BACKGROUND:
The health care industry utilizes advanced life science technology to provide health products and services. It is experiencing rapid growth due to a higher demand for advanced medical care. According to the Global Industry Analysis (GIA,2009), the global prescription drug market is estimated to reach about $897 billion by 2015, with substantial growth anticipated in the Asia-Pacific region. Australia’s healthcare sector is internationally recognized for its sophisticated and innovative industries.
According to the Government Department of Innovation (2011), there are approximately 470 healthcare companies in Australia and overseas that specialize in creating and selling biotechnology products. These companies hold a prominent global position within the healthcare industry. Additionally, GS1 Australia (2011) states that the healthcare sector contributes nearly 10 percent to Australia’s Gross Domestic Product. The ASX Health Care and Biotechnology Sector Profile (2011) reveals that there are 151 ASX listed companies operating within the healthcare and biotechnology industry, with a market capitalisation of around $52 billion as of March.
This report will analyze the industry characteristics by evaluating the value chain, applying Porter’s five forces, and comparing with the market. Furthermore, two prominent and representative healthcare companies, namely CSL (CSL) and Cochlear (COH), will be introduced to provide additional information for the healthcare industry analysis. ANALYSIS 1: Value Chain Analysis. Generally speaking, the primary production sequence in the biotechnology industry can be categorized into the following sectors: researching and discovering drugs, testing and obtaining government regulatory approval, designing and producing drugs, as well as delivering and selling them.
In the healthcare industry, the research of new drugs requires a significant amount of capital. The R&D expense for CSL and COH is 8% and 15% respectively, indicating a substantial investment in the discovery and research process. However, such a large investment does not guarantee a significant return as government regulators like TGA and FDA have strict standards for approving therapeutic goods manufacturing. This poses a potential risk for investment in new drugs that may not be able to reach the market due to government regulations.
Healthcare products are frequently utilized to treat specific illnesses or improve general well-being. Patients depend on these drugs to relieve symptoms or achieve complete recovery. Despite the limited options available to consumers, there is a continuous demand for these products. As a result, buyers have little influence over pricing, enabling manufacturers to set higher prices in order to cover extensive research and development costs and generate significant profits. The annual reports of CSL and COH indicate that their EBITDA reached $1,350.3 million and $236.6 million respectively in June 2011.
A study conducted by the U.S. Department of Commerce International Trade Administration (2004) found that countries like Australia in the Organization for Economic Cooperation and Development (OECD) have implemented price controls on pharmaceutical products in order to ensure health benefits for all. This leads to significant buyer power for biotechnology companies and acceptable prices due to government regulation, although it may slightly reduce purchasing power. However, these regulations provide stability.
Biotechnology companies generally possess moderate supplier power since they can easily obtain specialized products such as blood samples or cells. Nevertheless, they do require approval from government regulators before commencing their research, which poses a challenge and requires more effort for healthcare companies to acquire permission.
Rivalry among existing firms in the biotechnology industry is low because most companies have their own unique products. For example, CSL specializes in vaccines and plasma products while COH focuses on cochlear implant systems.
Once a drug is discovered or invented, it becomes difficult for competitors to imitate due to the majority of drug companies utilizing the patent system (thusleem,2008). Consequently, there is less competition in the market.*Threat of New Entrants(HIGH)* It is not an easy task for any investors to enter the healthcare industry as it requires a significant amount of capital, fully qualified and skilled scientists, and researchers who are in great demand. The research teams in the biotechnology industry cover a variety of fields, making it necessary to invest substantial efforts and money in this industry.
Moreover, the entry into the industry also requires consideration of government regulators’ manufacturing and sales approval. Additionally, the healthcare industry experiences a low level of substitution due to medication being a necessary choice for sick individuals that cannot be replaced. Furthermore, the healthcare industry in the Australian market has demonstrated strong performance and profitability. According to graph 1 from Finanalysis (2011), the healthcare industry showed fluctuations in line with market volatility but overall outperformed the ASX 300 during a six-month period.
The Thomson Financial forecasted (Graph 2) that, in contrast to other industries, the healthcare industry is expected to have a smooth growth rate of about 10% in the EPS and P/E ratio over the next two years. [pic] (Graph 1) [pic] (Graph2) SOURCE: CONCLUSION The historical market performance has been outstanding and is expected to remain robust. The high demand for healthcare may result in high sales returns. Investors can potentially profit greatly because biotechnology companies have strong bargaining power, low threat of substitutes, and less intense competition in this industry.
The biotechnology company can benefit from the R&D credit, and it is also a preferred industry for investors in the healthcare sector.
Both Finalysis and Cochlear Limited have their annual reports available for viewing on August 20, 2011.
On August 17, 2011, Finanalysis provided a performance chart for viewing.
Information about the healthcare industry can be found on GS1 Australia’s website and was viewed on August 18, 2011.
A sector profile for Health Care & Biotechnology was viewed on August 17, 2011.
The Prescription Drugs: A Global Strategic Business Report from 2009 is available for viewing as of August 21.
On 17 August 2011, the Australian government’s Department of Innovation, Industry, Science and Research examined the patent system in the pharmaceutical industry (Thusleem, 2008). Around the same time, on 17 August 2011, the United States Department of Labour’s Health Care Initiatives and the U.S. Department of Commerce’s International Trade Administration in 2004 discussed how pharmaceutical price controls in OECD countries could affect U.S. consumers, pricing, research and development, and innovation (United States, Department of Labour Health Care Initiatives; U.S. Department of Commerce International Trade Administration, 2004), viewed on 20 August 2011.
