Five Forces and Pharmaceuticals

Five Forces and Pharmaceutical Companies

Pharmaceutical Companies spends many years and millions of dollars developing new drugs. In order for these companies to be successful they must sell any successful drug at a high price to attempt to regain some of the cost of the drug. Once other companies replicate the drug the cost of the drug can be driven down with competition. Most people use their insurance companies to pay for their drugs, pharmaceutical benefits management (PBM). The pharmaceutical companies try to make deals with the PBM, by offering them lower prices so that they would pressure doctors into writing those prescriptions. Below is the five forces that drives the pharmaceutical industry.

Supplier Power is where the pharmaceutical company that is supplying the medication controls the power because of the volume of demand. The supplier power is defined by many different aspects of selling a specified drug. Usually once a drug is released on the market the company must sell as much of the drug possible to make the money it cost them to create the drug. The supplier power in that initial phase is defined by the cost of the drug and the amount of sale.

Threat of substitute is where the drug has been replicated. There is now other comparable drug on the market and therefore the original company no longer has the supplier power and they are now forced to lower cost of drug. Consumers must evaluate the substitute and choose the drug that has more benefits.

Buyer power is mainly defined by the choices available to the buyers. When there are alternative drugs on the market, the buyer usually have more power. The buyer sets the price because there are limited buyers and many producers.

Rivalry is derived from competition, which then brings profitability to zero. These companies become so competitive that they drive sale price down, causing the company to lose money. Rivalry causes companies to seek a competitive advantage over their rivals, to ensure profitability.

Barriers to entry are when existing companies protect their high profitability by inhibiting additional rivals from entering the market. Some companies may see rivals or competition as a major problem, a way to lower profitability. Companies may intentionally lower their prices to keep competition out; once the treat is no longer there they may then raise the price.