Question

Q3: Pharmaceutical industry firms have been trying to counter the changes below through M&A and strategic alliance activity. Please categorize them according to Porter’s Five Forces.

Porter’s Five Forces:
-Threat of substitutes (SUBST)
-Threat of new entrants (NEWE)
-Threats of supplier leverage (SUPPL)
-Threat of buyer leverage (BUYER)
-Threat of rivalry (RIVAL)

Adapted from Schon, H. 2015. Pharmaceuticals M&A versus alliances and its underlying value drivers.
1. ________ Government austerity measures like the 2010 Affordable Care Act have lowered prices.
2. ________ Generics constituted 22% of pharmaceutical sales in 2006, 40% in 2016.
3. ________ Biologics (biotechnology) accounted for 16% of pharmaceutical sales in 2006, 22% in 2016.
4. ________ R&D productivity in terms of new FDA-approved small and large molecules has remained essentially unchanged since 1998, perhaps contributing to slowing industry sales at large firms.

Answer 1

(1) Statement 1 is an example of "Threat of Buyer Leverage" as the Government legislation in this case is augmenting the bargaining power of buyers (the consumers), thereby depressing prices, revenues and profits.

(2) Statement 2 is an example of "Threat of New Entrants" as a rising Generics market share indicates higher that owing to better margins in the Generics category, newer entrants are becoming active in the vertical with every passing year which in turn is again posing challenges. It could also be a case of "Threat of Rivalry" as the lucrative generics segment might spark off a price war among company's so as to corner increased market shares which in turn can depress prices and margins.

(3) Biologics Constitute a "threat of substitutes" as they have the capability of replacing existing higher cost speciality drugs and even generic drugs.

(4) This statement constitutes a "threat of supplier leverage" as lower inflow of FDA approvals for biosimilars, pharma inputs, active pharma ingredients,etc is a form of supply constraints.