FUNDAMENTALS OF THE U.S. PHARMACEUTICAL INDUSTRY

After reviewing the particulars of the company itself, Kurious turns his attention to those of the industry in which Merck operates. Data on the major pharmaceutical companies can be found in Appendix 6B.

Pricing and the Demand for Pharmaceuticals

The demand for pharmaceuticals is relatively inelastic. U.S. consumers are not particularly price sensitive because third-party payers (e.g., the government, insurance companies, and large corporate employers) account for the vast majority of health care spending. The implication of demand inelasticity is that the industry is viewed as recession resistant.

The demand for pharmaceuticals is sensitive to significant demographic shifts. The over-65 segment of the U.S. population is increasing. The so-called “greying of America” implies an increase in the demand for pharmaceuticals. Third-party coverage of pharmaceutical costs, however, is neither uniform nor complete throughout the elderly population. Thus, their demand may be somewhat more price elastic than that of the general population.

Consolidation and Joint Ventures

The U.S. pharmaceutical industry has historically been of below-average concentration. It has been composed of numerous medium-sized companies. In recent years, however, the trend toward mergers has reduced the number and increased the size of pharmaceutical companies. Examples of major recent mergers and acquisitions are the merger of SmithKline Beckman with the Beecham ...

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