A PESTEL ANALYSIS OF THE GLOBAL PHARMACEUTICAL INDUSTRY

1. A PESTEL ANALYSIS OF THE GLOBAL PHARMACEUTICAL INDUSTRY Including Key Drivers for change and major trends in this industry

2. POLITICAL FACTORS • Many countries have a ‘monopsony’ where there is one powerful purchaser; the government • Goverments have focused on pharmaceutical companies as easy targets in their efforts to control rising health care expenditure. Methods include price or reimbursement controls. • Government price controls also created ‘parallel trade’. Single European Market allows distributors to pocket difference after buying from low price market and selling in high price market. • European government has forever changing cost containment plans • FDA perceived as too closely aligned with the industry • South African government proposed legislation to allow generic imports of branded drugs – 39 firms took legal action – not a good example of industry relations • Clear principles agreed on and adopted by many companies that they would supply critical drugs to poor countries on a no profit no loss basis • Japanese government calling for consolidation and globalisation of domestic companies • Free trade allows wholesalers to extract a large chunk from the value chain

3. ECONOMIC FACTORS • New economic reality in 2006 where growth is shifting from mature markets to emerging ones • Reduce time in which R&D costs could be recouped • Universal coverage systems, i.e NHS in UK too slow or unable to introduce latest treatments and insurance funded systems i.e In USA some people can afford treatments, but not all. 15.9% of US population without health insurance • Methods imposed to control pharmaceutical spending • Venture capitalists offering funding for new industry players like biotechnology companies • Pharmaceutical growth is aligned with GDP growth • Companies costs for providing drug benefits to employees were increasing by up to 20% annually. • MCO’s asked consumers for increasing co-pays on branded versus generic drugs • Economic recession in Japan • Slowing European economies • Chinese government pouring money into new universities and science parks • Acquisitions of biotechs • Product life cycle has shortened and R&D costs, in-licensing and marketing costs have risen • Emerging markets accounting for 50% of global GDP growth in 2005

4. SOCIOCULTURAL FACTORS • Regulators, payers and consumers more carefully weighing the risk/benefit factors of pharmaceuticals • Lack of public or political support for industry • Ageing populations pressuring health care funding • Increasing patient expectations • Trend by payers to use generic drugs as first line treatment option, only switching to patented drugs if they fail • Litigious US consumers forced MCO attention on offering optimal rather than cheaper care leaving the door open for genuine innovation • Japan had worlds most rapidly ageing population, however in 2005 the population itself began to decline • Emerging markets have enormous populations with high levels of unmet need • In 2006 companies realised that well informed patients were prepared to ask for drugs by name and were becoming increasingly vocal, well informed, and demanding • Consumers beginning to purchase across borders with no guarantees of drugs being safe or even genuine • Average life expectancy in developed countries increased dur8ihng 20th century by about 20 years • Public perception of pharmaceutical companies was that they were greedy and consumers and politicians lost trust • More educated consumers

5. TECHNOLOGICAL FACTORS • Expensive high technology solutions • International convergence of medical science and practice under the influence of modern communications technology and increased travel and information exchange • Pace of change outstripping the capabilities and powers of regulators • New product adoption is not keeping pace with loss of patent protection • Easy to purchase addictive painkillers and other potentially harmful drugs over the internet and rogue websites offering miracle cures for aids cancer • Opportunities in scientific and technological advances • Chinese government pouring money into new universities and science parks

6. ENVIRONMENTAL FACTORS • None identified

7. LEGAL FACTORS • Regulatory controls becoming tighter • Legislation enacted to set fixed period on patent protection – typically 20 years • Regulatory changes in 1997 lead to direct to consumer (DTC) advertising • Regulatory processes undergoing international harmonisation • European Medicines Evaluation Agency (EMEA) established • Move towards global regulatory harmonisation through the International Conference on Harmonisation (ICH) • Strengthened patent protection and liberalised equality controls in emerging markets • Fake drugs account for over 10% of the global market generating annual sales of more than $32b • Illegal drug cartels moving into the less risky, but equally as lucrative business of fake pharmaceuticals • Between 2000 and 2003 the US Justice Department collected over $2b in fines from cases against pharmaceuticals firms, manly for pricing and marketing crimes • Increasingly onerous regulation

8. KEY DRIVERS FOR CHANGE & TRENDS IN THE INDUSTRY • Large emerging markets with unmet need • Market shift to specialist driven medicines • Dominant belief that size it what counts • Opportunities in scientific and technological advances • Shorter product life cycles • Spiralling health care costs