Using appropriate theory, identify and critically evaluate the principal factors in the environment shaping the global pharmaceutical industry
The pharmaceutical industry is described by high levels of risky and lengthy R&D process, tough competition for intellectual property, tighter government regulations and powerful pressures on buying power (Johnson, 2006). This essay will illustrate and evaluate some of the most important factors that have shaped the global pharmaceutical industry is the dominant purchaser.
Government have played a significant role in the way in which the global pharmaceutical industry has been shaped since in 1970; it introduced two significant developments in the industry. The first was to set up tougher regulator y controls on clinical trials after the Thalidome tragedy, and the second development was the endorsement of a fixed period of 20 years time on patent protection. As Johnson et. al. claims the key drivers for change can have an important impact on the failure or success of a strategy (2008). In an effort to protect newly-developed drugs, the government created the time-limited restriction upon patent protection, preventing other pharmaceutical companies copying their original drugs.
This development led to the appearance of generics, although the high barriers of entry from government's legislation on patent protection. Generics were viewed as a new entrant threat in the pharmaceutical industry for the already existing original drugs. They have similar active ingredients with the originals but sold at lower and more affordable prices. According to Lynch, "substitutes may limit the profits in an industry by keeping prices down" (2009, p.100). Additionally governments use generic drugs as their first-line treatment option since they are cost saving (Johnson et al, 2008). Consequently from a strategy standpoint, companies expect patent protection to be expired and produce substitute drugs such as generics and sell them in lower prices.
Moreover, government's enactment on price controls was the introduction of "parallel trade" which involves the free movement of goods and products across the Single European Market. According to Sarah Holland from a strategic standpoint, "parallel trade" gave distributors the opportunity to cooperate with other traders around the world but also enables them to purchase drugs from low-price markets and later dispatch them to high-price markets, gaining the difference (Johnson et. al., 2008). "Parallel trade" can also be perceived as threat to the pharmaceutical industry, as the profit of the products on companies might be decreased.
Another important factor that have shaped the global pharmaceutical industry is the research and development and as Sarah Holland points out, R&D is a vital factor in the medical progress of pharmaceutical companies, as it is applied to discover new and improved drugs for many illnesses. Therefore, pharmaceutical companies try to be both effective and innovative. Some claimed that successful R&D can be obtained through "team working, knowledge management and close relationship with external opinion leaders whereas others sought for external innovation" (Johnson, et. al., 2008, p.614).
Although R&D is a costly, risky and lengthy procedure, companies which constantly invest money on R&D productivity and capabilities, can became industry leaders (Johnson, 2008). According to Lynch (2009), a company's competitive advantage occurs when an organisation has more organisational capabilities than the other one. Consequently, in strategic terms, companies' tend to focus in coping with the competition by creating new and innovating products over the long term and therefore gaining competitive advantage.
Another principal factor that have shaped the volatile situation to the industry is a combination of the pressure on health care funding systems occurred by the ageing population and the advanced technology needed to fulfil growing patients' expectations. In order to constraint these pressures and control the pharmaceutical spending, government implemented a strategic approach by emphasising either on the manufacturer or distributor, or on the prescriber and the patient. As Sarah Holland states, these controls are "designed to reward genuine advances - price premiums and/or reimbursement levels that are based on perceived innovativeness and superiority" (Johnson et. al., 2008, p610).
Furthermore, the reputation of the pharmaceutical industry has been influenced by some companies which were forced to pay millions of dollars in fines mainly for pricing and marketing offence whereas some others were blamed of placing profits instead of caring about patient protection. An example of that is Vioxx drug which was developed for the treating of cardiovascular disease, created from Merck (Johnson et. al. 2008). Vioxx was increasing the risk of cardiovascular disease and for that reason Merck was accused of not taking into account the problems during the product development and leaving public's health exposed. According to an article "Merck signed a $4.85 billion deal to settle thousands of claims for heart attacks, strokes and deaths allegedly caused by the drug."
Last but not least, Holland claims that even though there were already many powerful drugs for numerous of diseases, the pharmaceutical industry was also accused for not meeting the needs of patients in developing countries because of their high costs and thus people couldn't afford it. Strategically, companies should reorganize R&D efforts in order to produce all the vital drugs at lower prices but also to offer technological transfer. (Johnson, et. al. 2008)Word count:
Bibliography and Journals
- Anon, (2005), "Risky business of new products: But can companies afford not to try?"Journal: Strategic Decision. Vol 21, Issue: 2, Pages 20-23. Available at: http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=5420C4A5DD5046EDA51046B90443428F?contentType=Article&contentId=1463746 Date accessed: 03/12/09
- Johnson et. al. (2008), "Exploring corporate strategy, (2009)
- Anon, (2009) "Vioxx risks could have been detected earlier" Published: Archieves of Internal Medicine, available at: http://www.reuters.com/article/idUSTRE5AM4MV20091123 Date accessed: 05/12/09