Industry Analysis: Industry Overview Of The Pharmaceutical Industry

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II. Industry Overview
A. Industry Sector
On average, Americans spend about $800 to $1,000 annually per person in purchasing pharmaceuticals; this translates to about 2.0% of total GDP of the United States. Given this, we see that the pharmaceutical industry plays a critical role in the everyday spending of consumers. The industry total revenue is currently valued at $1,140 billion and expected to grow at a rate of 4% in the next 5 years.

The pharmaceutical industry is characterized by heavy investment in research and development (R&D). Companies need to spend a lot on developing new drugs in order to increase and maintain market share and of course, meet the ever-changing needs of consumers. R&D expenses add up to 12.9% of total industry
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For example, the FDA must approve a product before it is made available to the public and even after products are released, companies need to abide by the safety standards set by these agencies.

The industry also plays a considerable role in the global economy as it employs over 2 million people and that number is expected to grow at 1.4% annually . With regard to the industry’s impact to the economy, Industry Value Added, which is the impact that this industry has on the economy, has grown at a rate of 3% in the past 5 years and is expected to grow at a constant rate over the next few years .

Even though competition is stringent, market share concentration is low with Pfizer having the highest market share of 5%, Novartis with 4.3% and Sanofi with 4.2% (See Appendix B). Moreover, smaller entrants and generic drugs are expected to gain a stronger foothold in the market share because of patent cliffs in 2015, which means that patents are set to expire this year and is expected to bring about a loss of “$106 billion in sales” for established
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Also, several Governments and health insurance organizations have cut their drug reimbursement programs in order to control healthcare costs. This has caused a shift in demand from high-margin brand-name drugs to low cost generic drugs. In response, “the industry will contend with compliance-related operational costs that constrain profit.” In addition to this, there is also “increasing pressure from government to lower costs of drugs and also healthcare.”

A positive trend for the industry is the increase in per capita healthcare expenditures. Industry revenue is expected to grow even further in 2015 as life expectancy in OECD countries increases. This means that there will be more people aged over 65 that will require healthcare and longer lifespan means there will be more illnesses that need to be treated or even prevented.

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