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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.
- Bartfai, Tamas and Graham V. Lees. The Future of Drug Discovery: Who Decides Which Diseases to Treat? Amsterdam: Elsevier/Academic Press, 2013.
- 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.
- 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).
- Gassmann, Oliver, Gerrit Reepmeyer, and Max von Zedtwitz. Leading Pharmaceutical New York: Springer, 2007.
- Munos, Bernard. “Lessons From 60 Years of Pharmaceutical Innovation.” Nature Reviews Drug Discovery, 8/12 (2009).