ENVIROMENTAL ANALYSIS OF THAT INDUSTRY

https://www.slideshare.net/StevenSabo/pharmaceutical-industry-environmental-analysis-
sanofi-merck-co

http://www.strategic-planet.com/2011/01/a-pestle-analysis-for-the-pharmaceutical-industry/

A PESTLE Analysis for the Pharmaceutical Industry

It never ceases to amaze me why so many businesses fail to take the time to look at the macro
and the micro environments when completing their business plans and strategies. These
external forces will play a big part in shaping the final outcome of the ultimate corporate
achievement. Yet, most managers focus only on internal factors and it is fair to say that sales
growth and profits remain high on their agenda.

The macro environment tends to have a long term impact and requires extensive research.
Couple this with the fact that many managers are over worked and under resourced and we
begin to see why the process is often not completed. There is no published evidence to
confirm this hypothesis, just anecdotal hearsay.

The remainder of this article will illustrate an example of a Macro or PESTLE analysis for
the pharmaceutical industry. It is set at a very general level but it can be used as a template or
adapted to be more specific if required:

Political

There is now growing political focus and pressure on healthcare authorities across the world.
This means that governments will be looking for savings across the board. Some of the
questions the industry should ask are:

 What pressures will be put on pricing?

 What services will be cut?
 Will the same selection of drugs be available to everyone?

In addition to this, could there be more harmonization of healthcare systems across Europe or
the USA? What impact will reforms have on insurance models?

Economic

The global economic crisis still exists yet government reports still show that the spend on
healthcare per capital continues to grow. Will the current healthcare models exist tomorrow?
The growth in homecare (as seen in the Nutrition sector) demonstrates how nursing services
have moved to the private sector and have become a key business offering.

The reduction in consumer disposable income will have an impact on those countries using
health insurance models particularly where part payment is required.

These economic pressures are seeing an increased growth in strategic buying groups who are
forcing down prices.
Increased pressure from shareholders has caused a consolidation of the industry: more
mergers and acquisitions will take place over the coming years.

Social / Culture

The increasing aging population offers a range of opportunities and threats to the
pharmaceutical industry. The trick will be to capitalise on the opportunities.

There is also the problem of the increasing obesity amongst the population and its associated
health risks.

Patients and home carers are becoming more informed. Their expectations have changed and
they have become more demanding. Public activism has also increased through the
harnessing of new social networking technologies. How can pharmaceutical companies get
closer to consumers without over stepping the regulatory boundaries?

Technological

Technological advancements will create new business prospects both in terms of new therapy
systems and service provisions. The online opportunities will see the growth in:

 New info and Communications technologies.

 Social Media for Healthcare.
 Customized Treatments.
 Direct to Patient Advertising.
 Direct to patient communications.

Legislation

The pharmaceutical industry has many regulatory and legislative restrictions. There is also a
growing culture of litigation in many countries. The evolution of the internet is also
stretching the legislative boundaries with patient’s demanding more rights in their healthcare
programmes.

Environmental

There is a growing environmental agenda and the key stake holders are now becoming more
aware of the need for businesses to be more proactive in this field. Pharma companies need to
see how their business and marketing plans link in with the environmental issues. There is
also an opportunity to incorporate it within their Corporate Social Responsibility
programmes. Marketing and new product development should identify eco opportunities to
promote as well.

The information above illustrates just a fraction of the likely macro factors involved in the
pharmaceutical industry. A better way to summarise it would be in a table:
5 FORCES MODEL FOR THAT INDUSTRY
https://www.investopedia.com/articles/markets/051316/industry-handbook-pharma-
industry.asp

https://prezi.com/yimaqb55y0sg/porters-five-forces-analysis-pharmaceutical/

The pharmaceutical industry, or pharma industry, is one of the fastest-growing economic

sectors with worldwide sales of more than $982 billion in 2018. Approximately 47% of sales
each year come from the U.S., with sales at $464 billion in 2018.

Pharma is a dynamic industry with rapid growth and the potential for high profits. Top-
selling drugs have annual sales in the billions. However, a new drug requires millions of
dollars invested in research and development (R&D) and testing before it can be brought to
market. The majority of new projects never receive approval from the Food & Drug
Administration (FDA), resulting in large amounts of capital burned just to get one profitable
product.

Individual pharma stock investors face a difficult task in analysis due to the high level of
technical expertise required to adequately evaluate the viability of potential new products, as
well as the continued prospects for existing FDA-approved drugs. The most stable stocks are
those of large- and mega-cap companies with multiple products and large R&D budgets.
However, the greatest returns come from smaller companies that achieve scientific
breakthroughs.

Porter’s Five Forces Analysis

One model for examining an industry and a company's strategic position within its industry
is Porter's Five Forces analysis. The analysis looks at five competitive forces that influence
an industry: threat of new entrants, power of suppliers, power of buyers, availability of
substitutes, and competitive rivalry in the industry. How these five forces interact provides a
good picture of the sector's dynamics and whether an individual company is properly
positioned for survival in the sector.

Threat of New Entrants

The big payoffs available in the pharmaceutical industry lead to a steady flow of new
companies being created. A team of researchers with a hot idea or newly granted patents can
find venture capital funds eager to provide millions of dollars in startup funding. These
smaller companies pose no serious threat to big pharma. In fact, one of a startup investor's
main exit strategies is to sell out to a big pharma firm when new products are through the
initial development phase.

Power of Suppliers
Suppliers have very little power in the pharmaceutical industry. The raw materials for
manufacturing drugs are commodity products in the chemical industry, which are available
from numerous sources. Most of the equipment used in manufacturing and research is
available from multiple manufacturers. Suppliers usually offer multiple products to the
manufacturer, which moderates pricing on rarer materials and unique equipment.

Power of Buyers
Pharma is unique among industries because the medical patient has an absolute lack of power
regarding pricing. The prescriber of the drugs, the physician, ethically is not allowed to profit
from the sale of drugs. The entity that pays for the drugs, the insurance company, only has a
say in how much it will pay to the distributor of the drugs, meaning it has little power with
the drug manufacturers. The insurer can refuse to pay for treatments it believes are
overpriced.
The only entities with any negotiating power are the pharmacies and medical institutions that
fulfill the medical patients’ prescriptions. Even these entities have little power over newer
drugs under patent or drugs with only one manufacturer. Pharmacies focus on their profit
margins and have little incentive to provide patients with the lowest possible pricing.

Availability of Substitutes
The effect of substitutes is dependent on the individual drug. A new FDA-approved
blockbuster drug that has patent protection, treats a major health condition, and is first to
market in its category has a license to print billions of dollars. The development of a new
drug that cures a major disease could be worth tens of billions of dollars per year. However,
the 30th drug to treat a common condition could take years to recoup the R&D costs.

Once a drug loses its patents, generic drug manufacturers start selling copycat versions at
substantially lower prices. A drug that netted $100 million a year in profit could become one
that earns only $1 million a year in profit overnight. Additionally, there is a major
international problem with counterfeit drugs. The best of these counterfeits duplicate a real
drug's formula and sell it at a lower price, which hurts corporate profits. The worst
counterfeits are made with low-grade materials and can destroy the reputations of legitimate
products.

Competitive Rivalry
With more than $1 trillion in global sales, the pharmaceutical business can be cutthroat. The
huge importance of intellectual property results in strong competition for high-level workers
and leading researchers. Even strong nondisclosure and non-compete clauses cannot prevent
the leaking of competitive information.

Any potential new drug has its public information analyzed for the possibility of creating a
similar drug to market as a substitute. The industry exhibits a pattern of firms merging and
larger firms buying smaller firms that have promising research or new drugs.