Industry Profiles: Pharmaceuticals

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Industry Profiles: Pharmaceuticals


The United States is the world's largest producer and consumer of pharmaceutical preparations. Prescription drug sales alone reached approximately $165 billion in 2001, according to Washington-based Pharmaceutical Research and Manufacturers Association (PhRMA). That year, the largest prescription categories within the retail market were central nervous system drugs (21 percent), cardiovascular drugs (18 percent), and drugs involving the gastrointestinal system and metabolism (15 percent). In 2002 Connecticut-based IMS Health Inc. revealed that more than 3 billion prescriptions are dispensed in the United States, with more than 75 percent of sales occurring in chain stores and independent locations.

The country's relatively open market also made it the leader in research and development (R&D). In its Annual Report, 2001-2002 PhRMA explained that research-based pharmaceutical companies devote more to R&D (about 17 percent of sales) than companies in any other industry including electrical/electronics (8.4 percent) and computer software/services (7.8 percent). Since 1980, when spending totaled $2 billion, the industry has seen healthy annual increases in this area. However, PhRMA estimated that an especially sharp increase in R&D spending would occur in 2001, as totals rose from $26.4 billion in 2000 to $30.5 billion.

While short-term patent protection offers some potential for profits, major pharmaceutical producers often face tight competition on price. When a drug loses its patent, another producer, usually a low-cost, off-brand competitor, can offer an equivalent product, and the price of the drug can be quickly cut in half. The commodity nature of off-patent, or generic, drugs offers slim profit margins and sometimes forces name-brand manufacturers to eventually abandon making the compounds they originate, while low-end manufacturers continue to churn them out. As a result, new research is at the core of the pharmaceutical industry's health.

History of the Industry

Prior to the late nineteenth century, the U.S. pharmaceutical industry barely resembled its current structure. Simple chemical compounds such as iodine chlo-rate, along with plant extracts such as quinine, constituted the prime ingredients of available remedies. However, these drugs lacked specific scientific formulas. Thus a doctor's order for a medication might not yield the product intended. To offset this problem, doctors often dispensed medicines in addition to prescribing them. But they did not have a monopoly on medical advice or drug selection for patients. Given the uneven quality of medical care before the twentieth century, patients often chose to dose themselves with "patent" medicines or to describe symptoms to the druggist, who would offer his own remedy for purchase. Some traditional treatments, like digitalis, remain part of the pharmacological arsenal.

The War of 1812 and the Civil War stimulated an increase in domestic pharmaceutical manufacturing capacity. Both events temporarily disrupted the supply of fine chemicals (those with a purity level high enough for human consumption) from Europe with which pharmacists and doctors produced the few chemical medicaments that they knew. Advances in the isolation and creation of new chemical substances, such as the 1840 discovery of the medicinal applications for nitrous oxide (laughing gas) by an American dentist, Horace Wells, stimulated demand for more fine chemical capacity. During the Civil War, American firms like Squibb were able to establish themselves profitably by providing advanced machinery and quality products to the Union Army.

As the century progressed, other companies turned to the production of "ethical" drugs for physicians and hospitals. These drugs had clearly labeled and pharmacologically reliable contents (and were thus termed "ethical"). They were intended to supply drugs of standardized quality. Brand name ethicals were also promoted as alternatives to the wide variety of other proprietaries, mainly bottled "patent" medicines. These extremely popular elixirs claimed great therapeutic value while the contents—often only colored water, alcohol, and opiates—were generally ineffectual and occasionally dangerous. The reliability of the new ethical suppliers, on the other hand, induced doctors to begin requesting branded pharmaceuticals in prescriptions by the end of the century.

Following scientific breakthroughs in understanding the causes and potential treatments for many of the diseases that had long been the scourge of mankind, demand for these reliable drugs and vaccines soon increased. The germ theory of disease, based upon the research of bacteriologists like Pasteur, revolutionized medicine and drug therapy in the 20 years immediately before and after World War I.

Between the two world wars, U.S. firms copied the research orientation and patenting habits of German counterparts. Merck and Squibb opened direct ties with academic research institutions, financing research fellowships, laboratories, and institutes in the natural sciences. Drug companies hired academic research leaders to head or staff in-house labs. Firms developed some interest in basic research, but the major concern was using expanded research and development area capabilities to create new drug products for the expanding market.

World War II and the U.S. postwar economic dominance secured the foundation for phenomenal growth in the pharmaceutical industry. The desire to find new drugs, especially antibiotics, led companies to sometimes absurd extremes. Pfizer requested that people send samples of dirt from all corners of the world on the chance that some might contain new molds from which to extract antibiotics. In fact, a Pfizer employee did find a profitable new treatment, terramycin, in a sample of dirt outside a company plant in Indiana. This and other "broad-spectrum" antibiotics, those effective for a wide range of illnesses, provided revolutionary therapeutic regimens for physicians after the 1940s. Other breakthrough medications in the 1950s included Jonas Salk's polio vaccine, and tranquilizers and amphetamines, like Librium and Dexedrine, which promised to significantly aid patients suffering from mental illness.

In the early 1960s, a European sleeping pill called Thalidomide was found to cause severe birth defects when taken during pregnancy. Because the drug was widely used in Europe and would likely have gained approval under U.S. policy, the federal government responded to the resulting uproar by passing the Kefauver-Harris Amendments of 1962. These amendments to the Food, Drug and Cosmetic Act of 1938 required pharmaceutical companies to prove both safety and efficacy before a drug entered the marketplace. Formal procedures for new drug applications (NDAs) to the FDA and for the clinical investigation of potential therapies were established. All adverse drug reactions in clinical studies would have to be fully reported, and human clinical subjects had to be informed of the dangers of involvement in trials before giving consent. Additionally, the new act required that drugs must follow specific production guidelines, called Good Manufacturing Practices (GMP). Manufacturing plants became subject to both registration and inspection procedures. Finally, advertising for prescription drugs was placed under Food and Drug Administration (FDA) supervision, while over-the-counter (OTC) drug advertising continued under Federal Trade Commission (FTC) oversight.

The immediate effect of the new law was to drastically slow the rate at which pharmaceutical manufacturers introduced new drugs to the market. According to the Pharmaceutical Manufacturers Association (PMA), drug introductions fell from 45 to 24 annually between 1961 and 1962 alone. In the 1970s, they stayed below 20 in most years, and fared little better over the next two decades until changes were initiated in the mid-1990s.

However, larger research budgets needed to comply with the new requirements yielding a whole crop of profitable new drug therapies in the 1980s, including drugs for hypertension (Merck's Vasotec), cholesterol treatment (Lopid from Warner-Lambert and Mevacor from Merck), and blood-clot dissolvers for heart-attack victims (Genentech's TPA). Meanwhile, Ortho Pharmaceutical's (owned by Johnson & Johnson) anti-acne RetinA, and Upjohn's baldness treatment Rogaine, created new markets for cosmetic drugs. Even standbys like aspirin enjoyed increased sales as a result of studies that showed its potential to avert some heart attacks.

Lavish research budgets soon helped to breed what critics charged were unjustifiably high prices in prescription drugs, with companies allegedly spending more money on advertising, brand support, and lobbying efforts than they did on research and development. Some analysts felt that price was determining costs rather than the other way around. The prices of drugs were less related to cost inputs, they claimed, than to companies' needs to maintain corporate structures. Drug companies insisted that the prices were needed to recoup the vast research costs of all the compounds that never made it to the market, which were a necessary part of releasing the comparatively few successful drugs. Meanwhile, the soaring costs of health care in general in the 1980s and early 1990s added fuel to demands for drug price control policies similar to those in Europe or Japan. Medications sold in Europe and the United States were reported to have price differentials exceeding 50 percent.

Significant Events Affecting the Industry

In the mid-1990s, reforms at the U.S. Food and Drug Administration resulted in a reduction in the average approval time for new drugs. By the late 1990s the average drug typically took 15 years to bring to market, factoring in all initial testing through final regulatory approval. Final approval, on average, consumed between one and two years of this period. After a decade of hovering between 20 and 30 new approvals per year, in 1996 the FDA pushed through approvals on a striking 53 new drugs. However, from 1997 to 2000 a number of drugs had to be recalled or restricted. Facing criticism over hasty approvals, the agency slowed the number of drugs it approved each year and began to lengthen approval times.

The terrorist attacks against the United States on September 11, 2001 brought a heightened focus on bio-terrorism. Following the attacks, a number of Americans contracted the disease Anthrax after coming into contact with bacteria sent via U.S. Mail. Concerns also emerged over Smallpox, a deadly disease that had been largely eliminated years earlier, but which existed in laboratories in several countries including Russia and North Korea. The expensive antibiotic Cipro, manufactured by Bayer AG, is one of the primary drugs used to treat Anthrax infections. Following the attacks, a need emerged to stockpile large quantities of Cipro, as well as smallpox vaccines. This led to controversy concerning the potential suspension of pharmaceutical company patents, because of the need to make large amounts of desperately needed drugs at lower prices during times of crisis. Although such intervention was not necessary in the United States because Bayer agreed to provide Cipro to the federal government at a reduced price, the Canadian government did temporarily revoke Bayer's patent. In general, scenarios like the attacks of September 11 could change the dynamics of the industry by placing increased restrictions on domestic drug makers.

Key Competitors

With $47.7 billion in total 2001 revenues, of which about $21.3 billion came from pharmaceutical production, Merck & Co. Inc. is a world pharmaceutical industry leader. Merck initiated the 1990s trend toward purchasing drug distributors with its 1993 acquisition of Medco Containment Services Inc. for $6.6 billion. By 2001 the company's Merck-Medco pharmacy benefits management arm accounted for $26.4 billion in annual sales. The subsidiary had evolved into the leader in its category, managing upwards of 530 million prescriptions each year for 65 million people in the United States. In 2002, Merck announced that it would seek to spin the subsidiary off as a separate publicly traded firm. Merck's leading products include two cholesterol drugs, Mevacor and Zocor, as well as respiratory drug Singulair, and ulcer drug Pepcid.

Another one the world's leading drug makers is New York-based Pfizer Inc. With 2001 revenues of $32.3 billion, Pfizer manufactures a number of leading prescription drugs including Lipitor, Zithromax, Celebrex, Viagra, and Zyrtec. Accordingly, in 2001 a large percentage of the company's sales ($25.5 billion) came from its human pharmaceutical business, which experienced healthy growth rates of 12 percent in 2000 and 13 percent in 2001. In 2000 Pfizer merged with Warner-Lambert, a former competitor with a strong tradition in the area of research and development. Pfizer's Warner-Lambert Consumer Group manufactures leading over-the-counter pharmaceuticals like Benadryl, Listerine, Visine, and BenGay.

A 1998 merger brought two diversified U.S. pharmaceutical/biotechnology interests together, American Home Products Corporation and Monsanto Company. In March of 2002, the new company adopted the name Wyeth, based on one of its earliest prescription businesses founded in 1860. Through its Wyeth Consumer Healthcare subsidiary, Wyeth manufactures well-known OTC drugs such as Advil, Anacin, Anbesol, Caltrate, Preparation H, and Robitussin. The company's Wyeth Pharmaceuticals division markets a profitable line of estrogen tablets called Premarin, which generated more than $2 billion in 2001. The firm's other two divisions are Wyeth Research and Fort Dodge Animal Health. In 2001, the company had revenues of $14.1 billion, and spent almost $2 billion on research and development in areas like biotechnology products, vaccines, and various other drugs. It marketed its preparations in more than 140 different countries and employed more than 52,000 workers.

Other major U.S. drug companies include Abbott Laboratories, Bristol-Myers Squibb Co., Eli Lilly & Co., and Johnson & Johnson.

Industry Projections

In the early 2000s, the United States was expected to retain its leading position within the industry. According to IMS projections, from 2000 to 2005 U.S. sales should increase annually at a compound rate of approximately 12 percent. Comparatively, corresponding growth rates will hover around 11 percent in Canada, 10 percent in Spain, nine percent in Australia, and eight percent in the United Kingdom. Additionally, IMS projects that within 10 key international markets, the United States will have a market share of more than 60 percent by 2005, followed by Japan with about 15 percent, and Germany with more than 5 percent. The booming elderly segment of the population will fuel increasing levels of demand for pharmaceuticals well into the first quarter of the twenty-first century.

Global Presence

Of the world's 10 leading pharmaceutical companies, more than half are headquartered in the United States and the rest are based in Europe. Consolidation continues to take place throughout the industry on a global basis. Together, the leading 10 firms control almost half of the market, which is significantly higher than in past years. In addition to selling their products domestically, the major U.S. pharmaceutical companies also market their pharmaceuticals internationally. Among the leading European pharmaceutical firms are Novartis AG of Switzerland; GlaxoSmithKline plc and AstraZeneca of the United Kingdom; and Aventis, based in Schiltigheim, France. Although foreign markets like those of Europe and Japan often have greater controls on prices, many also present fewer regulatory hurdles to pass before introducing a new drug. Thus, many U.S. drug-makers issue new products abroad before they're able to do so in the United States.

Employment in the Industry

The pharmaceutical industry employs more than 315,000 people in the United States. According to the U.S. Department of Labor's Bureau of Labor Statistics, this number was expected to grow almost 24 percent between 2000 and 2010, eventually reaching 390,000 workers. The average annual salary within the industry exceeds $42,000 annually, or $20.41 per hour which is substantially higher than the average annual salary in many industries. This is true because a high share of the industry's workforce holds advanced and highly specialized training, including a large number of workers with doctoral degrees. While such highly trained workers usually face few difficulties finding jobs, pressures to contain costs have caused a number of leading companies to trim their workforces at home and abroad. As a result, net employment in the drug industry has dropped since the early 1990s, brought about in part through merger and acquisition activities.

Sources for Further Study

annual report 2001-2002. washington: pharmaceutical research and manufacturers of america, july 2001.

"healthcare: pharmaceuticals." standard & poor's industry surveys, december 2001.

occupational employment statistics. bureau of labor statistics, u.s. department of labor, 30 march 2002. available at

"pharmaceuticals." hoover's online, 28 march 2002. available at

pharmaceutical research and manufacturers. "new drug approvals in 1997." washington, january 1998.

"pharmaceutical results improve helped by new product launches." chemical market reporter, 27 january 1997.

serwer, andrew e. "layoffs tail off-but only for some." fortune, 20 march 1995.

taggart, james. the world pharmaceutical industry. london: routledge, 1991.

tighe, s.c., et al. merck & co. new york: merrill lynch, 12 november 1997.

u.s. industry and trade outlook. new york: mcgraw-hill and u.s. department of commerce, 1998.

u.s. pharmaceutical industry year in review 2000. connecticut: ims health inc., 2002.

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Industry Profiles: Pharmaceuticals

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Industry Profiles: Pharmaceuticals