Pharmaceutical Industry in Portugal - Case Study Example

1063117 - PHARMACEUTICAL INDUSTRY IN PORTUGAL 0 Introduction The provision of healthcare is an important aspect of the socio-economic development of every country. Being in a state of good health is actually a necessity to ensure that people can go about their normal duties and become useful to the economic growth of the country (quote). However, the healthcare sector is such a complicated and interrelated sector that no one industry alone can contribute to the success of healthcare provision in a given country. Often, it takes the coordinated and cooperative efforts of a number of stakeholders and industries to come together to form the healthcare sector. In Portugal, the pharmaceutical industry is one of such stakeholders within the healthcare sector that continues to play very crucial roles to ensure that the provision of quality and affordable healthcare to people is complete and well directed. Over the years, the pharmaceutical industry has strived to be a major force in the whole healthcare sector. This paper examines some of the key contributions that the industry has made to the healthcare sector and to the economy of Portugal as a whole. This will be done by relating the market structure of the industry to its level of performance. The current structure of the industry and forecasted structure in the future shall therefore be investigated. There shall also be an overlook of the competitive advantage that the Portuguese pharmaceutical industry has over those of other European pharmaceutical industries, particularly the British industry. All of these will be done while employing the use of key economic principles and models that make the discussion reliable and empirical. 2.0 Analysis of the structure of industry in Portugal 2.1 Identification and description of the structure The pharmaceutical industry in Portugal is an all-inclusive industry, made up of manufacturers, wholesalers, retailers, distributors, and exporters. In most cases however, when mention is made of the structure of the pharmaceutical industry in Portugal, most of the attention is given to the manufacturers and wholesalers as these form the largest proportion of industry players (quote). The discussions in this paper shall therefore not be any different, until where specified. According to the CBI Market Survey, in terms of production, foreign manufacturers lead the pharmaceutical market in Portugal with two-thirds of market share. The remaining one-third which is controlled by local producers is comprised of 15 leading manufacturers (p. 5). In terms of wholesale there is much emphasis on domestic dispensing of drugs. Because of this, most of the wholesale aspect of the pharmaceutical market is controlled by local companies. On the whole, the manufacturing and wholesale components form a perfect competition market structure, whereby there are no barriers to new entry (quote). As a result, there can currently be seen an unlimited number of producers and consumers spread evenly across major cities of the country. This is however notwithstanding the fact that most of the market players are only smaller companies, whose activities and operation, though open to free entry is often overshadowed by larger companies who have brand equity and competitive advantage. Together, the pharmaceutical industry of Portugal account for 2.5% of the pharmaceutical market in the EU, which makes it the tenth largest in the EU (European Federation of Pharmaceutical Industries and Associations, EFPIA, 13). Together, this market accounted for € 3.5 billion, which was an increase as compared to other years. 2.2 Rationale behind the structure There are specific reasons that account for the existing market structure of the Portuguese pharmaceutical industry. According to quote (year), the government had for long believed in an oligopoly market structure, where the market was controlled by only a few industry players. But as the industry started showing promises through various trade agreements that made it possible for exportation to expand, the government saw the need to open up the market for some more active competition to take place. This is because demand for the pharmaceutical industry started going up, especially from the year 1999. As a response to this, there were a number of industry based incentives that were put in place by the government to attract more foreign direct investment for the pharmaceutical industry in Portugal (quote). Consequently, the market structure started changing to the current perfect competition, where there is no restriction to entry, as long as entrants meet regulated procedures. The current market structure is therefore in place in response to the need to allow the market to experience free growth from the demand for its pharmaceutical products, both locally and internationally. It is not surprising that over the years, the industry in Portugal has been experiencing very steady levels of growth. The period of open market was also influenced by the Portuguese Medicines Agency, actively promoting the use of generic medicines, antibiotics, and anti-depressants, which made the market highly attractive to investors from most of the leading pharmaceutical markets in the EU, especially France and Germany (CBI Market survey, 7). 2.3 Possible future structure There are several market forecasters that have predicted a monopolistic competition as the future market structure of the Portuguese pharmaceutical industry (quote). This is expected to happen as an impact of the current market structure on future performance. This is because in monopolistic competition, even though there are several producers selling the same product, each seller makes his or her product differentiated from one another in terms of branding and quality (quote). In such a structure, there is so much emphasis on price charge, and industry players tend to take clues from what is happening with their competitors in terms of the pricing trends used by their competitors. Monopolistic competition has been said to be the outcome of perfect competition and this is not expected to be any different with the pharmaceutical market in Portugal. This is because as there are more and more new entrants to the market and each of them begin to gain brand equity and competitive advantage, there become an equality in the strengths of the companies, such that the only way out to survive competition is to use basic differentiation strategy options in gaining competitive advantage (quote). Into the future, it is expected that the pharmaceutical industry in Portugal will become more attractive to international investors than it is today. There is therefore expected to be massive financial investment in the industry, leading to the monopolistic competition. Once this era comes, there will be survival of the fittest, such that it is only companies that are able to put their houses in order that will be expected to survive the competition. 2.4 How structure affects strategy decisions Given the current perfect competition structure where several producers are serving the numerous consumers, it is expected that strategy decisions on the part of industry players will be affected in a number of ways. Using the Porter’s Five Forces Model, industry player are expected to have their strategy decisions affected in the ways discussed below. 2.41 Threat of new entrants With the market structure, there industry is very open to new entrants, meaning that there are no restrictions on people who want to enter the market for the first time. In terms of possible threats posed by these new entrants, there are two major ways that existing companies would have to approach them. First, foreign companies have been identified to have better capital support from their parent companies, and also enjoy open market incentives from the Portuguese government (quote). Because of this, chances that new foreign entrants will survive and overtake existing local businesses are higher. Existing foreign companies however seem to have a better cushioning against this threat. The only cushion local existing companies have is against new local entrants. It is therefore important that local existing companies and even foreign existing companies will strategise against threats in terms of capital requirements, absolute cost, government policies and economies of scale by focusing on access to distribution, brand equity, economies of product differences, and product differentiation. 2.42 Threat of substitute products or services There are potential products and services that patrons of the pharmaceutical industry are likely to switch to. Some of these include the use of alternative medicines and unorthodox drugs and medicines such as herbal medicine (quote). However, it has been said that the possibility that such substitute products and services could pose major threat to existing pharmaceutical companies in Portugal is very rare. This is because of the level of buyer propensity to pharmaceutical products that makes pharmaceutical products and services the very first point of call for most people needing medical pharmacology (quote). The only possible factors that could create greater threat of substitute products and services are substandard products and quality depreciation (quote). It is therefore important that industry players will strategise on maintaining their levels of quality and standard. This will also call for an industry wide strategy that ensures that there is adequate supervision to ensure that higher standards are always maintained so that substitute products and services will not be optioned by consumers. 2.43 Bargaining power of customers Bargaining power of customers happens when customers have the ability to force prices to go down in a manner that does not favour producers (quote). Within the pharmaceutical industry in Portugal, there are a number of factors that can bring this situation about. Buyer concentration to firm concentration ratio is one of the likeliest factors that can bring about bargaining power of customers (quote). In this regard, the industry can be said to have an advantage, where the perfect competition existing makes it possible to have as many concentrated firms as possible at any point in time. This notwithstanding, it is still important that producers will strategise against possible bargaining power of customers resulting from bargaining leverage, which can come about as a result of high fixed costs (quote). In such case, industry players can use customer loyalty strategies to ensure that customers stay with the patronage of products and services without pushing for price reductions when that will only come to affect the industry negatively. 2.44 Bargaining power of suppliers Bargaining power of suppliers is a market of inputs where suppliers may gain power over firms, especially when there are only few substitutes around. For the Portuguese pharmaceutical industry, greater parts of supply of raw materials are known to come from outside the country. This means that the industry depends largely on importation of raw materials from other European countries, America and Asia (quote). Because of this, bargaining power of suppliers is very high because firms hardly have any control over suppliers. As a way of dealing with this situation, three major strategies are suggested. First, it is important for firms to always have alternative, parallel or substitute suppliers. This will ensure that where one supplier fails, another will be there to deliver. It will also ensure that there is competition among suppliers to reduce prices. It is also important that there will be effect supply chain management that prevents situations of shortages with inventory. Last but not least, it is important for the whole industry to strengthen its local supply base to make it more effective. 2.45 Intensity of competitive rivalry In an outright manner, there are two major competitive rivals that can be identified in the Portuguese pharmaceutical industry. These are local firms and foreign firms. As explained already, the foreign firms currently have an upper hand over the local firms. This however does not mean that the local firms are not having a successful business. The only implication in this case is that there are many foreign companies as against local firms, but each is doing well CBI Market survey, 1). Intensity of competitive rivalry can therefore be talked about in terms of the number of firms for the industries. On the part of the local firms, it is important that there will be strategies that focus on firm concentration ratio in smaller towns and villages to ensure that the people have a better touch and interactivity with the local firms. Once this is done, patronage will continue to be higher, which can lead to expansion and growth in numbers. Foreign companies must also guard against new entrants from the local size as a way of maintaining their superiority. 3.0 How contributes to the economy in a country 3.1 Industry value to the healthcare sector As indicated in the early parts of the paper, the healthcare sector is very large, integrated and interrelated. Because of this, it is made up of several other sectors coming together to serve the health needs of the populace of Portugal. This situation noted, studies have indicated that the pharmaceutical industry alone is one of the most contributing to the whole health sector in terms of economic revenue generation, human resource employment, access of healthcare, coverage, and research and development (quote). For this reason, the pharmaceutical industry in Portugal has been described as one of the most innovative industries in the healthcare sector of Portugal. In a recent study, Costa (p. 4) indicated that with the exception of global multinational enterprises outputs, there has been a steady growth in the rate of expansion in the pharmaceutical industry when it comes to areas of global sales, research and development, and development times. This data is presented in the figure low. Source: Costa (p. 6) The figure above gives an indication of the contribution of the pharmaceutical industry to the overall healthcare sector of Portugal, whereby it has been a source of great innovation for the sector. Consequently, Portugal can today boast of being one of the countries in the world with the best forms of healthcare deliveries (quote). Even though the rate of innovation in the industry in terms of research and development and other variables will be praised, the need for further expansion is also suggested. This is because in a report by the EFPIA (p. 13), it was noted that compared to other EU countries, Portugal does not investment as much in research and development as the other countries does. This data is represented in the figure below. EFPIA (p. 7) 3.2 Sharing market to the economy In relation to the larger economy of Portugal also, it can be noted that the pharmaceutical industry have been very significant in contributing to economic growth. First, the contribution to economic growth is viewed from an indirect fiscal contribution. This way, the place of the industry in empowering and strengthening the people; through its output products and services can be mentioned. This is because as part of the medicines and health services that people get from the pharmaceutical industry, they are always in a position to receive good health and vitality to go about their normal duties, which have been said to be highly contributing to economic growth. In effect, the pharmaceutical industry can be said to be responsible for increasing productivity through the provision of good health, which is also an important variable in ensuring that people are of good health to work and contribute their quota to the economy of Portugal (quote). From a direct fiscal perspective also, the pharmaceutical industry in Portugal can be said to be a key contributor to the gross domestic product of the country. This is because the industry accounts for a good number of employments for local people, which ensures that these people will have a source of livelihood and a consequential mean to contribute to the economy through the payment of personal taxes. The pharmaceutical companies themselves also contribute to payment of taxes as part of policies to start business operation. What is more, the exportation of pharmaceutical products from Portugal to other parts of the world has also been named as a useful contributor of revenue to the GDP of Portugal (quote). 3.3 Collective figures and data to compare In the table below, Costa (2012) gave a major breakdown to the economic contribution of the pharmaceutical industry in Portugal. Source: Costa (2012, p. 10) From the table above, it will be noted that with a number of 120 associated companies in Portugal, it has been possible for these companies to provide services in a total of 8 major health related areas including innovative medicines, generic medicines, prescription medicines, biotechnology, vaccines, in vitro diagnostics, veterinary medicines, and research and clinical trials. Collectively, this has contributed to 2,074 EUR million and 251 million packs to the economy in just one year. The fiscal contribution of the hospital market, which also has the pharmaceutical industry as a major stakeholder is 1,000EUR million in one year and an amount of 68 million Euros in investment in R&D. It must be emphasised that the investment in R&D has been made possible largely because of the perfect competition market structure in place in Portugal, which makes it possible to welcome as many foreign direct and local investments as possible. Again, the pharmaceutical industry has been a contributor to the employment situation of the economy by employing as many as 9,511 works, whose production stand at 1,679 million EUR for the year under review. As indicated of exportation earlier, the pharmaceutical industry in Portugal has been a key player in exportation, bring a total of 500 million EUR in the year under review. These indeed are data to suggest the relevance of the pharmaceutical industry to the larger economy of Portugal. The data can also be directly linked to the type of market structure existing in Portugal, where the freedom to enter the market has brought about need for industry players to be strategic enough to ensure growth for themselves. 4.0 Competitive advantages of the pharmaceutical industry in Portugal In this section of the paper, the writer outlines the competitive advantage that Portugal has to make it a preferable destination for doing pharmaceutical business as compared to other countries in the EU, particularly to U.K. Using the Porter’s Diamond of National Advantage as a model, Portugal is compared in terms of four major variables as discussed below. 4.1 The firm strategy, structure and rivalry Porter argued that the structure of an industry determines the kind of strategy that firms adapt and the level of rivalry that can be experienced, which will tell the level to which people would want to do business with the nation (p. 23). In the case of Portugal, it has been noted that there is a perfect competition structure that allows free entry. In comparison to most other EU countries including France, Germany and U.K, these other countries already have a monopolistic competition, which has rather been suggested to be the future of the Portuguese pharmaceutical industry. The implication here is that the other competitors have gone beyond the level Portugal finds itself now, since it was said that this structure normally grows out of the perfect competition structure. This notwithstanding, the structure and kind of open rivalry presents Portugal with a lot of competitive advantage. This is because in most countries where there is monopolistic competition, new entrants are deterred from entry, especially small and medium scale firms (quote). Once this happens, the opportunities of foreign direct investment elude such countries. The Portuguese pharmaceutical industry can therefore be said to have an advantage of attracting as many investments as possible, both from foreign firms and local firms. 4.2 Demand conditions for products The demand conditions for products is an important competitive advantage variable, given the fact that it helps in giving hope to investors that once they go into a particular market, there will be ready demand for their products and services. Porter actually saw the level of demand conditions as the major driving force that determines the rate to which firms will grow. Meanwhile, demand for products in the pharmaceutical industry in Portugal has been said to be one of the steadiest and rapidly growing. It is not surprising that since 2007, there has always been an increase in the domestic contributions that the pharmaceutical industry makes in Portugal (CBI Market Survey, 6). In comparison to UK however, the CBI Market Survey indicated that the UK market has a higher demand (7). This notwithstanding, there is still an opportunity for businesses to make gains when operating from the Portuguese market. Such opportunity comes from the relationship between demand and supply for the two countries. This is because even though demand may be higher for a particular country, where there are so many suppliers, the indication will be that each supplier will only make a little revenue. This is the situation for UK but in Portugal, there are relatively a smaller number of suppliers, meeting the relatively fair level of demand that is received (quote). 4.3 Related supporting industries Related supporting industries refer to the situation whereby there is the presence of other supporting industries that have direct needs of the products and services offered by one industry (Porter, 34). For the pharmaceutical industry in Portugal, it has already been said that the industry is part of the collective healthcare sector. As a result, there is always a ready market from the supporting industries from the healthcare sector, including clinics, hospitals, and the health insurance scheme. These industries support the pharmaceutical industry also in terms of logistics and research (quote). In comparison to the U.K, Portugal may have the competitive advantage of attracting investors from this perspective, given the level of interrelatedness that exists with the other industries in the health sector, as compared to interrelatedness in the UK. This is because UK has the National Health Service (NHS) programme, which limits the level of interrelatedness between the various industries within the health sector (quote). Because most industries want to be seen as independent in the UK, they would rather depend on external or foreign industries than internal companies. This rather makes the cost of production in that country very expensive. 4.4 Factor and Government conditions This is one area that it can readily be said that Portugal has a disadvantage when compared to the other EU countries, particularly, UK. This is because UK has so much home-grown resources that make local production very easy and viable. On the other hand, Portugal does not have such levels of home-grown resources, making the country rely on the use of external suppliers. Consequently, there is the threat of suppliers on very regular basis in Portugal. What is more disturbing is the fact that in Portugal, government support is towards foreign direct investment, as against local investment. Consequently, government incentives for local producers are very limited. When viewed from the other side of the coin, where reference will be made to foreigners seeking to do business in Portugal, then it can be said that Portugal has an advantage than its competitors. It is however believed that should the position of government be changed, then there will be a change in the whole market structure in the pharmaceutical industry in Portugal (quote). 5.0 Conclusion There are several important discoveries that have been made about the pharmaceutical industry in Portugal in terms of the market structure of the industry and how this structure has affected the output of market performance. Generally, it has been seen that the perfect competition structure on the market has been an effective structure in opening the pharmaceutical industry up to growth and expansion. It is not surprising therefore that the industry continues to progress over the years on the larger EU market. Into the future, this competition is expected to be even more intensified, leading to a possible monopolistic competition. Currently, the perfect competition structure has accounted for a very responsible discipline by industry players, where firms have learnt to put structures and strategies in place to ensure that they take the right decisions to survive on the market, especially against new entrants, bargaining power of suppliers, and threat of substitute products and services. Whiles looking at the Portuguese pharmaceutical industry from a competitive advantage perspective, especially in comparison with the UK market, one can say that the overly dependence on foreign companies in Portugal is weakening a base for independent future competition by the industry. Into the future, there is the tendency that once the local people become so settled with the foreign products, the demand conditions for products will be centred on foreign products, leading to a situation where importation will be higher than the patronage of local products when there is no more active presence of foreign companies in Portugal. It is thus recommended that the local industry will be given the kind of boost that has been given to foreign companies to ensure that there is a localised competitive advantage as exists in UK than a foreign based competitive advantage. References Costa, Heitor. The Pharmaceutical Industry in Portugal. Apipharma: Lisbon. 2012. Print. CBI Market survey. The Pharmaceutical Products Market in Portugal. 2010. Web. 20, April, 2014. European Federation of Pharmaceutical Industries and Associations. The Pharmaceutical Industry in Figures. 2013. Web. 20, April 2014. Read More