What it means to be 'big pharma' in a $980 billion industry (Part 2 of 10)
Barriers to entry
The pharmaceutical industry is one of the most capital-intensive industries and it has a large number of requirements. The four major barriers to entry in the big pharma industry are captured in the graphic below.
The industry is dominated by major players. It’s not possible to replicate the business models of any of these companies, as they are all established across many countries around the world.
The manufacture of specialty drugs is done by batch and each batch has a process cycle that can last for a few hours or a few days. During this time, strict atmospheric conditions must be maintained in order to ensure precise drug formulation. These requirements involve high fixed costs, so a business must have certain economies of scale to remain profitable.
In contrast, entry into generic drug manufacturing or CRAMS (contract research and manufacturing services), doesn’t require as much capital. Having said that, the profit margins in these areas are thinner, too.
The pharmaceutical industry is highly regulated. In fact, there are three levels of regulations to be aware of:
Patent regulations are necessary to protect the rights of patented-drug license holders. These drugs can’t be manufactured without licenses from patent holders until the drug becomes off patent.
Quality regulations apply standards to a range of variables including the following:
storage containers and space
grade of ingredients
Price regulations make sure drugs aren’t sold at exorbitant prices and that companies sell drugs with the intention to serve society, not to just turn a profit.
Research & development
The research & development, or R&D, division is responsible for developing new drugs. In big pharma, patented drugs are a main source of revenues. The high cost of R&D is one of the entry barriers to the world of patented medicines. The better the R&D division, the better the pipeline of drugs under development.
A few big pharma companies are headquartered in the United States, including Johnson & Johnson (JNJ), Pfizer (PFE), Merck and Company (MRK), and Gilead Sciences (GILD). Combined, they form 30.34% of the Health Care Select Sector SPDR Fund (XLV).
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