The global pharmaceutical market is a multibillion-dollar industry. The 10 largest drug companies control over one-third of the market, several with sales of more than $10B a year and profit margins of 30%. Six of these companies are based in the U.S. and four are in Europe. It is predicted that North and South America, Europe, and Japan will continue to dominate by accounting for 85% of the world’s pharmaceutical market. Companies currently spend one-third of all sales revenue on marketing, which is roughly twice of what they spent on R&D (“Pharmaceutical Industry”). The cost of innovation proves to be very high as the drug business is very risky; 1 out of 10,000 discovered compounds are approved for sale. Since 2001, the Center for Drug Evaluation and Research averaged 22.9 approvals per year. Only 3 out of 20 approved drugs bring in adequate revenue to cover the R&D costs and only 1 out of 3 approved drug generate enough revenue to cover previous failures. According to a study by Bain & Company, the cost of discovering, developing, and launching a new drug rose to approximately $1.7 billion in 2003, taking into account opportunity costs, marketing, and other business expenses (“Pharma Markets”).
The major factor affecting supply is the advancement of technology. The development of simulation and data analysis tools condenses the drug’s process time from development to full-scale production. Process tomography and high frequency camera systems help hasten products from clinical trial stage to commercial availability. Integrated sensors are being used to monitor the performance and quality parameters of drug manufacturing processes on a real-time basis in order to ensure the quality of the medicine being produced and to gather data necessary for optimizing future productions. According to an Industry Week article, technology trends are likely to continue influencing the pharmaceutical industry for the next 5 to 10 years (Accenture). The enhanced flow of information due to advanced technology and the utilization of social media can help pharmaceutical companies identify the best-targeted and most cost-effective products, enhancing the supply of products by providing more effective pharmaceutics in a more timely manner (“Six Tech Trends”). Globalization also continues to have profound effects on supply chain. As more R&D and manufacturing move to Asia, the pharmaceutics industry must cope with more widely distributed resources as well as a greater potential for pandemics. The geographical expansion of the industry also meant expanding the number of products offered and modifying the nature of the products in order to cater to a diverse group of disease types in various parts of the world (“Pharma Markets”).
Demand in the pharmaceutical industry proves to be a complex combination of push and pull factors.
Third parties make decisions on the formularies that affect prescription behavior whereas drug