Five Forces Analysis: Pharmaceutical Industry
Five Forces Analysis: Pharmaceutical Industry
MSOD 617 | Pepperdine University
Sikin Samji
Rachel Purcell
Karen Portillo
Five Forces Analysis: Pharmaceutical Industry
A report by Price Waterhouse Cooper (PwC, 2012, pg. 5) estimates that by 2020, the
market for medicine could be worth $1.6 trillion, potentially more as the global population
increases, ages and becomes more sedentary. On a global level, the pharmaceutical industry
continues to steadily grow, with sales reaching $1.08 trillion in 2011 – a year-on-year increase of
7.8%. Sales in the BRIC countries (Brazil, China, India and Russia) rose by 22.6%, while sales
in 13 other growth countries rose by 7.2% (PwC, pg. 5). Many leading pharmerging markets,
including: Brazil, India, Turkey, Mexico, Russia, South Korea, China, Venezuela, Chile,
Vietnam, and the Czech Republic, also show double-digit growth rates due to economic growth,
demographic and epidemiologic changes, along with improved state and private insurance
funding for healthcare and medicines (IMS Institute for Healthcare Informatics, 2013, pg. 1).
These emerging markets are, however, limited by affordability of pharmaceuticals for the
growing population. Generic spending in particular is forecasted to rise by $35-40 billion over
the next five years with 60% of the increase resulting from greater utilization of existing
generics. Sales are growing in mature markets at a more sluggish rate than growth in emerging
markets, being primarily hindered by pricing pressures and increasing regulation. However, the
overall high profitability in the industry, coupled with advances in genetics and genomics,
technology, a strengthening scientific base, and growing demand for medicines make this an
attractive industry to invest in.
New Entrants
The threat of new entrants to the industry is moderate. Newcomers face various barriers
such as high research and development costs, and government regulations. The high cost of
developing a new drug comes with the risk that once completed it may not be approved by the
government’s agencies (IMS Institute for Healthcare Informatics, 2013). Tighter government
regulations also influence a firm’s ability to enter the industry. Regulators around the globe are
Five Forces Analysis: Pharmaceutical Industry
collaborating more, so a product in one region is more likely to be rejected in others. As an
example, in 2010, the European Medicines Agency pulled diabetes drug Avandia, while the Food
and Drug Administration imposed restrictions on its use. Both agencies swapped information
before reaching a decision. 24 countries thus far have introduced laws or codes of conduct
requiring pharma companies disclose any interactions with healthcare professions who are also
customer (PwC, 2012, pg. 6).
Patents can also act as a deterrent to entry. Even with many expiring in the coming years,
many large pharmaceutical companies invest heavily in generics prior to their patents expiring in
order to beat out the competition. Branding is also critical in the industry to build and/or
maintain customer loyalty and brand reputation.
Bargaining Power of Suppliers and Customers
A large number of suppliers can be found anywhere along the supply chain, eroding the
power suppliers have over raw materials and distribution. Differentiators for successful
companies include having an integrated supply chain (PwC Supply Chain Survey, 2013). This
can potentially increase switching costs for these organizations. Overall, the industry outsources
product development 25% of the time (PwC, 2012). Outsourced manufacturing facilities can
produce multiple and varying medical products including prescription, generic, and over-thecounter; allowing the industry not to rely upon a single source.
The bargaining power of the customer depends on size, with large customers such as
hospitals having more power than individual consumers. Increasing regulatory pressures are
causing a shift. For example, Healthcare Reform in the U.S. will shift toward ACOs (accountable
care organizations) which holds providers (i.e. doctors) accountable for the services they
provide, thus transferring the buying power toward the doctors as they will hold pharmaceuticals
Five Forces Analysis: Pharmaceutical Industry
to similar standards. In a survey by PwC, four-fifths of U.S. health insurers polled now require
evidence of cost savings or a clinical benefit to include new products in their formularies (or
reimbursed drug list). 16% have also entered into outcomes-based contracts with pharmaceutical
companies and another 33% expected to do so in the next three years. In addition, the rise in
social media allows customers access to more information on treatment alternatives. According
to a 2012 survey by PwC, 16% of U.S. adults said they post reviews of their treatments on social
media.
Substitutes
Threat of substitutes is low to moderate. Many drugs are set to come off patent by 2015,
causing an expected increase in the use of generic drugs (U.S. Food and Drug Administration).
Drugs going off-patent in 2014 contribute just under $50 billion in pharmaceutical revenue.
However, not all products losing protection face imminent competition from generics; biological
products and drugs delivered by devices are best poised to extend their money-spinning streak
(Bloomberg Businessweek, 2013).
Industry Rivalry
Competition in the industry is high; companies currently spend one-third of all sales
revenue on marketing their products, roughly twice what they spend on research and
development. The 10 largest drug companies control over one-third of the market. According to
a 2014 report from Marketwatch, executives from the global pharmaceutical industry anticipate
an increase in levels of consolidation, with 61% of respondents projecting an increase in mergers
and acquisition activities in 2013. The need for new products pipelines, new product acquisition,
patent expiries, cost containment and credit availability have prompted companies to consolidate
positions and look for mergers and/or possible acquisitions.
Five Forces Analysis: Pharmaceutical Industry
Sanofi
Sanofi is a French pharmaceutical company with over 110,000 employees located in over
100 countries worldwide. The Company is currently ranked the fifth largest pharmaceutical
company based on 2013 sales (www.fiercepharm.com). In June 2013, Sanofi was voted first for
Investor Relations in the Pharmaceutical & Biotechnology sector in Europe and first in France in
the EXTEL Survey. Sanofi ranks first for the fourth year in a row in these two categories.
The Company ranks first in emerging markets with a 5.7% market share and is number one in
BRIC countries (en.sanofi.com).
Company Strategy
The Company initiated a new strategy in 2008 after the expiration of a number of patents.
Since that time, the Company has shifted its position from a traditional pharmaceutical company
to a bio-pharmaceutical company with 45% of sales from biologics and 80% of the development
pipeline now also in biologics (up from 26% in 2008). The development portfolio includes 9
possible launches over the next 4 years (en.sanofi.com). The Company’s shift in strategy is
consistent with breakthroughs in science enhancing the opportunities of biologics in
pharmaceutical development.
In connection with this strategy, the Company has focused on seven strategic platforms:
Emerging Markets, Vaccines, Diabetes Solutions, Consumer Healthcare, Genzyme (rare diseases
and multiple sclerosis), Animal Health and Other Innovative Products. Focusing on these
platforms supports sustainable growth, as these platforms are less exposed overall to patent
expirations. Revenue from these platforms now exceeds 70% of the Company’s overall sales.
Five Forces Analysis: Pharmaceutical Industry
The Company’s partnership with the Bill and Melinda Gates Foundation is an example of
how the Company is focusing on the emerging markets. The purpose of this collaboration is to
explore and develop new platforms and methods so as to accelerate new R&D vaccines. With
this collaboration, both intend to accelerate the research and development of effective and
affordable vaccines that will ultimately benefit the world’s poorest people (Sanofi Annual
Review 2013).
Industry Position
With this new strategy, the company is positioning itself within the industry by exploiting
the changes that the industry is experiencing. The company recognizes the shifting growth
potential in the emerging markets and is focusing its R&D efforts on products with wide
marketability. For example, the Company has nine potential vaccine filings for 2014-2018
including the world’s first dengue vaccine which impacts approximately 2.5 billion at-risk men,
women and children in over 100 countries (en.sanofi.com).
Financial results for the Company have lagged the industry over the last few years due to
revenue decrease caused by expired patents on certain older drugs and the continued pricing
pressures of governments. Company net income decreased from 2011 (8,748€) to 2013
(6,687€) as a result of patent expirations in the U.S. for products such as Plavix®. The
Company’s sales over the last twelve months decreased 2.96% compared to industry growth of
12.93%. The Company’s price per sales of $3.58 is below industry average of $4.35. In
addition, the Company’s price per earnings for the last twelve months is $28.59, which is below
the industry average of $32.84. The Company’s earnings per share for the most recent quarter of
$74.92 exceed industry average of $31.25; however, the Company’s debt to equity ratio (28.65)
is higher than industry average (10.25) indicating that it is capitalized with more debt and less
Five Forces Analysis: Pharmaceutical Industry
equity than its peers and thus have higher earnings for each shareholder. The Company’s higher
dividend yield supports this conclusion. The Company’s gross margin (67.10%) and operating
margin (16.96%) both exceed industry averages of 51.47% for gross margin and 14.24% for
operating margin. This indicates that the Company has been effective in keeping its costs lower
than its peers thus supporting their strategy to focus on less patent intensive business platforms.
The Company’s new strategy to focus on biologics and emerging markets appears to be
an appropriate adjustment according to the industry movement. However, their financial results
have not yet demonstrated the benefit of the new strategy. According to Reuters.com, the
analysts’ consensus recommendations for Sanofi is “buy” or “outperform”, giving indication that
analysts believe the new strategy will lead to growth in the future.
Conclusion
Sanofi is an organization that has adjusted its position within the pharmaceutical industry
by exploiting the changes occurring in the global markets. The Company was stuck in 2008 with
sluggish sales impacted by expiring patents of older pharmaceuticals. The old strategy of being a
traditional pharmaceutical that relied heavily on patents was keeping the Company in the middle
of the “big pharm” industry. As the Company adopted the newer, platform-focused strategy and
emerged as a biopharmaceutical company, the organization has positioned itself to compete in
the evolving global pharmaceutical industry. The financial benefits of this shift have yet to be
recognized, however industry analysts seem to support this new strategy as they expect the
organization to outperform its peers.
Five Forces Analysis: Pharmaceutical Industry
Bibliography
Armum, P.A. (2014). IMS Offers a Subdued Outlook for the Global Pharmaceutical Industry at
DCAT Week 14. Retrieved from http://connect.dcat.org/blogs/patricia-vanarnum/2014/03/25/ims-offers-a-subdued-outlook-for-the-global-pharmaceutical-industry.
on September 11, 2014
Bloomberg Businessweek Companies & Industries. (2013). Big Pharma’s Patent Cliff. Retrieved
from http://www.businessweek.com/articles/2013-11-14/2014-outlook-big-pharmadrugs-going-off-patent on September 17, 2014
Business Data Screener. (2013). Porter 5 Forces. Retrieved from
www.businessdatascreener.com/industries/porter-5-forces on September 11, 2014
Express Pharma. Global Pharmaceutical Market Outlook 2015. (2001). Retrieved from
http://pharma.financialexpress.com/20120115/market02.shtml on September 17, 2014
FiercePharma. (2013). Sanofi Uses Multi-Pronged Strategy To Defend Its Place In Diabetes
Market. Retrieved from www.fiercepharm.com on September 21, 2014
IMAP Healthcare Report. Pharmaceutical & Biotech Indsutry Global Report – 2011. (2011).
Retrieved from
http://www.imap.com/imap/media/resources/IMAP_PharmaReport_8_272B8752E0FB3.
pdf. on September 11, 2014
IMS Institute for Healthcare Informatics. (2013). The Global Use of Medicines: Outlook
Through 2017. Retrieved from
http://www.imshealth.com/deployedfiles/imshealth/Global/Content/Corporate/IMS%20H
ealth%20Institute/Reports/Global_Use_of_Meds_Outlook_2017/IIHI_Global_Use_of_M
eds_Report_2013.pdf on September 11, 2014
Marketwatch. (2014). Global Pharmaceutical Survey 2013-2014 – Market Trends, Buyer Spend
and Procurement Strategies in the Global Pharmaceutical Industry. Retrieved from
http://www.marketwatch.com/story/global-pharmaceutical-survey-2013-2014-markettrends-buyer-spend-and-procurement-strategies-in-the-global-pharmaceutical-industry2014-07-15 on September 17, 2014
Price Waterhouse Cooper (PwC). (2012). From Vision to Decision: Pharma 2020. Retrieved
from http://www.pwc.com/gx/en/pharma-life-sciences/pharma2020/industry-challengesand-issues.jhtml on September 13, 2014
Reuters. (2014). Financial Highlights. Retrieved from
www.reuters.com/finance/stocks/financialhighlights?symbol=SNY.N on September 21,
2014
Five Forces Analysis: Pharmaceutical Industry
Roland Berger Strategy Consultants. (2013). Retrieved from
http://www.rolandberger.com/press_releases/513press_archive2013_sc_content/Pharmaceutical_industry_in_a_strategic_crisis.html on
September 11, 2014
Sanofi Annual Review. (2013). Retrieved from http://sanofi.publispeak.com/annual-review2013 on September 21, 2014
Sanofi. (2014). Our Strategy. Retrieved from http://ensanofi.com/our company/our strategy/ our
strategy.aspx on September 21, 2014
Sanofi. (2014). Retrieved from http://en.sanofi.com/images/36039 FYR2013 Infographic.pdf on
September 21, 2014
Sanofi. (2014). Investor Relations Awards. Retrieved from
http://en.sanofi.com/investors/awards/awards.aspx#para on September 21, 2014
Sanofi. (2014). Chief Executive Touts Organic Growth Strategy. Retrieved from
www.ft.com/intl/cms/s/0/539168e6-cf80-11e3-bec600144feabdc0.html#axzz3EIC9fGXA on September 21, 2014The Pharmaceutical
Industry. Retrieved from http://www.best-information.eu/international-marketingstrategies/Appendix-B.html on September 11, 2014
U.S. Food and Drug Administration. (2012). Facts About Generic Drugs. Retrieved from
http://www.fda.gov/drugs/resourcesforyou/consumers/buyingusingmedicinesafely/unders
tandinggenericdrugs/ucm167991.htm on September 11, 2014
Venture Navigator. A Recent History of the Pharmaceutical Industry – Based on All Five Forces.
(2007). Retrieved from http://www.venturenavigator.co.uk/content/154 on September 11,
2014
World Health Organization. (2014). Pharmaceutical Industry. Retrieved from
http://www.who.int/trade/glossary/story073/en/ on September 11, 2014
Five Forces Analysis: Pharmaceutical Industry
Appendix A
Five Forces Analysis: Pharmaceutical Industry
Five Forces Analysis: Pharmaceutical Industry
Appendix B
Sanofi
Financial Ratios: (Source: Reuters.com)
Company
28.59
3.58
17.17
3.37%
Industry
32.84
4.35
27.07
1.45%
Sector
33.70
5.14
27.05
1.42%
Sales (TTM) vs TTM 1yr ago
Sales (MRQ) vs Qtr 1 yr ago
EPS (MRQ) vs Qtr yr ago
-2.96%
0.74%
$74.92
12.93%
8.35%
$31.25
12.94%
8.55%
$31.62
Current Ratio
Total Debt to Equity
1.43
28.65
2.46
10.25
2.52
13.02
67.10%
16.96%
51.47%
14.24%
51.03%
12.01%
P/E Ratio (TTM)
Price to Sales
Price to Cash Flow
Dividend Yield
Gross Margin (TTM)
Operating Margin (TTM)