Threat posed by new entrants
Any new entrant into the pharmaceutical sector will be faced with various "hurdles" that have been previously erected by already established businesses and by national and international standards and regulations. Some of these "hurdles" are: manufacturing, R&D, marketing, sales (economies of scale); establishing products, brands and relationships (Product differentiation); capital requirements and financial resources; access to distribution channels; and regulatory policies like patents and regulatory standards. However, the three factors that most influence the success of the pharmaceutical industry are capital requirements and financial resources, the research and development and regulatory policies. These three main aspects can influence each other and a failure in only one area can be destructive for a pharmaceutical company.
Capital requirements and financial resources are extremely important as an entry barrier since the pharmaceutical industry incurs enormous costs. Bringing a new product to the market, research and development (R&D), manufacturing and advertising are no low-cost activities.
Especially in an industry like the pharmaceutical industry a lot of its funds are spent on research and development. Drug discovery and development is very expensive; only a small fraction of the investigated products are eventually approved by government appointed medical institutions or boards, who have to approve new drugs before they can be traded. Drugs which fail part-way through this process often bring about large costs, while generating no revenue in return. Considering all the expenses of these failed drugs, the cost of developing a successful new drug has been estimated at about 1 billion USD (not including marketing expenses). According to the consulting firm Bain & Company the cost for discovering, developing and launching a new drug rose to nearly $1.7 billion in 2003.
Pharmaceutical companies also spent a large amount of money on marketing, advertising and lobbying. They...