Pfizer and the Challenges of the Global Pharmaceutical Industry

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Chapter 4.2: Bargaining power of the suppliers:

A powerful supplier is trying to gain a higher profit by charging higher prices, limiting quality or services, or shifting costs to industry participants. Raw materials for drugs are extracted from natural or synthetic sources. Recently, many of the raw materials previously derived from natural sources are being produced synthetically with bio-technologically which is more economical, safer, and quicker. As raw materials we need to consider the following four major groups: animal extracts, intermediate drugs, herbal raw materials and pharmaceutical additives. As the pharmaceutical market is growing, the raw material market is going to grow as well. "The total size of animal extract industry is approximately US $ 19.6 billion, growing at a rate of 4.7% annually. The global market for herbal raw material is US $ 584.3 billion, which is estimated to reach US $ 225 trillion in the coming few years." As the industry is growing we can expect an increase in raw material prices.
Pfizer is dependent from there raw material suppliers. Nevertheless there would be several substitute suppliers on the market who deliver high quality. Even so, these suppliers have high switching costs due to highly differentiated technological manufacturing processes, specialised machines and core competences.
Due to this interdependence, the power of the raw material and machinery suppliers can be stated as moderate or even low, stabile and developed.
4.3 Threats of substitutes products:

A substitute supplies same or a similar function as a product by different means. Regarding substitute products for Pfizer drugs, we need to observe the market of the protected branded drugs, generics were the patent protection is exhausted and, as seemingly unrelated businesses can have major impacts on industry profitability; we have to view alternative medicines as well.
Branded drugs are recognised as patent-protected and therefore not substitutable. Usually the threat of substitution is low and high profit margins are secured. On the other hand some Pfizer produces (incl. blockbuster: Lipidor) recently lost their patent protection and has opened the way to generics and eroding a major source of Pfizer profits. Additionally the deteriorating environment for intellectual property protection in India is a cause of great concern. "Patented products portfolio continues to face challenges either by way of a draft patented products pricing policy or through issuance of unwarranted compulsory licenses, the unfair revocation of valid patents, and the denial of patentability of inventions in India." This trend is creating significant uncertainty in the market, facilitates the threat through generics and negatively impacting innovation in the Pharmaceutical Industry.
Generics: A generic is a copy of an original prescription patent-protected branded drug and offer an attractive price-performance advantage compared to the original. They enter the market if the patent protection of a brand drug is expired. The price advantage of generics com-pared to the brand drug is enormous and the buyers cost for switching to a substitute is mini-mal. As mention above, the lack in patent protection in some areas (India) is incurring additional pressure on profitability. Though the recent increase in prices of generics the majority still remains far below the cost of the brand-name drug and let generics incur tremendous pressure on the profitability of Pfizer.
Complementary and alternative medicine (CAM) includes such practices as osteopathy, homeopathy, acupuncture, yoga, massage, herbal medicine, and meditation, and it has been increasing in popularity for many years. "In Africa, Asia and Latin America, traditional medicine plays an important role in health care. In Western markets, many of these treatments are scientifically controversial where the medical affects are unclear or the side effects relatively strong or unforeseeable. In the largest European markets, US and Japan, alternative medicines are often used as complementary therapy to a more conventional treatment. Nevertheless in 1990, a third of all Americans had used some form of CAM. By 2002, the number of people had nearly doubled and the numbers remain on the rise. Overall, there was a 14% increase in the use of CAM over the five-year period. Americans reportedly are spending $33.9 billion annually on alternative medicine protocols and products in 2007. While relatively new in the U.S., complementary and alternative medicine (CAM) is a fully accepted and integrated form of health care in many areas of the world and has existed since antiquity. For Americans, CAM is one of the fastest growing fields in healthcare and is more widely used today than ever before. The thread through substitution from CAM attacks the generic and the branded drug business unit similarly.
Despite the expansion of generics, the threats incurring by substitutes can be expressed as medium due to an established system, loyalty of doctors, a lack in proven alternatives to medication and the fact that Pfizer itself has his own generic business unit. However, the recently loss of patent protection of cash cow "Lipidor" and the uncertain patent protection issues in India gives a tendency to a high rating in terms of threats via substitute products [.].