Table of contents

Table of contents

 

 

Introduction

In this assignment analyses of pharmaceutical industry and Agilent Technologies are going to be described.

The aim of the work is to reveal profitability of company, barriers to enter new market, its strengths and weaknesses. With the help of SWOT analyses make strategic recommendations, what should the company do with its problems.

Also important is to understand what place takes pharmaceutical industry all over the world now and what will be with it in future.  Opportunities and threats are not less important.  Who are buyers, suppliers substitute products and competitors of pharma industry.

The object of research is Agilent Technologies, its activity in pharmaceutical industry. The assignment consists of introduction, 5 main parts conclusion and resources.

The first main part is called industry analysis, it consist of description of the industry, its segments, suppliers, buyers, competitors, and prognosis for future. 

The second main part is called company analyses it consist of AT overview, defining of its mission and vision, financial analyses, division of segments, substitute products, competitors and so on.

The third part is called business unit analyses. AT has life science department which produces instruments, advise, software, services and consumables for the pharmaceutical industry. This part describes its activities and geographical diversification.

The fourth part is SWOT analyses. Considering of all previous parts give us possibility to estimate strong and weak sides of company activity, opportunities and threats which influence on AT from external environment.

In the fifth part which name is a strategic recommendation it’s possible to define new ways of changing weaknesses of the company into its strengths and keep on the same level or even higher.

The last part of this work is conclusions. It contains main points which can be inference during all work.

1. Pharmaceutical Industry Analysis

1.1. Description of an industry

The pharmaceutical industry develops, produces, and markets drugs licensed for use as medications. Pharmaceutical companies can deal in generic and/or brand medications and are subject to a variety of laws and regulations regarding the patenting, testing and marketing of drugs

Over a period of time many of these chemical companies moved into the production of pharmaceuticals and other synthetic chemicals and they gradually evolved into global players. The introduction and success of penicillin in the early forties and the relative success of other innovative drugs, institutionalized research and development (R&D) efforts in the industry.

The pharmaceutical industry of the world develops and markets medicines prescribed for patients by medical practitioners. The U.S., U.K and European pharmaceutical companies are the major ones of the industry. The total number of major pharmaceutical companies(annual revenues USD 1,000million and above) worldwide is estimated to be about 50

The global pharmaceutical industry is expected to reach $830 billion by 2012 with a growth rate of around 5 to 6 percent. While the pharmaceutical industry in regions like Latin America, Europe and Japan is growing at a steady rate which is more are less equal to that of the overall industry, the developing regions like China and India are recording corresponding growth in double figures. Industry analysts predict that the pharmaceutical market would reach $1.1 trillion by 2015 with the average growth rate of around 7 percent. United States is still the largest pharmaceuticals market in the world with a market size of around $300 billion and it is expected to reach $370 to $390billion by 2015. The developing countries like China, India and Brazil still need to go a long way to reach the level of operations of the developed countries. As the developing countries are growing at the rate of 15 to 16 percent, there is a huge scope for the development of generic drugs there.

The industry share distributed among the locations, is presented onto the  Figure 1.1 We can conclude that the biggest share has USA almost 33%  on the second place is Europe with the share of 30%  the third place takes Japan – 18% and the lowest share have such locations as Canada and Africa .

 

 

 

Figure 1.1.1. Industry share by location.

Over time medicine has evolved in favor of less invasive treatments, and the role of prescription medicines in treating disease has expanded. Advances in science and technology have given researchers more sophisticated knowledge of the root causes of disease. Scientists can now more effectively design medicines to attack specific disease targets, resulting in the invention of hosts of new medicines. These innovations have contributed to better patient outcomes and increases in our lifespan.

Throughout this quarter century, the biopharmaceutical industry also has evolved. Five major trends characterize these changes — increased complexity of the research and development (R&D) process, continued investment in R&D, increased use of medicines in health care, increased value for today's patients, and continued importance of intellectual property protections including patents and data protection for innovative medicines.

Pharmaceutical companies like Pfizer, GSK and Novartis are spending more than $5billion towards research and development. Pfizer takes first place in the race as it spent around $6 billion on R&D in the year 2009 mainly on preclinical testing, lab testing and clinical trials. Introducing an innovative drug is not an easy task in the pharmaceutical sector if spending money on lab testing and clinical trials is not on prolific. Most of themajor companies spend around $1 billion for more than eight years to research the drug.So, R & D investment is a prime cost-factor for pharmaceutical companies.

The pharmaceutical industry is characterized by a high level of concentration with fifteen multinational companies dominating the industry. Table 1.1 contains information about these major pharmaceutical companies that are sorted in the order of theirrevenues from the sales of pharmaceutical products. Numbers provided in this table include sales of all subsidiaries and affiliated companies that are consolidated in annual reports of the corresponding companies. In order to facilitate a comparison of different companies revenues of all of them are shown in US dollars.

 

 

 

 

 

 

 

Company	HQ location	Revenue of pharmaceutical segment, mln USD	Total sales, mln USD	Share of pharmaceutical segment, %
Pfizer	NY, U.S.	46,133	52,516	87.85%
GlaxoSmithKline	UK	31,434	37,324	84.22%
Johnson & Johnson	NJ, U.S.	22,190	47,348	46.87%
Merck	NJ, U.S.	21,494	22,939	93.70%
AstraZeneca	UK	21,426	21,426	100.00%
Novartis	Switzerland	18,497	28,247	65.48%
Sanofi-Aventis	France	17,861	18,711	95.46%
Roche	Switzerland	17,460	25,168	69.37%
Bristol-Myers Squibb	NY, U.S.	15,482	19,380	79.89%
Wyeth	NJ, U.S.	13,964	17,358	80.45%
Abbott	IL, U.S.	13,600	19,680	69.11%
Eli Lilly	IN, U.S.	13,059	13,858	94.23%
Takeda	Japan	8,648	10,046	86.09%
Schering-Plough	NJ, U.S.	6,417	8,272	77.57%
Bayer	Germany	5,458	37,013	14.75%
Table 1.1.1. Major pharmaceutical companies.

As Table 1.1 shows, the majority of the largest pharmaceutical companies are not diversified. They are either concentrated exclusively on pharmaceutical products (Eli Lilly and AstraZeneca are good examples with virtually 100% of their revenues coming from sales of pharmaceutical products) or, although they develop and manufacture other health care products, they still have pharmaceutical divisions as the core of their business that provide more than 50% of their revenues. Other products manufactured by these companies usually include medical devices, nutritional products, consumer healthcare products and products for animal health.

Only two out of these 15 major pharmaceutical companies have revenues from sales of pharmaceutical products that are lower than 50% of their total sales. These companies are world giants Johnson & Johnson (which besides pharmaceutical products manufactures consumer goods and medical devices) and Bayer which has only about 15% of its revenues from the sales of pharmaceutical products.

Eli Lilly’s $13.1 billion sales figure made it the twelfth largest company – with Pharmaceutical sales considerably larger than Bayer’s $5.5 billion but a lot less than Pfizer’s $46.1 billion.

Geographical headquarters of major pharmaceutical companies are approximately evenly distributed between the U.S.  and Western Europe with only one Asian company in the list. Indiana is home to one of these companies, Eli Lilly.

As well as driving medical progress by researching, developing and bringing to patients new medicines that will improve health and the quality of life around the world, the research-based pharmaceutical industry is a key asset of the worldwide e economy. It is one of world's top performing hightechnology sectors.

 

2. Segments of  a pharmaceutical industry

Pharmaceuticals - is the largest segment of the global pharmaceutical, biotechnology and bioindustry markets takes a share of 72.1% of total gross turnover of the global industry.

Share of biotechnology, in turnover is 26.1% of the market. The remaining 1.8% of the market are BioIndustry.

Three-quarters of industry sales consist of pharmaceuticals used in outpatient settings, with the balance administered in hospitals, nursing homes, and other inpatient facilities. About 70% of prescribed drugs is distributed through wholesalers to hospitals, health maintenance organizations (HMOs), and retail pharmacies. The remaining 30% is sold directly by manufacturers to physicians, hospitals, retailers, and others.

Pharmaceutical sales include:

• ethical (prescribed) drugs, which can't he dispensed without a physician s prescription;
• over-the-counter (OTC) medications, which are readily available on drugstore shelves.

Ethical drugs account for about 60% of total industry sales, with OTC products representing the balance.It has been represented in Figure 1.3

The ethical sector can be further segmented into:

• brand-name products;
• generic products.

Generics are less-expensive equivalents of brand-name prescribed drugs, and may be produced and sold once the original drug's patent protection expires.

Figure 1.2.1. Industry segmentation by products

 

The major firms that pioneered the industry back in the early 20th century were located in Switzerland, Germany, UK, and the US. Today, these countries are still the location of the major firms. Since the industry requires sophisticated manufacturing techniques and intensive, high-cost R&D, the most profitable firms are in predominantly advanced, developed economies. Even with a growth in the industry, and changing trends in international trade, the early pioneers are still in the lead.

1.3 Suppliers

Supplier could be the providers of the raw materials and intermediates, the manufacturing and production plants, the overseas head offices who supply finished product, the local co-marketing partners who supply product and/or third party suppliers anywhere along the supply chain. Each company will have different suppliers depending on whether they are OTC, ethical, or generic businesses. It is important to remember that labour should be viewed as a supplier to industry. 

Different suppliers can have different levels of impact. Some have more bargaining power when they have significant influence in the market, for instance, when it is difficult for the industry to switch to other suppliers or when they threaten to withhold supply. Either situation can cause serious consequences. 

Suppliers of the Pharmaceutical industry can be characterized this way:

• A low concentration of suppliers means there are many suppliers with limited bargaining power. Low concentration of suppliers positively affects Pharma industry.
• High levels of competition among suppliers acts to reduce prices to producers.
• When inputs are not a big component of costs, suppliers of those inputs have less bargaining power.
• When critical production inputs are similar, it is easier to mix and match inputs.
• Low supplier switching costs.
• Volume is critical to suppliers. When suppliers are reliant on high volumes, they have less bargaining power, because a producer can threaten to cut volumes and hurt the supplier’s profits.

 

1.4 Byers

Demand for pharmaceutical products stimulated by the desire of the population to be healthy. Profitability of individual companies depends on their ability to innovate and sell new medicines and medical equipment. Large companies are paid for boosting research, manufacture and marketing of pharmaceuticals and medical equipment. Small companies can compete effectively by specializing in the production and distribution of drugs that are designed to perform highly specialized treatment of one or two diseases. 

The pharmaceutical industry  differes from other areas of the rapid advance of the production of scientific knowledge, while providing effective medicines. Pharmaceutical market is the tight integration with the market of biotechnology and bioindustry that lead to new treatments. Often, the pharmaceutical market major players on some stage of their development are changing the business model and companies operating in the field of marketing and development of new drugs and medical equipment, results of studies from small companies in the industry. 

In the pharmaceutical industry, the buyers are the patients, the family members, the PBAC, the PBPA, the finance departments, the hospital boards, the tender boards, the chief pharmacist along with a range of other buyers, depending on the specific business. 

Their influence needs to be considered. In various ways, buyers can affect a business by seeking price reductions, - demanding higher quality and demanding better service. 

In short, buyers can exercise power by seeking price reductions and threatening to go to other suppliers to get their products. Powerful buyers demand costly service. The government requires in-depth analyses that costs money, and consumers require up-to-date and relevant medical information - another costly service.

A buyer is powerful in the following situations:

1. when they purchase large volumes
2. when they buy your products from other suppliers because they are standardised
3. when they are knowledgeable and make demands based on this knowledge.

In short, buyers can exercise power by seeking price reductions and threatening to go to other suppliers to get their products. Powerful buyers demand costly service. The government requires in-depth analyses that costs money, and consumers require up-to-date and relevant medical information - another costly service.

The unique feature of Pharma industry is that the end user of the product is different from the influencer (read doctor). The consumer has no choice but to buy what doctor says. However, when we look at the buyer's power, we look at the influence they have on the prices of the product.

In Pharma industry, the buyers are scattered and they as such does not wield much power in the pricing of the products. However, government with its policies, plays an important role in regulating pricing through the FDA (Food and Drugs Administration).

Figure 1.4.1. Shows the largest countries – importers of pharmaceutical products.

Figure 1.4.1. Major importers of pharmaceutical products.

Figure 1.4.2. illustrates us which types of pharmaceuticals are mostly consumed.As we can see medicaments n.e.s take 50% of all value,glycosides-24%,homones-7%,antibiotics-5%,medicaments containing hormoones and antibiotics-4% and others-6%.

Figure 1.4.2.Consumption of pharmaceuticals by segments.

 

The buyers of pharmaceutical industry have the following characteristics:

• Low buyer price sensitivity. When buyers are less sensitive to prices, prices can increase and buyers will still buy the product.
• There are large numbers of customers, no one customer tends to have bargaining leverage.
• Customers are loyal to existing brands. Strong brand names are important.
• Limited buyer information availability.
• Limited number of substitutes means that customers cannot easily switch to other products or services of similar price and still receive the same benefits.
• Limited buyer choice. When customers have limited choices they end up paying more for the choices that are available.

 

1.5 Substitute products

Substitute products perform the same function as the product, and are a competitive force as they can take away demand or tie up those customers who choose to use the substitute instead of your product. For example, generic brands are substitutes for original products and there are devices that can substitute for pharmacological treatments, like stents in thrombo-embolic disease.

One of the biggest bugbears of the contemporary pharmaceutical industry is the spectre of generic competition. All that time and money invested in research and development, protected so briefly, before competitors swarm in and drive down prices to near worthless. But what is the background to this industry that has so much impact on the current drugs market?

The differences between the generics industry and other pharma companies wouldn’t exist without patents – legal titles that exclude others from producing or using an invention or innovation discovered by an inventor.

Increasing pharmaceutical expenditures have been acommon problem in many western countries. One way to curb growth in pharmaceutical expenditures is through generic substitution (GS). GS has been introduced in at least 22 European countries and in most states in the United States . The purpose of GS is to increase dispensing of less expensive generic medicines and to decrease the price of pharmaceutical products through price competition. GS has successfully promoted the sales of less expensive medicines and decreased the prices of pharmaceutical products in several countries, and thus has effectively reduced growth in the pharmaceutical expenses of society and patients, for example in Sweden and Finland

 

1.6 Rivalary

Rivalry  occurs among competitors because one or more of them either feels the pressure or sees the opportunity to improve their position in the market place. This rivalry among firms usually takes the form of jockeying for position using tactics like price competition, advertising battles and product introductions. It can be intense if companies are scrambling for market share, but if the overall market is in growth or the position of the company is protected through patents, then the rivalry is likely to be less intense.

 

• Low storage costs. When storage costs are low, competitors have a lower risk of having to unload their inventory all at once.
• Relatively few competitors.Few competitors mean fewer firms are competing for the same customers and resources, which is a positive for Pharma industry.
• High capital requirements mean a company must spend a lot of money in order to compete in the market. High capital requirements positively affect Pharma industry.
• High sunk costs make it difficult for a competitor to enter a new market, because they have to commit money up front with no guarantee of returns in the end. High sunk costs positively affect Pharma industry.
• When exit barriers are low, weak firms are more likely to leave the market, which will increase the profits for the remaining firms. Low exit barriers are a positive for Pharma industry.
• Entry barriers are high. When barriers are high, it is more difficult for new competitors to enter the market.
• Patents that cover vital technologies make it difficult for new competitors, because the best methods are patented.
• If strong brands are critical to compete, then new competitors will have to improve their brand value in order to effectively compete.
• When the learning curve is high, new competitors must spend time and money studying the market before they can effectively compete.
• Product differentiation:When products and services are very different, customers are less likely to find comparable product or services that meet their needs. This is a positive for Pharma industry.
• Industry requires economies of scale. Economies of scale help producers to lower their cost by producing the next unit of output at lower costs. When new competitors enter the market, they will have a higher cost of production, because they have smaller economies of scale.
• Geographic factors limit competition. If existing competitors have the best geographical locations, new competitors will have a competitive disadvantage.
• Large industry size. Large industries allow multiple firms and produces to prosper without having to steal market share from each other.
• Fast industry growth rate. When industries are growing revenue quickly, they are less likely to compete, because the total industry size is also growing. The only way to grow in slow growth industries is to steal market-share from competitors.
• Government limits competition.Government policies and regulations can dictate the level of competition within the industry.
• Advanced technologies are required. Advanced technologies make it difficult for new competitors to enter the market because they have to develop those technologies before effectively competing.