The Threat of Substitution and New Entants

The threat of substitution is between a moderate to a high amount in the industry of pharmaceuticals. This is due to the industry being so lucrative and there being so many alternatives to the same product.  The greatest risk any pharmaceutical company faces is that of another company selling a product that works the same but is not as effective and is sold at lower price in other words a generic form of the product (Chatteriee). However, companies have been known to use the generic product threat to their advantage and sell a generic version of there own product at a lower price (Gassman 27).  Even though most companies must deal with this threat it is much more prevalent in companies that sell pharmaceutical products whose units are sold in large quantities.  An example would be that headache medicine has more generic versions than hemorrhoid cream would because of the units they each sell in. This in turn makes the generic market of pharmaceuticals small compared to the original product market because of companies sticking to drugs that are sold in large volumes.

Other substitutes would include hospitalization, eastern remedies, or medical devices that make drug use unnecessary. Really anything that makes buyers not buy a pharmaceutical companies’ product is a threat of substitution that affects a companies profits. This is why the threat is pretty high in the market of pharmaceuticals.  

The threat of new entry into the pharmaceutical industry is somewhat low. Even thought the market is very profitable and attracts many new entrants it is very hard to get in because of how expensive of a start up it is (Kaiser). Research and development alone is a major start up cost that could to nothing but costs (Gassman 26). Also it takes a while for the new drugs to be developed. It is also difficult to get into the market because of the already well established named brand products. Distribution is another cost that has to be dealt with as pharmaceuticals have a strategic way of distributing. Some companies focus on one product to try and help their chances. They spend millions of dollars and that is just to propose their possible product. It would more than likely take a health break through pharmaceutical product to have a better chance to enter the industry.