The Economics of the Pharmaceutical Industry -- Focus on Pfizer Drugs
Specify on some background of the company
According to its official website, Pfizer Incorporated "discovers, develops, manufactures, and markets leading prescription medicines for humans and animals and many of the world's best-known consumer brands. Our innovative, value-added products improve the quality of life of people around the world and help them enjoy longer, healthier, and more productive lives. The company has three business segments: health care, animal health and consumer health care. Our products are available in more than one hundred and fifty countries." (Official Website 2004)
Although Pfizer's claims to offer value to its consumers may be debatable, its contention that it is the leader of the industry in sheer dollar terms cannot be disputed. Of particular value to Pfizer as a stock has been its patent of the drug Viagra, and it continues to capitalize upon its dominance as an industry leader even in the second of its website that attempts to attract individuals to work for the company.
How inelastic is the demand for the company product?
Demand for pharmaceuticals is relatively inelastic, in the industry as a whole, not simply for Pfizer's drugs, but also in the sense that few consumers can say, 'oh well, the economy is bad, my budget is tight -- guess I'll cut back on my insulin/beta blockers/cholesterol lowering drug' this month. However, generic alternatives have posed potent threats for the industry. (EGA, 2004) Furthermore, although Pfizer has the advantage of having certain drugs, such as 'Viagra' with such high name recognition the brand name is virtually synonymous with the drug's function, Viagra is not a necessary drug because of its sexual enhancement function in the sense that life-preserving drugs are. However, the potency of the 'Viagra' name should not be underestimated. In other words, rather than the chemical name itself, much like Eli Lilly' relationship with the antidepressant drug Prozac, before Prozac's patent ran out in the past century, people know Viagra's function to be synonymous with Viagra rather than with the drug's generic alterative. However, Prozac, a potent antidepressant, was far more necessary to its core audience of psychologically disturbed users than Viagra, although it too was alleged as being a 'cosmetic' drug, as deployed by some physicians.
Why is the pharmaceutical company considered to be part of an oligopoly-style market?
In a traditional oligopoly market structure, there are only a few firms that make up the industry as a whole. (Investopedia, 2004) Thus, the few firms making up the industry have control over the prices of the industry's product, by and large, although the relatively wide range of products available within the pharmaceutical industry bring this economic fact into some dispute -- again, there is a difference in demand and drug effects within certain drug types, although not all. For instance, Viagra may be a favored brand for its purposes, but the over-the-counter Pfizer drug Sudafed, an anti-contestant, has far more competition and available substitutes.
Like a monopolistic market, an oligopolisic market often has high barriers to entry. The high cost of researching, developing, and patenting a new product alone mean that a company often has a great deal of problems entering a monopolistic of an oligopolistic market structure. In such market structures "the products are almost identical and thus the companies, competing for market share, are interdependent via market forces. If, for example, an economy needs only 100 widgets but Company X produces 50 and its competitor, Company Y, produces the other 50, the prices of the two brands will be interdependent upon one another and therefore similar. So, if Company X starts selling the widgets" for a lesser price, it will get a greater market share and force Company Y" to sell for a lesser price." (Investopedia, 2004)
How they compete against the other few competitors? Prices?
Only a few pharmaceutical giants, such as Pfizer and Eli Lilly, have the economic resources to do the necessary research to create new drugs, as well as the ability to commend the necessary salaries for researchers and government grants to do so. Consumers are also often unwilling to deviate from their favored brands of drugs, because of health concerns, real or imagined. Although economists assume there are a number of different buyers and sellers in the marketplace, meaning "that we have competition in the market, allowing for changes in price with changes in demand and supply, and that "furthermore, for almost every product, there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead," substitutes are not always available for drugs, when drugs are patented, and consumer's health care plans do not always provide for all drugs. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent over Viagra. (Investopedia, 2004)
In a market with many buyers and sellers, both the consumer and supplier have equal ability to influence price. But the prices of drugs have remained relatively inflexible, despite the presence of some generics. First of all, in the industry, in some cases "there are no substitutes and there is no competition. In a market that has only one or few suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility, and has have very little influence over price." (Investopedia, 2004) Also, there are fears about drug safety, fanned to a certain extent by industry giants such as Pfizer as well as its primary competitor Eli Lilly. "The Food and Drug Administration, Drug Enforcement Administration and Customs Service all agree that lowering importation standards is a dangerous idea. And Health and Human Services says it will not result in significant savings for consumers. While the U.S. is fortunate to have a pharmaceutical distribution system that is generally considered to be among the safest in the world, incidents of counterfeiting nevertheless have increased fourfold over the past several years. It's a growing problem in need of creative solutions." (Official Website, 20040
Thus, Pfizer is part of the classic oligopoly structure where, "other firms cannot enter the market because either the startup costs are too high" and "the cost structure of the market gives an advantage to the largest firm. Most public utilities would fall into this category," however, the pharmaceutical market is subject to far less recognition.
How many competitors?
Name recognition for products like Viagra is one of the company's greatest strengths. Its competitors within the oligopoly are relatively few, and safety fears limit cost competitiveness between more potent economically competitive operators such as generic drug brands or importers from overseas.
How do they calculate their costs against competitors?
Generic medicines are themselves more economically priced than originator products selling at 20-80% less than original prices; (EGA, 2004) Thus name recognition is a factor, the R&D costs of developing the drug, how soon its patent is pending termination by the FDA, demand for the drug, and consumer need for the drug.
Analyze their prices
Drug prices have traditionally differed substantially, "reflecting differences in regulation, insurance coverage, medical practice, exchange rates, and other factors. Meaningful comparison of drug prices in different countries is technically problematic, because of vast differences in the range of drugs, forms, strengths and pack sizes available in different countries." (Danizon, 2002)
Do they have an efficient amount of resources?
Some would contend that the industry has, if anything, too many resources, not simply economically, but also in congress. The pharmaceutical industry is more research intensive than any other industry. R&D is roughly 14-17% of current sales. But R&D accounts for about 30% of total costs, if all costs are discounted to present value at the…