GLOBAL PHARMACEUTICAL

AN INDUSTRY ANALYSIS
Executive Summary
This report aims to understand the micro and macro environment around the pharmaceutical
industry. It discusses the important characteristics and major trends prevailing in the industry and
about the different factors that make the pharmaceutical industry different from the other
industry. In context to this, the report has highlighted that Pharmaceutical industry functions
differently from the rest of the FMCG industry as the consumption is derived from necessity and
not by choice as is generally witnessed with other industries. Further, the report has revealed that
pharmaceutical industry is heavily regulated and competitive in nature. Two layers of
competition can be seen in this industry: one at the top level where global leaders from the US
and Europe compete for patents and quality drugs. Product differentiation through innovation in
R&D is used as a strategy to gain market dominance. The second layer of competition is at the
bottom for generic drugs, where the fragmented market includes a large number of
manufacturers, and to gain more market share cost leadership strategy is followed. However, it
has been highlighted that there is no market leader in the second layer of the competition.
Further, in the second layer competition, the sale volume derived here is much larger than
patented drugs segment but the median sale is far lower.
Apart from this, the report utilized Porter’s five forces model to highlight that industry’s
challenges and opportunities, for example, Generic drugs are blessing for the patients and
governments but a curse to the manufacturers who put years of continuous efforts to bring the
drug to the existence and allowed exclusive right for mere 20 years to recover the cost and to
possibly reward themselves with profit. Further, it was revealed that although North America,
Europe, and Japan constitutes 75% of the global market, China is developing to be the next
potential market to manufacture world-class drugs which can result in the diversion of the
constituted market.

i
Table of Contents
Executive Summary ......................................................................................................................... i

Introduction ..................................................................................................................................... 1

Macro-environmental Analysis ....................................................................................................... 7

Competitive Analysis - Porter 5 Forces: ......................................................................................... 9

Conclusion .................................................................................................................................... 11

References ..................................................................................................................................... 12

ii
Introduction
The Pharmaceutical industry is responsible for the manufacturing of drugs. It requires intense
research and development, testing and then huge marketing activities to bring the drugs from lab
to patient. The industry functions in a different way altogether from most of FMCGs, the primary
reason being the consumers do not influence the purchase much, its rather the medical
practitioner under whose prescription the sale is derived. The industry is growing and sale
crossed 1 trillion mark for the first time in 2014, and it was $1143.3B in 2017 (Statista, 2019).
The industry grew 193% from 2001 to 2021 (figure 1). US accounts for more than one-third of
the global sales and is the largest market geographically followed by the EU and Japan (World
Atlas, 2019). China has emerged as the 4th largest market, registering the fastest growth in recent
years from 2012 to 2017 (Statista, 2019). China has proved itself a strong contender challenging
US dominance in the industry. It is expected that the industry will continue to grow at 6.5%
annually until 2022 (Evaluate, 2017). It is estimated that the global market will be worth $1.57T
by the year 2023 (Figure 4). Emerging markets include but not limited to Mexico, Russia, Brazil,
and South Korea. As per a report by Forbes (2015), the industry is the most profitable industry
with a net margin of 30% (Figure 3), however, it is for generic drugs. The industry is highly
regulated, drugs are paid by the government and insurance companies many times.

Figure 1: Revenue of the worldwide pharmaceutical market from 2001 to 2017 (in billion U.S. dollars)

1
 SALES ($M) Net Margin in 2016
Major Banks
Other
Regional Banks
IT Services
Spain
Canada Savings Banks

UK US Biotechnology

Italy Internet Software/Services

Pharma:major
Brazil
Tobacco
France Investment Managers
Pharma: Generic
Germany
0 10 20 30 40
China Japan Net Margin in 2016

Figure 2: Biggest Pharmaceutical Markets In The World By Country. Source: WorldAtlas.com Figure 3: The Most Profitable
Industries In 2016. Source: Forbes

Figure 4: Estimated Drugs sale continent wise – 2023, Source: Navadhi.com

2
The pharmaceutical industry’s peculiarity can be witnessed by the fact that most of the
expenditure is incurred on Research and development which is the lifeblood of the industry
(Farbia, 2012). Companies have to spend a lot on identification, development, testing and then
approval of new drugs before its launch in the market. It typically takes 12-15 years for a drug to
complete all this process (IFPMA, 2017). Further, the amount spent by pharmaceutical
companies on R&D accounts for 15% of their sales at $150B (figure 6), which is highest in any
industry (European commission, 2018), the annual growth rate of 7.7%, Roche (Switzerland) has
invested the most followed by Johnson & Johnson (US). Of the total investments made on this
R&D, only 80% of drugs pass the development stage. It is very saddening that after so much of
efforts the maximum period for which a patent can be held is for 20 years only. The company
possessing patent have exclusive right to manufacture and sell the drug for this period and after
the expiry, these rights are opened for all and any company can manufacture the drug. Other
companies do not have to spend much on the R&D, they simply produce the same drug
consisting of same compounds, these sub-branded drugs are called generic drugs and are the
main problem for branded drug manufacturer but a major relief to the consumers. It has been
witnessed that most blockbuster drugs have lost market share soon after the expiry of their patent
rights. The share of patented drugs is falling year on year, the generic drug market is worth
$315B in 2017 and expected to value at $474B by 2023 (IMARC, 2018).

Pharmaceutical
Drugs

Prescription Bases Over the

(85%) Counter(15%)

Conventional
pharmaceuticals

Figure 6: Pharmaceutical R&D network, Source: ifpa.org

Biopharmaceutical

Pharmaceutical Pharmaceutical
Drugs Drugs

Patented /
Primary Care Specialist Generic
Branded

Figure 5: Classification of drugs based on various characteristics

3
 Figure 7: Industry wise spent on R&D as a percent of sales. Source: European Commission, 2018

Cost Structure of Patented Drug

Other
20% manufacturing of
goods
25%

Administration
10%

R&D
20%
Marketing and sales
25%

manufacturing of goods R&D Marketing and sales Administration Other

Another major cost includes Marketing and Sales which typically accounts for 25% of total cost
and for generic drugs the share is even more as they do not incur any R&D. Different marketing
strategies are applied for primary care and specialist products, muscle marketing is used for
primary care products where TRM is adopted later. Mass marketing makes the audience able to
recognize the drug by brand name. The industry requires individual sales representatives who
possess knowledge of the field of medicine and are able to convince medical practitioners. US
companies spend as much as $5bn on such sales rep (Fugh-Berman & Ahari, 2007). These reps
have to follow the code of ethics as practitioners are not allowed to receive even gifts.

4
 One of the major key drivers of the industry is the aging population. World population is
increasing and it’s getting old. According to a study by the United Nations (2008), the world
population will cross 9 billion by 2050 and 21% of this population will be more than 60 years
old. The market will have a large number of the aging population who would be requiring
healthcare and drugs as studies have shown that over-65 consumes 4 times the healthcare
products than youth. The companies will have greater opportunity to cater to such a large number
of population. Another very important driver is innovation since the industry is patient-centric.
Personalized medication has evolved with better findings in the healthcare domain. Doctors are
understanding the individualness of every patient and treating them differently with specific
doses that better suits the individual. Technology has enabled the process fast and accurate. With
the help of new technology better R&D can be done in a better way. The pharmaceutical
industry can be divided based on patent drugs and generic drugs. The generic market is
fragmented with many companies participating with no dominant. On the other hand, the market
for the patented drug is highly consolidated with the top 10 drugs contributing to 10% of profit
(Deutsche Bank, 2012). The major players include Pfizer (US), Johnson & Johnson (US), Merck
& Co. (US), AbbVie (US), Novartis (CH), Roche(CH), GSK (UK), AstraZeneca (UK) and
Sanofi (France) (Statista, 2019). The later five companies are from Europe and known as Big-5.
Cancer anti-diabetes and antibiotic drugs contributed most of the sales (Deutsche Bank, 2012).

Figure 9: Top 10 Pharmaceutical companies. Source: DB, 2018 Figure 8: Top 10 Therapeutic categories. Source: DB, 2018

5
The product life cycle begins when the approval for the drug is taken from the government and
end when the patent expires (Bernard, 2013), it consists of three major phases: R&D exclusively
patented production and then the generic competition. The early stage of research and
development is the most crucial part of the plan as most of the drugs fail at this stage. The
development stage takes up to 12 years (IFPMA, 2017). It starts with a detailed plan, preliminary
studies, financial evaluation, feasibility studies are conducted. These are followed by
experiments and development. Once a prototype drug is prepared, it is tested on the animals, if
the results are positive then few volunteers are called up for further testing. The last stage of
testing is done on a big sample size involving a thousand subjects on an average. After the tests
are successful approval from FDA or regulatory body of that region is seeking. Once the
approval is obtained the product becomes ready to launch.
The middle part of the life cycle has 4 phases vis intro, growth, maturity and decline. The
introductory phase is the early launch period. The product is new here, intense marketing
activities are done at this phase. Sales representatives cover most of the hospitals and
practitioners; patients are made aware of the products. The cost is very high at this stage and
profit very low. Once the product increases visibility in the market, the next phase starts which is
the growth phase. Under this phase, the drug makes its journey into different markets that are
targeted at the planning stage. One factor that contributes to the growth the most is the patented
right of the company to manufacture. There is no risk of copy, patients buy the drug when they
get informed. This phase is followed by the most profitable phase - the maturity phase, it
witnesses low cost due to economies of scale. As the market is already penetrated during the
earlier phase, no major growth occurred, in fact, sales stars to fall down by the end.
The last phase in the middle stage is the decline, by this time better drugs arrive in the market
and are easily available. As the competition is unmatched because of technological advancement
they bring with them, the falling sales keep on falling until the profit touches lowest. The last
stage includes generic competition, by this time the patent is expired and the market is flooded
with low-cost drugs performing the same cure. The main business loss is government contracts
as it will now procure from the generic supplier. The only way to survive here is slashing the
prices to the level generic players sell the drug. The product does not survive much at this stage
due to price competition.

6
 Figure 10: Product life cycle graph of Pharmaceutical Industry. Source: Stan Bernard, Bernard Associates, LLC, 2013

Macro-environmental Analysis
Political: Government plays an important role in shaping the industry. The drugs are regulated
by the government so that no one misuses them. In some countries starting R&D is complicated,
preclinical tests are not allowed. Taxes imposed by the government are a decisive factor. The
price of a steroid Pulmicort is $175 in the US and an identical product is available in the UK for
$20, similarly, there are many drugs in the US market that are expensive as compared to markets
in the UK (New York Times, 2013). Taxes imposed in a country increases the prices in that
region, this leads to parallel trade where medicines are purchased from low tax countries and
then sold to high priced countries. The practice is followed in Europe (Font & Kanavos, 2005).
Sometimes, when the government of a nation provides free healthcare services to its citizens
(Canada and Scandinavian countries) then it becomes difficult for a commercial pharmaceutical
company to survive there. Globalization has made it possible to manufacture the products from
any part of the world where it is most convenient and economical.
Environment: The natural environment is very sensitive. The manufacturing of drugs requires
animal testing and the production of waste. Sometimes, environment movements create hurdle in
operations. Proper tests are not conducted and cause a delay in the overall plan. Waste
management is also an area of concern. It has been reported many times that production units of
big pharmaceutical companies in less developed nations like Africa and India do not comply
with waste disposal norms. The waste is disposed of in the rivers casing huge environmental
damage. When these incidents are brought to courts, heavy penalties are imposed causing
reputational and financial loss to the company. Further, education and awareness among the
society regarding the use of drugs and drug abuse must be provided, as it causes serious
psychological imbalances, medical practitioners must be aware of proper dosage and over
prescription be avoided.

7
Socio-cultural: The socio-cultural aspect encompasses elements from demography to
psychograph. The attitude of people living in a society impact on the performance of a
pharmaceutical company. In China opium and other herbs are used for its medicinal properties,
similarly in India and surrounding region hemp is used for recreational properties. People’s
perception differs in these areas. Further, purchasing power doesn’t allow people to buy
medicines even if they want to. Lack of medication leads to early death of children in Africa.
Technology: IT plays an important role in life science. As success or failure of a drug depends
on its R&D, technology allows a better execution of research practices. The results will be more
accurate; it will lead to strong development that will ensure long term survival in the market.
Economy: A strong correlation is observed between GDP and life expectancy (IFPMA, 2017),
countries where GDP is high spend more healthcare. The US is the world’s largest economy and
largest consumer as well. China is an emerging economy, so is the case with drug consumption.
The demand-supply leads to market equilibrium, countries with demand are an opportunity to
make a profit. The high tax regions are those where government spending on healthcare is high,
and high indirect taxes shrink profits, an analysis of tax structure is a pre-requisite before making
an entry to the new market.
Legal: The US government had earlier enacted a law called the Orphan Drug Act of 1983. This
act encourages companies to manufacture those drugs that are not very profitable but are
necessary for humankind (FDA, 2019). This put a financial burden on pharmaceutical
companies. Further, there are always government policies of price restriction in order to make
the drug affordable to the general public. In the US these are categorized into 5 schedules, Sch-I
being most abuse potential and Sch-V being least (DEA, 2019). Companies have to take
approval from the government departments before launching their products. It takes FDA 10
months on an average to approve a drug (Deutsche Bank, 2012).

8
Competitive Analysis - Porter 5 Forces:

Threat of new
Entrants
- China

Bargaining
Bargaining power of
power of Industry Rivalry Customers
Suppliers - Top US companies - Too many
- High cost of and Europe's Big - 5 companies
chemicals - Avalability of
generic drugs
Threat of
substitute
products
- Generic
Pharmaceuticals

Industry Rivalry: The market is dominated by 4 major US firms and European Big-5 which
accounts for 34.5% (Evaluate, 2017). These companies will compete for patents. The market
leader position in the past shuffled amongst J&J, Pfizer and Roche. The industry is consolidated
for patented drugs. US firms are more innovative than Big-5. Due to the huge R&D cost, the
competition is limited to these firms only. Brand loyalty pays off but requires huge marketing
expenditures. The annual growth rate is estimated at 6.5%, there is space for each competing
firms. Market share can be increased either by cost leadership, i.e. more efficient R&D at low
cost or through product differentiation, i.e. making the product distinct from the available drugs.
Bargaining Power of Suppliers: Due to too many suppliers and no distinctiveness in the raw
material requirements, it is easy to procure RM. However, the basic cost of raw material is high,
margins affect a lot by a minor change in the cost of RM. Most of the machinery and equipment
are too can be obtained from multiple sellers, the suppliers do not hold much power.

9
 Bargaining Power of Buyers: the US is the largest consumer, North America share is 45%
followed by EU and Japan. Most of the branded drugs are sold in these markets. Price sensitivity
is a factor as individuals would prefer low priced generic drug if the difference would be high.
However, brand loyalty is strong in these regions. The government is the largest buyer in the
industry, hospitals are supported and medical aid is provided to the general public. Since the
government uses taxpayer’s money to fund its operations, generic drugs are preferred over
branded drugs.
Threat of Substitute: The biggest thread this industry faces is from generic drugs and
counterfeited drugs. The later can be handled but generic drugs are tormenting. The product is
almost the same with no major differentiation, there are many companies manufacturing these
drugs. Generic drugs account for 90% of US sale, India being one of the major suppliers, the cost
of generic drugs procured from the country is very low and there is not much switching cost due
to a low degree of differentiation. The minor substitute includes natural herbs and recreational
drugs like cannabis but it is illegal in most of the part of the world and most of the population is
not assertive to its use.
Threat of New Entrants: The R&D cost is a savior for existing players as it is huge and restrict
small players to manufacturing generics only. Since the patent allows the holder to earn a profit
for a reasonable span of time when the demand for the product is high and it gives enough time
to further upgrade the product with more R&D, the patent holder always have an edge. The
government also impose certain affiliation and approval criteria that require strict norms to be
followed for new entrants. This factor eliminates incompetent candidates. However, the
emerging markets are witnessing double-digit growth, China is the third largest consumer of
pharmaceutical drugs at $122bn. China always has a manufacturing advantage and regarded as
the factory of the world. With the establishment of CDA (China Drug Administration), they are
doing fast track research (The Economist, 2018), once they get a breakthrough, a chain of
factories are ready to shorten the cost to the minimum.

10
Conclusion
The Pharmaceutical industry functions differently. A major part of the cost is R&D whose
success rate is 20% only. Competition is among top US and European companies. R&D is both
strength and weakness as it prevents entry and causes hindrance to fast growth. Generic drugs
cause revenue loss for major players, governments adopt a different set of rules and regulations
to control the industry, but these are offered by consumers due to the huge difference between
prices. Unethical practices like parallel trading and counterfeiting drugs are being done in some
part of the world. The life cycle is normal except for the extra R&D phase (long) and patent
expiry period (short). The overall environment is heavily regulated and the major competitive
forces include industry rivalry, threats of substitute and new entrants.

11
References
Bernard, S. (2013, February 1). Rethinking Product Lifecycle Management. Retrieved from
Pharmaexec: http://www.pharmexec.com/rethinking-product-lifecycle-management
DEA. (2019). Drug Scheduling. Retrieved from DEA: https://www.dea.gov/drug-scheduling
Deutsche Bank. (2012). Pharmaceuticals for Beginners. London: Deutsche Bank.
European commission. (2018). EU R&D Scorecard. Seville: European Commission.
Evaluate. (2017). World Preview 2017, Outlook to 2022. London: Evaluate.
Farbia, H. (2012). Industry Dynamics in Pharmaceuticals . Pharmacology & Pharmacy, 1-6.
FDA. (2019). Orphan Drug Act - Relevant Excerpts. Retrieved from FDA:
https://www.fda.gov/forindustry/developingproductsforrarediseasesconditions/howtoappl
yfororphanproductdesignation/ucm364750.htm
Font, j., & Kanavos, p. (2005). Pharmaceutical Parallel Trade in Europe: Stakeholder and
Competition Effects. Economic Policy, 751-798.
Forbes. (2015, December 21). The Most Profitable Industries In 2016. Retrieved from Forbes:
https://www.forbes.com/sites/liyanchen/2015/12/21/the-most-profitable-industries-in-
2016/#2bc8de255716
Fugh-Berman, A., & Ahari, S. (2007). Following the Script: How Drug Reps Make Friends and
Influence Doctors. PLoS Med, 150.
IFPMA. (2017). The Pahrmaceutical Industry and Global Health. Switzerland: IFPMA.
IMARC. (2018). Generic Drugs Market: Global Industry Trends, Manufacturing Process,
Share, Size, Growth, Opportunity and Forecast 2018-2023. Retrieved from IMARC:
https://www.imarcgroup.com/generic-drug-manufacturing-plant
Manufacturing Chemist. (2018, July 3). Key drivers of the UK pharmaceutical market. Retrieved
from Manufacturing Chemist:
https://www.manufacturingchemist.com/news/article_page/Key_drivers_of_the_UK_pha
rmaceutical_market/144619
New York Times. (2013, October 12). The Soaring Cost of a Simple Breath. Retrieved from
New York Times: https://www.nytimes.com/2013/10/13/us/the-soaring-cost-of-a-simple-
breath.html

12
Statista. (2019, April 8). Growth of top 10 national pharmaceutical markets worldwide from
2012 to 2017*. Retrieved from Statista:
https://www.statista.com/statistics/266459/growth-of-the-top-10-global-pharmaceutical-
markets/
Statista. (2019, April 8). Revenue of the worldwide pharmaceutical market from 2001 to 2017 (in
billion U.S. dollars). Retrieved from Statista:
https://www.statista.com/statistics/263102/pharmaceutical-market-worldwide-revenue-
since-2001/
The Economist. (2018, August 30). China is sprucing up its pharma sector. Retrieved from The
Economist: https://www.economist.com/business/2018/08/30/china-is-sprucing-up-its-
pharma-sector
United Nations. (2008). World Population Prospects, the 2008 Revision. Retrieved from UN.org:
https://www.un.org/en/development/desa/population/publications/trends/population-
prospects.asp
World Atlas. (2019, April 8). Biggest Pharmaceutical Markets In The World By Country.
Retrieved from WorldAtlas: https://www.worldatlas.com/articles/countries-with-the-
biggest-global-pharmaceutical-markets-in-the-world.html

13