Birzeit University | Strategic Management | Porter’s Analysis: Pharmaceutical Industry | Submitted to Dr. Grace Khoury | By: Asem Masri. Student No. 1125420 | 11/6/2014 |

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Contents
Introduction 1 Porter’s Five Forces Analysis 1 Threat of new entrants 1 Rivalry among existing firms 2 Threat of substitute products 2 Bargaining power of buyers 3 Bargaining power of suppliers 4 Relative Power of other stakeholders 4 Conclusion 5 References 5

Introduction
The pharmaceutical industry in Palestine is one of the most profitable industries, with the Palestinian companies owning 55% and 30% market share of the private and public sectors respectively, and high potential of growth even more, in a market estimated at around USD 100 million. All these companies mostly reproduce generics that are seen as commodities rather than differentiated, and highly depend on preferred agreements with pharmacies, doctors, hospitals and medical centers to serve both as their marketing and distribution channels. All operating firms in the industry are publicly traded companies, are highly controlled and regulated, depend heavily on technology and require vast financial resources.
Because of the large size , high complexity and vast financial requirements of the industry, it won’t be a straight forward task to decide on whether this industry is attractive to enter or not, without performing proper STEEP and industry analysis. In this case, we will focus on performing pharmaceutical industry analysis using Porter’s five forces model.

Porter’s Five Forces Analysis
Threat of new entrants
The threat of new entrants to the pharmaceutical industry in Palestine, is considered to be low due to the following reasons: 1. Economies of scale: The main players in the Palestinian pharmaceutical companies already has cost advantages over new entrants coming economies of scale, due to their high experience curve and Research and Development activities, large scale production for different products using same basic raw materials, and well established sales and distribution channels and partnerships with existing hospitals, pharmacies, doctors and medical facilities. 2. Capital requirements: The pharmaceutical industry in general requires substantial financial investment in machinery, facilities, R&D, distribution and human resources. The financial investment requirements in facilities was 3.9 million US dollars as of 2005. For example, total assets of Al-Quds pharmaceutical industry is 24.9 million dinars, while for Birzeit Pharmaceutical Co, it is 18 million dinars. 3. Access to distribution channels: The Palestinian pharmaceutical companies usually establish preferred arrangements with pharmacies, hospitals, medical centers and doctors. This will make it very hard for a new entrant to compete or break such arrangements. 4. Political situation: The Israeli government put limitations and regulations on importing pharmaceuticals and chemicals from foreign pharmaceutical companies, to enforce buying from its own pharmaceutical companies rather than importing from the outside. 5. Government Policies: The government requires that the pharmaceutical company meets quality and procedural standards, and that they must acquire a license and register all their products at the ministry of health which is most of the times a costly and lengthy process. The ministry of health also regulate and audit the companies, their products and the manufacturing process.
Rivalry among existing firms
The rivalry among existing pharmaceutical firms in Palestine, is considered to be high due to the following reasons: 1. Number of competitors: There are currently 5 operational pharmaceutical companies in Palestine (Birzeit Palestine pharmaceutical company, PharmaCare, Jordan Chemical Laboratory in Beit Jala, Middle East pharmaceutical and cosmetics, Jerusalem pharmaceutical company). Since these competitors are few in number and roughly equal in size, they watch each other carefully to make sure that they match any move by another firm with an equal countermove. 2. Commodity form products: Since all companies produce almost the same generic products, using the same formulas and effective materials, their products take the form of commodities and as such the competition among the companies takes high rivalry. Although PharmaCare currently has its own original research undergoing, this will not lower the high rivalry until it results into differentiated product which are protected with patents. 3. Market size and rate of growth: Since the companies mainly server the local market through almost 100% commodity products, the market is very limited, which will increase the rivalry of the firms, especially that these companies has a market share of 55% of the private sector and 30% of the public sectors, and have to compete with other Israeli and foreign companies over the rest of the market. 4. High exist barriers: The high exist barriers in the pharmaceutical industry mainly come from the fact that most of the facilities, machinery, R&D work, and other assets have few or no other uses if not used for producing medicine.
Threat of substitute products
The threat of substitute products on the Palestinian pharmaceutical industry is considered to be low. The main substitutes are biotechnology which doesn’t exist or is not used in Palestine. Another substitute is the use of herbs which, although common in Palestine, is decreasing by time. Physiotherapy is also considered a substitute in some cases, but is not currently widely used in Palestine. The last substitute is health consciousness, which depends on customer’s self-consciousness to their health, playing sport and watching their diet. Although this substitute is not widely spread in Palestine, indicators show that its effects will increase in the future, although staying limited to some diseases and medicines.

Bargaining power of buyers
The bargaining power of buyers in the pharmaceutical industry is considered to be medium. The pharmaceutical companies sell to the private sector, NGOs and the government. When the pharmaceutical companies sell to the private sector, they mostly do so through hospitals, pharmacies and doctors, and when they sell to the government and the NGOs they mostly do so through bids. According to this, there are many reasons which reduce the buyer’s bargaining power, and other reasons which increases it resulting in a total bargaining power of a medium level.
The reasons which reduce the buyers’ bargaining power are: 1. The end users of the pharmaceutical products, mostly don’t have anything to say about the prices or the type of products they buy, since this is usually decided by the influencers, E.g. doctors, hospitals, pharmacies, reducing the end user’s bargaining power. 2. The number of buyers and influencers is very large, making the actual competition among the companies occur only at the level of the large influencers, and reducing the buyers’ pressure power. 3. The pharmaceutical companies in Palestine are part of a union called union of Palestinian pharmaceutical manufacturers, which is allowing the companies to work together and coordinate with each other with the vision of covering 100% of the local market, and even compete outside Palestine. This will stabilize the prices in the industry and accordingly reduce competition rivalry and buyer’s bargaining power. 4. The pharmaceutical companies enter preference agreements with the doctors and hospitals, which obligate the doctors and hospitals to prescribe the companies medicines in exchange for incentives other than lowering prices. These include bonus systems, free drugs, attending conferences and gifts. 5. The buyers can’t integrate backward and produce their own products due to high entry barriers and rival competition, so they will still need to depend on the pharmaceutical companies to produce their products for them.
On the other hand, there are many reasons which increase the buyers’ bargaining power including: 1. The doctors, hospitals, medical centers and pharmacies buy in bulks, allowing them to practice pressure on the suppliers in terms of prices. 2. Since the Palestinian pharmaceutical companies are generic companies which produce undifferentiated products, and accordingly their products are considered commodities, the buyers can switch to any supplier with very low switching costs. Although there are some companies like Pharmacare who currently work on their original research and patents to guarantee differentiation, since so far no actual products and patents are announced, then this remains with no effect on the buyers’ bargaining power. 3. The Pharmaceutical products represent a high percentage of the pharmacies, medical centers and hospitals costs, which provides an incentive for them to shop around for alternatives. 4. Since there is a standard pricing for different medicines forced by the pharmacists Syndicate, this serves as an incentive for the pharmacies and medical centers to shop for alternative suppliers with lower prices to increase their profit margin. 5. The medical centers and hospitals provide a treatment service and they do not sell specific drugs. Rather they can use any drugs which will provide effective treatment. And since the local products are generic by nature, a specific product won’t mostly be of high importance to final treatment, making the hospitals and medical centers indifferent about the products and accordingly look for substitutes with lower prices. 6. The government and NGOs mostly buy through bids. Since the products are undifferentiated, this will result in a price based competition and accordingly reduce prices and increase buyers’ bargaining power.
Bargaining power of suppliers
The bargaining power of suppliers in the Palestinian pharmaceutical industry in low to medium for the following reasons: 1. The Palestinian pharmaceutical industry imports the needed chemical materials from outside. Since there are large number of suppliers for the raw materials used in producing the generic products produced by the Palestinian pharmaceutical companies, and since these raw materials are considered commodities then it would be easy for the pharmaceutical companies to change suppliers with low switching cost, reducing its supplier’s bargaining power. 2. The pharmaceutical companies buy large portions of the suppliers’ products, and are thus very important to the supplier. 3. Still, since the pharmaceutical companies import the raw materials which are not readily available, and since this import have to approved by the Israelis who limit the import abilities to force the Palestinian companies to buy from the Israel ones, this complicates the supply chain process and limits the suppliers in terms of number and geography, increasing their bargaining power, but still not to a dangerous level.
Relative Power of other stakeholders The main stakeholders who affect the pharmaceutical industry in Palestine include: 1. Shareholders: all five pharmaceutical companies are publicly traded corporations with thousands of shareholders, making these shareholders a major influencer in the pharmaceutical industry. 2. The ministry of health: The ministry of health forces regulations on the pharmaceutical companies which include quality regulations, licensing on both the company and the products levels, and auditing, making the industry less attractive. 3. The Israelis: The Israelis limit the pharmaceutical companies’ importing and exporting abilities and flexibility, making the industry less attractive. 4. Union of Palestinian pharmaceutical manufacturers: This union joins all 5 companies under one union, for better coordination and boosting, allowing the industry to grow. 5. Pharmacists syndicate: The syndicate enforces many regulations on the pharmacies, pharmaceuticals, pharmacies profit margins, and preferred vendors, making it a powerful stakeholder in the pharmaceutical industry.
Conclusion
Overall, and based on Porter’s 5 porter analysis, we can conclude that although the pharmaceutical industry in Palestine has high profit margin and attractive market share, it is not an attractive industry to enter, due to all above barriers and threat which except for threat of substitutes, ranges from medium to high. Accordingly, in order to succeed in this industry, one must have a well-established strategy, supported by effective planning, vast industry expertise, and very large financial abilities.

References * Pharmaceutical Industry in Palestine
Extracted from: http://www.wafainfo.ps/atemplate.aspx?id=3101 * Union of Palestinian Pharmaceutical Manufacturers web site: http://www.uppm.org/html.html * Masar for technical Consulations (2005). The Palestinian pharmaceutical industry sector.
Extracted from: http://82.213.48.101:4000/Publishing%20Documents/Medical%20Industry%20In%20Palestine.pdf