely to enter

this type of market. Even though pharma firms have to contend with new generic manufacturers,

they can count on patent protection once their new drug is approved; even if the patent does not

Students Name Essay # Date Driving Forces In The Pharma Industry

an infinite life. Also the industry is highly regulated and the approval process take a long

duration of time which also ties back to requiring new firms to have lots of resources if it plans

to enter the market.

Another force is generic drugs; these are substitutes and pose a moderate threat the

industry. Lower R&D cost, and lower retail prices make generic drugs a viable substitute.

However, firms have devised ways to combat this threat such as legal recourses, patent extension

or rebranding. Firms can also produce generic drugs, in the industry to capture some of the

generic drug manufacturer’s market share.

Let’s us now turn to jockeying among the firms in the industry. Competition in the

market is evident through the extensive marketing carried out by these firms. In the US drug

commercials frequent TV spots, even more so in prime time when most Americans are home.

Even further they seem to create joint venture and engage in M&A to limit competition or

increase market share. While important, jockey for position does not seem to be the dominant

force in the industry. Alliances seem to be of more important in the industry.

The last force we will discuss is bargaining power of suppliers. In my opining this seems

to be the least importance force in the industry. Biotech firms that supply the industry formed

alliances with the pharma firms, and were in their infancy stages. They remained small with only

a few large enough to challenge the big firms. In the future we might see biotech posing a threat

in the industry but currently they are of little importance to the pharmaceutical firms.