Instructions for Industry Analysis:

Instructions for Industry Analysis:

•       Focus on the firm that sells the product you chose for your demand analysis

•       One or two paragraphs summarizing product

•       One or two paragraphs describing the firm’s background and general operations

•       Identify the firm’s market structure

–      Explain

–      Graph

•       Predict what will happen next to the firm in this market

–      Explain

–      Graph

Here is my paper:

In 2002, Botulinum Type A was introduced as a cosmetic procedure by Allergan as a means to paralyze the frown lines and reduce wrinkles around the eyes.  In addition to cosmetic procedures, Botox has been proven to help eliminate migraines and most recently has been approved to incontinence issues concerning the bladder.

Allergan started out as a specialty pharmacy and sold eye drops and nasal spray.  Over the past few decades, Allergan has expanded the business to include products in the following categories: medical aesthetics (Botox, Juvederm, and Latisse), medical dermatology, ophthalmic pharmaceuticals, urologics and neurosciences (Allergan, 2014). 

The medical aesthetics business has proven to be Allergan’s flagship and has made the name “Botox” as recognizable as Coca-Cola.  In the first quarter of 2011, sales increased 13.3% to 1.3 billion just for this product (CNN Money, 2011). Botox has proven to be recession proof because they were able to increase sales while other companies were struggling to make a profit.

Competitors such as Dysport made by Valeant Pharmaceuticals and Xeomin by MerzPharma Group only occupy 15% of the market.  Botox by Allergan maintains an 85% market share (BDlive. 2013).  Valeant is trying to acquire Allergan as I write this paper so the landscape could change. According to the reports I’ve read, this could be considered a hostile takeover (The Motley Fool, 2014). Johnson and Johnson had planned to release a similar product in 2015 but just recently stopped the project (Wall Street Journal, 2014).

Market Structure

Allergan is an oligopoly based on the following:

·         Large firm size.

·         Few competitors.

·         Similar products and differentiation of medical aesthetic products and other pharmaceuticals.

·         Few firms serving many customers.

·         High barriers to entry.

More specifically, Allergan is a Stackelberg oligopoly because a single firm (Allergan) chooses the output before all other firms choose their outputs. With 85% of the market share, Allergan is definitely the leader (BDlive, 2013). Since Allergan has such a dominant presence in this area, it would make sense for the competitors to produce less product.  This gives Allergan the ability to continue market dominance and earn profit.

As described previously, Allergan has very few competitors and one of the main barriers to entry in this market is their patent.  Botox is considered a biologic (not man-made) and contains a very small dose of the deadly Botulinum toxin. In order to try to replicate this product, a company must have vast resources available to them in research and development.  Allergan currently spends 16% of their total sales on research and development (CNN Money, 2011). This month Johnson and Johnson announced that they had stopped development of PruTox.  My guess is the research and development cost was too steep (Wall Street Journal, 2014).  Incidentally, Allergan continues to use Botox to find new ways to treat patients with different symptoms other than aesthetic uses.

Additionally, Allergan has been very successful in advertising their products and has a much higher budget for this type of promotion.  The company has name recognition and has developed a niche in the market. 

Below is a graph that indicates Allergan in the short run.

 

		Botox Sales – Allergan – Insert short run graph

 

Exhibit 1

In this graph, Allergan outputs and price are above average total cost which creates profit for the company.  In order to show positive profits, the ATC curve must lie under part of the demand curve. As the market leader, they have the first-mover advantage and can dictate the price.  A profit maximization strategy for a company is to set marginal cost equal to marginal revenue and this is illustrated above.  Any change in the marginal cost curve or marginal revenue curve will result in a change in price and quantity.  Consistently, sales for Allergan products have increased year after year (Allergan 2012 Annual Report, 2013).

Allergan in the Long Run

With the recent news of the pharmaceutical giant Valeant posing a hostile take-over of Allergan, the future seems uncertain.  The stock price has continued to increase and one might think it is tied to the possible take-over.  If Allergan can fight off the take-over, then their flagship product, Botox will continue to be the dominant product for years to come.  Since younger women have now jumped on the Botox band wagon, Allergan sales should stay steady and possibly increase. 

The barriers to entry including patent, research and development, and advertising will continue to make it difficult for other companies to compete.  In a sense, Allergan has a monopoly since they control 85% of the market (BDlive, 2013).  Their capacity for profit maximization is good to great in my opinion,