Page 6 - CIMA SCS Workbook November 2018 - Day 1 Suggested Solutions

CIMA NOVEMBER 2018 – STRATEGIC CASE STUDY

successful drug may still not be bought as it is considered that funds are better spent elsewhere.
This helps keep prices in check.

For those countries where healthcare is not state-funded, health insurance is the main way of
obtaining healthcare, and so insurance companies are the customers as they have the ability to
agree to/reject proposed drugs. They are in the same position as governments.

Patients have no power over the price of drugs as they are consumers rather than customers.

Overall, the power of customers is medium.

Threat of substitutes

A new drug receiving approval from the regulatory bodies is typically patent protected, and this
prevents legal copycat products coming to the market for at least 20 years. During this time, the
only legitimate threat comes from a better, more effective drug for the same condition being
launched by a rival.

Once the patent has expired the drug goes “off patent”, meaning that any drug company can
produce its own version. This increases the threat of substitutes.

There is a threat from counterfeit drugs i.e. drugs that are made illegally and branded using an
approved drugs name. The high price charged by pharmaceutical companies makes this a valuable
criminal activity. However, drugs companies and government authorities look to take action
against such counterfeit producers as soon as they are identified.

Overall, the threat of substitutes is low/medium.

Competitive rivalry

The rewards on offer for launching new drugs makes for strong competition between
pharmaceutical companies. There are a number of very large, global operators with access to
significant capital and research facilities; they will therefore be aggressive in attracting the best
scientific talent. Furthermore, the industry has an established pattern of firms merging to gain
advantage or larger firms buying smaller businesses that have promising research projects or new
drugs in their portfolio.

Overall, competitive rivalry is high.

Conclusion

The main forces to focus on in the pharmaceuticals industry are competitive rivalry and, to a
certain extent, the power of customers.

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