The Pharmaceutical Industry: Challenges in the New Century

Using Porter's 5 forces model, analyze the pharmaceutical industry in 2003. How can firms in this industry reshape the forces in their favor, and/or exploit changes in the forces?

In 2003 the pharmaceutical industry was a rapidly evolving marketplace under strong influence from several underlying forces. My analysis shows that each of Porter’s five forces had a hand in influencing the companies, but the threat of new entrants played the most dominate role in reshaping the industry.
The pharmaceutical industry’s business model is primarily based on leveraging “supplier power.” Companies create products protected under patent laws that are highly sought after by hospitals, HMO’s, and other drug buyers. This allows pharmaceutical companies to command whatever price point they see fit. There are no major substitutes to effective prescription and over-the-counter drugs. A small amount of market share may be lost to unconventional holistic medicine practices, but this is a niche market. In fact, the lack of substitutes to effective medicine is what makes the pharmaceutical industry one of the most profitable, with an average ROIC of 31.7% between 1992 and 2006. (Porter, 5) The only real forceful substitution during this time period was the innovation of a new marketing strategy. The advent of e-detailing and e-prescribing presented a more efficient way of marketing pharmaceuticals without a massive sales force. A more fruitful online sales pitch could now substitute time-consuming sales calls. Although still just a growing trend in the industry, the new substitution had the possibility of allowing companies to dramatically cut costs and boost sales.
Similarly to “supplier power,” product differentiation within the industry is a major force in limiting the threat of competition. Under patent protection, pharmaceutical companies avoid profit eroding price wars by creating products that are unique to other established competitor’s. This secures customer loyalty as well as market share. Unfortunately for most pharmaceutical companies with a blockbuster product, patents have an expiration date.
Although the government should not be categorized as a 6th force, its influence through patent laws makes it a considerable factor in the pharmaceutical industry. Patent expirations immediately lower the barriers of entry for new competitors. “Between 2002 and 2006, approximately 40 drugs representing $40 billion in 2001 sales would lose patent protection.” (Bradley & Weber, 3) This opened the doors to a flood of new entrants to the generic pharmaceutical market, resulting in the most dominant reason for profit loss. Any introduction of a generic drug shifted the power of the suppliers to the power of the