Medicinal Chemicals and Botanical Products

SIC 2833

Companies in this industry

Industry report:

This classification covers establishments primarily engaged in manufacturing bulk organic and inorganic medicinal chemicals and their derivatives, as well as processing--grading, grinding, milling--bulk botanical drugs and herbs. Included in this industry are establishments primarily engaged in manufacturing agar and similar products of natural origin, endocrine products, manufacturing or isolating basic vitamins, and isolating active medicinal principals from botanical drugs and herbs.

Industry Snapshot

Revenues for medicinal and botanical manufacturing reached $11.3 billion in 2008, up from $9.82 billion in 2006, according to the U.S. Census Bureau. Products from this industry appealed to a variety of different people, due to the wide diversity of offerings, with more constantly in development. An estimated $65.2 billion was spent on research and development activities by pharmaceutical manufacturers in the United States in 2008.

Companies in this industry segment furnish the active ingredients used by pharmaceutical firms to manufacture finished products, called pharmaceutical preparations (see SIC 2834: Pharmaceutical Preparations). Active ingredients constitute the portion of a finished drug that creates the desired effect, either therapeutic or preventive, for humans and animals. Extracts of crude drugs (not yet processed) derived from plant or animal sources are important examples of the components produced by this industry sector.
By the 1960s, synthesized chemicals, either a manufactured copy of an organic or inorganic substance or a new chemical entity (NCE), had become common active ingredients in pharmaceuticals, from vitamin pills to hormones. Meanwhile, the biotechnology revolution, beginning in earnest in the 1980s, produced methods of inserting genetic material into small microorganisms. This made them miniature factories for the production of active drug ingredients like insulin and, in the process, created new molecular entities (NMEs) that could be patented.

Organization and Structure

A large number of the medicinal and botanical establishments are divisions or subsidiaries of other firms, including pharmaceutical industry giants such as Merck and Hoffman-La Roche. Parent firms that have developed in-house active ingredient suppliers are said to be "back-integrated," and their chemical products are referred to as "captive," dedicated to the parent firm. Chemicals produced by firms independent of the final purchaser are called "merchant."

"Fine" chemicals are pure substances that are produced by a chemical reaction. Many fine chemical companies that produce for the merchant market are contracted to large pharmaceutical companies to supply custom or specialty chemicals, while others produce and sell them on the open market. The latter often manufacture well-known bulk pharmaceutical compounds, like those used in the production of aspirin. Custom and specialty chemicals are produced in smaller quantities than bulk chemicals and frequently combine several different chemical compounds called intermediates, which are more expensive. Traditionally, fine chemicals are those with fewer impurities than the industrial chemicals not intended for human consumption.

Both the back-integrated firms and the independent fine chemical companies are involved in the complex processes of producing extracts of natural substances, synthetic inorganic and organic chemicals, or combinations of any or all of these, that go into most modern medicines. The specific formulas for these substances can be found in academic monographs or in the official U.S. Pharmacopeia (USP) and the National Formulary (NF). If they have not yet been manufactured on an industrial scale or are entirely new compounds (NCEs or NMEs), the pharmaceutical firm creates a document as a reference for its own in-house producers or as a guide to firms contracted to supply active ingredients. These references provide manufacturers with the acceptable legal standards of purity and potency for products. A new manufacturing process, as well as an NCE or NME, can be patented in the United States.

Active ingredients from natural sources start as crude drugs. According to Pharmacognosy, which is the standard text on drug extraction from natural sources, crude drugs from vegetative or animal origins are "natural substances that have undergone only the processes of collection and drying." Natural substances are those "found in nature . . . that have not had changes made in their molecular structure." The sources of these substances are medicinal plants or the animals from which glands and organs are needed and can be either raised commercially or collected in the wild. Nevertheless, environmental concerns tended to support the former in the late twentieth century. It is of vital importance, especially with plants, that the correct species be identified before collection. Once a crude drug has been collected and the needed portions separated and cleaned, it must be safely stored or immediately processed according to how quickly the active ingredient will spoil or lose its potency. Plants are often stored over long periods to help decompose unwanted plant components while leaving the desired portions intact. Animal glands and organs, however, are generally processed quickly to avoid deterioration.

If the crude drug is a plant, the active constituent, which is the ingredient desired for the final drug product, must be extracted. The first step in this procedure is grinding and mincing the appropriate plant parts, such as the leaves or the seeds. Production facilities in this industry house hammer mills, knife mills, and teeth mills designed to reduce leaves, stems, seeds, or roots to a manageable powder composed of evenly sized granules. Some plant products, such as herbal remedies, can be packaged at this point for sale or combined into other preparations. For most plant-derived drugs, the powdered plant must be submitted to a series of solvent baths (a process called maceration) in alcohol or ether, or the plant goes through a series of distillation procedures (in the case of volatile oils) that separate the desired ingredient from the crude material. Animal glands or organs are also minced, then mixed with a solvent that aids extraction and often preserves the substance. After centrifugation, the animal extract is filtered to separate remaining impurities. Antibiotic molds, on the other hand, are actually grown in large fermentation tanks. The molds release their medicinal yield into a fermenting medium or solution. These fluid mixtures of either mold, plant, or animal materials are submitted to "precipitation," which involves the application of either heat or freezing cold or the addition of salts or some other compound that separates or isolates the target active ingredient from the fluid. Isolates are then sent to the customer in either powdered or fluid form to be assembled into a marketable drug.

Manufacturers of active ingredients ship finished products in batches to the preparation firm awaiting them. The chemical composition of these shipments must match a parent batch to ensure purity and strength and must meet with the approval of the U.S. Food and Drug Administration (FDA), as well as the client company. Firms that desire a regular supply of high-quality materials will often inspect manufacturing plants before assigning a production contract for active ingredients. The FDA is responsible not only for comparing active ingredients to the standard, but also for ensuring that every step in the process of pharmaceutical raw material production meets specific production standards.

Background and Development

Raw material suppliers for pharmaceutical companies, in the form of fine chemical producers, actually pre-date the pharmaceutical industry. Until well into the nineteenth century, doctors and apothecaries (i.e., pharmacists) collected and processed their own botanical remedies and compounded their own medicinal chemicals. Drugs in the limited and non-standardized pharmacopoeia were herbal remedies whose provenance was centuries old and could be prepared simply. Pharmacists could produce what chemical treatments there were in drugstores using comparatively unsophisticated equipment. Because of the similarity of pharmaceutical chemicals to the processes for making industrial chemicals, small-scale producers often engaged in the manufacture of both. In fact, many modern medicinal chemical suppliers, like Dow and Hoechst, produce industrial chemicals as well.

An increase in the scientific study of chemistry and botanical extracts in the nineteenth century yielded a range of new chemicals and isolates with pharmaceutical potential. Included among these were the anesthetics ether and morphine. These drugs required a greater degree of standardization and production expertise than earlier treatments. Their efficacy also increased public demand. Pharmacists like H. E. Merck in Germany, as well as doctors and fine chemical producers, started developing and building the manufacturing capacity to meet these needs. The new pharmaceutical firms called themselves "ethical" manufacturers to differentiate themselves from the "patent" medicine producers, who bottled popular concoctions with broad therapeutic claims but dubious medicinal value. The makers of ethicals clearly labeled the contents of products and promoted the therapeutic strength and purity of their medicines.

Many early active ingredient suppliers for the U.S. ethical and patent producers were European fine chemical companies. However, events such as the War of 1812, the Civil War, and World War I disrupted European supplies and spurred U.S. companies to increase capacity for domestic chemical manufacture. U.S. companies like Squibb, which subsequently became Bristol Myers-Squibb Company, established themselves by supplying medicines for the Union armies.

By the first decades of the twentieth century, breakthroughs in understanding the bacteriological basis of many diseases by Louis Pasteur and the effect of chemicals on certain parts of the body by Paul Ehrlich led to a new era in pharmaceutical science in which specific compounds could be screened for effectiveness against known disease organisms. The discovery of such "wonder drugs," like the anti-infective sulfanilimides and various vaccines, increased the demand for reliable new drug treatments. However, most drugs, with the exception of injectables, still did not reach the physician or pharmacist in finished form. Pharmaceutical firms continued to purchase fine chemicals from companies like Pfizer Inc. or Merck & Co. and compound them into pharmaceutical mixtures for distribution to hospitals and pharmacists. Pharmacists mixed these bulk ingredients into finished form in the drugstore. However, it is important to note that these treatments did not displace botanical products as the dominant form of drug treatment until after World War II.

With its urgent demand for new anti-infectives like sulfa and the antibiotic penicillin, World War II changed the structure of the pharmaceutical industry. Bulk suppliers, such as Pfizer and Merck, found themselves producing drugs on a massive scale in both finished and bulk form. After the war, these companies stayed in the profitable ethicals business, making prescription-only pharmaceutical preparations. With a high public demand for new life-saving or extending medications, companies began to finance enlarged research and development departments to discover and develop important, and profitable, therapies. A vast array of drugs were introduced in the 1940s, 1950s, and 1960s, including tranquilizers, steroids, vaccines, and antibiotics. Many of these drugs were derived from the laboratory screening of botanicals and animal products, like steroids from yams used to make a cortisone treatment for arthritis and insulin from animal pancreas extracts used to control diabetes. However, the limits of natural supply prompted many pharmaceutical companies to synthesize the active ingredients in these medicines.

Meanwhile, new federal regulatory requirements created tight restrictions on the production of drugs after 1962, when a popular European sleeping pill, Thalidomide, was found to cause severe birth defects in some newborns. In response, Congress passed the 1962 Kefauver-Harris Amendments to the 1938 Food, Drug, and Cosmetic Act. The legislation required FDA licensing and oversight of all pharmaceutical manufacturing facilities and processes, including those of bulk pharmaceutical suppliers. Similar production controls had already been instituted after 1949 for "batches" of bulk penicillin.

Kefauver-Harris reinforced trends in the industry toward in-house production of active ingredient supplies for pharmaceuticals. Because the pharmaceutical company was ultimately responsible for the purity of its product, even if an outside supplier provided ineffective or dangerous compounds, companies thought it safer to have internal oversight and production control. Perhaps as important to major firms was a desire to maintain command of active ingredient supply even after patents had run out on new medications. In his history of the pharmaceutical industry titled The Structure of American Industry, Walter S. Measday cited a situation in which over 150 companies offered Vitamin C in dosage form but "the entire output of the vitamin itself is produced by Merck, Pfizer, and Hoffman-La Roche, Inc." If ethical pharmaceutical companies could control bulk supplies for medications more advanced than Vitamin C they could effectively extend their patent period and associated high profits indefinitely even after product patents ran out.

In the late 1980s and early 1990s, pharmaceutical firms began to reverse the trend of in-house production of active ingredients in favor of a more complex combination of captive production and long-term contracts with outside custom suppliers. Among the factors fueling this trend were the 1992 economic recession and excess world chemical capacity, the increasing costs in both time and money to negotiate regulatory hazards, the complexity of new drug compounds, and the desire to avoid tying up too much capital in supply factories.

Meanwhile, the highly politicized drive for healthcare reform in the late 1980s and early 1990s created downward pressure on the prices the big pharmaceutical firms could charge for their prescription drugs, even for "breakthrough" treatment therapies with extremely high development costs. The immediate winners in this contest over drug prices seemed to be the smaller, independent generics companies. Generics, markedly cheaper therapeutic and chemical equivalents of prescription patented medicines, are produced once the patent protection on a prescription drug expires. Generics companies manage inexpensive prices because they only have to copy the drugs they produce rather and not pay for research and development.

Because of this, however, the active ingredients in generics accounted for almost one-half of the sale price, which represents a ratio three to four times greater than prescription versions of the same drug. This made the generic companies susceptible to fluctuations in the supply of active ingredients worldwide. As Drug Topics reported in 1994, when the European Economic Community temporarily "outlawed the exportation of bulk/fine chemicals," generics companies were faced with an 85 percent cutoff of supply. At the same time, the prescription pharmaceutical firms controlled the current capacity on the active ingredients in their drugs coming off-patent. Combined with a wave of takeovers or start-ups of generics firms by large pharmaceutical producers, the cutoff in supplies threatened to squeeze independent generic producers out and effectively extended prescription patents and higher drug prices much longer than healthcare reform advocates intended.

By 1999, the fine chemicals sector of the industry was very fragmented, with the top 25 companies accounting for less than 25 percent of the $60 billion market. Of the $21 billion U.S. market, 44 percent of sales were generated by the pharmaceuticals industry and 54 percent were agricultural chemicals.

As growth in life sciences industries boomed, companies in the industry likewise looked forward to strong growth as pharmaceutical companies focused more on research and development and increasingly outsourced active-ingredient production. Outsourcing reduced the burden of drug development while accelerating the process for pharmaceutical companies. Additionally, pharmaceutical companies were no longer responsible for costs associated with maintaining manufacturing facilities.

The botanicals segment of this industry also offered tremendous growth potential as consumer awareness and demand grew in the global nutritional industry. According to International Research Institute, U.S. sales of botanical medicines in 1998 totaled $4 billion. Companies were able to add value to natural ingredients by developing and patenting methods of standardized extraction of active plant constituents. One such company, Inter-Cal, a subsidiary of Zila Inc., patented Ester-C brand products and a standardized extract of Saw Palmetto for treatment of benign prostate hyperplasia, affecting 50 percent of the male population by age 60. Additionally, Congress called for funding for university research grants to increase scientific information available for botanical dietary supplements.

While the botanicals segment took steps to gain public trust, seven leading vitamin manufacturers pleaded guilty in the largest criminal settlement in U.S. history and agreed to pay combined fines of $1.8 million in 1999. Five of the companies pleaded guilty to charges of conspiracy to fix and inflate vitamin prices. Fined most heavily were Swiss pharmaceutical giant Hoffman-LaRoche Inc., which agreed to pay $500 million, and German BASF AG, which agreed to pay $225 million. The scheme lasted nearly a decade, affecting more than $5 billion in U.S. commerce in common household products. Dr. Kuno Sommer, former director of worldwide marketing for Hoffman-LaRoche Vitamins and Fine Chemicals Division, agreed to plead guilty, resulting in a four-month prison term and a $100,000 fine.

Challenges faced by the fine chemicals sector included the continued decline of new drug approvals, following a trend that began in 1999. Only 35 new products were approved for marketing that year, dropping to 27 in 2000 and 24 in 2001. Fourteen product withdrawals between 1997 and 2000 also contributed to the negative atmosphere in the fine chemicals industry. These factors all related to the stricter control being exercised by the FDA in the early 2000s, which toughened safety measures on all fronts, from drug interactions to manufacturing practices.

With major pharmaceutical manufacturers consolidating, some fine chemical operations were being brought in-house, increasing competition among small and medium-sized companies in an already overcrowded landscape.

Research and development (R&D) remained an enormous drain of both time and costs for pharmaceutical manufacturers in the mid-2000s. According to Pharmaceutical Research & Manufacturers of America (PhRMA), the average time required to develop a drug was 10 to 15 years. The industry spent $55.2 billion in R & D in 2006, a figure that represented approximately 17.5 percent of sales. In fact, of every 10 drugs on the market, only three generate enough revenue to match or exceed R&D expenses related to that drug.

Counterfeiters avoided the R&D process by selling pharmaceutical preparations purporting to be the genuine brand. Not to be confused with generic drugs, which are the equivalents of branded drugs whose patents have expired, counterfeit drugs pose a great risk to both the legitimate pharmaceutical industry as well as consumers. They may contain incorrect and potentially toxic ingredients or correct ingredients in incorrect quantities, or they may lack the active ingredient, leaving the consumer's affliction or disease essentially untreated.

The Pharmaceutical Security Institute reported that the number of counterfeiting incidents recorded between 2004 and 2005 jumped by 40 percent. Moreover, 89 countries recorded such incidents, a 32 percent increase over the 67 countries affected the previous year. In Europe, according to The Times of India, more than 2.5 million counterfeit items were seized in 2006, a five-fold increase over the previous year. The European Commission (EC) traced most of the fake drugs to India, China, and the United Arab Emirates. "These three countries combined accounted for over 80 percent of all counterfeit medicines in Europe," the EC reported.

Counterfeit products were not the only area for concern for the pharmaceutical industry in India and China. By outsourcing the manufacture of active pharmaceutical ingredients (APIs) to developing countries, drug companies became vulnerable to substandard ingredients. A 2006 issue of Biopharm International related the story of a drug manufacturer that outsourced API production to a developing country and received samples that repeatedly failed purity tests. Ultimately, the pharmaceutical company returned to its original API manufacturer, but only after expending great amounts of time and money in dealing with the faulty API manufacturer.

Current Conditions

Approximately 400 medicinal and botanical manufacturers were in operation in the United States in 2007, according to the U.S. Census Bureau. The industry employed 25,848 individuals, and total industry shipments were valued at $11.1 billion. California was home to most manufacturing establishments, according to Dun and Bradstreet's figures, followed by New York, Florida, and Texas.

Medicinal and botanical manufacturers in the United States produced revenue of $11.3 billion in 2008, according to a report by Supplier Relations US LLC. This revenue represents a small fraction of the pharmaceutical preparation market, which in 2008 reached $145.3 billion in the United States.

Other figures from the Pharmaceutical Research & Manufacturers of America (PhRMA) showed that 31 new drugs were approved in 2008, and, in 2009, 2,900 new drugs were in development. Development cost continued to be a significant factor in the industry; according to PhRMA, the average price tag for developing a drug in the late 2000s was approximately $1.3 billon. The industry spent about $65.2 billion on R&D in 2008, a figure that amounted to approximately 20.3 percent of domestic sales.

Other factors that impacted the industry involved government regulations. Unlike some countries, the United States regulates the safety of drugs and dietary supplements. The United States Pharmacopeia (USP) verifies the identity, strength, purity, and quality of dietary supplements and pharmaceutical ingredients. Although testing is voluntary, the USP's standards are enforced by the U.S. Food & Drug Administration (FDA). The FDA itself regulates the quality, manufacturing, packaging, and labeling of such products. In June 2007, the FDA expanded its oversight of dietary supplements by releasing its final rule for current good manufacturing practices (CGMPs) for dietary supplements. Under this rule, manufacturers are required to evaluate the identity, purity, strength, and composition of supplements.

Industry Leaders

Pfizer Inc. of New York was the world's largest research-based biomedical and pharmaceutical company in the late 2000s. Founded in 1849 by cousins Charles Pfizer and Charles Erhart, this company produced Celebrex, Lipitor, Viagra, and Zoloft. Research and development expenditures totaled $7.6 billion in 2006, and company revenues reached $48.2 billion in 2008, when the company employed 81,800 workers worldwide. In 2009 Pfizer purchased former rival Wyeth for $68 billion.

Merck & Co. Inc. in Whitehouse Station, New Jersey, continued to dominate the market by delivering, developing, manufacturing, and marketing a broad range of human and animal health products. The company produced such drug brands as Vytorin, Zocor, and Singulair, as well as vaccines for children and adults. Overall sales in 2008 surpassed $18.5 billion, and employees numbered approximately 51,000 worldwide. In late 2009 the company merged with Schering-Plough Corp., bringing the total number of employees to 106,000. The new firm continued to operate under the Merck name.

Bristol-Myers Squibb Co. was another one of the world's leading pharmaceutical companies. Headquartered in New York City, the firm produced treatments for cholesterol, hypertension, and heart disease, among others. Consolidated company revenue reached $20.5 billion in 2008 with 35,000 employees. With 30 manufacturing plants and 10 R&D centers worldwide, the company derived about half of its income from the United States.

Founded in 1983, Metagenics Inc. was a leading producer of nutritional supplements. The California-based firm had a catalog of more than 400 products, sold only to health care practitioners for ultimate sale to consumers. A private company, Metagenics reported revenues of $188.9 million in 2008 with 360 employees. The company was acquired by Alticor Inc. in 2009.

NBTY Inc. of Ronkonkoma, New York, produced and distributed more than 25,000 nutritional supplements, including brands such as Nature's Bounty, Vitamin World, Puritan's Pride, and Osteo Bi-Flex. Sales in 2008 reached $2.1 billion with 13,760 employees.

America and the World

Despite the twentieth-century revolution in chemical pharmaceuticals, The Medicinal Plant Industry reported that "50 percent to 80 percent of the developing world depends on traditional therapies for their health care," namely plant-derived remedies. In China and Southeast Asia, indigenous industries process and package plant-based remedies based on ancient recipes. Some processors utilize the same machinery and manufacturing expertise as American companies, and others are extremely small and use traditional methods. This system of traditional active ingredient production for drugs, except to the extent that Western-style medicines were adopted or locally produced for export to the West, remained relatively untouched by U.S. corporate influences.

Nonetheless, suppliers of fine chemicals for U.S. pharmaceuticals have never been limited to the country's borders. European chemical companies, except for temporary alterations during various wars, have always had a large presence in the U.S. market. Asian and Indian producers were increasing market share, as products developed by these companies did not have the strict Western environmental codes applied to U.S. producers. Asian producers proved to be particularly competitive in the bulk pharmaceutical and intermediates classes.

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