Pfizer Industry Review

Pfizer Corporation:

The pharmaceutical industry began in the early 1800’s when several chemical companies were founded in Philadelphia, marking the beginning of our current pharmaceutical manufacturing industry (Pfizer, 2008a). Founded in 1849, Pfizer has grown into a multibillion-dollar corporation by providing many of the highest quality drugs available today (Pfizer, 2007). However, many factors impact the continued success of Pfizer and the pharmaceutical industry in general. After reviewing these factors, it is our recommendation that Pfizer focus on short-term consolidation and long-term global expansion into emerging markets while focusing research and development efforts in the biotech sector.

Market Structure

Since the 1950s, the global pharmaceutical industry has evolved from “…a collection of several hundred, small, barely profitable firms to as small group of large, highly profitable firms” (Younkin, 2008, para. 1). This evolution has resulted in an oligopoly market structure with a few large firms, and significant barriers to market entry. In the last 20 years, pharmaceutical consolidation has continued with both vertical and horizontal mergers that have further shrunk the market. Since 1995, Pfizer has merged with five pharmaceutical firms (Industry Brief, 2003) in an attempt to increase its research and development divisions and to offset declines in new product development; increases in generic competition; and the emergence of bio-pharmaceutical firms (BCC Research, 2004). Although pharmaceutical firms no longer view mega mergers as “…a cure-all for [their] innovation drought” (Simons, 2007, para. 1), this trend towards consolidation is expected to continue, with firms focusing “…on targeted acquisitions and alliances with smaller…more innovative drug makers and biotechs” (Simons, 2007, para. 10).

Competition

Competition is somewhat limited in oligopoly market structures due to the barriers to market entry. In the pharmaceutical industry, such barriers include “…economies of scale, distribution product differentiation, capital requirements and financial resources, access to distribution channels, regulatory policy and switching costsвЂ¦Ð²Ð‚Ñœ (Global Pharmaceutical Industry, 2007, para. 7). However, new companies are entering the market, bringing with them new and innovative drugs, and established firms are investing in and acquiring these “…struggling, venturesome and often cash-hungry biotech outfits” (Martino, 2007, para. 2). Pfizer “is aggressively pursuing partnerships with small developers” (Martino, 2007, para. 1), “…with the hope that their innovative drugs may someday make it into Pfizer’s pipeline” (Martino, 2007, para. 3). Although the entrance of new companies sparks increased competition, established firms face the most serious competition from other established firms, not only in terms of new drug development but also in the generic drug market. Every major pharmaceutical firm is facing significant revenue losses due to patent expirations. Not only has this created significant competition in the generic drug market from mid-sized generic-producing corporations, but it has also prompted established pharmaceutical firms to enter the market (U.S. Environmental Protection Agency, n.d.). To combat revenue losses and increased competition, many firms are selling generic versions of their own drugs. Pfizer announced, prior to the expiration of its patent on Zoloft, that it would begin selling a "branded" generic version the drug once the patent expired (Rubin, 2006).

Global competition has forced Pfizer to take action in order to gain and maintain market share. Pfizer has made numerous acquisitions, expanded into new markets, and cut costs in order to stay ahead of this competition. In addition, Pfizer has taken political action as a member of The Pharmaceutical Research and Manufacturers of America in order to advocate for legislation that benefits the company. The group recently advocated against government negotiation for Medicare prices, legislation allowing importation of cheaper drugs from foreign countries, and legislation weakening patent protection (The Associated Press, 2008).

Pfizer is also trying to come up with new ways to hold onto revenue that is lost to generic producers once patents have expired. Pfizer is advocating to create a new category of prescription drugs called authorized generics in which “the original manufacturer licenses exact copies of its branded drug to a generic manufacturer” in exchange for keeping some of the revenue (Business Week, 2008, para. 4). In order to fight off generic competition, Pfizer has to advertise to differentiate its products.

Pfizer has become interested and is investing in biotechnology not only because of the patent potential, but also because the biologic compounds are significantly harder to copy by generic manufacturers (Lawler, 2007). Pfizer’s billions of dollars dedicated to research and development have been fueled by the search to be the first to patent a new blockbuster drug. The discovery of a blockbuster drug can make or break a company. In response to competition going global, Pfizer has done the same only to be forced to face problems with both counterfeiting and the protection of intellectual property (Kermani, 2006). Overall, Pfizer has been affected by global competition in numerous ways, and most of the actions Pfizer has taken as a result have made the company more profitable as a whole.

Supply and Demand

In the pharmaceutical industry, supply and demand is complicated by regulatory requirements and payment mechanisms of public and private insurers. Federal regulation requires a physician to write a prescription for many pharmaceutical products, and it is the physician who makes medication decisions based on “…the patient’s health status, financial condition, and insurance coverage” (U.S. Environmental Protection Agency, n.d., p. 3-64). There is a large pharmaceutical demand from seniors age 65 and older, and as population continues to rise, this age-related demand will continue to grow (Saul, 2007). The discovery of new drugs for highly concentrated illness areas will increase demand considerably. Demand is also dependent upon new pharmaceutical discoveries, incidence of illness, and the affordability of pharmaceuticals for those in need. All of these factors are subject to change over time, and although future demand