Pharmaceuticals
SIC 2834
NAICS 325412
Pharmaceutical manufacturers produce a diverse range of preparations for human and veterinary treatment. The majority of these firms' products are produced in final form for consumption, such as ampoules, tablets, capsules, vials, ointments, medicinal powders, solutions, and suspensions. Industry output consists of two important lines. Pharmaceutical preparations promoted primarily to the dental, medical, or veterinary professions are called "ethical" drugs, also known as prescription drugs. Those sold openly to the public are commonly described as "over-the-counter" (OTC) drugs. Industry firms may also produce therapies derived from genetic engineering or related biotechnology processes.
The pharmaceutical industry is one of the world's most dynamic and lucrative in terms of sales volume. Despite rising pressure from government agencies and employers to lower drug prices, worldwide pharmaceutical spending increased 11 percent in 2003. That year, spending totaled approximately US$500 billion, according to IMS Health. Of this total, US$230 billion was attributed to the United States and Canada. By 2008, according to Business Communications Company, the world market for pharmaceuticals will reach US$900 billion.
Mergers and product turnover continue to refashion the companies and products that lead the industry, but all of the top companies have historical ties to the industry often dating 50 years or longer. Because there are numerous specialties within the industry—numerous forms of cancer, AIDS, hypertension, cholesterol, and neurological drugs to name a few—many of the leading producers may at first only compete with one or two others on a product-by-product basis. This pattern derives in part from the enormous research costs usually involved with producing a new drug, a reality that has led many drug makers to specialize in a few therapeutic fields.
A source of continuing vigilance within the industry is the expiration of brand-name patents. While laws vary by country, in most world markets a new drug may be patented—that is, produced exclusively by its originator or firms authorized by the patent holder—for a fixed term. After the term expires, which is sometimes as long as 17 years, the compound is open to generic competition, and thus market forces usually bring prices down substantially from the levels obtained during the founding company's monopoly.
In early 2004, IMS reported that while the overall pharmaceutical market was expected to experience single digit growth in 2004, generic drug sales would increase 20 percent, reaching US$34.8 billion. The research firm indicated that branded drugs would face noteworthy competition from generics through at least 2010. However, certain factors limit generics' ability to capture market share. Large patent holders can manufacture their own generics, force legal actions to protect intellectual property, or simply pay competitors to delay market launch of generics. A 2000 investigation by the U.S. Federal Trade Commission found Abbott Laboratories paying a generic drugmaker US$4.5 million per month to delay a generic product. Occasionally, generic drugs reach the market only to find patent holders with new drugs ready to supplant their predecessors, rendering generics out-of-date before gaining market presence. However, with health care costs rising near double digit percentages, U.S. lawmakers were considering reducing patent protection times, among other remedies, to allow greater competition by generics.
Another key issue for the industry is controlling the cost and duration of research and development (R&D). A rising share of company sales—more than 18 percent in the United States in 2002—are funneled into R&D, and development times have been on the upswing as well. The U.S. industry, the world's largest, averages 10 years to bring a new drug to the market. As a result, a number of major firms engage in resource-sharing schemes such as joint ventures with other companies or undertake internal restructuring to arrive at a more cost-efficient workflow. Pharmaceutical consultants also push companies toward better data management. Successful manufacturers can feed back point-of-sale data to optimize current production, thus reducing inventory.
A trend continuing in the mid-2000s has been the increasing percentage of marketing targeted directly to consumers. Following a softening of the U.S. Food and Drug Administration's (FDA) stance on the issue, for example, drug makers spent an estimated US$2.27 billion in 2000 on direct to consumer advertising, up 41 percent from 1999. According to a study by Harvard University and MIT, a 10 percent increase in direct-to-consumer advertising resulted in a 1 percent increase in sales.
The global pharmaceutical market continues to consolidate. Notwithstanding high profile mergers and acquisitions by Pfizer, Glaxo, and Aventis, the single largest pharmaceutical company in 2001 accounted for only about 8 percent of the world's total market value by sales. As companies merged, they often shook off the "pharmaceutical" label for a more encompassing one—"life sciences". Many are chemical companies with separate divisions producing a wide range of products, from pharmaceuticals to agricultural chemicals.
Pharmaceutical preparations are commonly divided into two categories: ethical and over-the-counter (OTC). Worldwide, most ethical drugs are paid for by governments or consumers (patients) indirectly through third-party payers like health insurance companies.
The top six classes of prescription drugs were: central nervous system and sense organs; cardiovascular; digestive and genitourinary; neoplasms, endocrine and metabolic diseases; parasitic and infectious diseases; and respiratory.
These classes of finished-form drugs commanded the highest profit margins (30 percent of sales was commonplace), but also demanded high research and development and marketing expenses—15 percent and 24 percent of sales, respectively. Pharmaceutical firms used two primary methods to maximize the profit potential of their discoveries: marketing and patenting.
Specialized marketing techniques unique to the pharmaceutical industry evolved in the twentieth century. Since doctors usually made the purchase decision for the customer or patient, and (in most countries) ethical drugs could not be advertised to the general public, most pharmaceutical marketing was directed at general practitioners. Branding was a primary method of product differentiation. Knowledgeable sales forces made regular calls on doctors in an effort to sway their prescribing decisions. Most pharmaceutical firms also employed advertising in medical journals, direct mail, conference sponsorships, and promotional giveaways. In 2000, pharmaceutical companies spent US$15.7 billion on promotion of ethical drugs, over half the amount they spend on research and development, with an increasing share of the U.S. marketing budget going to direct-to-consumer pushes.
A recent trend in pharmaceutical marketing is the rise of online drug stores and mail order pharmaceuticals. According to the pharmaceutical market research firm IMS Health, prescription drug orders to U.S. mail order pharmacies rose 27 percent to US$13.6 billion for the year ending in June 2000. The total market, including traditional retail pharmacies, rose 17 percent to US$82 billion. The typical mix of name brand to generic sales in those pharmacies is 59 percent to 41 percent, respectively. Mail order drug stores, however, typically fill name-brand prescriptions 72 percent of the time—a significant difference for maintaining or increasing brand market share. With health care costs rising dramatically in the United States at the end of the twentieth century, the FDA is also monitoring the rise of offshore online pharmacies, which offer pharmaceuticals at low prices, sometimes without a doctor's approval. The FDA bans such practices, but is unable to handle enforcement effectively due to the sheer volume of sites and the ephemeral nature of the World Wide Web.
Patenting was one of the most important aspects of the pharmaceutical industry. Most patents fell under two categories: product patents, which covered a given chemical substance, and process patents, which protected the manufacturing technique used. Until the mid 1950s, most countries found process patents sufficient to protect pharmaceutical preparations. But since circumventing these copyrights was relatively easy, many countries, including most of Europe and the United States, switched to product patents.
Although nominal patent life—the span of time from patent issue to expiration—exceeded 15 years in all countries that granted patents, effective patent protection began to grow shorter in the 1970s due in part to the often lengthy government approval process. The proliferation of so-called "me too" and derivative drugs shortened pharmaceutical companies' "pay back" period even further. By the early 1990s, all but 10 percent of patented drugs had a direct competitor, and some had more than one.
The 1962 Thalidomide scare precipitated more stringent global drug safety and approval standards. The United States had required federal inspection of new compounds since the beginning of the twentieth century and had toughened those controls...
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