Tuesday, March 25, 2008

Porter's Five Forces Analysis for the Pharmaceutical Industry

By Maria Gabriela Marin

Porter's Five Forces Model helps strategic business managers analyze the industry in which their companies operate to determine what can be done to get an advantage over their existing competitors and also to determine how attractive a particular industry would be for new entrants.

Porter's Five Forces are: 1) Threats of entry posed by new or potential competitors; 2) Degree of rivalry among existing firms; 3) Bargaining power of buyers; 4) Bargaining power of suppliers and 5) Closeness of substitute products.

Below is an anlysis of the Pharmaceutical Industry using the above named forces:

1. Threats of entry posed by new or potential competitor (LOW)

  • High entry barriers due to costs associated with research & development of new drugs (i.e. years of investment in R&D for a drug that may/may not work)
  • Government regulation (i.e. FDA)
  • The threat of entry posed by new or potential competitor is a LOW competitive force due to the above entry barriers & regulatory constraints.
2. Degree of rivalry among existing firms (HIGH)
High rivalry among main companies in the industry. For example the current rivalry in the erectile dysfunction space where Bayer & GlaxoSmithKline claim that Levitra works faster or Eli Lilly & ICOS claim that Cialis works longer than Pfizer’s Viagra
  • The degree of rivalry among existing firms is a HIGH competitive force
  • 3. Bargaining power of buyers (MEDIUM)

    • Hospitals & other health care organizations buy in bulk quantities and exert pressure on pharmaceutical companies to keep prices in check
    • Regular patients have lost bargaining power due to price increases in generic drugs
    • The bargaining power of buyers is a MEDIUM competitive force.

    4. Bargaining power of suppliers (LOW)

    • Sales for the pharmaceutical industry concentrate in a handful of large players and that has decreased the bargaining power of suppliers.
    • The bargaining power of suppliers is a LOW competitive force

    5. Closeness of substitute products (HIGH)

    • Demand for generic versus brand name drugs has increased because of the costs
    • Generic drug companies do not have the high costs associated with the research & development of new drugs and that allows them to sell at cheaper prices
    • The closeness of substitute products is a HIGH competitive force

    Overall and based on the above analysis of Porter’s Five Forces, we can conclude that the pharmaceutical industry is not attractive for new entrants.


    Haiqun Lu said...

    After reading your post of the Pharmaceutical Industry using the porter's analysis, I agree with you that the attractiveness of this industry is low, I think that the entry barrier of the high cost and time needed with R&D and government regulation is really the number one reason making this industry unattractive.

    Shumei Li said...

    I agree with your analysis of the pharmaceutical industry. There are many factors that are unfavorable to this industry. The high entry barriers is already a big obstacle that stops most of the people who want to get into this industry. Moreover, I also think this industry is risky and need lots of efforts to survive.

    Diana Sun said...

    Hi, Maria:
    I agree with your thorough analysis, however, I think pharmaceurical is an attactive industry to enter. Just as you analyzed, the costs of some drugs are low and the profits are high. For example, a drug only costs few cents, but pharmacy sells it for more than $50. It could be a very profitable business if you develop a good business plan. Overall, I like your analysis.

    Maria Gabriela Marin said...

    Thanks Diana for your comment on my analysis of the Pharmaceutical Industry.

    Although I agree that the profit margin for drugs is high, I still believe that the entry barriers are too high for new entrants for this industry in the US.

    Perhaps, it may be easier for a well established foreign pharmaceutical company to expand its operations in the US rather than starting from scratch.

    Sarah said...

    Though its a good analysis, its very general. Pharmaceutical industry has three major divisions and the 5forces vary in them. API, generic and patent drugs have different forces.

    john said...

    pattipaka janardhan

    yes i agreee the entry barriers are high due to
    1) high r&d costs involved in the drug development i,e more than 194 million dollar for each drug to take into market..

    2)srict regulatory conditions imposed on by the FDA in the drug approval process

    3)longer period of more than 15 years of the time taken for the introduction of the drug into market

    5)high fixed cost involved and the lack of intelectual property protection in some semi regulated and reregulated countries

    6) sales and marketing costs involved are also substantially increasing as companies need to spend huge amount of the money on sales force to move the product in the market

    7)cost of conducting the clinical trails also increasing substantially..

    6) fda withdrawl of drugs are also increasing substantially if the drug is to show adverse effects after releasing into the market (drug recall)

    7) the govt intervention in the pricing through policies like the new drug pricing policy in india..

    8) the apllication for the compulsory licensing by the company may increase which may effect the revenues of the innovator companies

    9)stricter regulatory control in drug application in the form of NDA and the manufaCturing in the form of GMP,regulation in advertising and promotional aspects in the form of the drug and magic remedies act..

    affu said...

    my frend john r&d cost for one molecule to enter into the market is around $1 billion....

    john said...

    but affu there are some sites like "fierce biotech" which says astrazeneca on an average spending 4.5 billion dollar in r&d for getting a new drug into the market..would u believe this....? dont rely on this sites ra affu..

    Alistair Schneider said...


    what is the bargaining power for pharmacist and inurances? (public or private)