The 1990’s saw a highly fragmented pharmaceutical industry with many competitors. The top ten firms in pharmaceutical sales held 28% market share in mid-1995. The top 50 firms held just over 60 percent. Changes were occurring in the pharmaceutical industry in the 1990’s. With pharmaceutical benefit management (PBM) firms working to reduce costs, pharmaceutical firms held less power. PBMs sought to reduce the number of supplier firms by only purchasing from the largest firms and requiring doctors to prescribe drugs from approved lists called formularies. Many pharmaceutical firms saw mergers as a means of reducing costs and increasing market share. On August 20, 1995, two ...view middle of the document...
It would be hard for a new entrant to obtain the capital necessary for this endeavor with little certainty as to if they will ever be able to pay it back. Further barriers to entry are probablein the future. The economies of scale created by the current consolidation occurring in the pharmaceutical industry will be hard to match.
Suppliers to the pharmaceutical industry hold some amount of power in the pharmaceutical industry. The most important suppliers are those of intellectual resources. Companies employ thousands of scientists and physicians who are usually specialists in specified fields. Salaries expected by scientists and researchers range from $100,000 to $5 million. In an increasingly technological world, new technologies are readily available. In addition to intellectual suppliers, the only power would be from suppliers of advanced equipment and any compounds that cannot be created in-house.
THREAT OF SUBSTITUTES
Substitutes for the medications created by the pharmaceutical industry are slim to none. The consumers of their products are those that are ill. The only way to treat a disease or other medical condition is through medication or hospitalization. In the cases where medication is a viable option, the consumer is likelyto choose that option, as hospitalization or surgery are much more expensive, painful, and dangerous. Also, in most cases where hospitalization or surgery is necessary, medications will still be used as a supplement.
The main pitfall of the pharmaceutical industry in 1995 was the power of the buyers. A change was occurring, shifting the power from the industry to the buyers. This shift was due to the increasing formation of PBMs that were demanding lower costs for bulk purchases. These PBMs and individual plan administrators made approved lists, or formularies, for doctors to prescribe from. Exclusion from these lists was practically a death sentence to a pharmaceutical firm, limiting possible buyers.
Rivalry in the pharmaceutical industry at this time was at a good level. As stated before, the industry has low concentration, consisting of numerous firms. No one firm has significant market share. This allows existing firms the opportunity for success. A firm is also only given market exclusivity on a newly developed drug for approximately 10.2 years, or as long as the patent lasts. After this time, other pharmaceutical firms are allowed to duplicate the drug as a generic brand. This regulation on drugs insures that no one company will have an unfair advantage in gaining dominance in the industry.
UPJOHN’S STRATEGY: PRE-MERGER
Prior to its merger with Pharmacia, Upjohn operated in several market segments, ranking as the nineteenth largest pharmaceutical company in the world. Pharmaceutical products were divided into the areas of central nervous system; steroids, anti-inflammatory and analgesic; reproductive and women’s health; critical care,...