GSK Bribery Case in China - Part 1: Pharmaceutical Industry Overview: M&As, R&D and competition

The market domination of corporate pharmaceutical giants (i.e., Johnson & Johnson, Roche and Pfizer – Top 3 as of December 2017) enables them to dictate drug prices. In the past years, pharmaceutical product prices have risen faster than the rate of inflation, and this was exacerbated by drug companies cooperating together resulting to the so-called huge pharmaceutical mega-mergers. They are called behemoths, which can outweigh entire continents in terms of revenues. Through a recent and ongoing wave of mergers and acquisitions, the big companies intensify the process of consolidation. Thus, leading to limited competition in the free market even further. However, M&As can be costly at times, thus, more frequently strategic alliances are being formed with small biotech companies to reap the new economic benefits that biotechnology firms offer.

All pharmaceutical companies concentrate on doing extensive R&D to own key drugs for specific diseases, which can increase their competitive advantage. With a better R&D and first-mover advantage, this can be a high barrier to entry especially for small firms, and even new competitors to enter the industry. There is a rapid growth in the market and research environment in emerging economies such as Brazil, China and India, leading to a gradual migration of economic and research activities from Europe to these fast-growing markets. In 2012 the Brazilian and Chinese markets grew by 16% and 21% respectively compared to an average market growth of minus 2% for the five major European markets and minus 1% for the US market.

The combined worth of the world’s top five drug companies is twice the combined GNP of all sub-Saharan Africa. The pharmaceutical industry is one of the most profitable industries in the US and UK. The big pharmaceutical companies’ profits can be even higher due to limited competition in the pharmaceutical industry caused by strict patent laws. The fact that there is very little price elasticity associated with price increases is a major factor contributing to the high profitability of the pharmaceutical industry. A patient will not change the demand for a product with a small change in price when there is no close or available substitutes. Thus, there is really a captured market.

Thank you for reading the first part.