The Development Of Palestinian Pharmaceutical Industry Economics Essay

There are more than 4,000 Palestinian, Israeli, and foreign pharmaceutical products in the Palestinian market. Palestinian products cover a wide range of therapeutic categories with various dosage forms; however many Palestinian pharmaceutical companies focus on similar products, mostly re-production of generics. Palestinian drugs are believed to constitute around 45 percent of the dollar value, and 60 percent of drug consumption, in a market estimated at around USD 100 million.

Structural Industry Analysis (Porter’s Five Forces)

Rivalry among existing firms

The rivalry among existing firms can be analyzed from different perspectives: at the industry level and at the product market level

 Threat of new entrants

Threat of new entry will depend on the extent to which there are barriers to enter the market. Possible entry barriers are: economies of scale, capital requirements for entry, access to technology.

Pharmaceutical industry make good profit in PPI for example, Jerusalem Pharmaceuticals net profit $ 1.6 million in 2009, while Birzeit Pharmaceutical Co. has achieved a net profit for the year 2009 $ 3.5 million

There is substantial evidence for the existence of barriers to entry into the pharmaceutical industry. Four potential barriers to entry can be identified in the pharmaceutical industry: patents, Research and Development investments, marketing investments and company reputation. Patents are a major hurdle for free entry into the market. Drugs are expensive to develop but once invented are inexpensive to copy. Without legal barriers such as patents, competitors could easily copy drugs, driving down prices and eliminating the return on R&D investments that produced the original innovation

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The establishment of pharmaceutical industry require investments with very high amounts, total assets of Al-Quds pharmaceutical industry 24.9 million dinars, Birzeit Pharmaceutical Co. had total assets of 18 million dinars, Add to this to establish a company in the pharmaceutical industry needs licenses from the Palestinian Authority, and that every product drug enter the Palestinian market, whether produced by a Palestinian or import by foreigner must be registered at the Palestinian Ministry of Health, Add to that the complicated procedures by the Israeli occupation when you import the chemicals but there is an advantage of the pharmaceutical sector that there is no material costs of converting the customer from one product to another,

The threat of substitute products

Three major types of substitutes influence the ethical pharmaceutical industry: alternative therapies,  the health consciousness of the customer and generics. Alternative therapies, such as joint replacements for arthritis or organ transplant for organ failures cut directly into the potential growth of the pharmaceutical industry. Replacing bad kidneys with healthy kidneys inevitably reduces the market for drugs dealing with kidney problems. The extent of this phenomenon is limited is limited by the restricted supply of healthy replacement organs and by the immunity problems inherent in the transplants. The health consciousness of the customers will lower the incidence rate of certain types of diseases thus lowering the sales potential for the drugs involved. Generic brand medication is often seen as the main substitute for products produced by the pharmaceutical industry, it substitute because it keep the prices of brand name medicines competitive. But , generic medicines are not always an available substitute because of patents. It is debatable whether or not generic medicine is really a substitute and not a rivalry. Brand names and generics are the same product delivered to the customer in a similar way. The only differences are the name and price. Complementary Alterative Medicine and alternative medicine are also substitutes for the products produced by the pharmaceutical industry. The complementary includes a wide array of healthcare products and practices that are not recognized as being a part of conventional medicine. Although these substitutes do not impact the pharmaceutical industry as much as generic brands, they can be considered as more of an actual substitute. This is especially true for alternative medicine because it is not directly affected by the pharmaceutical industry.

The bargaining power of customers

The unique feature of pharmatical industry is that the end user of the product is different from the influencer (read doctor). The consumer has no choice but to buy what doctor says. However, when we look at the buyer’s power, we look at the influence they have on the prices of the product.

Consumers in the pharmaceutical industry include doctors, patients, hospitals, drug stores, and pharmacists. There are several indicators of the threat of customers in the pharmaceutical industry; this include the number of buyers, product differentiation, and product significance of a buyer’s final cost. customers do not compose a big threat to the pharmaceutical industry since firms spend their time on research and development of new patent drugs.

The industry has many customers, and competition normally occurs among consumers such as competition among hospitals or drug stores, the power of buyers in terms of the number of buyers in the industry is relatively small . The pharmaceutical industry does consist of a lot of players and thus, buyers are able to choose among many similar products. In order to combat this problem, individual pharmaceutical companies invent new drugs that they then patent to keep up their competitiveness.

Products are branded, buyers are able to purchase according to their own preferences because of the similarity of products. Individual consumers prefer generic to brand name drugs, since generic drugs are cheaper. Big hospitals or drug stores can pressure individual pharmaceutical companies to lower prices as they purchase large quantities and have a higher bargaining power. If a pharmaceutical company is not willing to lower the price, then the hospitals or drug stores will look for another firm willing to lower prices. However, if a pharmaceutical company owns the patent to a specific drug, it monopolizes the market for that specific drug and it becomes the price setter.

Drugs are necessities. Hospitals do not have to have every drug to operate, patients prefer hospitals to be able to supply their medications if they are having in-patient services. As a result, costs of drugs might not be the most expensive item on a hospital bill, but it plays a role in a patient’s decision on whether to stay in that particular hospital.

The bargaining power of suppliers

It is essential to identify the suppliers for the pharmaceutical industry. The suppliers could be a wide variety of the providers such as the raw materials and intermediates, the manufacturing and production plants, the overseas head offices who supply finished product, the local co-marketing partners who supply product or third party suppliers anywhere along the supply chain. Also, labor can be considered as a supplier to industry. Depending on the department, for example the clinical research departments, the suppliers can be the patients in clinical trials, the investigators or the study staff who provide the data. Internal labor can also be another significant supplier to the department.

All suppliers provide different levels of threat. It is not easy for the pharmaceutical industry to change suppliers even when they threaten to withhold supply. Labor can also be the significant supplier because labor holds immense power when inquiring for more compensation or reducing quality by working fewer hours Pharmaceutical companies usually own manufacturing plants so that suppliers can not charge unreasonable prices on their own and it is doubtful they will make threats to take their business somewhere else. Labor is not only a threat in the pharmaceutical industry, but also in most industries. Thus, the threat from suppliers in the pharmaceutical industry is not considered significantly big.

The PPI import materials of 90% which is needed for production of medicines from abroad, the most important companies such as Otapharm, Novartis, and this is the biggest challenge to companies, especially because of Israeli actions on the border crossings, ports and airports and since Israeli authorities prevent entering chemicals used in manufacturing medicines.

Relative Power of Other Stakeholders

Characteristics of the Industry

• Market share: no other industry reached the point where more than 60% of consumption was locally manufactured. This is higher than in neighboring countries, in spite of the fact that Palestine is open to Israeli and foreign products.

• Corporate mentality: The six pharmaceutical companies present are shareholding companies with thousands of shareholders. In contrast, the Palestinian economy in general is dominated by private or family-run businesses.

• A technology driven industry compliant with international standards: even during difficult times, the PPI was upgrading its facilities, equipment and personnel. Due to the mandatory special requirements and international standards for pharmaceutical production, quality control and quality assurance, most Palestinian companies have invested heavily in state-of-the-art manufacturing facilities and equipment. More than $35m were invested by manufacturers over the past eight years. High standards of operation are the norm at Palestinian pharmaceutical companies. All the companies are ISO 9000 certified and many are currently developing their environmental management systems based on the ISO 14000 standard.

• A truly national industry: activities encompass wide sectors of the Palestinian public, involving the medical and pharmaceutical communities and a nation-wide spread of »¿thousands of employees and shareholders profiting from a high return on investment.

• A highly regulated and controlled industry: The Palestinian Ministry of Health (MOH) registers products and ensures that only drugs of acceptable quality are marketed. The health authorities, in cooperation with accredited Quality Control (QC) labs, implement programmes of inspections, sampling and analysis.

• Comprehensive quality testing: While such concepts were and are still alien to other industries, the PPI implements a variety of quality enhancing measures including investing in equipped QC and Research & Development (R&D) labs and in quality assurance systems and personnel, separation between QC and production personnel and the use of the batching system in production, which facilitates testing and traceability.

• Prices: The PPI supplies quality products at 35-60% of the price offered by competitors. Palestinians save some $80m by using locally manufactured pharmaceuticals.

• Employment: More than 42% of those employed in the industry are female and 65% are college or university graduates. This high ratio helps the industry maintain its standards. The industry offers employment opportunities for specialized employees and is continuously raising their capabilities through training. Employment in the pharmaceutical sector could grow even further, particularly since the current average utilized production does not exceed 40% of capacity.

• Productivity: The Palestinian pharmaceutical industry is characterized by an average annual sales per employee of $30,000. – UPPM membership: All manufactures are members in the Union of Palestinian Pharmaceutical Manufacturers, a membership-based organization founded in 1996 to serve the interests of pharmaceutical manufacturers. The union carries out support programs including technical assistance and training. It implemented programs that ensured all members were ISO 9001 – 2000 certified, and is currently implementing the ISO 14000 (environmental compliance).