pharmaceutical industry

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The pharmaceutical industry has two distinct functions: research and development (R&D), and manufacturing. Some firms are primarily engaged in R&D, while others concentrate on manufacturing. The largest and best-known pharmaceutical firms do both.

Research-oriented firms include the large, well-known drug producers, which are often multinational firms with a presence in the three largest drug markets—the United States, Europe, and Japan. Others are smaller, and usually younger, firms that are attempting to develop a narrower range of products. This grouping includes most biotechnology firms, few of which have so far succeeded in bringing the results of their research to market. Among the manufacturers are firms producing generic drugs—products that are in many ways equivalent to existing drugs whose patents have expired.

The number of pharmaceutical manufacturers is large; the Department of Commerce listed nearly 1,500 in 1997. This might suggest that the industry is highly competitive. But the number of pharmaceutical compounds is also very large. The Physician's Desk Reference lists 1,300 different distinct compounds. In spite of the large number of drug products, there are so many therapeutic classes that the number of products that are substitutes for one another, and hence compete with each other, is small. So though the industry as a whole is highly competitive, individual products are less so.

Another remarkable characteristic of the pharmaceutical industry is its high rate of investment in R&D, with a correspondingly rapid pace of product innovation. U.S. firms, for example, spent over $21 billion in R&D in the United States and abroad in 1998, an increase of nearly 11 percent from the year before. Expenditures in 1999 were estimated to be over $24 billion, an annual increase of 14 percent. These investments represent a 12 percent share of total revenue, a share that is nearly double that of most other industries, including office equipment, electronics, and telecommunications companies. This rate of investment has enabled the U.S. pharmaceutical industry to produce nearly half of all patented drugs that were introduced globally between 1975 and 1994.

The high rates of innovation that characterize the pharmaceutical industry result from high rates of return on investment in R&D, which create the incentives necessary to conduct this research. This implies that R&D will typically flow to clinical areas characterized by relatively large markets—either large numbers of patients; or purchasers willing to pay prices that, in the long run, cover the costs and risks of these investments. Smaller markets or markets that are unable to pay such prices will rarely attract these investments.

The Orphan Drug Act was enacted by Congress in 1984 to create incentives to encourage manufacturers to develop products for diseases affecting relatively small numbers of patients. Following the act's passage, many drugs were developed and introduced addressing these relatively rare diseases. To replicate the act's success in a broader international context, however, would require support of international organizations such as the World Health Organization or the World Bank.

(SEE ALSO: Antibiotics; Drug Resistance; Economics of Health)

Bibliography

Barral, P. E. (1996). Twenty Years of Pharmaceutical Research Results Throughout the World. Paris: Rhone Poulenc Foundation.

Physicians Desk Reference, 54th edition (2000). Montvale, CA: Medical Economics Company.

— STUART O. SCHWEITZER

Production of substances for the prevention or treatment of disease or other human ailments began in the American colonies as an unspecialized craft. By the mid-twentieth century, however, it was largely the province of a few specialized corporate enterprises that depended on a flow of creative product developments from well-financed research laboratories. In the colonial period, physicians of limited training and even the keepers of general stores often compounded and distributed medicinal materials, but by about 1800, pharmaceutical production and distribution began to emerge as a specialized area of commerce.

During the second half of the nineteenth century, the character of production of pharmaceutical preparations again changed substantially. The large military demand during the Civil War encouraged large-scale, specialized, and mechanized production. The rapid growth and dispersion of the population in the late 1800s stimulated further entry of manufacturers into the field, many of whom were trained pharmacists or physicians. Around 1900 many new substances joined the pharmacopoeia, which reflected the influence of scientific work. Leadership in both scientific and commercial development came from Germany, Switzerland, and France. In the early twentieth century, a few American companies introduced research facilities, but they enjoyed only limited success competing against German and Swiss companies.

The two world wars did much to change the character and role of the American industry. The large military market and American and Allied civilian markets, cut off from the German suppliers, became the domain of American companies. Moreover, American patents held by German firms became available to American companies. The new therapeutic approaches that emerged during the first third of the century, including the development of chemicals that specifically attack disease-causing agents without harming the human host and the identification of vitamins and hormones, changed the general character of the pharmacopoeia. One of the most important new developments, antibiotics, was the product of British research from the late 1920s to the early 1940s, but leading American companies introduced commercial production of the first antibiotic, penicillin, during World War II. After the war, the leading companies introduced a number of important new antibiotics, which helped to place the American industry in a position of international leadership in innovation and sales.

About two dozen corporations came to dominate the industry. The drug industry grew rapidly and began to produce a host of new products that were effective in the prevention, treatment, and eradication of many deadly diseases. Drug therapy became important, widespread, and generally cost effective. The drug industry in the late twentieth century was a large, highly profitable, socially important, and politically powerful entity. As a result of these successes and some widely publicized failures, drug company activities became highly politicized.

The largest and most sophisticated multinational drug companies combined research and development with an elaborate network for distribution of information and products. The industry became increasingly international. Worldwide production doubled between 1975 and 1990, reaching $150 billion. Market growth proved nearly as robust. Debate continued in the early twenty-first century about the extent and appropriateness of the high profits of the industry, which were well above the average for all manufacturing industries as well as for Fortune 500 companies.

By the end of the 1980s, public concern over the cost of health care and growing interest in health care reform had increased markedly. This concern politicized federal agency and industry decisions. Drug makers typically offered price breaks to hospitals and health maintenance organizations, but pharmacists often faced huge markups. In the early 1990s, retail pharmacists and others brought price-discrimination suits against drug manufacturers. Analysts doubted the pharmacists would prevail in court because they suspected that the real intent behind such suits may have been to keep pressure on Washington to include some limits on differential pricing practices as part of health care reform.

Conservatives and industry spokespeople argued against government interference in the market, particularly through price controls. They claimed that without high profits, there would be little innovation. Liberals and consumer advocates pointed to the monopoly benefits of patent protection, evidence of oligopolistic behavior, and extensive government subsidization of research costs to back their claims that there should be price controls or profit limits set by the government.

Pricing decisions have always taken place within the context of patent laws, and in industrial countries, patent protection usually lasts sixteen to twenty years from the date of application. During this period, the company has exclusive marketing rights. Once the patent expires, a drug is much less profitable. Even when prices are high, companies may claim products are cost-effective by pointing to the cost of alternative methods such as surgery and other treatments. Since the 1950s, debate over pharmaceutical profits has been tied to the question of whether high profitability is the result of monopoly or oligopoly. It is doubtful that any firm enjoys monopolistic status, but evidence suggests that some enjoy considerable market power.

The largely cordial relationship between government and the drug industry began to change in 1959 with the Kefauver hearings. Questions emerged about research practices, drug safety and effectiveness, and price disparities between brand-name drugs and generic equivalents. The Thalidomide disaster, widely publicized in 1961, heightened public concern. Such events led to a more complex approval process and stricter manufacturing guidelines in the attempt to ensure both the safety and efficacy of drugs.

Drug manufacturers have complained about such regulations as lengthy approval processes by claiming that they prevent marketing of potentially beneficial drugs. Many new drugs, however, are often essentially equivalent to existing drugs and are not necessarily more effective. The industry has often benefited from government policies. Pharmaceutical manufacturers have rightly noted that research and development is risky and expensive, but university laboratories, small companies, and the National Institutes of Health (NIH) bear much of the risk associated with the research and development of new drugs. These organizations do much of the initial screening of compounds for possible therapeutic efficacy. Once they discover a promising compound, they can sell or license it to the large drug companies. Furthermore, the government provides roughly half of all U.S. health-related research money, largely through the NIH. The NIH conducts drug-related research, and when promising compounds appear, companies bid for a license to market them. The industry benefits from a variety of tax breaks, including Section 936 of the U.S. Internal Revenue Code. Intended to promote economic development in Puerto Rico, Section 936 allows U.S. industries partial tax exemption on profits from operations in Puerto Rico and other U.S. possessions. Consumer advocates and policy-makers continue to debate these and other issues as they address the rising costs of health care.

Bibliography

Abraham, John. Science, Politics, and the Pharmaceutical Industry: Controversy and Bias in Drug Regulation. New York: St. Martin's Press, 1995.

Blackett, Tom, and Rebecca Robins, ed. Brand Medicine: The Role of Branding in the Pharmaceutical Industry. New York: St. Martin's Press, 2001.

Gambardella, Alfonso. Science and Innovation: The US Pharmaceutical Industry during the 1980s. Cambridge, U.K.: Cambridge University Press, 1995.

Harris, Michael R., and Mark Parascandola. Medicines: The Inside Story. Madison, Wis.: American Institute of the History of Pharmacy, 1996.

Kaplan, Steven N., ed. Mergers and Productivity. Chicago: University of Chicago Press, 2000.

Schweitzer, Stuart O. Pharmaceutical Economics and Policy. New York: Oxford University Press, 1997.

Swann, John Patrick. Academic Scientists and the Pharmaceutical Industry: Cooperative Research in Twentieth-Century America. Baltimore: Johns Hopkins University Press, 1988.

Weatherall, Miles. In Search of a Cure: A History of Pharmaceutical Discovery. Oxford: Oxford University Press, 1990.