Discussion Questions1. What are the barriers to entry into the pharmaceutical industry? To what extent do you think these entry barriers protect established pharmaceutical companies from new competitors?2. The pharmaceutical industry has long been one of the most profitable in the United States. Why do you think this is the case?3. What forces in the general environment influence the nature of competition in the task environment facing pharmaceutical firms?4. Are there reasons for believing that the profitability of the industry might come under threat over the next decade? What do you think managers in the industry should do to counter this threat? THE PHARMACEUTICAL INDUSTRYManagers in pharmaceutical firms face a dynamic and challenging task environmentthat creates both opportunities and threats. Demand for pharmaceuticals is strong andhas been growing steadily for decades. Between 1990 and 2005 there was a 12.5 percentannual increase in spending on prescription drugs in the United States. This strong growthwas driven by favorable demographics. As people grow older they tend to consumemore prescription medicines, and the population in most advanced nations has beengrowing older as the post-World War II baby boom generation ages.Moreover, successful new prescription drugs can be extraordinarily profitable. ConsiderLipitor, the cholesterol lowering drug sold by Pfizer. Introduced in 1997, by 2005 this druggenerated a staggering $12 billion in annual sales for Pfizer. The costs of manufacturing,packaging, and distributing Lipitor amounted to only about 10 percent of revenues, oraround $1.2 billion. Pfizer spent close to $400 million on advertising and promoting Lipitorand perhaps as much again on maintaining a sales force to sell the product. That stillleaves Pfizer with a gross profit from Lipitor of perhaps $10 billion.Lipitor is highly profitable because the drug is protected from direct competition by a 20-year patent. This temporary monopoly allows Pfizer to charge a high price. Once thepatent expires, other firms will be able to produce generic versions of Lipitor, and theprice will fall–typically by 80 percent within a year–but that is some time away.Competing firms can produce drugs that are similar (but not identical) to a patent-protected drug. Drug firms patent a specific molecule, and competing firms can patentsimilar, but not identical, molecules that have a similar pharmacological effect. ThusLipitor does have competitors in the market for cholesterol-lowering drugs-such asZocor, sold by Merck, and Crestor, sold by AstraZeneca. But these competing drugs arealso patent protected. Moreover, due to Federal Drug Administration regulations andrequirements for demonstrating that a drug is safe and effective, the costs and risksassociated with developing a new drug and bringing it to market are very high. Out ofevery 5,000 compounds tested in the laboratory by a drug company, only five enterclinical trials, and only one of these will ultimately make it to the market. On average,estimates suggest that it costs some $800 million and takes anywhere from 10 to 15 yearsto bring a new drug to market. Once on the market, only 3 out of 10 drugs ever recouptheir R&D and marketing costs and turn a profit. Thus the high profitability of thepharmaceutical industry rests on a handful of blockbuster drugs. To produce ablockbuster, a drug company must spend great amounts of money on research, most ofwhich fails to produce a product. Pfizer, for example, spent over $7.4 billion on R&D in2005 alone, equivalent to 14.6 percent of its total revenues.In addition to R&D spending, the incumbent firms in the pharmaceutical industry spendmuch money on advertising and sales promotion. Although the $400 million a year thatPfizer spends promoting Lipitor is small relative to the drug's revenues, it is a large amountfor a new competitor to match, making market entry difficult unless the competitor hasa significantly better product. In addition to R&D spending, the incumbent firms in the pharmaceutical industry spendmuch money on advertising and sales promotion. Although the $400 million a year thatPfizer spends promoting Lipitor is small relative to the drug's revenues, it is a large amountfor a new competitor to match, making market entry difficult unless the competitor hasa significantly better product.There are also some big opportunities on the horizon for firms in the industry. New scientificbreakthroughs in genomics portend that within the next decade pharmaceutical firmsmight be able to bring new drugs to market that treat some of the most intractablemedical conditions, including Alzheimer's, Parkinson's disease, cancer, heart disease,stroke, and HIV.On the other hand, managers in the industry face serious challenges. Many patent-protected medicines are scheduled to come off patent in the next decade, and tomaintain profitability, pharmaceutical firms must find new drugs to replace them. Inaddition, as spending on health care rises, seniors are complaining about the high costsof prescription medicines, and politicians are looking for ways to limit this. One possibilityis some form of price controls on prescription drugs. Pharmaceutical price controls arealready in effect in most developed nations, and although they have not yet beenintroduced in the United States, that could happen. Another possibility is to make it easyfor U.S. residents to purchase pharmaceuticals from foreign nations where prices arelower.

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Answered: Discussion Questions 1. What are the…

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE