Team 4

Pharmaceutical ManufacturingJune 4, 2012

Qing Guo

Levi Marthis

Hillary Judd

Coleman Weiss

Phillip Warren

Executive Summary

The pharmaceutical industry develops, produces, and markets drugs licensed to use as medications. Within the industry they have an option to sell generic and/or brand medicines and medical devices to individuals who are in need.

To create this analysis of the pharmaceutical manufacturing industry, a compilation of many different types of data were required. The qualitative research sources that were identified provided a baseline for describing the industry and many of the challenges that companies in this industry face. A compilation of quantitative sources provided the necessary information about the financial undertakings that these companies must endure and how lucrative and profitable this industry can be.

The economic factor is arguably the most important factor in the pharmaceutical industry. Many companies are having a hard time developing new drugs for which to patent. This inability to earn a return on their R&D departments has led many companies to restructure their departments and to decrease funding. Instead many companies are finding it more beneficial to refocus their R&D into faster growing fields such as biotechnology. Biotechnology represents a lucrative investment because of difficulties to imitate and high cost that limit the amount of competitors available.

Macro natural environment affects the pharmaceutical industry from three major fields; geography, natural resources, and weather. These three factors keep to a certain extent, and keep a relationship that affects the pharmaceutical industry, but at the same time they also bring some great opportunities that allow the pharmaceutical industry to make more profits. Using Porter's Five Forces method to analyze the pharmaceutical industry helps to develop a sense of qualitative understanding. The threats of new entrants are low, increasing profits for existing companies. Bargaining power of buyers is also low because consumers usually do not have a choice of what is prescribed to them. The third force is rivalry among existing companies in the industry which is very high. Generic brands cause a high threat in substitutes which cause low profits for competitors. The financial force is bargaining power of suppliers and that is low because are various suppliers.

Table of Contents

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

Industry Description................................................................................1

Research Methodology............................................................................3

Macro Environment.................................................................................4

Industry Analysis Framework...................................................................8

Summary of Findings.............................................................................10

Conclusion.............................................................................................10

References.............................................................................................11

Appendices............................................................................................12

IntroductionThe pharmaceutical industry represented more than $ 880 billion dollars of sales

globally in 2011, making it one of the largest industries in the world. According to Fortune 500,

the pharmaceutical industry has remained year after year the most profitable industry in the

U.S, reporting a profit of 18.5 cents for every $ 1 in sales. The industry is rapidly growing with

new drugs and treatments being developed yearly while still maintaining a necessary

commodity. This competitive nature has led to many companies trying to enter this lucrative

market and increased the importance of staying on the frontline of innovation. This report will

include an analysis of the macro and microenvironment of the pharmaceutical industry using

the Porter’s Five Forces model. The collection and analysis of data will identify the current state

of the industry along with its possible opportunities and threats.

Industry Description

Organic chemistry formed the basis of many products including drugs, petrochemicals,

and food. Organic chemistry also helped the pharmaceutical industry evolve during the 1800’s.

However, over the next century the industry really evolved with the introduction of new

technology and research. There is a lot of time and money that go into the research

development of a new drug in the pharmaceutical industry, and one of the industries that

changed the way of searching for new cures is the biotech industry.

With time and money today pharmacist can now mass screen, producing thousands of

pharmaceuticals, when at one time a researcher was lucky enough to synthesize a few new

chemical entities a year.

The discovery of the structure of DNA, by James D. Watson helps to tell what makes us

each an individual. This is important for pharmaceutical companies so they can alter products

to our genetic code (DNA). Some of the true leaders in the pharmaceutical area are from the

Native Indians who we learned the use of plants, herbs, and even tobacco. ("Pharmaceutical

industry overview," 2011)

Today, the pharmaceutical industry develops, produces, and markets drugs licensed for

use as medications. Industries can sell generic and/or brand medications and medical devices to

individuals that need them. They consist of establishments primarily in manufacturing biological

and medicinal products; processing, grading, grinding, and milling botanical drugs and herbs;

isolating active medicinal principals from botanical drugs and herbs; and manufacturing

pharmaceutical products intended for internal and external consumption in forms as ampoules,

tablets, capsules, vials, ointments, powders, solutions, and suspensions. ("32541 naics code,"

2012) Pharmaceutical manufacturers can produce synthetic and plant-derived (phytochemical)

preparations. The major portion of production is shared by seven countries—the USA, Japan,

the Federal Republic of Germany, Great Britain, France, Italy, and Switzerland ("Pharmaceutical

industry overview," 2011). The pharmaceutical industry has revenues reaching $266 billion as of

2010. Although, it is estimated that by 2015 the industry will be worth $347 billion. European

and Asia-Pacific markets are expected to grow to $260 billion by 2015, showing that the US is

the leading pharmaceutical manufacturer and seller.

The partnership of highly educated scientists at universities and private companies is

relied on with the drug development. The modern era of drug discovery and development

originated in the 19th century when scientists learned how to isolate and purify medicinal

compounds and developed large-scale manufacturing techniques. As the understanding of

biology and chemistry improved in the 20th century, drugs are now being extracted from plant

substances, while others are discovered and synthesized by techniques including combinatorial

chemistry (the rapid synthesis or the computer simulation of a large number of different but

often structurally related molecules or materials) ("Combinatorial chemistry," 2012) and

recombinant DNA technology (result from the use of laboratory methods [molecular cloning] to

bring together genetic material from many sources, creating sequences that would not

otherwise be found in biological organisms) ("Recombinant DNA," 2012). The pharmaceutical

industry has greatly aided medical progress, and many new drugs that have been discovered

and produced in industrial laboratories. Identifying new drug targets, attaining regulatory

approval, and refining drug discovery processes are among the challenges that the

pharmaceutical industry faces in controlling and eliminating disease. (Britannica Encyclopedia,

2008)

Research Methodology We will use a variety of research techniques. Most of our research will be secondary

research since we do not have a large amount of qualitative sources at our hands and since we

will do most of the quantitative research will be done when we select a company for our SWOT

analysis. We have identified a qualitative source that should give our group a different

perspective and an inside view of the pharmaceutical manufacturing industry; a family member

of Phil’s is a manager of Hollister Stier, a pharmaceutical manufacturing company. It is the

leading manufacturer of Allergenic antibiotics to North America.

We will draw the largest amount of our secondary research from credible websites.

Since pharmaceutical manufacturing is a competitive industry that moves extremely fast, much

of our research must be new to be relevant to the most current events. Using the Internet will

allow us to get up-to-date information on this industry. We will also draw some secondary data

from either ratings companies or individual firms for the economics portion of the macro

analysis.

We have prepared a questionnaire for the individual that works at Hollister Stier to be

able to get sufficient enough information to better grasp how the inner workings of this

industry thrives. A manager has data anywhere from the latest projects being worked on in the

lab to the company’s employment to the amount of production and revenue that the company

creates. Again this will not be our immediate focus since it is the entire industry that is under

examination and not just a single company. Since pharmaceutical manufacturing is a large

industry with a large amount of information available it will be a challenge to investigate and

find the data that will be most useful to our group.

Macro EnvironmentEconomic

In 2010, the U.S pharmaceutical industry experienced revenues over $267 million dollars

and an average annual growth rate of 4% between 2006 and 2010. Analyst now predict an

increase of annual growth from 4 to 5.5% or the market to increase to an estimated worth of $

347 million by 2015. With the U.S representing 36.2 % of the industry these statistics are an

accurate indicator of the global trend. (DATAMONITOR, 2011) The leading cause of these

projected statistics is the rapid growth of the emerging markets, led primarily by China. While

European and U.S industries struggle with debt crisis and austerity legislation, Asia is expected

to experience an annual growth of 8%, with China representing 28% of global sales by

2015(Standard & Poor’s, 2011). Meanwhile, in response to modest gains in the last few years

U.S and European companies have responded with cost reducing initiative and restructuring of

their marketing and R&D departments. While these changes have produced positive results in

2010 and 2011, the security of the big pharmaceutical companies is still at risk as the enter

what analyst are calling the, “patent cliff.”(Standard & Poor’s, 2011) By the end of 2011 -2012

six of the world’s largest selling drugs will lose their patent protection. Soon, popular drugs,

such as Celebrex and Plavix, will soon become available for generic drug companies to

manufacture and distribute leading to an estimated loss of $120 billion from 2011-2015.

(Standard & Poor’s, 2011) With R &D productivity relatively low in the last few years many

companies have moved to refocus their research departments in an attempt to over come the

looming patent cliff.

Technological

In response to the threat of increasing competition and declining profits we are

currently seeing a industry wide shift away from developed markets to more product

development inn newer and faster growing fields of medicine. Biotechnology has presented a

profitable opportunity for big companies with inventions such as human insulin and human

growth hormones. The complexity and costliness of biotechnical research ensures that it is not

beneficial for generic companies to attempt to replicate their products. Another growing tend

in the industry is the reinvestment of many companies into the development of orphan drugs.

Companies that develop orphan drugs receive major bonuses and tax exemptions from the

government. The orphan drug market itself is expected to expand from an $ 85 billion industry

to an 11.4 billion by 2014. (Standard & Poor’s, 2011) In 2011, the FDA approved thirty new

molecular entities. Of these 30, eleven where orphan drugs, seven were for the treatment of

cancer and, ten where biotech inventions. ( Standard & Poor’s, 2011) This statistic shows the

immediate shift transpiring within the pharmaceutical industry and what we can expect in the

next five years.

Environment

There are three major fields playing the key role: geography, natural resources and

weather. Every pharmaceutical manufactures or company will serious consider geography

when planning to build a plant. A good location can help pharmaceutical company reduce costs

and avoid lawsuits. If a pharmaceutical company builds a plant in a downwind district, it can be

affected by pollution from the upwind district. The same will be happening if the plant is

located downstream on a river. Pharmaceutical plants have strict requirements for geography

because the product they make will be related to human safety. An ideal location for

pharmaceutical industry should not have heavy pollution concentration: air pollution, water

pollution, and soil pollution. Desired locations are as far away as possible from coal steam-

electric plant, paper mill, railways, and any industrial that plant produce large amounts of

harmful gas and smoke, such as chemical plants, sewage treatment plant, and refuse processing

plant. All of these measures are necessary to ensure that pharmaceutical plants can produce

goods within an area free of environment pollution.

Another important geographical issue is transportation cost. Transportation expenses

of raw material and product will help determine how much profit the company can make. For

this reason, if a pharmaceutical plant is built where transportation is convenient and close to

the target market, the company can save lots of money on transportation cost. The resources

needed to supply the pharmaceutical industry are diverse. Small differentiation in medical

products creates a need for vastly different resources. For this issue, being close to the right

raw material origins influences the pharmaceutical industry

Since producing different drugs relies on a large source of different materials, the

availability natural resources is important in the pharmaceutical industry. Water is a necessary

natural resource for the pharmaceutical industry. Additionally, the water must be free of

pollutants. The pharmaceutical industry must guarantee the quality of the water that the

company uses in its production. Some pharmaceutical manufacturers might also require a

special kind of raw materials. For this reason, lots of pharmaceutical plants were built close to

the raw material producing area.

The weather affects the industry in two ways. First way they may affect people’s health.

For example, the weather changing between seasons, it can causes people to get such

sicknesses as the flu. During the usual yearly flu pandemic, the pharmaceutical industry will be

busy. Second, severe weather such as flood and drought will increase cost, delay the

production time and lower industry profits.

In general, the macro natural environment will affect the pharmaceutical industry.

Sometimes it will present opportunities to make profits, for example with H1N1 and bird flu.

Other times it will negatively affect the industry, such as environmental pollution.

Industry Analysis Framework

Threat of New Entrants

The threats of new entrants in the pharmaceutical industry are low. This industry is so

large and diversely spread across the world that small companies cannot enter with ease. The

research and development of new pharmaceutical products is the key to becoming a major

competitor in the industry. A company wishing to market its products must demonstrate that

its drugs are safe and effective, to the satisfaction of the national regulator and will need

significant up-front investments (Pharmaceuticals Industry Profile United States, page 18).

Although the threats of new entrants are low, patent expirations of pharmaceutical drugs are

always giving competitors a chance to produce generic products, creating decreased revenues

for competing companies.

Bargaining Power of Buyers

Consumers prescribed certain brands and types of medication by doctors typically do

not have a choice but to buy that drug at its particular price causing bargaining power of

buyers, consumers in this case, to be low. Brand name drugs are always more expensive, and

the consumer is unable to have an effect on the prices. “The ultimate source of funds for drug

purchases is in most cases a public- or private-sector health insurer or similar body. This

increases buyer power. Not only can such large purchasers exert monopsony market power,

but also it is very common for them to use one or more specific price control strategies

(Pharmaceuticals Industry Profile United States, page 14-15).”

Rivalry among Firms

“The US research-based pharmaceutical industry is dominated by several multinational

corporations, alongside smaller firms such as biotech players focused on a small number of new

products; generics companies are also present (Pharmaceuticals Industry Profile United States,

page 22).” In the pharmaceutical industry the rivalry among the market is very high.

Threat of Substitute Products

The generic brands of drugs have increased because of costs of name brand drugs. The

ability for customers to find generic brands is increasing because of the expiration of patents on

name brands drugs. “Manufacturers of generics can offer the same drug at a much lower price,

as they rely on the safety and efficacy data provided by the innovator product, and they

therefore do not have to conduct costly clinical trials (Pharmaceuticals Industry Profile United

States, page 20).” The threats of substitutes in the pharmaceutical industry are very high

because of different attributes of substitution.

Bargaining Power of Suppliers

Companies in the pharmaceutical market can purchase their raw materials from many

suppliers which helps to reduce their dependence on one particular company. “Over recent

years, larger pharmaceutical companies have turned to producing their own chemicals in a bid

to enhance profits, however smaller companies lack the resources required to do this and

remain reliant on active pharmaceutical ingredient manufacturers (Pharmaceuticals Industry

Profile United States, page 17).” The overall power of suppliers is medium.

Summary of FindingsThe Porter’s Five Force analysis shows aspects of the industry that are attractive and

repellent to customers, competitors, and investors. It is tough for new entrants in

pharmaceuticals to become a key player, generating even more profits for existing competitors.

Consumers have a low purchasing power, creating large profits for companies in the industry.

Rivalry among existing competitors is high which makes it tough for new companies to enter

the industry and gives companies the incentive to create new products. Patent expirations

create a high threat for substitute products at lower prices. The last of the Porter’s Five Forces,

bargaining power of suppliers, is low because of heavy driving force of large pharmaceutical

companies.

ConclusionTechnological advances have helped the pharmaceutical industry manufacture,

research, and develop new products. The modern era of drug discovery and development

allowed scientists to manufacture more efficiently and at a larger scale. These advancements

have helped the pharmaceutical industry to become highly competitive. Also, patent expiration

of brand name drugs has allowed small companies to produce generic drugs for inexpensive

prices. As well as geological location and natural resources which intertwine to help determine

prices. The pharmaceutical manufacturing industry is a highly competitive fast moving

organization that must quickly adapt to changes both in the market and the environment while

still maintaining innovation and efficiency to remain one of the most profitable industries.

References

Pharmaceuticals Industry Profile: the United States. (2011). Pharmaceuticals Industry Profile

United States, 1-46.

Standard & Poor's. (2012). Standard & poor's iq. Retrieved from

http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/showIndust

rySurvey.do?code=hep

U.S Census Bureau. (2011, May 03). United states census bureau. Retrieved from

http://www.census.gov/econ/industry/products/p325412.htm

Pharmaceutical Industry. (n.d.) Britannica Concise Encyclopedia. (1994-2008). Retrieved June 3

2012 from http://encyclopedia2.thefreedictionary.com/Pharmaceutical+Industry

Corporation. (n.d.). Water Technologies for the Pharmaceutical Industry. Pharmaceutical

Capabilties . Retrieved May 26, 2012, from

www.water.siemens.com/SiteCollectionDocuments/Industries/Biopharmaceutical/

Brochures/Pharma_Capabilities.pdf

32541 naics code - pharmaceutical and medicine manufacturing. (2012). Retrieved

from http://naics-code-lookup.findthedata.org/l/510/Pharmaceutical-and-Medicine-

Manufacturing

Appendices

ReportLinker. (2010). Reportlinker. Retrieved from http://www.reportlinker.com/ci02257/Pharmaceutical.html

GBI Research. (2012, June 04). Contact pharma. Retrieved from http://www.contractpharma.com/issues/2012-06/view_features/oral-drug-delivery-market-report/