Pharmaceutical Industry Five Force Model

According to the first class, the power point showed that the pharmaceutical industry is the most profitable industry. Based on the Porter’s five forces model, there are convincing explanation why the pharmaceutical industry has big profitability. For the threat of new entrants perspective, it is high. The pharmaceutical industry has a big barrier to prevent newcomers to enter this industry such as R&D costs, patents limitation, the long length of clinical time, the percentage of FDA to approve drug, a access to distribution channels, huge marketing and sales costs and production of drugs. The bargaining power of suppliers is low. The bargaining power of customers is low in the US market while the bargaining power of customer in some countries is medium for example Canada which the government sponsored Canadian health care has a powerful bargaining power to pharmaceutical companies. However, that would not be a big problem because the US market is still the major source of revenue in most pharmaceutical companies. For the threat of substitute products, it is still very low due to the patents protection but in case of the expired patents, it is medium. A pharmaceutical company has lots of way to fight back against generic drugs such as obtaining patents on component chemicals, manufacturing methods, product extension/formula modifications or improving drug-delivery methods. Rivalry among existing firms is medium. Each pharmaceutical company has to fight in order to take an advantage of the first one who obtains patents. Moreover they are competing to bring their drugs to doctors’ mind by hiring reps.

There are several alternatives to make a company less venerable. For the bargaining power of customers, in US, the MCOs are becoming stronger and stronger while the battle in prices against the purchaser outside the US is not decreasing so pharmaceutical companies cannot avoid reducing the prices of drugs. A pharmaceutical company can move its R&D centers to other countries which have low labor costs such as India or China ,or it can outsource small companies or biotech companies to do R&D instead. If doing so, a pharmaceutical can lower its R&D costs and drug prices so it will have more profits to fund its new drug research. Another alternative is to focus on the new science and technology. Previous century, the deep understanding of living organisms and advance in technology help pharmaceutical companies to stay competitive in the industry. For the future, pharmaceutical companies should invest in the newest medical diagnosis “DNA and Genome” which if successfully getting new drugs, it will be a great barrier from other pharmaceutical companies to enter because of the complexity of the DNA and Genome. The last alternative is to get merger or acquisition to other leading pharmaceutical companies or promising biotech companies. Merging and acquiring will make a company stronger in the areas of