Page 5 - CIMA SCS Workbook November 2018 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

EXERCISE 2

Barriers to entry

The pharmaceuticals industry requires significant capital; funds are needed for research and
development, developing a brand name, equipment, hiring skilled staff etc. There will also usually
be a long gap between researching the first product and enjoying subsequent cash inflows.

The market is dominated by global players who specialise in all aspects of healthcare. Identifying a
gap in the market that is not currently being served can be difficult.

Regulatory approval from bodies such as the FDA and NICE is required before drugs can be
marketed.

However, if a small research team were to identify a new medication for which funding is
required, the high potential returns may well persuade a finance house such as a venture
capitalist to help overcome this barrier. New, smaller pharmaceutical companies emerge
regularly.

Overall, barriers to entry are high

Power of suppliers

Raw materials for manufacturing drugs are commodity products in the chemicals industry and
available from numerous sources, therefore such suppliers are unable to exert great influence
over the prices they are paid.

Suppliers of equipment that is used in manufacturing and research is also available from a range
of suppliers, and such suppliers will usually offer a range of equipment to the pharmaceutical
company, which moderates prices on the rarer/more specialised equipment.

Skilled staff are needed, with specialisms in particular aspects of research/healthcare e.g. stem
cell research. Such employees will be highly valued and therefore have greater bargaining power
over their employers.

Overall the power of suppliers is low for raw materials and equipment, and probably medium for
skilled staff

Power of customers

In countries where healthcare is funded by the government, the state is essentially the customer
for the pharmaceuticals companies. The drugs companies are able to charge high prices as long as
value is added to patients. However, if there is little in terms of cost/benefit to the state, a

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