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GSK competes in the pharmaceuticals industry, which is focused in the production of
ethical drugs. The pharmaceutical industry is highly competitive and is comprised of several
similar companies, including Pfizer Inc., Merck & Co. Inc., and Johnson & Johnson (Data
Monitor, 2010).
To give an indication to the relative size of the industry, it is interesting to note that in
2007, the U.S. pharmaceutical industry generated $276.4 billion in revenue. And although
companies like GSK provide various pharmaceutical products, the central nervous system
segment generated a large portion of total industry revenues, grossing $64 billion or 23.2
percent. Projected to continue its growth over the next several years, the pharmaceutical industry
is expected to be valued at $343.1 billion by the end of 2012 (Data Monitor, 2010).
These macroeconomic indicators demonstrate the relative size and profitability of the
pharmaceuticals industry but do not outline its competitive landscape. A thorough five forces
analysis will identify its environmental threats and help define GSK¶s position within the
industry.

Threat of Suppliers

Manufactures of Active Pharmaceutical Ingredients (APIs) are the major suppliers of the
pharmaceutical industry. These manufactures form a sub-sector of the chemical industry.
Although most large multinational pharmaceutical companies have fine chemical manufacturing
operations, the wide diversity of chemicals required by pharmaceutical companies gives the
manufacturers of APIs supplier bargaining power. Smaller pharmaceutical companies are
especially prone to the threat of APIs because they are unable to independently synthesize
specific chemicals (Data Monitor, 2010).
The threat of suppliers is also enhanced by the fact that supply is determined by
contractual agreement. Contracts increase switching costs, which inhibit companies from leaving
less they are willing to detrimentally impact their financial statements. In order to reduce
contractually fortified supplier power, pharmaceutical companies employ sourcing managers to
minimize costs in the purchase of APIs (Data Monitor, 2010).
 The development of novel prescriptions often requires unique active pharmaceutical
ingredients for which suppliers can charge a premium. A successful novel drug brought to
market equates to significant benefits for the supplier.
m erall, supplier power in the pharmaceuticals market is strong.

Threat of Buyersp

Health insurance providers and individual patients are the major buyers of prescription
drugs. Individual patient purchases, however, are usually instructed by individual practitioners.
Thus, marketing of prescription drugs is aimed primarily towards physicians
The threat of buyers can largely be reduced if a manufacturer can differentiate its unique,
patented product by demonstrating legitimate clinical benefits for consumers. Conversely, buyer
power is enhanced when generic equivalents to a branded drug exist.
m erall, the threat of buyers in the pharmaceutical industry is moderate

Threat of Entrants

 High development costs and risks associated with developing innovative prescription
drugs prevents new companies from entering into the market. For example, the development
costs of a new prescription drug, from the initial discovery of a potential healing agent through to
its marketing authorization, generally exceed $800 million(Indian Medical Association, 2009).
Also, existing drug sales are usually eroded by drug development as the failure rate of producing
a novel prescription is high (Data Monitor, 2010). Continually, many pharmaceutical companies
obtain patents for new drugs so as ensure profitability and offset development expenses. These
companies generally refrain from sharing information about product development, which creates
severe barriers to entry.
The threat of entry is relati ely low in the pharmaceutical industry; howe er, companies
entering the industry do so by producing branded drugs under license from the de eloper or
generic drugs.
Threat of Ri alry

 The pharmaceutical industry displays a strong level of rivalry as major players, especially
research-based companies, are typically large multinational companies with a high level of
capital investment. The rivalry is further intensified by high fixed costs and exit costs,
development costs for novel prescription drugs, competing drugs within a given area, and the
lack of switching costs for the healthcare buyers (Data Monitor, 2010).
Multinational corporations continue to create stronger rivals as each company must invest
extensively in sales and marketing in order to promote and differentiate products. Successful
marketing campaigns are crucial in generating substantial revenues and capturing market share.
m erall, the threat of ri alry in the pharmaceutical industry is high.


Threat of Substitutes

 Although alternative and holistic medicines present more of a threat to over the counter
(OTC) medicines than prescription medicines, these approaches have experienced increased
popularity among the general public(Indian Medical Association, 2009). Alternative approaches
do, however, ignite heated debate from the medical community as these techniques have not
been thoroughly tested
±ltimately, the threat of substitutes in the pharmaceutical industry is relati ely low and
sub ert little market share from traditional drug manufacturers.

Summary of Position

An understanding of the pharmaceuticals industry¶s competitive landscape highlights
GSK¶s market position, GSK competes as a research-based pharmaceutical company that
discovers, develops, manufactures, and markets leading prescription medicines for humans and
animals (GSK, 2008). Currently, GSK holds 19.7 percent of the pharmaceutical industry and is
defending its competitive market position (MoneyControl.com 2010)