Introduction
In the context of the U.S., pharmaceuticals remain one of the most profitable, yet controversial, industries in the market. Classified under 2834 in SIC, the industry is characterized as a business that manufactures, processes, or produces medicines for treating people and animals (“NAICS/SIC identification tools,” n.d.). 32451 code in NAICS also specifies that pharmaceutical companies function in manufacturing medicinal and biological products, drugs, and herbs, intended for external or internal consumption (“NAICS/SIC identification tools,” n.d.). This analysis will briefly introduce the pharmaceutical industry, assess the industry’s economic profile, uncover history cycles, and economic forecasts, finalizing with an overview of the strengths and weaknesses, as well as the potential for investment.
Industry Introduction
The pharmaceutical industry has a wide range of stakeholders in different categories. While the upstream stakeholders include patients with chronic diseases, prescription medicine, and those who use off-counter drugs, downstream stakeholders refer to medicine distributors, merchants, owners of the pharmacy, and manufacturers of biological and medicinal products. According to Masoumi, Yu, Nagurney (as cited in Tomas, Harrington, & Srai, 2017), the market structure of pharmaceuticals is better described as oligopoly for the following reasons. Around five firms dominate the market, selling differentiated but similar products. While there are few barriers to entry, no business has complete market power, despite holding a reputable brand (Tomas et al., 2017). Some experts in the field note that the nature of the pharmaceuticals business has changed from monopoly to oligopoly with recent scientific advances and strengthened laws for patenting and promoting newly developed drugs.
Industry Economic Profile
Major types of goods and services provided by the industry directly affect the market segmentation. As followed by Gassmann, Schuhmacher, Von Zedtwitz, and Reepmeyer (2018), there are four critical product categories in the industry, such as medicinal and botanical products, biological products, pharmaceutical preparations, and diagnostic substances. Notwithstanding this fact, many experts take a step forward, dividing major products in pharmaceuticals, dependent on the applicable therapeutic areas. The prevalent specialties include oncological and antidiabetic products, constituting 10.8 and 9.4% of the industry’s revenue, respectively (Gassmann et al., 2018). A highly competitive environment of the pharmaceuticals industry requires substantial human capital for the business’ success. Labor is divided mainly among the medicine distributors, manufacturers, and retailers. With regards to human capital, staffing has become an acute issue in the industry for a staggering lack of skilled professionals to join the demanding field and meet customers’ needs.
It is difficult to determine a stable customer profile for the industry since people of all genders, different ages, and backgrounds take advantage of the pharmaceutical products. However, as explained by Pujari, Sachan, Kumari, and Dubey (2016), geriatric females who are married, supported by their family, financially stable, and educated tend to show more buying power than other demographic categories of customers. Such a pattern may be explained by the fact that the modern pharmaceuticals industry is not easily accessible to people who do not own insurance, have low income, and have unfortunate socio-economic factors.
Historical Industry Cycles
The pharmaceutical industry generally remains unaffected by seasonal changes and holiday days. Critical trends include pressure from generic medicine, price gouging, and collaborations between leading companies in developing drugs. As suggested by Herper (2017), patterns indicating unreasonably high prices for specific medicine are connected with FDA regulations rather than business’ unmoral decisions, despite common customers’ commentary. According to Gassmann et al. (2018), the annual growth rate of the pharmaceutical industry from 2012 to 2018 was approximately 4%. The revenue of the businesses added up to 174 billion in total, resulting in nearly 40 billion dollars in profits. As suggested in “NAICS/SIC identification tools” (n.d.), cash flows from the pharmacies constitute more than 1/10 of the overall market value in the United States, with a potential to continue growing. The pharmaceutical’s overall profit margins exceed the banking, car, and oil industries.
Industry Economic Forecasts
To ensure the quality of the distributed medicine, the pharmaceutical industry is heavily controlled by internal regulatory bodies in compliance with federal laws. As followed by Pezzola and Sweet (2016), the three major governmental institutions that oversee pharmacies’ actions are WHO (World Health Organization), FDA (Food and Drug Administration), and MHRA (Medicines and Healthcare Products Regulatory Agency). The policies set by these organizations aim at ensuring the best standards in terms of safety, quality, quantity, pricing, patents, and research incentives (Pezzola & Sweet, 2016). In other words, public issues of WHO, FDA, and MHRA control the activity of the pharmaceutical industry on all three levels: manufacturing, distribution, and retailing process.
Along with the governmental regulations, the activity of the industry is affected by a number of recent policy changes. For instance, Bentil (2018) noted a sufficient reduction in the act taxes: from a previous top rate of 35% to a flat rate of 21% now. Such tariff “allows a full deduction of the foreign portion of dividends received by corporate shareholders from foreign subsidiaries” (Bentil, 2018, para. 5). Furthermore, a new repatriation tax was approved, meaning that deferred foreign earnings will be taxed at significantly lower rates: 15,5% for cash and 8% for non-liquid assets (Bentil, 2018). Such implications of the tax reform are likely to facilitate the activity in the industry.
Even though the pharmaceutical industry is one of the most heavily regulated, new technology and innovations are frequently incorporated by businesses. For instance, pharmacies already take advantage of artificial intelligence, 3D printing, and precision medicine in their daily routine. As mentioned in “Encouraging innovation in pharma manufacturing” (2016), modernization of the manufacturing process helps to improve the working conditions by minimizing errors related to the human factor. While the aforementioned technologies proved to be highly effective, the regulatory guidelines in the industry noticeably slow down the process of their practical usage.
Strengths and Concerns of the Industry
The current model of the pharmaceutical industry has several strengths and potential concerns for consideration. As supported in “Strengths and weaknesses of the current pharmaceutical industry model” (2016), on the one hand, it is profit-oriented, well-established in the market flow, and has substantial financing. Pharmaceutical companies are also characterized as resilient and obedient to governmental regulations. On the other hand, the industry is criticized for harnessing the latest science and being oriented on a small scale of customers, restraining the accessibility of healthcare (“Strengths and weaknesses of the current pharmaceutical industry model,” 2016). Another potential concern is expensive failures, meaning that mistakes made by medicine manufacturers and distributors may have an irreversible effect on the patient’s health.
Taking into consideration the outlined strengths and weaknesses of the industry, I would likely invest in the pharmaceutical business if I had one million dollars. First, strict governmental regulations significantly lower the instances of corruption and illegal deeds in the industry. Second, the high demand for medicine of different origins signifies that the pharmacies are unlikely to bankrupt in the near future. Third, recent technologies and innovations noticeably improve the working conditions, minimizing risks of manufacturing errors related to the human factor.
References
Bentil, J. (2018). How tax reform will affect the pharmaceutical industry. Pharmaceutical Executive. Web.
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Gassmann, O., Schuhmacher, A., Von Zedtwitz, M., Reepmeyer, G. (2018). Leading pharmaceutical innovation: How to win the life science race (3rd ed.). New York, NY: Springer.
Herper, M. (2017). Why did that drug price increase 6,000%? It’s the law. Web.
NAICS/SIC identification tools. (n.d.). Web.
Pezzola, A., & Sweet, C. M. (2016). Global pharmaceutical regulation: The challenge of integration for developing states. Global Health, 12(85), 1-37.
Pujari, N. M., Sachan, A., Kumari, P., & Dubey, P. (2016). Study of consumer’s pharmaceutical buying behavior towards prescription and non-prescription drugs. Journal of Medical and Health Research, 1(3), 10-18.
Settanni, E., Harrington, T.S., & Srai, J. S. (2017). Pharmaceutical supply chain models: A synthesis from a systems view of operations research. Operations Research Perspectives, 4, 74-95.
Strengths and weaknesses of the current pharmaceutical industry model. (2016). Web.