1. Drawing on the five forces model, explain why the pharmaceutical industry has historically been a very profitable industry.
2. After 2002, the profitability of the industry, measured by ROIC, started to decline. Why do you think this occurred?
3. What are the prospects for the industry going forward? What are the opportunities, what are the threats? What must pharmaceutical firms do to exploit the opportunities and counter the threats?

Historically, the pharmaceutical industry has been a profitable one. Between 2002 and 2006 the average rate of return on invested capital (ROIC) for firms in the industry was 16.45%. Put differently, for every dollar of capital invested in the industry, the average pharmaceutical firm generated 16.45 cents of profit. This compares with an average return on invested capital of 12.76% for firms in the computer hardware industry, 8.54% for grocers, and 3.88% for firms in the electronics industry. However, the average level of profitability in the pharmaceutical industry has been declining of late. In 2002, the average ROIC in the industry was 21.6%; by 2006, it had fallen to 14.5%.