Pharmaceutical Industry Essay

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The pharmaceutical industry  concerns  the discovery,  development, and  manufacturing of  various means  related  to  human   and  veterinary   health, ranging  from drugs or medications to biologically based   therapies   and   methods   for   diagnosing diseases. Pharmaceuticals in the form of herbs and potions  assumed  to have healing or pain-relieving powers,  as  well  as  various  methods   of  therapy, have a history of thousands of years. However, the pharmaceutical industry  in the sense of the organized  manufacturing of  drugs,  based  mainly  on scientific discoveries, did not emerge before sometime  around the  19th  century.  Aspirin  was  first invented   by  Bayer  in  1897   and   subsequently launched  on the general market  in 1900. Germany was for a time called the pharmacy of the world because  of  its  dominance of  the  pharmaceutical industry  worldwide, but companies  besides Bayer venturing  into  the  pharmaceutical market  in the late  1800s  include  the  U.S. firms  Bristol-Myers Squibb,   Parke-Davis,  Eli  Lilly  and   Company, Abbott   Laboratories, Upjohn,  The  Searle  Company, Pfizer, and Johnson  & Johnson.

From   the   early   20th   century   and   onward, increased  research  efforts  in fields like chemistry and physiology gave new insights into how to treat illnesses, as well as how to prevent them by way of administering various types of drugs, and the number of pharmaceutical companies  grew rapidly. As a parallel  development, government regulations started  to be implemented in order  to distinguish between all kinds of remedies assumed to have therapeutic effects on the one hand and authorized or approved drugs on the other hand. In the United States, the federal government began to issue licensing in 1902,  and a Pure Food  and Drug Act issued in 1906 required that all pharmaceutical products should  be truthful in their labels.

Major Pharmaceutical Corporations And Markets In The Early 2000s

The world pharmaceutical industry  is relatively concentrated when it comes to the countries  where corporations are headquartered. For decades, there has  been  a high  concentration of pharmaceutical corporations focusing on the development and manufacturing of  patented prescription drugs  in the United States and Europe. The 10 largest corporations of the  world  in terms  of 2012  sales were (1) Pfizer (United States), (2) Sanofi (France), (3) Novartis (Switzerland), (4) Merck & Co. (United States), (5) Roche (Switzerland), (6) GlaxoSmithKline (United Kingdom), (7) AstraZeneca (United Kingdom/Sweden), (8) Johnson & Johnson (United States),  (9)  Abbott   Laboratories  (United  States), and  (10)  Eli Lilly and  Company (United  States). There  were,  however,  Japanese  corporations positioned as Numbers 13 (Takeda Pharmaceutical Co.), 18, 19, and 20. Tamas  Bartfai and Graham V. Lees have  identified  eight  indispensable factors  for  a country  to host pharmaceutical companies.

First,  it  must  provide  a  strong  capital  market and long-term  financing. Second, there has to be a strong background in chemistry and biology, either indigenous  or imported. Third,  there has to be an investment attitude that accepts that as many as 90 percent  of projects  may end in a loss of invested capital  and  efforts.  Moreover, these  failures  will become evident only after 8 to 10 years of investment.  Fourth,  it is necessary  to have strong  intellectual property protection because it will be otherwise  unacceptable to conduct  the kind of investments   that  are  necessary.  Next,  there  is  a need for a strong regulatory framework in the country, with  the promise  of reliability  and  credibility when it comes to clinical trials. As the sixth factor, Bartfai and Lees name a global attitude that consists  of a willingness  to  produce  on  a worldwide  scale  because  there  are  hardly   any  home markets  that  are large enough  to single-handedly secure  the  return   of  the  investments. Last,  they mention  prime  production facilities  and  internationally  credible  control  authorities. The  current leaders are located in countries  where these factors are  present,   and   the  problem   for  corporations from  other  countries,  such  as China  and  Russia, which  may  enter  the  competition in  the  coming years  is that  they  are  headquartered in locations where one or several of the factors  are absent.

According  to IMS Health,  North America is by far  the  largest  market  for  pharmaceuticals in the world,  with  approximately 37  percent  of worldwide sales in 2012.  Next  is Europe,  with approximately  24 percent,  and  Japan,  with  11.5  percent. Latin  America  had  approximately 7.5  percent  of world   sales,   whereas   Asia   (excluding   Japan), Africa, and Australia  had  17.5  percent  combined. However, the last-named group is the fastest-growing market, with 15-percent  increase, together with Latin  America,  which  increased  12  percent  from 2007  to  2012.  Russia  is also  in  the  category  of such emerging markets  with high rates of increase. In comparison, North America  and  Europe increased  3  and  2.4  percent,  respectively,  in  the same   period.   The   pharmaceutical  corporations thus  tend  to  view  North America,  Europe,  and Japan  as advanced  or mature  markets, where increasingly innovative  drugs must be marketed in addition to the more conventional drugs, whereas to  retain  high  levels  of  revenue  they  must  also draw   their  attention to  the  vast  possibilities  in emerging markets in Asia, Latin America, and elsewhere.

Drug Development Process

The discovery and development of molecular  candidates  for  the  purpose   of  finally  marketing an approved drug is a highly complicated  and lengthy process. Estimates vary, but for each new drug that reaches the approval stage, there  may be between 5,000  and 10,000 chemical compounds that  have undergone  screening.  Only  about   250   of  these enter  a stage of preclinical  testing, whereas  about five or six candidates enter the first of three clinical stages. In the clinical stages, the drug  candidate is tested   on   an   increasing   number   of  volunteer patients, with 20 to 100 healthy persons in the first phase,  100  to  500  persons  who  have  the  disease the treatment is intended  for in the second  phase, and as many as 1,000 to 5,000 patients  in the third phase.  Many  drug  candidates fail  in  the  second phase because of toxicity  or other  problems.  After a candidate has passed Phase 3, the time to receive an eventual approval from the authorities takes on average   around  10  months   in  the  case  of  the United  States as of 2010.  The whole  process  may thus  take  as long as 10 to 15 years before a drug can be marketed. Corporations also operate  with a follow-up  phase (Phase 4) after approval, either on their  own  initiative  or a as result  of requirements by the authorities. This is to observe  whether  the marketed  drug   might   have  any  long-term   side effects or other  complications after all.

The pharmaceutical industry subsequently spends  enormous amounts of money  on  research and  development  (R&D),   given  the  amount  of time and resources  needed to develop a successful drug and also because of the high number  of failures. Based on figures for member corporations of the  Pharmaceutical Research  and  Manufacturers of America (PhRMA), the average annual spending on  R&D   was  approximately between  16.0  and 17.5  percent,  as seen in relation  to their  turnover during     2007     to    2012.     This    means    that pharmaceutical firms invest as much as five times more  in  R&D   compared with  the  average  U.S. manufacturing  firm.  These  costs  are,  based   on 2012  figures, divided between  23.8  percent  of the costs for preclinical research, 7.7 percent for Phase 1 clinical  trials,  11.6  percent  for  Phase  2 clinical trials, 32.1  percent  for Phase 3 clinical trials, 13.7 percent  for Phase 4 follow-up,  7.7 percent  for the approval procedures, and  3.3  percent  for uncategorized  costs.  PhRMA  sources  estimate  that  the cost  for  developing  a totally  new  drug  has  risen from approximately $140  million per drug during the  1970s  and  $320  million  during  the  1980s  to $1.2  billion  in the  early 2000s,  when  the  cost  of failures is included, adjusted  to dollars  in 2000.

The mid-2010s  signify a period  with the end of the patent  protection for a series of drugs selling in large volumes,  and  since these drugs  may eventually be replaced by generic drugs, which are copies of the originals often produced by other firms specializing in generics, the corporations focusing on the  development  of  original   patented drugs  are conscious of the need for developing products that can generate new revenues. In recent years, several corporations  have  developed   strategies   whereby they  continue  to  produce  generic  versions  of the drug after the patent-protected period has expired, at the  same time as they try  to develop  new and original drugs. Bartfai and Lees distinguish between three  different  models  when  it comes to pharmaceutical corporations and their strategies. The first consists of reducing the dependence on a few blockbuster  drugs,   and   instead   expanding  the share of generic prescription drugs, over-the-counter  drugs,  and  even  medical  devices. Johnson  & Johnson,  GlaxoSmithKline, and, more recently, the Japanese corporation Daiichi Sankyo are examples of companies  that have adopted this strategy. Although  the corporations lower the odds of gaining extremely high revenue products, the gain is in return  for a more  steady and modest  flow of revenue, with generic and over-the-counter drug products being sold with lower margins.

The   second   model   is  to   continue   or   even increase R&D efforts to develop high-value proprietary   drugs.   Corporations  that   continue   to adhere   to  this  strategy   are  Merck   &   Co.  and Roche.  Among  this  group,  however,  a  relatively recent  strategy  appears  to  be  a  reduction of  the actual  in-house  R&D  and  instead  spending  some more  of  the  R&D   funds  for  acquiring   smaller R&D-intensive companies,  especially  within  biotechnology.  Sanofi  is,  according   to  Bartfai   and Lees, an  example  of this  strategy,  as exemplified with its acquisition of the company  BiPar, whereas Japanese   Takeda   Pharmaceutical  Co.   has   also become  known  for  high-profile  acquisitions such as Nycomed  and Millennium Pharmaceuticals. As a third model, there are cases of hybridity  between the first two models. Pfizer in recent years acquired the  companies  Wyeth,  Rinat,  and  CovX  to  complete a new proprietary drug and vaccine portfolio, simultaneously by acquiring  a leading producer of generics, King Pharmaceuticals. Novartis has also acquired  a large German  producer of generics, the company  Hexal.

Challenges And Opportunities  Facing  The Pharmaceutical Industry

From the early 2000s and onward, the pharmaceutical  industry   had  to  face  a  number   of  issues. Whereas the industry experienced a remarkable growth  exceeding  10  percent  throughout the  last three decades of the 1900s, such a growth  is more likely to be around the range of 5 to 8 percent per year on a global basis in the foreseeable  future. To control  expenditures, health  care systems in many countries  have  implemented new  policies  regarding reimbursement rules for drugs, including  price cuts for original drugs, and encouraging health institutions to  investigate  the  possibility  of using generic drugs, if feasible. Thus, corporations have implemented strategies  aimed at cost cutting.

In the last decades of the 1900s and during the early 2000s,  there  was fervent  activity  regarding mergers  between  corporations, such  as  between Pfizer and Warner-Lambert (2000), Glaxo Wellcome and SmithKline Beecham (2000), Pfizer and   Pharmacia  (2003),   and   Roche   and   the Japanese   Chugai   Pharmaceutical  Co.   (2002). Later,  there  was  a  tendency  toward looser  relationships  in the form of collaborations and licensing deals. The  cost  of R&D  is increasing  at  the same  time  as  output in  the  form  of  innovative new drugs, and treatments are at a standstill. Gassmann and  his colleagues  note  that  in 2006, the major U.S. and European pharmaceutical companies  spent  $43  billion  on  R&D,  whereas 29   new   molecular   entities   were   approved  by U.S.  authorities  the  same  year,  compared  with 53 just a decade before.

Also, several cases of recalls or legal battles have been  challenging  several  corporations, such  as in the case of the best-selling drug Vioxx. This was a drug for treating  arthritis, developed and marketed by Merck  &  Co.,  and  had  been  approved in the United  States  in  1999.  It  was  more  potent  than other  contemporary drugs, but  then  it turned  out that  it led to increased  risk of heart  attack  when taking  the  drug  over  prolonged periods  of  time. The  drug  was  eventually  removed  from  the  market. Such cases may be part  of the reason  that  the procedures for conducting clinical trials have become  even stricter  and  more  complex  in recent years. Another  reason  is increased  complexity. For example,  in  recent  years,  many  small  molecules have  been  identified  that  target  specific points  in pathways that  are  functioning abnormally, however, with increasing  recognition that  multiple  signaling  pathways can be affected.  Combining several small molecules may be considered for improving  results.  This  would  further  complicate the design and interpretation of results from clinical trials,  in terms  of both  side-effect profile  and efficacy results, and  also could  potentially  significantly increase the cost of care.

In addition, a new arena that is emerging is personalized medicine, in which cellular-based immune therapy   requires   modification  of  each  patient’s cells. An overview offered by PhRMA  shows that in the  case of approval in the  United  States,  the total  procedures per  clinical  trial  protocol (e.g., work related to blood, routine  exams, and X rays) increased  from 105.9  in the 2000–2003 period  to 166.6   in  the  2008–2011  period,   resulting   in  a 57-percent  increase  in complexity. The number  of case report  form  pages  per  clinical  trial  protocol increased  on average from 55 to 171 pages in the same time periods, a 227-percent increase. The clinical trial  treatment period  lengthened  on average from 140 to 175 days. All these factors signify that   clinical  trials  have  become  more  complex, time demanding, and expensive for pharmaceutical corporations.

An additional challenge  is the  public  criticism posed at the pharmaceutical industry  regarding  the way  that   new  products  are   marketed.  This   is unique  in the  sense that  the  corporations have  a sales force, usually  called medical  representatives, traveling  around to  inform  prospects   about   the medicine’s benefits, and the corporations spend additional funds on sponsoring various  events for physicians  and other  related  personnel.  In a study by Marc-André Gagnon and Joel Lexchin, the conclusion is that pharmaceutical corporations may, in many cases, actually end up spending more on marketing than on R&D. There are, however, some trends  that  could offer opportunities for the pharmaceutical  industry. The consultancy firm Deloitte has noted  that  a rapidly  aging  population—especially  in  large  markets   such  as  North America, Europe,  and  Japan—will  increase  the demand  for pharmaceuticals. The  growth  of the  rate  for  persons 65 years of age or older  is projected  to outpace that  of the 0to 4-year-old  segment by 2020. In addition, because of lifestyle changes and eating habits, there is an increase in chronic diseases such as diabetes and hypertension, with a corresponding increased  need for medical treatments. There is an expansion of opportunities in the  emerging  markets. This expansion can, to a certain degree, offset the  limited  growth  in mature  and  advanced  markets. Although  some health  regimes are becoming stricter  in many  countries,  there  are opportunities primarily  in the United  States as of 2014  because of the extension of Medicaid eligibility to new population  groups   under   the  Patient   Protection and Affordable  Care Act.

Within  the field of R&D,  the various  emerging forms of collaboration with public institutions, smaller  biotech  firms, and  even competitors may create  knowledge  that  can  serve as the  basis  for new projects. There is also great faith in the availability   of  new   techniques   for   screening   large amounts of data,  which may in turn  speed up the process of finding molecules eligible as candidates for further  development. The Analysis Group  estimates that there were, as of 2011, more than 5,400 medicine  candidates  in  one  of  the  clinical  trial phases on a global basis. Since some of these drug candidates were intended  for several different indications  or treatments, the total number  of projects amounted to approximately 8,000.  Moreover, the recent accumulation of vast amounts of knowledge regarding  the  genetic  and  molecular  basis  of diseases was  expected  to  result  in  more  and  better biologic medicines at a relatively early stage. However,  although this has turned  out to take longer time than was originally anticipated, there may be a boost  of such medicines in the years to come. PhRMA  estimates  that  there  were more  than  900 medicine candidates classified as biologic in development  in  2013.  A vast  majority  of  these  (338) were  intended   for  cancer   treatment  or  related issues, whereas another large group of drug candidates  concerned  infectious  diseases (176).  In contrast to the small molecule-based conventional medicines, biologic medicines that  consist of large complex  molecules, derived from living cells, may represent  entirely  novel strategies  with  the potential to transform the clinical treatment of diseases.


  1. Bartfai, Tamas and Graham V. Lees. The Future of Drug Discovery: Who  Decides Which  Diseases to Treat? Amsterdam:  Elsevier/Academic  Press, 2013.
  2. Chandler, Alfred D. Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical  Cambridge, MA: Harvard University Press, 2009.
  3. Gagnon, Marc-André and Joel Lexchin. “The Cost of Pushing Pills: A New Estimate  of Pharmaceutical Promotion Expenditures in the United States.” PLoS Medicine,  5/1 (2008).
  4. Gassmann, Oliver, Gerrit Reepmeyer,  and Max  von Zedtwitz. Leading Pharmaceutical  New York: Springer, 2007.
  5. Munos, Bernard. “Lessons From 60 Years of Pharmaceutical Innovation.” Nature  Reviews  Drug Discovery,  8/12 (2009).

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