Competitive Analysis and Strategic Assessment

Profitability is one of the key findings of competitive analysis and strategic evaluation, and it differs depending on the kind, structure, and nature of industries. In order to improve Medicare, the pharmaceutical industry must conduct extensive research and development (R&D), as innovation is at the heart of this sector (Schuhmacher, Hinder & Gassmann, 2016). To remain competitively relevant, pharmaceutical companies need to adopt a strategic positioning. This business plan covers competitive analysis, competitiveness, strategic evaluation, analysis of business risks, and financial planning with the goal of examining Ultrastatin’s competitive and strategic posture as a new company. The nature of competition of the industry under which Ultrastatin is operating in can be evaluated using Porter’s Five Force framework. The Porter’s Model also evaluates how different forces can affect the profit margins and structure of the companies operating within pharmaceutical industry. The analysis of competition level helps the company to come up with strategic business strategies to keep it on top of its existing competitors. The following are factors that affect the competition level in the pharmaceutical industry and which will potentially affect the operations and profitability margins of Ultrastatin Company, based on Porter’s model:

Threats of new entrants – low

The pharmaceutical industry is a very complex sector that requires intensive research and development, as innovation is the lifeblood of this industry and the key to any improvement in Medicare (Schuhmacher, Hinder & Gassmann, 2016). There are high capital requirements in research and development; unrelenting long approval processes; and heavy marketing demand for the new entrants. The presence of these high barriers to entry makes it difficult for potential pharmaceutical companies without financial muscles to enter into this market. The ‘big pharma’ firms that have already built global networks are now enjoying economies of scale due to their massive production of drugs and easy access to cost effective suppliers. The new entrants, such as Ultrastatin Company, encounter difficult regulatory environment. The new pharmaceutical products have to be approved by FDA for them to be allowed to enter into the market (Barr, 2016). It is important to note that the existing pharmaceutical firms have an upper hand as far as employer-based health coverage in the United States is concerned. Patients purchase drugs from certain pharmaceutical firms through doctor’s prescription. The expiration of patents may result in new entrant entry into pharmaceutical market. However, the existing pharmaceutical firms are able to cover the revenue loss due to expiration of patents due to the success of their existing products. Due to these high barriers, the competition in pharmaceutical industry from new entrants is very low.

The existing rivalry – High

Since pharmaceutical industry is one of the most lucrative in the world, it is very competitive. Some of the existing players have been in operational for over century with their popularity spanning worldwide. There are several factors that make pharmaceutical industry become very competitive – high profit margins, large number of companies (small and large-sized ones) and stringent regulations. In this industry, there is no margin for errors because it deals with sensitive matters of health. The recent merger and acquisitions of small pharmaceutical companies and technological innovations in generics and biotech have further intensified competition. The major existing competitors in this industry include but not limited to Pfizer, AstraZeneca, Sanofi, Merk, and GlaxoSmithKline (Hanefeld, 2015: p, 128).

Threat of substitutes – low to medium

When the drug is still protected through patent, no substitute to the drug can be allowed. However, upon the expiry of the patent, generic drugs are massively produced with numerous substitutes. The alternative treatment and medicines are substitute threat to pharmaceutical drugs and may include meditation, yoga, and an array of therapies. Other substitutes include herbal and homeopathic treatments.

Buyers’ bargaining power - low

It is significant to note that patents for pharmaceutical drugs last as long as 20 years (Hitt, Ireland, &Hoskisson, 2015). Such a long period of time gives the drug manufactures a leverage to control prices until the patent expires. Although large health institutions may have a higher bargaining power due to economies of scale, individual customers have no say in dictating the prices of pharmaceutical drugs. The only source of bargaining power for buyers is access to information through internet as they can research drugs. In overall, the buyers’ bargaining power is low.

Suppliers’ bargaining power – very low

The pharmaceutical companies only require raw material suppliers, technology suppliers, and packaging material suppliers. According to Pharmaceutical Resource Directory (2017), some of pharmaceutical suppliers include Wako Chemicals, Nexeo Solutions, and BASF Corporation. There are many suppliers whose influence is very low to affect the market prices since their bargaining power is very low.

Strengths of competitors

Evaluating the strengths of the competitors can help Ultrastatin to develop entry strategy into pharmaceutical market. The major Ultrastatin’s competitors include, but not limited to Pfizer, AstraZeneca, Sanofi, Merk& Co., Johnson & Johnson, Abbott, andGlaxoSmithKline as listed on the NYSE, while the smaller companies are trading through the NASDAQ (Beynon& Porter, 2011). One of the strengths of these competitors is huge investment in research and development activities. According to Morgon (2014), Forbes estimated the costs of research and development for the US pharmaceutical companies to range between US$4.5 and 18.6 billion per new drug approved by FDA in the last decade. The advancement in research and developments along with technological innovations gives the competitors a competitive edge over the new entrants. The large pharmaceuticals have recently, especially in 2013 and 2014, have used mergers and acquisitions as a way of increasing their size in the long-term (Baskaran, 2017). Mergers and acquisitions result in synergies in operation, market share, and financial leverage due to increased efficiency, sales, profits, and reduced risks. Additionally, the competitors have higher market command as depicted by their sales turnover in 2012 – Pfizer ($46,930m), Merk& Co. ($40,115m), Sanofi ($37,780m), GlaxoSmithKline ($32,714m), AstraZeneca ($31,893m), Johnson & Johnson ($27,933m), and Abbott ($26,715m) (Hanefeld, 2015: p, 128). Also, increased patent portfolios for new drug development give the existing pharmaceutical companies a competitive advantage over new entrants (Baskaran, 2017). The patent implies that the manufacturers control the drug until the patent expires. The competitors enjoy extended distribution networks for its manufactured drugs worldwide. The supply chain used to distribute pharmaceuticals in the US is one of the most complex systems (Smith, Wertheimer &Fincham, 2013). The success of the supply chain for pharmaceuticals originates from a comprehensive distribution network because of the market dynamics for pharmaceutical products, technology, economics and the strategic locations for pharmaceutical manufacturers, warehouses, and distributors. Thus, Ultrastatin’s competitor strengths include research and development, technology, mergers and acquisitions, size, market share, patents for new drug development, and distribution network.

Factors affecting competitiveness

The dynamic, complex, and highly globalized nature of pharmaceutical industry is characterized by intense research and development activities and strict regulations compared to other industries (Hitt, Ireland, &Hoskisson, 2015). The industry is highly competitive, but there are several factors affecting the competitiveness of pharmaceutical market in the United States.

Regulations

Regulations in the Pharmaceutical industry affect the competitiveness (Shabaninejad, et al. 2014). Most significantly, a pharmaceutical company applies for a patent on a potential drug during the research stage. Under WTO rules, a patent life is 20 years for a pharmaceutical product since the time of application and the company is given market exclusivity (Hitt, Ireland, &Hoskisson, 2015). During the patent life, other pharmaceutical companies are not allowed to manufacture or sell the generic of the drug and this affects competition as the manufacturer retains market exclusivity. Upon the expiry of patent, a pharmaceutical company can apply to the FDA to produce and sell a generic drug, provide it contains the same ingredients, effectiveness, use and is manufactured based on FDA standards. Since the patent has to expire, some manufacturers have come up with ways of limiting competition from generic drugs –suing to extend the patent life or even seeking patents for other drug compounds. In the period between 2010 and 2014, the pharmaceutical companies have lost a cumulative loss of about $1421 billion dollars in sales after the expiry of patents.

Technological trends

Technology provides a way of increasing the efficiency and speed of pharmaceutical firms in developing and taking the product to the market. According to Hitt, Ireland &Hoskisson (2012), pharmaceutical firms are shifting to electronic collaboration software like the EMC Documentation enterprise with an aim of reducing costs, shortening delivery times, and improving the ability to fast retrieval of information. The pharmaceutical firms are continuously adopting new technology in research and development to develop new drugs so as they can remain competitively relevant. The new drug is patented to prevent other companies from producing generic drugs until the patent life is over.

Mergers and Acquisitions (M&A)

M&A is another factor affecting competitiveness in pharmaceutical industry. Large pharmaceutical firms have been acquiring small sized ones with an aim of reducing costs by eliminating redundant positions, increasing the economies of scale, capitalizing on synergies and expanding knowledge base pertinent to development of new pharmaceutical products (Ghauri& Hassan, 2014). M&A activities in pharmaceutical industry have increased in the recent years and this has affected the competitiveness in this industry.

Business Strategies

Strategies for attracting first-time buyers

Positioning the company’s products as the solution

Ultrastatin will attract first-time buyers by positioning itself as a solution to wide array of pharmaceutical problems. With widespread drug resistance, creating new products will attract first-time buyers. For example, antibiotic resistance is increasing and this has contributed to treatment failures (McKerrow&Debnath, 2017). Chronic illnesses affect many people in the United States and people may be interested in finding the solution to their problem.

Providing free health information

The company can provide free health information regarding chronic diseases as a tactic to attract first-time buyers of Ultrastatin more so institutional buyers. This tactic can increase awareness of the existence of a new drug capable of treating these diseases. This tactic can give the company an opportunity to attract first-time buyers who might be interested in the new drug.

Free testing and samples

Many first-time buyers may be reluctant to purchase the new drug due to uncertainty and perceived risks or side effects. However, providing free testing and samples can increase the chance to attract first-time buyers after knowing the effectiveness of the new drug. This tactic can help the company increase awareness of the new drug and many customers might be interested in purchasing the product after testing the samples.

Marketing tactics for attracting first-time customers

Ultrastatin’s marketing tactics for attracting first-time customers can be developed from marketing mix framework – 4Ps: product, place, price and promotion.

Product strategy

In the US, life expectancy is increasing because of advances in technology and medicine and enhanced access to healthcare as well. WHO estimates that up to a billion people in the world ware suffering from the neurological disorders such as migraines, dementia, and epilepsy and these have been attributed to the aging population (Hitt, Ireland &Hoskisson, 2012). There is increased need for new pharmaceutical drugs to treat these diseases. Thus, Ultrastatin can attract new customers by providing solutions to these diseases through new product development.

Pricing Strategy

Ultrastatin can attract new customers through pricing strategy. Many pharmaceutical firms control the prices of patented new drugs since they are protected till the end of patent life (Hitt, Ireland, &Hoskisson, 2015). Customers have lower bargaining power and this implies that they do not influence drug prices. Many customers cannot afford some drugs. As a way of attracting first time buyers, the company will offer generic drugs with lower prices compared to its competitors. The long-term objective is to build a customer base, especially health institutions, to remain competitively relevant. The company will focus on developing substitutes for expensive drugs with lower priced, therapeutically similar ones, based on the pharmaceutical marketing strategy by Mullner (2011).

Advertising

Since the market is concentrated among few large pharmaceutical companies, advertising product can help Ultrastatin Company to attract new buyers. Advertising with warranty messages can attract first-time buyers. Providing a one-year warranty can decrease the uncertainty associated with new products (Mullner, 2011). This pharmaceutical marketing strategy can attract first-buyers, especially health institutions, to purchase the products because there are low perceived costs related to uncertainty.

Business risks

Internal risks

Product failure

According to Meyer (2012), in the pharmaceutical industry, there is high chance of product failure. Ultrastatin is no exception.  The company will have a huge capital expenditure on research and development and during this product development phase, the development of Ultrastatin may fail. The company can incur huge losses in case the Ultrastatin fails during product development phase.

Logistical risk

There are potential risks associated with warehousing management, especially where there is lack of just-in-time delivery system (Kersten&Hasin, 2010). The pharmaceutical products stored in the warehousing can became damaged or even disappear. These risks can lead to financial losses.

External risks

Legal risk

Pharmaceutical products are highly regulated in the United States. Ultrastatin is subject to FDA regulations and must be approved before the product is taken to the market in relation to safety, efficacy, and quality (Mochly-Rosen & Grimes, 2014). The company faces litigation risks once the product is taken to the consumer should the drug fail to generate the expected therapeutical outcomes.

Technological trends

The changes in technological trends in pharmaceutical industry may leave the firms with competitive disadvantage. Technology plays a significant role in the research and development of the pharmaceutical products (Mochly-Rosen & Grimes, 2014). For example, pharmaceutical technology for identifying new compounds has played a significant role in product development.

Mitigation strategies

Investment in technology

One of the mitigation strategies is investment in advanced technology to increase the success of Ultrastatin development. High-end technology can help the company mitigate risks associated with technological trends, product failure, and quality.

Agility supply chains

Ultrastatin should have agile supply chains to reduce or mitigate logistical risks, such as warehousing losses and delivery. An agile supply chains is flexible and responds to the changes in the market settings.

Financial Plan

Sources of funding

There are several sources of funding for entrepreneurial venture. One of the sources is venture capital funding. Venture capitalists offer huge sum of money in trade off equity interest. Additionally, venture capitalists invest in a potentially lucrative business, such as pharmaceutical business. The advantages of using venture capitalists are that they can provide expertise pertinent to the growth and expansion of the business. However, venture capitalists invest their money with sole purpose of getting return on their investment. Bank is also a source of funding for startups in the form of a loan. However, this funding must be repaid together with the interest.

Funding strategy

Ultrastatin will use venture capital funding to start the business. Venture capital is chosen because the initial amount is not given back and dividends are only paid when the business makes profit. As a startup company, venture capital funding is the best strategy since a pharmaceutical firm can stay even for 12 years before the product is released to the market. Venture capitalists would be willing to take this level of risk more than banks.

Operational cost report

The operating costs include costs selling and administration expenses (advertising, payroll, research and development, transport, utilities, office supplies, licenses) which are projected as follows.

Projected advertising costs

TV

350,000.00

Radio

300,000.00

Magazines

200,000.00

Retail Shops

65,000.00

Shows and Conventions

150,000.00

Sample - POP Display

55,000.00

Total

1,120,000.00

Table 1: Advertising Costs

Pay roll expenses

2 Directors

240,000.00

CEO

100,000.00

Production manager

80,000.00

Sales Manager

60,000.00

CFO

75,000.00

18 Employees

450,000.00

Total

1,005,000.00

Table 2: Payroll Expenses

Projected first’s year operation costs (fixed cost)

Month

Year 1

Payroll

1,005,000.00

Advertising

1,120,000.00

Utilities

80,000.00

Transport

65,000.00

Total

2,270,000.00

Table 3: Operation costs

Break-even analysis

Break-even sale is the amount of sales that covers fixed costs. However, in order to carry-out break-even analysis, contribution margin per unit should be considered.

Selling price

$ 18.00

Raw materials

4.00

Labor

4.50

Variable fixed cost

2.50

Variable costs

11.00

11.00

Contribution margin

7.00

39%

Table 4: Contribution margin per unit

Break-even sales =$5,837,142.86

Conclusion

In conclusion, pharmaceutical industry is characterized by high competition from the existing firms, high barriers to new entrants, low substitutes, low buyer’s bargaining power and low suppliers’ bargaining power. The existing competitors are very strong given the fact that some of them have been in operation over a century. Factors affecting competitiveness in pharmaceutical industry include regulations, technological trends, and mergers and acquisitions (M&A). There are two main sources of capital for capital-intensive businesses like Ultrastatin – venture and borrowed capital. However, venture capital seems to the best for Ultrastatin as it is a startup business with a high growth potential. The business risks that Ultrastatin will likely encounter include product failure at development stage, logistic risks, litigation risks, and changes in technological environment. The risks will be mitigated through investment in research and development, technology and agile supply chains.

References

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