United Drug is a Dublin-based firm that describes itself as "a provider of outsourced commercialisation solutions to healthcare companies operating across three divisions." The three divisions are Healthcare Supply Chain; Sales, Marketing and Medical; and Packaging and Specialty. Supply Chain involves wholesaling, sales and distribution and sometimes manufacturing. The Sales, Marketing and Medical division includes as functions contrast sales outsourcing, sales force consulting, and healthcare communications. The Packaging and Specialty division focuses on a number of packaging functions, Cold Chain delivery, nursing services to the home and vaccines. According to the 2011 Annual Report, the company's vision is "to be a true innovator in the provision of value enhancing and integrated product/service solutions in key international healthcare markets, enabling better market outcomes for producers, providers, payers and patients."
The company's mission is "to be a leader in all key international markets in the provision of exceptional integrated and market specific outsourcing solutions for our healthcare partners." The company interprets this as having several components. The first of these is "to provide innovative, secure healthcare packaging solutions for medicines and device producers." The second component of the mission is "to provide flexible, service driven sales, marketing and medical resourcing solutions for pharma companies." The third of these is to "provide quality-based specialist supply chain services for medicines, devices and clinical trials materials."
With its mission and vision, United has established that it intends to compete as a differentiated player, implied by innovation as a key selling point for the company. Porter's argues that a differentiated strategy is focused on product uniqueness, or when that fails brand uniqueness. This uniqueness should attract customers and allow the company to charge higher prices as a result of this perceived uniqueness. Uniqueness must be fostered in some way, including through a consistently high level of innovation and a strong value proposition.
In order to determine whether United Drug is performing well with its current strategy, as assessment of the environment must be taken into account. There are a few different tools by which the external environment can be evaluated. Porter's Five Forces model allows for determination of the general attractiveness of the industry. The five forces are the bargaining power of buyers, the bargaining power of supplies, the threat of new entrants, the threat of substitutes, and the intensity of rivalry of firms within the industry (MindTools.com, 2012).
The bargaining power of buyers is moderate. The controls on pharmaceutical pricing, for example, depend on the market. For United, it must typically bring the drugs it wholesales in at a point where it can be profitable. For other products, the company may have more flexibility in its pricing to the end user, but it does deal from a position of strength with regard to knowledge, since most end users of pharmaceuticals or medical products know little about the product, how much it costs to make, or even what its value might be.
The bargaining power of suppliers is also moderate. While United provides a valuable service, many suppliers such as pharmaceutical companies or device manufacturers may choose vertical integration. There may be little value for these companies to run their own distribution networks in Ireland, but in the UK or any other larger market such an approach would have some appeal. There are other packaging suppliers, and packaging is not particularly well differentiated, so technological advantages are easily imitated. As a result, the company must ensure that it adds value for its customers, and this places constraints on the spreads it can earn on its wholesale function.
The threat of new entrants is moderate. There are no significant barriers to entry into any of the segments in which United Drug operates, in terms of technological learning curve or capital requirements. Firms from the continent or America could easily enter the market in the UK and Ireland, as the regulatory restrictions are not especially difficult to overcome. Other companies that perform similar functions in other industries could especially enter this industry. Yet, there has not been a spate of new entrants, indicating that many potential new entrants are either unaware of opportunities or do not view the opportunities in this industry compelling.
The threat of substitutes is low. While firms may engage in vertical integration, there is little conceivable substitute for the service that United provides. United can provide this service in a number of different ways, if an innovative new method of product or service delivery is developed, United could adapt that innovation. The intensity of rivalry within this industry is relatively high. In most markets, there are only a few specialty firms providing this function and they compete with each other for accounts. For example, two or three firms might each have a different drug to treat a specific ailment, or a different family of medical devices. These firms would then compete against each other for access to retail channels, especially smaller retailers that are unlikely to deal with multiple wholesalers. The sun total of the five forces analysis is that this industry is moderately desirable. Firms in the industry are not wildly profitable, and have limited growth opportunities, but they are able to derive some profits from the areas where their own power is relatively strong, such as the lack of new entrants and the low level of threat posed by substitutes.
The macroenvironment is challenging. According to the 2011 Annual Report, the company's profits are split geographically as 41% UK, 35% Ireland, 20% U.S. And 4% EU. The economy of the United Kingdom is in a poor state of health at the moment. The latest report (Q4 2011) from the Office for National Statistics has GDP in the UK declining by 0.3%. This stagnation and potential slip into recession come as the result of austerity policies that, predictably to those who understand economics, were always going to be disastrous. The Irish economy has struggled badly since the questionable decision to bail out the banks. The central government is looking at restructuring its debts in order to lessen the fiscal burden, which has placed the country close to default. This has reduced public spending. Pending the referendum this spring on the Eurozone's fiscal compact, the macroeconomic situation is anything but certain (The Economist, 2012). The situation in the United States is not much better, with sluggish economic growth, political paralysis and lingering implementation effects of trying to make changes to the health care system.
Demographics should be a bright spot, as aging populations in all four of United's markets should result in increased demand across the entire health care industry. These demographics would normally result in industry growth, but Ireland and Northern Ireland both are shedding talent. The sorry state of the economies in these areas is leading to an outflow of talented young people, something that will continue to hamper economic progress, as well as population growth for the long-run. Thus, there are demographic challenges to offset the benefits of a glut of older people in increasing need of health care.
The industry in Ireland is challenged by the public budget challenges. The Health Service Executive is funded out of a general taxation and is responsible for the vast majority of health spending in Ireland. The budget cuts necessitated by the bank bailouts have hit the HSE hard, with an estimated €750 million in cuts, some of which will come to services. There will be public beds closed and cuts in activity elsewhere (Wall, 2012). Cuts to drug and device expenditures cannot be far behind. The same situation exists in the UK, where austerity measures have resulted in cuts to the NHS budget that affect the aggregate demand in sterling terms for health care (Kellett, 2012).
The greatest threats, therefore, lie in the challenges associated with shrinking government health budgets and the impacts that this will have on aggregate demand in the industry. United relies on more people needing drugs and devices, and on customers willing and able to pay for them. When these things are compromised, this represents a significant challenge to the business. The company noted in its 2011 Annual Report that it is suffering the effects of regulatory pricing pressure in Ireland, for example. Ongoing economic weakness only exacerbates the problem.
However, it is worth noting that healthcare budget cuts also create some opportunity. Firms that had previously chosen a path of vertical integration may look to United as a source of cost-effective solutions. The value proposition of United Drug is that the company already has the infrastructure for production and distribution, and therefore is in a position where it can perform these functions at a lower cost than firms may be able to perform these functions themselves. If that is the case, then United will be able to attract new business by offering drug and device companies cost savings over in-house production and distribution units. The Chairman's Statement from the 2011 Annual Report highlights this as the biggest opportunity in the current economic climate.
The company has…[continue]
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