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Drug BusinessCase Study

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The pharmaceutical industry is defined as "all enterprises that were involved in the invention of drugs, the production of the active substances in drugs, the formulation of drugs and the promotion of them to the public, as well as the specialists who prescribe them" (Text). Drugs are typically understood to be those non-food items that are produced for human or animal consumption, that are intended to have specific medical characteristics or benefits. Drugs are generally viewed as subject to regulatory approval as a drug. The pharmaceutical industry can be split into different types of companies. Some companies are drug creators, which engage in research and development activities to bring new drugs to market. These companies will receive monopoly protection from regulatory authorities (in the U.S., the FDA) and will use that monopoly protection to earn profit on those drugs. Other companies in the industry will focus on the production of generic drugs, those for which monopoly protection has expired. This paper will examine the pharmaceutical industry. The paper will focus on information from the text, as well as online sources that can provide any additional insight into this basic explanation of the pharmaceutical industry.

Market Size and Major Players

Every country in the world has a pharmaceutical market. In developed nations, most people utilize some sort of prescription or over-the-counter (OTC) drug. As a result, the drug industry is massive. The textbook has the total U.S. pharmaceutical market at $228.7 billion. The second-largest market is Japan, at $55.4 billion and Germany is third at $27.8 billion. The eight largest markets are all fully-developed economies. In these countries, per capita spending exceeds $300 per annum, and pharmaceuticals are over 1% of the GDP.

The largest emerging market economies for pharmaceuticals are China ($6.6 billion, or about six bucks a year per person) and Mexico ($6.3 billion). The most recent figures place the size of the U.S. market today at between $360-390 billion. The overall global market will be over $1.1 trillion by this year (IMS, 2014). The largest growth markets are, not surprisingly, in emerging markets, as they are not yet mature the way that Western markets are. Pharmaceuticals are growing at a faster pace than most economies overall, in part due to aging populations that are increasing demand and in part due to information asymmetry and monopoly protections.

Several pharmaceutical companies have global reach. One study has the top pharma companies as follows (PMLive, 2013):

Pfizer

United States

$47.8 billion

Novartis

Switzerland

$47.6 billion

Roche

Switzerland

$39.1 billion

Merck

United States

$37.4 billion

Sanofi

France

$37.1 billion

Glaxo SmithKline

United Kingdom

$33.3 billion

Johnson & Johnson

United States

$28.1 billion

AstraZeneca

United Kingdom

$25.7 billion

Eli Lilly

United States

$20.9 billion

In total, there are 22 pharmaceutical companies with revenues in excess of $10 billion. In addition to the countries in the table above, Japan and Israel are major producers of pharmaceuticals.

The largest per capita consumer is the United States by far, followed by Japan and Germany. In general, modern Western countries have high per capita rates, roughly in line with each other. The United States is an outlier, having much higher per capita consumption of pharmaceuticals than other nations. The most recent figures, as compiled by the OECD (2013), have per capita consumption in the U.S. At $1,010. Belgium, at $736, is next in 2013, but data for Canada was unavailable for that year, and Canada has historically consumed more than Belgium. Among OECD countries, Mexico at $70 has a very low rate of consumption of pharmaceuticals, despite its status as being one of the best emerging markets. Developing nations in general have much lower per capita rates of pharmaceutical consumption.

Globalization is an important factor in the pharmaceutical market. Most pharmaceutical companies compete globally. Most major markets have protections with respect to intellectual property that allow for companies that develop drugs to receive monopoly rents in order to recoup their investments. These are the markets where companies compete. Most pharmaceutical companies are therefore globalized. They all have a common interest in developing the third world markets, but face risk in those markets as those markets often have inadequate intellectual property protections. The result is that in China, India, Russia and other such markets, drug companies tend to be local and focused on generic production.

Research & Development

Research and development is a critical component… [END OF PREVIEW]

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