Pharmaceutical Company Analysis

Industry Overview

The Pharmaceutical industry is composed of companies that research, develop, produce, market, and sell chemical or biological substances for medical or veterinary use; these products include: prescription, generic, and over-the-counter drugs; vitamins and nutritional supplements; diagnostic substances. The companies also develop and manufacture drug delivery systems. The U.S. Pharmaceutical industry is the world leader in pharmaceutical research and drug production, with worldwide sales expected to reach $650 billion in 2006 (Pharma Executive).

The U.S. Department of Labor and Statistics reports that this industry ranks among the fastest growing manufacturers in the United States. It has enjoyed tremendous growth over the last decade, as annual sales have nearly doubled. The industry has also enjoyed generous profit margins, consistently outperforming the S&P's 500 Index. It is expected that such prosperity will continue unabated.

Some of the factors contributing to this growth are increased life expectancies and the concomitant demographic expansion in older segments of the population, an increase in the standard of living in developing countries, and also increased numbers of untreated persons, such as those with elevated cholesterol levels or diabetes. Not surprisingly, seniors represent the largest market for prescription drugs. As their numbers expand, so does demand for pharmaceuticals (csustan).

The introduction of breakthrough drugs also fuels the industry's growth. In recent years, companies have successfully developed and marketed new treatments for heart disease, cancer, arthritis, depression, diabetes, and HIV. Also of significance is the expanding market for 'quality of life' products- those 'vanity' drugs which help to keep people looking and feeling young, such as Botox, Collagen, and hair restoration products (csustan).

The industry has experienced a high level of consolidation in recent years, and this activity has included international companies. The industry leaders frequently form cooperative ventures with small drug discovery companies and research and development institutions. In the early 1990's, this consolidation was primarily driven by a desire to cut costs. However, in the late 1990's, a strategic shift occurred, and research and development opportunities became the chief focus of the large pharmaceutical companies. This year R&D costs are expected to equal or exceed 20% of the industry's revenues, compared with 15.9% in 1990 and 11.7% in 1980 (csustan).

Industry Analysis

In 2006, the U.S. pharmaceutical market is projected to account for approximately $280 billion dollars of the total industry growth of $650 billion, an increase of 9% over last year's increase of 5 to 7% of the total (Pharma Executive). This growth includes two one-time events: (1) the start of Medicare prescription drug benefits, The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) a program developed in order to provide prescription drug benefits to the elderly and the disabled, (2) the recovery of sales lost after the recall of Vioxx from the market. However, the key driver of sales will be newly released drugs for cancer including; Avastin, Erbitux, Alimita, and Tarceva. "The big one is going to be Avastin, which is expected to get new indications for breast cancer and non-small cell lung cancer, " says Jason McKinnie, pharmaceutical research analyst for Frost & Sullivan (Pharmaceutical Executive).

Prescription drugs currently account for 60% of world wide sales, while over-the-counter medications comprise the remainder. Companies based in the United States make up the majority of worldwide sales, with the top 10 firms reaching or exceeding $20 billion dollars in revenue annually. The U.S. market provides 65% of their sales while 35% of sales are derived from customers outside of the U.S. Previously, from 1994-1998, domestic sales accounted for 60% of industry sales, and international 40%. Also of significance is the fact that, since 1985, pharmaceutical spending in the United States as a percentage of total health care expenditures has risen from 4.9% to 7.2% in 1997 (Wikipedia).

The growth in the domestic market has produced a prosperous environment for the industry leaders. Two key measurements- Return on Assets and Return on Equity- offer proof. Among Fortune 500 companies, those within the pharmaceutical industry have ranked number one in terms of return on assets, and number three in terms of return on equity since 1997. U.S. firms dominate through their ability to patent their innovations, globalize products, and develop new products through biotechnological research. Although the prescription drug industry is made up of several hundred companies around the world, sales within the U.S. are dominated by the ten largest concerns. For example, in 1997, the ten largest companies accounted for 53% of total domestic market sales. Also, U.S. companies engage in 36% of all R & D activity, followed by Japan with just 19%. Consequently, the majority of new medications are developed by the U.S. companies; between 1975 and 1994, nearly 50% of the 152 new drugs introduced into the world market were produced by American companies, with British and Japanese companies together accounting for just 23%. The balance is divided among numerous countries (csustan).

Although the U.S. is the world's biggest consumer of pharmaceutical products, it actually spends less per capita on pharmaceuticals than many other industrialized nations. U.S. spending actually ranks 4th per capita in the world behind Japan, France and Belgium. As a percentage of the Gross Domestic Product (GDP), spending on pharmaceuticals is lead by France with 1.7%, Japan with 1.5%, and the U.S. with 1.1%. Daily U.S. per capita spending for pharmaceutical products is $0.64 as compared with daily per capita spending for alcohol of $0.91, $1.07 for telephone service, $2.84 for clothing, $7.94 for food and $8.45 for housing (csustan).

One significant trend in the industry has been the increase in sales of over-the-counter medications. Sales in this category have more than doubled since 1987. This may be explained by both effective marketing strategies and also the proliferation of information now available to customers over the internet. The marketers have emphasized both product information and a 'do-it-yourself' approach to the treatment of numerous ailments.

Brand recognition continues to be of great importance to capturing market share. Consequently, many companies have increased their advertising budgets