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Introduction

Preface

The pharmaceutical industry is a complex, potent, and greatly globalized industry. It allocates the majority of its resources to the process of drug discovery, manufacturing, marketing, and logistics (Halliday et al. 1997).

It needs high research and development (R&D) expenditures and extensive regulation of its products compared with other manufacturing sectors (Micheal et al. 1999).

The pharmaceutical industry is one of the main industries in the world as more countries develop and promote constantly. It is a strategic activity as it concerns peoples well-being and protects public health.

The research is divided into five main parts, the first part contains an introduction includes Research problem, Research questions, Research objectives, and Research value. The second part contains a literature review provides an overview of the pharmaceutical Industry in Saudi Arabia with a focus on the components that are relevant to the competitiveness in this industry and factors affected it. This section also presents Porter´s theory with its five forces of competitiveness.

The research methodology was introduced in section three, which includes the target population, sample population, data collection methods and statistical treatment used. Part four displays the study results, while the fifth part concerned on the important recommendations and the Scientific Implications related to the study.

Research problem

Saudi Arabia is determined to become a regional leader in life science industries especially pharmaceuticals industries. Moreover, Saudi Arabia offers a variety of impressive opportunities and investment including specific areas such as the efforts of The Saudi Government for expanding the industrys regulatory framework in addition to strengthening its intellectual property law regime to foster greater innovation and domestic manufacturing for this sector.

The pharmaceutical market in Saudi Arabia is considered one of the largest and the richest markets in the Middle East and North Africa. The Saudi Arabias citizens are the largest consumers of pharmaceutical products in the Gulf region, as the consumption of medicines is estimated to be $52 per capita, compared to about $20 in the rest of the Arab world (Issa et al. 2009). In 2014 the total pharmaceutical expenditure (TPE) in the Saudi market reached about 5 billion dollars (U.S Commercial Service Healthcare Technologies Resource Guide 2015).

This growth in Saudi Arabia pharmaceutical industry can be seen in the wide product lines; ranging from pure generics to branded generics which enables the consumer to exercise choices (Bawazir 2013), Furthermore, Saudi pharmaceutical market goes over the other Arabian Gulf market in the number of generic brand manufacturers with local pharmaceutical industry.

The local industry for drugs in Saudi Arabia covers between 16 and 20 percent of the domestic market needs, and the industry imported the rest of its needs. In 2012 Saudi Arabia imported drugs of about 10.8 billion Saudi riyals (2.88 billion dollars) (Bawazir 2013).

Given the importance of the pharmaceutical industry in the Kingdom with the presence of 33 pharmaceutical companies manufacture medicines and a big number of distributors for many international companies, it is important to study the attractiveness and competitiveness of this industry, whereas Porters model is applied to determine the intensity of competition within the industry and to supports analysis of the driving forces in the market. Furthermore, it helps management to decide how to develop particular characteristics of the industry.

Research questions

The following research questions outline how the study will be focused:

Firstly, the author asked, is the pharmaceutical industry is economically promising, attractive and profitable industry in the Kingdom? Is it having intensive competition? How can we apply porters model to measure the competitiveness in pharmaceutical industry in Saudi Arabia? How can suppliers drive prices upwards? Is it possible for buyers to drive down prices? How easy for competitors to enter the market? Does the Saudi pharmaceutical products compare favorably to other possible substitute?

Is rivalry among competitor high? What are the characteristics of the Saudi pharmaceutical market? Which is the possibility that support or hinder the pharmaceutical industry? How to finding out the opportunity and threat to the pharmaceutical sector in Saudi Arabia? And finally, what is the role The Saudi Arabian government to support and encourage the Pharmaceutical Industry?

Research objectives

This study aims to:

Describe the competitive factors in Saudi Arabia pharmaceutical industry using the theoretical models of porter.
Outline the forces such as the economic and legal factors that affect the Saudi Pharmaceutical Market.
Highlight the role played by the Saudi government in an attemptto raise the level of national pharmacological security, and then upgrading the level of human development indicators of the Saudi citizen.
Complete integrated analysis of the drug manufacturing policies inSaudi Arabia that underline the problem of competitiveness with manufacture decision-making and drug policies.

Research value

The pharmaceutical sector is a knowledge-based manufacturing industry and an important part of the health care sector; it represented 25 percent of the total spending on Saudi Health Care expenditure, which estimated at 5 billion dollars. This make the Saudi pharmaceutical market as the richest in the Gulf region, and this raise the need to have specialized studies and analysis on Saudi pharmaceutical industry competition. This study takes its importance from the following considerations:

Importance of pharmaceutical industry worldwide.
Importance of pharmaceutical industry in Saudi Arabia.
Importance of pharmaceutical industry structure analysis and how it affects competition and profitability.
Importance of giving a scope on changing strategies related to market environment.
Enrich the Arabic library.

Literature Review

Overview

In this chapter the relevant terminology has been defined, the theories and themes governing the competitiveness in pharmaceutical industry have been discussed keeping in mind the study objectives. The following literature review will provide an overview of this Industry in Saudi Arabia and the factors affected it. This chapter will proceed in three major sections. First, background about the pharmaceutical industry will be described. Second, shows the industry definition. Third, gives a glance on Global pharmaceutical industry. Fourth, discuss the pharmaceutical industry in Saudi Arabia and factors affected it. And finally presents Porter´s theory with its five forces of competitiveness

Industry Background

The pharmaceutical market has undergone fast, exceptional, tremendous and complex changes in the last several years (Al-Hag 2013, p.3). The pharmaceutical industry is considered one of the most inventive, innovative and profitable industries. These features have led to categorize it as a high-tech industry (Kasapiand Mihiotis 2011). The pharmaceutical industry represents a considerable added value to the national economy through export or direct investment (Al-Hag 2013).

The importance of big changes in pharmaceutical industry should be considered due to intensity in Research and Development (R&D) activities, uncertainty in drug development process, lack of new products, rapid integration, rapid development of generic markets (KarhuandYla-Kojola 2010), and finally increased global competition and technological advances (McAdam & Barron 2002). Moreover, some unique characteristics such as high-regulated setting, the long development process, risky and high level of cost in research phase (Cardinal 2001) distinguish the pharmaceutical industry from other industries.

The rapid changes in consumer behavior led to the significant growth in demand for pharmaceutical products in the 1990s. The increase in demand led to the growth of the market size, which was characterized by the changing nature of competition and increased competitiveness (Hadzovi 1997).

Industry Definition

The pharmaceutical industry is responsible for the development, production and marketing of medications (John L. McGuire et al., 2007). However, companies that operate in the industry are required to comply with the laws and regulations governing the production, distribution, and consumption of the products besides the patenting, testing and ensuring the safety, efficacy, and marketing of drugs (Harrigan 1984, p.2).

According to Lee, Ahmad, Ahmed and Nawaz (2010), drug companies operate like other companies by manufacturing products for profitable sales in order for them to survive and grow. However, they are different from some companies because the drug business is very risky. Ingelman-Sundberg, Oscarson and McLellan (1999), Ahuja and Scypinski (2010) and Harrigan (1984) argue that manufacturers require high capital investment for research and development to patent new drugs.

Because drugs are consumed by human beings, the process of researching, discovering, and developing new drugs is expensive and time consuming. That makes a small percentage of products to be eventually approved for human consumption. Most national governments appoint medical institutions or boards to evaluate and to approve new drugs before they can be marketed.

The total industry can broadly be classified into two categories.

These are:

Patent Medicines
Generic Medicines

According to Kheir et al. (2008), patented medicines are the products that are invented by the companies, who have their own research team working on their own laboratories. These companies range from very large multinationals to small management establishments (SMEs). These products are patented for many years to enjoy the monopoly market. After years of business, the formulation is sold in the market so that others can go into mass production.

Generic medicines are products that are produced by several companies using a business model aimed at the development of a medicine which is identical or equivalent to Patent Medicines under different brand names in mass scale. These are marketed as soon as the originator product encounters loss of exclusivity. The Generic medicines are sold at a much lower price than the original product.

The difference in business models between originator and generic companies is reflected in their cost structure. The manufacture cost products for generic companies account for the largest share of the costs, for originator companies research and development, marketing and sales together account for a much larger share of total costs than the manufacturing process.

Pharmaceutical companies commonly spend a large amount on advertising and marketing. Different advertising platforms are used to reach the customer including the mainstream media and healthcare journals. However, some countries encourage direct adverts to the consumer. Companies make direct marketing possible by employing and engaging the services of marketing representatives who have direct access to healthcare workers and physicians.

Global Pharmaceutical Industry

One of the most profitable industries for many decades has been the global pharmaceutical industry (Kola, Landis 2004), however, due to dynamic forces in the competitive as well as regulatory environment, the conditions of the industry have changed.

Some of the factors that have contributed in different ways to the nature of the industry has been the strong dependency on innovation, the high risks involved, and R&D, and the supply chain management activities (Jaberidoost et al 2013), cause to decrease the attractiveness of the pharmaceutical industry compare to other industries (Gassmann et al 2008). Studies show that new drugs are expensive and time consuming to develop and the underlying process is extremely risky. Studies to determine the cost of bringing a new drug into the market show that approximately $800 million must be incurred (DiMasi2002 & 2003).

Moreover, it is estimated that an average of 12 years would have been passed from the synthesis of the new active pharmaceutical materials to launch a new drug to the market (MatíasReche2010). Thereby, on average, out of every 10,000 ingredients synthesized in the laboratories, only one or two will successfully pass all the steps to become marketable medicines (Festel et al 2010). Meanwhile, international competitiveness is becoming more important for the pharmaceutical industry.

Increased competitiveness and the changing structure of competitors impact the strategic direction of the pharmaceutical companies in the world (Kesi
2009). On the other hand, companies try to increase the profitability of all phases of the value chain from primary discovery research to production phase and logistics as well as sales and marketing phases (Zarenzhad et al. 2014).

Sales revenues generate company profits, allowing for more research, which in turn might lead to another successful novel product (Conklin 2010). Creating a cycle, which is initiated whereby, profits from existing drug sales fund and marketing of future drugs (Eljelly 2004). The cycle may potentially be repeated for each new drug developed and marketed. That makes the pharmaceutical companys research and development (R&D) infrastructure is a major contributing factor to its competitiveness in the industry (Michels and Jonnard, 1999).

Competition in the industry occurs within the sectors and among other sectors. In the brand name sector, brands point out to treat with certain drug via the competition on its safety, efficacy, and brand equity. However, manufacturers of generic drugs do not incur the initial research and development costs that are often very expensive. They merely compete only on the lower prices of their products (Morton 1999).

Relatively low costs allow the generic sector to compete on price by offering generic equivalent drugs at prices that are approximately 70% less than those of brand name drugs (Generic Pharmaceutical Association [GPA], 2011)

Saudi Pharmaceutical industry:

Historically, the first pharmaceutical factory was established in the Kingdom of Saudi Arabia in 1926 to manufacture Eucalyptus pills for the treatment of citizens and pilgrims from malaria, then a factory for typhoid and smallpox vaccines was established (Bawazer 2010).

In the mid-thirties, pharmaceutical trading was grown and emerged agencies and drug stores were selling pharmaceuticals in cities like Jeddah and Makkah, The first regulation of pharmaceuticals and herbal trading was issued in 1938. The name of Public Health Department was changed to the Ministry of Health in 1950 (Bawazer 2010).

In 1959 an important shifting point was founded in the history of pharmacy in Kingdom, through establishing the first college of pharmacy in King Saud University. During the years followed, the total growth in the health sector was increased and drug stores and pharmacies were spread in deferent areas (Bawazer 2010).

The Saudi pharmaceutical industry has been adapting itself more and more to the strategic market trends and demands. The Saudi Arabian pharmaceutical market is one of the largest in the Middle East and North Africa. Its expenditure in 2014 represented 25 percent of the total spending on health care which estimated at USD 20 billion (5 billion dollars), growing an average of 10 percent annually (U.S Commercial Service Healthcare Technologies Resource Guide 2015). It can be concluded that patients bargaining power is significant and the overall power of buyers is considerable.

The pharmaceutical industry in Saudi Arabia is one of the most successful business sectors. As the companies compete on products characteristics and tend to invest heavily into marketing activities to gain physicians/patients loyalty (McGuire, 2007).

Saudi Arabia is considered as one of the best countries that protect the property rights of the pharmaceutical industries leading to greater openness to the international market. Saudi drug market is characterized by strong presence of major international companies. They enter the market through strategic partnerships with local companies. The market characterized by a dynamic pricing system responsive to changes, balancing the reasonable price and the availability of medicines (Bawazer, 2013).

As Figure (1) indicates, six out of the top ten pharmaceutical companies in the Saudi Market are international companies (IMS Health, 2010). The result was an increase in the scope of competition from the local to the global level. The leading foreign firms in Saudi Arabia include; GlaxoSmithKline (UK), Pfizer, Novartis, Astra, MSD and Janssen, etc. While, the Leading domestic manufactures in Saudi Arabia are; SPIMACO, Tabuk Pharmaceuticals Company, Jamjoom Pharma, Al-Jazira Pharma, Riyadh Pharma, and Saja Pharmaceuticals. In Saudi Arabia, foreign pharmaceutical companies dont have a legal entity as they must work through local Saudi agents (Al Shaikh 2011, p.29).

The private pharmacy sector tends to support branded pharmaceutical industry as it is marked by tight price controls (Al Shaikh et al, 2011)

*Figure (1): Top ten pharmaceutical companies sales in Saudi Arabia market.*

Building a life sciences industry in Saudi Arabia is one of the governments top economic priorities. In addition to transforming the economy and its infrastructure to support knowledge-based industries, the government is supporting the sectors development through a variety of direct and complementary investments. According to the Saudi Pharmaceutical Market is fragmented among 271 companies (IMS Health, 2010, p.7), Saudi pharmaceutical manufacturers are mainly involved in secondary manufacturing, through the use of active ingredients of a pharmaceutical drug due to the increasing number of primary products losing patent protection worldwide (Business Monitor International 2010, p.19).

The domestic production in Saudi Arabia supplies only 15 % of the market need and 85% of the market need is imported. (85% of its output is exported to the other GCC countries). Therefore, it imports a large amount of semi-finished medicaments, some of which are then relabeled, repackaged and exported (Issa et al. 2009).

According to Enright (2003) and Bawazer (2013), Saudi Arabia consumes about 80 percent of the innovative medicines and the remaining 20 percent goes for the generic medicine. This gives great opportunities for the development of investment in the field of medicine in Saudi Arabia. Fina and Rugman (1996) and Frank (2007) have pointed out that the pharmaceutical industry in Saudi Arabia has shown a quick development of the world generic markets and generic drug manufacturers rely on government substitution laws to take sales away from branded counterparts. Government policies are biased in favor of domestic producers, providing them exemptions, including interest-free funding, subsidized utility charges, and no import duties on raw materials and intermediate products (U.S Commercial Service Healthcare Technologies Resource Guide 2015).

At present, there are about 30 manufacturing facilities in the Kingdom that produce the following products: Augumentin, Viagra, Snafi, Lipitor, Rofenac, Klavox, Zithromax, Nexium, Dermovet, etc. It is important to declare that generic drugs are gaining market share in the Saudi pharmaceutical market, since they are considerably cheaper, resulting in the Saudi pharmaceutical industry being more competitive (Al Sheikh et al. 2011).

(Rashid 2014) stated that, unfortunately no factory not only in the Kingdom, but also in all Arab countries licensed for drug industry from the original company. The role of manufacturer in our region is limited to the manufacture of medicines that have passed the period of protection (10 years). But that does not mean it is a weak manufacturer, because there is a high demand on these drugs as it reduces numerous amounts of money that Saudi Government pays for Government Health Services (Fung et al. 2001). It also relieves the burden of importing medicine with original high cost and replaces it with generic medicines of the least cost.

(AL-Abdulkarim 2014) said that, the Saudi market is highly competitive, open for all companies and there is a lack of control over the prescribed medication by physicians thus makes the national firms find it difficult to compete. He added that, the lack of the information in the pharmaceutical industry sector makes investors fear from pumping massive money without having sufficient information about the market, as the investment in this sector needs huge capital.

Al-Abdulkarim presented a number of proposals to support the local pharmaceutical industry like increasing the Saudization of more than 40% at least with recruiting well-trained Saudis. Such support will stimulate international companies to move there manufacturing to the Kingdom.

Economic factor that affect Saudi pharmaceutical industry

According to the Saudi Arabian General Investment Authority, Saudi Economy is ranked among the top ten most competitive economies because of the oil and centralised controls of major economic investments and related activities (Business Monitor International 2010, p.3)..The Saudi Pharmaceutical market is the largest among the Gulf Cooperation Council Countries with an estimated double-digit annual growth till 2019 (Business Monitor International 2010, p.5). Such a high growth rate should signify a striking chance to foreign pharmaceutical companies to invest their job in the kingdom.

The Food and Drug Administration has estimated the local pharmaceutical industries growth rate in Saudi Arabia has been 40 percent in last seven years, and happens according to increasing number of local factories. The growth has triggered an increase in the application of intellectual property laws on pharmaceuticals industry.

Drugs manufactured in Saudi Arabia are within 33 local factories, two of them for veterinary medicines. The number of factories specialized in pharmaceutical industry in Saudi Arabia is expected to be 40 pharmaceutical factories by 2020, which will increase the ratio of locally manufactured products to between 35 and 40 percent.

Bawazer (2013) stated that, there are great opportunities for the development of investment in the field of drugs; by direction the global companies to build their factories in King Abdullah economic city in Saudi Arabia (western zone) beside the presence of a large number of companies in the Saudi market.

Increasing health insurance is considered as a factor that helps in increasing the consumption of drugs indirectly, particularly for people with chronic diseases (Bawazer 2013).

With enhancing the technology level thus will create a good media for market competition. As most of the local Saudi companies dont have the know-how of manufacturing high technological products like biotechnology products and anti-cancer therapy (Business Monitor International 2010, p.12).

Industrial cities commission « Modon » in Saudi Arabia is planning to establish the first pharmaceutical complex in the region, aimed to create an appropriate environment for the industry through the spaces, technology and integrated services in supply chain opportunities from raw materials, production and packaging, or support services thus enhance the competiveness in the industry (Bawazer 2013).

Legal factor that affect Saudi pharmaceutical industry

Legal factors are related to the legal environment in which firms operate. Law is the supreme command of any nation Health Laws included (Palmer, 2004). Companies need to be aware of the risks involved in the legal environment and are often advisable to have a reliable local partner and an attorney who can deal with the legal issues (Morrison 2009).

In Saudi Arabia, there are legal provisions establishing the powers and responsibilities of the Medicines Regulatory Authority (MRA). Legal provisions exist requiring authorization to import medicines. Laws exist allow the sampling of imported products for testing. Regulations or laws exist to allow for inspection of imported pharmaceutical products at authorized ports of entry (Issa et al. 2009).

In Saudi Arabia, there are legal or regulatory provisions affecting pricing of medicines. These provisions are aimed at the level of manufacturers, wholesalers and retailers (Alakloby 2005). They affect: Innovated Patented Products, Generic Products, Under License Locally Manufactured Products, Products with Different Package Sizes or Strengths, Products that have Specific Advantages, and fixed Combination Drug Product. Legal provisions exist requiring manufacturers to be licensed (Alpen Capital 2013).

AL-Mishaal (2014) emphasized that the Saudi government (Saudi food and drug authority) aims to support localization of institutions and private sector companies, especially in the drug sector and medical devices to be in competition with the international companies. Moreover, the Saudi food and drug authority work to balance the availability of medication and high prices, so it established a (competent committee of drug pricing agency) with a specific rule like the cost of manufacturing and economic indicators.

Also, the political environment in Saudi Arabia has a great influence on management and leadership of pharmaceutical company (Al-Wazaify et al. 2006). Political environments refer to public institutions (such as the government, government agencies, and government-owned businesses) and non-public institutions (such as environmental and other special interest groups that represent specific individuals or groups) (Baron 1993).

According to Asiri (2011, p.3) and the Business Monitor International 2010, p.5), the political system in Saudi Arabia is relatively stable, which could represent a motive for international pharmaceutical companies to invest in the kingdom.

Porters five force analysis

Michael Porters initial thoughts on how competitive forces shape strategy were formed in1980 and later expanded upon in 2008 (Kotler & Armstrong 2010). These forces are used to better understand the complexities of the competitive environment and to analyze profitability of an industry. Porter created a five forces model that outlines the competitive forces.

This section briefly presents Porter´s theory with a focus on the components that are relevant to the competitiveness in pharmaceutical industry in Saudi Arabia. That aims to provide a strategic framework to analyze industry structure and how it affects competition and profitability. This type of analysis enables firms to be prepared for, and take advantage of challenges in order to survive in a competitive industry.

Porter (2008) made a critical observation by not only understanding the underpinnings of competition and the root causes of profitability, but also how their competitors will shape the amount of profit they can generate. According to Kulkarni (2004, p.9) and Weir (2013, p.13), Porters Five Forces Analysis is an important tool for assessing the potential of profitability of a business. Understanding of these forces helps a firm through increasing its knowledge of its own industry, be better prepared to face any challenges and furthermore it increases long-run success.

According to Porter (1985, p.11), the five forces model provides the basis for structural analysis of industries with a powerful tool for understanding where power lies in a business situation. They determine the profitability and the degree of attractiveness of a given industry and constitute strong threats to a companys profitability (Baker 1992 & Bradley 1995).

Grundy (2006) developed advantages which significantly act with the porter model acting on the business strategy which are: emphasizes the importance of negotiating power, bargaining arrangements in determining relative market attractiveness, how competitive rivalry is very much function than other four forces and combines input-output analysis of a specific industry with industry boundaries via entry barriers and substitutes.

*Figure (2): The five competitive forces that shape strategy (Porter M. E., The Five Competitive Forces That Shape Strategy, 2008).*

As shown in Figure 2, Porters 5 Forces are clearly illustrated. Recklies (2001, p11) and Lee et al. (2010, p5) indicated that Porters forces determine the intensity of competition, hence the profitability and attractiveness of an industry. The objective of this model is to modify these competitive forces in a way that improves the position of the industry and provides an analytical view of the forces in the market (Bingham & Eisenhardt 2008, p.23). Furthermore, it helps management to decide how to develop particular characteristics of their industry.

Rivalry within the Industry

Grant (2010) considered the force that commonly gains the most attention in the industry regarding the existing competitors. The rivalry among existing competitors is huge if the competitors are numerous. Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve its position (Cafferky, 2005). The intensity of rivalry can increase if the industry growth is slow, since more firms compete for the market shares. Competition within an industry can also be more intense if the barriers to exit are high (Bruzelius & Johansson 2012). The industry of rivalry depends on the barriers are associated with costs of leaving the industry, this obstacle implies how firms can be challenged to exit owing to the high costs (Shin 2001).

The number and diversity of competitors are factors that have effects on rivalry within the industry (Barney 2007). Moreover, it depends upon the high fixed costs, as the firm must produce its product at a high output level in order to lower per unit cost. This implies that a high level of production will urge the firm to compete for market share and this will cause an increase in rivalry (Miller 2002).

Threat of Substitute Products

In Porters model, threat of substitutes refers to a degree, to which products or services can satisfy the same needs of the local industry. Lowering the price of a product increases i

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