The competitiveness of pharmaceutical industry in Saudi Arabia

The aim of this paper is to describe and analyze the competitiveness of the pharmaceutical industry in Saudi Arabia, what new companies need to consider before entering this market and evaluation of such investment. I will discuss the boundaries of this industry under …

I will briefly highlight competitiveness of the Pharmaceutical industry at the global level.

Boundaries of the industry:

The scope of this analysis is the pharmaceutical industry where Key Products are human drugs excluding veterinary drugs, medical devices and diagnostics. Key players in the market are pharmaceutical companies, hospitals, distribution agents, chain pharmacies and patients’ support groups. As Porter identifies an industry as “the group of firms producing products that are close substitutes for each other” (Porter, 1980, p. 5), I will take the perspective of the pharmaceutical companies.

The geographic scope of this paper is the Kingdom of Saudi Arabia. However, large hospitals and institutions have access to medications through international brokers (Business Monitor International, 2010) making the market open to international competition.

Many pharmaceutical companies in the Saudi Market are international companies (IMS Health, 2010). Six out of the top ten pharmaceutical companies, as measured by their 2009 sales, in the Saudi Market are international companies five of them are American (IMS Health, 2010).

This leads to broadening the competition scope to take a global level as will be discussed. Also there is a very high impact of supra-state organizations like FDA and EMEA as Saudi Arabia considers guidelines and warnings issued by them as a reference (Business Monitor International, 2010). For example approval or suspension of a medication by those authorities impacts the business of the drug in the Saudi Market (ibid). So changes at the global level are reflected on the market.

Overview on the Saudi Pharmaceutical Market

The total market size was around US$ 2.65bn in 2008 and due to the country’s wealth, novel patented drugs and expensive ones are growing in demand (Business Monitor International, 2010).

One of the good tools to analyze the external factors affecting or might in the future affect the industry is PESTLE analysis (Armstrong, 2006). It is an acronym for Political, economic competitive, socio-cultural, technological, legal and ethical factors. Looking at the six dimensions, offer a good insight for strategic analysis (ibid).

Political Review (Insurance companies and price pressures)

Although the middle-east tends to be a politically unstable area, the political system in Saudi Arabia is relatively stable (Business Monitor International, 2010). The political power lies in the hand of the king who faces new challenges including pressures from the United Sates to democratize the system (Shoult, 2006). Yet, with 25% of world’s oil reserves in the country, international powers, including the US, see stability of the kingdom in their favour (Business Monitor International, 2010). Such political stability could represent a motive for international pharmaceutical companies to invest in the kingdom. However political stability alone is not the only factor to consider for investment decisions. Other dimensions in the following analysis will give a more comprehensive view of the industry.

Economic Competitive Review

With the discovery of oil reserves in Saudi Arabia in 1930s, the country turned into a first-world economy (Shoult, 2006). Saudi Economy is ranked among the “top ten most competitive economies” (Saudi Arabian General Investment Authority). Saudi Pharmaceutical market is the largest among the Gulf Cooperation Council countries with an estimated double digit annual growth till 2019 (Business Monitor International, 2010). Such a high growth rate should represent an attractive opportunity to foreign pharmaceutical companies especially at times of international slow down. Some companies like J&J consider Saudi Arabia as one for the international emerging markets along with Brazil, Russia, India and China that the company is willing to invest in to expand its business (Al-Abd, 2009).

Socio-Cultural Review

The Saudi pharmaceutical industry like many other industries is reliant to a great extent on expatriate workers whether as pharmacists or physicians (Shoult, 2006). This increases bargaining power of suppliers to residency visas to pharmaceutical companies as discussed below.

The Saudi culture is a very conservative one (ibid). Direct to the patient promotional activities although legal, might be a very risky move especially in certain therapeutic areas like women and men health. That could make the competition between pharmaceutical companies more aggressive at the level of prescribing physicians. More details about this will be discussed under the 5 forces analysis below.

From my experience, when it comes to patients’ support groups; most of them are relatively newly established. Their role, so far, is limited to increasing the awareness about illnesses and trying to minimize the stigma associated with some diseases like psychiatric illnesses and HIV. They don’t present a real threat for lobbying or exerting pressures on pharmaceutical companies. So most companies perceive them as an opportunity to increase awareness about illnesses and grow the total market size.

Technological review

Most of the local Saudi companies don’t have the know-how of manufacturing high technological products like bio-technology products and anti-cancer therapy (Business Monitor International, 2010). So the market of those therapeutic areas is almost totally controlled by international companies (ibid). This should represent an opportunity for local companies as the development of such capability could be a differentiating advantage versus all local Saudi incumbents. Yet, developing such capabilities would require a very heavy initial investment (Bogner, Thomas, & McGee, 1996). On average, it takes around US$ 700 million to develop a new molecule and then around US$ 400 million for marketing activities (Leask & Parker, 2007). One of the characteristics of the pharmaceutical industry is the slowness of diffusion of new technologies, where around 17 years is required “for the results of clinical trials to become standard clinical practice” (Porter, 1985, p. 406). This may be due to the legal and ethical issues related to the pharmaceutical industry, which brings us to the last element of PESTLE analysis.

Legal and Ethical Factors

The pharmaceutical industry is recently under scrutiny like never before (Beller, 2008), especially when it comes to relations with health care professionals. With the Foreign Corrupt Practices Act in the United States and the very aggressive penalties on the giant company Pfizer, $ 2.3 Billion by the FDA (The New York Times, 2009) most of the companies became very conservative. International companies, especially American ones, find themselves forced to follow Health Care Compliance Guidelines. This factor is not affecting local Saudi Companies, where such regulations are not in place (Al-Abd, 2009). For example, it is very common for local Saudi pharmaceutical companies to invite physicians and even purchasers for international trips with their families in a practice that is not controlled or regulated by Saudi Health Authorities (ibid).

This PESTLE analysis represents the outline of the playing ground. Competitive force and what is happening inside could be seen by the following 5 forces analysis.

Five Forces Analysis

As per Porter, the health care industry is very complex, highly customized and, unlike many other industries, consumers have limited information (Porter, 1985). Porter identified five forces that can drive the competition in an industry (Porter, 1980). The following analysis will briefly go through the impact of each force in the Saudi pharmaceutical market.

Threat of New Entrant

New entrant into an industry exerts pressure on incumbents’ prices and costs hence represent a risk in eroding their profitability (Porter, 1985). The intensity of new entrants will depend on the ease of entering the market and Porter identifies seven factors that might represent an entry barrier (ibid).

I find at least four of them to be applicable in Saudi pharmaceutical market, the relative high investment required to establish a new pharmaceutical company, government policies that raised the cost required for registering new drugs (Al-Abd, 2009), the recent price cuts enforced by Saudi Ministry of Health (Business Monitor International, 2010), incumbency advantage including know-how for manufacturing and unequal access to distribution channels. For example, many hospitals now have regulations that necessitate the removal of a drug from their formularies in order to add a new one (Al-Abd, 2009). This makes doctors face tough decision upon requesting new medications. All of these factors are in favor of incumbent companies and might represent entry barriers. On the other hand the low switching cost is an opportunity for new entrants. From my experience, shifting from a medication to an alternative or a generic doesn’t cause any switching costs.

Pharmaceutical companies in Saudi Arabia are not allowed to make special offers or special discounts (Al-Abd, 2009). They also can’t explicitly state the disadvantage of a competitor. Such heavy regulation would minimize the impact of retaliation against a new entrant.

The Power of Suppliers

In Saudi Arabia, foreign pharmaceutical companies don’t have a legal entity as they must work through local Saudi agents (Shoult, 2006). Such agents are responsible for the distribution and act as a supplier of labor. My personal experience is that, it can be a source of competitive advantage to companies as agents’ access to residence visas depends on many factors including but not limited to their personal network with the governmental officials. Therefore some companies’ expansion plans might be put on hold due to deficiency in visas required for new workers.

The Power of Buyers

Key participants of the industry changed recently with the tendency of buyers to collate into central buying centers like NUPCO, a newly established National Unified Procurement Company for Medical Supplies for all Ministry of Health hospitals (NUPCO). The same applies for National-Guard hospitals which decided to issue a unified tender for purchasing drugs (National Guard Health Affairs). The author’s experience shows that even private street pharmacies are dominated by chain pharmacies with central purchasing centers. The declared reason behind such moves is usually increasing efficiency (NUPCO) (National Guard Health Affairs). As per Porter’s five forces for industry analysis, the main reason might be the wish to increase their bargaining power against pharmaceutical companies.

The availability of me too products and several generics to non-patent drugs in the Saudi market (IMS Health, 2010) could turn many drugs into a commodity. As several alternatives become available, the bargaining power of purchasers increases (Porter, On Competition, 1985). This in turn could erode companies’ profitability. Therefore most of the international companies stop promoting their drugs once they lose their patents and shift their focus to new still patent protected drugs (Al-Abd, 2009).

The Threat of Substitutes

Porter defines a substitute as something that “performs the same or a similar function as an industry’s product by a different means” (Porter, 1985, p. 17). With this definition in mind, a substitute to a pharmaceutical drug could be a surgery or an alternative medicine. Alternative medicine is common in Saudi Arabia to the extent that an official National Centre for Alternative and Complementary Medicine was established in 2008 (Business Monitor International, 2010). Yet, it would be difficult to quantify and measure this market and its impact on the Saudi Pharmaceutical market due to the lack of reliable statistics and the poor control on traditional healers (Al-Rowais, Al-Faris, Mohammad, Al-Rukban, & Abdulghani, 2010).

As key hospitals can purchase medications through international brokers, this exerts more price pressures on local operating companies. Such international brokers might be considered as a substitute to local pharmaceutical companies. Their impact might lead to forcing the local operating companies to reduce their prices in order to match brokers’ price which could lead to eroding profitability.

Rivalry among Existing Competitors

This force analyzes how competitors are “jockeying for positions” (Porter, 1980, p. 17). It might be the most important force in the Saudi Pharmaceutical Market. The Saudi Pharmaceutical Market is fragmented among 271 companies (IMS Health, 2010). This might be one of the reasons behind the high intensity of competition. The leading company, GLAXOSMITHKLINE has a market share of only 9% followed by Pfizer 8% and then the local company SPIMACO 7% and the rest of the market distributed among the remaining companies. Intensity of rivalry increases in cases of “Numerous or equally balanced competitors” (Porter, 1980, p. 18). Yet the relative high growth rate in the market (IMS Health, 2010), could retain its attractiveness as possibility of reaching zero sum competition looks remote. Porter considers the competition in the health care system as zero sum (Porter, On Competition, 1985). This might be relevant only to the US market. The Saudi Market is not yet mature given its high growth rates and the under awareness and under diagnosis in many therapeutic areas like HIV and ADHD (Business Monitor International, 2010). It might be a positive sum competition.

From the author’s experience, pharmaceutical companies in the Saudi Market can be classified into International companies with most of their products patents and local companies producing mostly generics. Some of the International companies like GLAXOSMITHKLINE and Pfizer work in different therapeutic areas and most of their products are patents so their main strategy might be differentiation. There are other international companies that are focused in one segment, therapeutic area, like Lundbeck in central nervous system and Novo Nordisk in Diabetes (IMS Health, 2010). Such companies are mainly utilizing a niche or focusing strategy. Then there are the Saudi companies producing generics and their main strategy could be cost leadership. The existence of many generics, me too products, increases the intensity of competition due to the lack of differentiation (Porter, 1980). Such competition is very clear as many buyers are relying on tenders (Business Monitor International, 2010) rather than direct orders to utilize such competition in their favor. Price war among generics’ companies can be understood with such lack of differentiation. This could be compounded with the high initial investment required as mentioned earlier that might raise the exit barrier making companies more committed to the business.

When it comes to competition between international companies and local Saudi companies, economies of scale are in favour of international companies as they produce and sell their products worldwide while local Saudi companies usually don’t have access to European or American markets due to concerns on quality standards (Business Monitor International, 2010).

Advice to a New Firm Entering the Market

For a new firm entering the market, it needs to carefully position itself. Comprehensive understanding of the industry value chain will be important for the company to position itself (Porter, 1985).

Industry Value Chain

If this new company were a local Saudi one then it should rely on cost leadership. For example, the firm infra structure, like manufacturing facility, should be in a nearby location to the main consumers like the Ministry of Health in order to minimize the shipping costs. IT infrastructure and Human resources all should be designed with cost leadership in mind. Currently most of the local companies purchase their row materials from India in order to reduce their costs.

If the new company were an international company, then it would be almost essential to have patent and differentiated new molecule entities. Such patents would enable the new company to avoid a price war with local generics’ companies and being differentiated could help in positioning its products against existing international companies. A deep and comprehensive understanding of the Saudi Market and Saudi culture is also required. This level of understanding would depend on the new company background and whether it has previous experience in the Saudi Market, or not.

For the new company to secure its supply of labor and expatriate staff, they need to develop a strategic partnership with a local Saudi vendor.

Conclusion

As per Porter, the objective of industry analysis shouldn’t be to “declare the industry attractive or unattractive” (Porter, 1985, p. 5). It should be to understand the drivers of profitability so that more informed decisions could be made (ibid).

Future Changes

Shift to privatization and private market, shift toward generics.

If outsourcing the product from another company, logistics and registration is the barrier. (You need to register the manufacturing facility which requires inspection by the Saudi FDA to the site a process that takes around one year. The registration process of the drugs itself will take around another one year. This will not limit the entry to the market but it slows down the new competition.

Saudi Arabia requires local laboratory testing

Pay to delay!

Tutor Hints:

Think about the different levels in the industry value chain, and the fact that the issues of competitiveness at those different levels may be driven by different sets of business environment and industry environment factors. They may also involve different sets of industry players, some of whom may be more extensively integrated across the industry value chain than others, operating different types of business models and competing on different bases and perspectives.

Keep the focus firmly at the industry level, and not on individual companies. That said, comments on different companies competing one with another may form part of the analysis and argument.

Obviously in choosing an industry and setting some boundaries within which to work, the nature of the industry is one of the factors to consider. Some industries are inherently more international than others. Some markets are more open to international competition than others.

Competitiveness:

Define success in the competition, how do you score a goal? is it volume, share, profit, brand recognition? include ‘extent’, ‘nature’, ‘features’ and ‘character’. And in terms of thinking about ‘success’, once again it is worth thinking about how this is judged best and from whose perspective in any context.

Basic analytical models (eg PESTLE, P5F, SW/OT) may provide a useful starting point or provide a basic overview of an industry

My Comments:

Outside in

PESTLE analysis

Under scrutiny like never before.

Inside Out

Merge and acquisitions

Importance of Patents in Pharma

“About 80% of all pharmaceutical products and about 45% of all processes are patented (Arundel and Kabla, 1998).

Overall, patent protection is particularly effective in this industry (Gambardella, 1995), playing an important role for preventing imitation (Levin et al., 1987). Typically, patenting occurs when new chemical and potentially useful compounds are synthesized, applications for them are identified, and manufacturing processes are developed.” (Sternitzke, 2010)

Relationship between high innovative propensity and sustained superior profitability in pharmaceutical industry in the US is confirmed (ROBERTS, 1999)

Advertising & promotion in Pharma decreases price elasticity which means, the heavier the promotional activities, the higher the prices. (Rizzo, 1999)

Abstract

This paper uses data on the majority of name-brand antihypertensive drugs marketed in the US during 1988-93 to test the hypothesis that advertising decreases the price elasticity of demand in the pharmaceutical industry. This is the first study to directly estimate the effects of drug product promotion on the price elasticity of demand in this industry. We find strong evidence of an advertising effect. In particular, detailing efforts (the salient means for product promotion in this industry) systematically lower price sensitivity. Given the inverse relationship between elasticity of demand and price, it is likely that consumers pay higher prices as a result of the advertising that occurs in this industry. Our findings are thus consistent with Hurwitz and Caves, who find evidence that advertising inhibits entry into this market but in contrast to earlier research that found no anticompetitive effect.

Advertising and Competition in the Ethical Pharmaceutical Industry: The Case of Antihypertensive Drugs

Comment on referencing:

For chapters of edited books the required elements for a reference are:

Chapter author(s) surname(s) and initials. Year of chapter. Title of chapter followed by “In:”

Book editor(s) initials and surnames with ed. or eds. after the last name. Year of book. Title of book. Place of publication: Publisher. Chapter number or first and last page numbers followed by full-stop.

Smith, J., 1975. A source of information. In W. Jones, ed. One hundred and one ways to find information about health. Oxford: Oxford University Press. Ch. 2.

Samson,C., 1970. Problems of information studies in history. In S. Stone, ed. Humanities information research. Sheffield: CRUS, 1980, pp. 44-68.