Pharmaceutical Preparations

SIC 2834

Companies in this industry

Industry report:

This industry includes establishments primarily engaged in manufacturing, fabricating, or processing drugs in pharmaceutical preparations for human or veterinary use. The greater part of the products of these establishments are finished in the form intended for final consumption, such as ampoules, tablets, capsules, vials, ointments, medicinal powders, solutions, and suspensions. Products of this industry consist of two important lines: pharmaceutical preparations promoted primarily to the dental, medical, or veterinary profession, and pharmaceutical preparations promoted primarily to the public.

Industry Snapshot

Since World War II, when the U.S. drug industry was established on a permanent footing, pharmaceutical firms have enjoyed a high level of profitability. The discovery and development of dozens of life-saving medications in company research laboratories created enormous demand for pharmaceuticals, while patent protection and sophisticated marketing structures maintained sales and profits. However, the high cost of drug development and marketing tended to concentrate industry earnings in several large firms. Even with strict regulatory oversight and periodic crises, such as the Thalidomide scare of 1962, the U.S. pharmaceutical industry, or at least its major players, managed to remain both profitable and beneficial to world health while avoiding the price controls common in other industrialized nations.

According to the U.S. Department of Commerce, sales of pharmaceutical preparations reached $140.5 billion in 2007, up from $123.16 billion in 2005 and $104.15 billion in 2002. The industry was expected to sustain the consistent and substantial growth it experienced over the prior decade. Despite the economic downturn of the late 2000s, the pharmaceutical industry remained robust and was poised to meet the increased prescription needs of the aging U.S. population.

Organization and Structure

Pharmaceutical production and employment in the 2000s were concentrated in New Jersey, Pennsylvania, and New York. About 20 percent of the nation's drugs were shipped from New Jersey, home to industry leaders American Home Products Corp., Johnson & Johnson, and Merck & Co. Inc. Other states with high concentrations of drug companies were California, Illinois, Texas, Indiana, and Florida.

Companies marketing pharmaceutical preparations, or finished-form drugs, maintained their traditional leadership of the industry into the late 1990s. Companies in this sector share similar manufacturing techniques combining active medicinal ingredients, chemicals, or natural products with excipients (i.e., buffered powders) or sterile water to produce the finished, or dosage, drug form. The most common dosage forms are oral (tablets and liquid suspensions), parenteral (by injection), or solid (suppositories and ointments). Unusual drug delivery systems appeared in the 1980s and 1990s, including polymer implants, transdermal patches, and controlled-release sponges inside tablets.

Preparations firms also concentrated on the development, production, and marketing of therapeutic agents, which are drugs designed to treat, cure, or prevent specific diseases (antibiotics); suppress symptoms (analgesics); or supplement deficiencies (vitamins). Meanwhile, other industry segments concentrated on making drugs to create immunities (vaccines) or aid in diagnosis (radioactive iodine for X-rays). Within the general area of therapeutics, pharmaceutical companies developed expertise in one or more of the eight therapeutic classes of drugs, such as cardiovasculars, or even a specific disease, such as hypertension. Industry leaders generally manufactured and marketed drugs in several therapeutic categories, while some small companies produced only one drug.

All companies in the pharmaceutical industry operate within a strict regulatory environment. Because these companies manufacture potentially harmful, yet socially necessary products, but must also make a profit, the pharmaceutical industry has maintained a complex relationship with government regulators. These regulators are charged with protecting the public and encouraging business growth at the same time. Major incidents of adverse or fatal reactions from drugs, evidence of collusion or corruption within the industry, and the government's desire to move the industry in a particular direction have historically prompted new regulation. From the Food and Drug Administration (FDA) to the Federal Trade Commission (FTC), pharmaceutical companies and the federal government are linked at all stages, including development, production, and marketing.

Moreover, division and segmentation characterized the industry. Some of this was the result of federal regulation, and the pressures of a highly competitive marketplace were responsible for the rest. One point of division for regulatory agencies was that between "ethical" and over-the-counter (OTC) drugs. Ethical drugs require a prescription from a physician before being dispensed to the patient, while consumers can purchase OTC medications like aspirin and antacid without a doctor's prescription.

The ethical drug segment of the industry is further subdivided into "patented" and "generic" prescription drugs. Patented drugs are therapies developed by pharmaceutical companies whose formulas, production processes, and trade names (often called branded prescription drugs) are protected for 17 years under U.S. patent laws. Patented prescription drugs were the driving force behind pharmaceutical industry sales after World War II and continued market domination into the mid-1990s. Branded prescriptions include almost all of the major breakthrough therapies developed in drug research labs since the 1940s, continuing the drug industry's unusual combination of health- and profit-driven research. Meanwhile, an alternative to some of the most popular remedies are generics, which are markedly less expensive chemical and therapeutic equivalents of patented prescription drugs that go into production once brand-name therapies have come "off-patent."

In addition to drugs for human consumption, pharmaceutical companies produce drugs for the veterinary market. The U.S. Census Bureau reported that many drug industry leaders maintained specific animal health divisions or were involved in the animal health care industry. This segment had sales of nearly $3.35 in 2005, accounting for a small percentage of overall industry.

Beginning in the early 1980s, the new force entering the pharmaceutical arena was biotechnology. From the discovery of DNA structure in 1953 and new knowledge of "genetic blueprints" that direct protein growth by messenger RNA, scientists were able to clone proteins in the laboratory. The knowledge of a specific protein's function in the body, such as stimulating infection-fighting cells or blocking a destructive internal process, allowed physicians to induce desired reactions in patients by injecting biotechnology-produced cloned proteins, or "magic bullets," into the body. Although biotech companies managed to create and patent many exciting new treatments in the 1980s, they were generally inconsequential, lacked marketing structure, consumed vast amounts of research capital, and created little profit compared to those offered by the industry leaders. Nevertheless, because of the potential to continue providing breakthrough treatments and vaccines for some of the most stubborn diseases, biotechnology companies were the target of buyouts, mergers, and joint ventures in the 1980s and 1990s. In one such move, the industry giant Roche purchased controlling interest in the biotechnology pioneer Genentech in 1990.

Background and Development

Before the late nineteenth century, the U.S. pharmaceutical industry barely resembled its structure in the twenty-first century. Simple chemical compounds like iodine chlorate, along with plant extracts like quinine, were the prime ingredients of available remedies. However, these drugs lacked specific scientific formulas, so a doctor's order for a medication might not yield the product intended. To offset this problem, doctors often dispensed medicines as well as prescribing them. However, 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 sell the patient a remedy of his making. Some traditional treatments, like digitalis, remain part of the pharmacological arsenal in the late 2000s.

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, which have a purity level high enough for human consumption, from Europe with which pharmacists and doctors produced what few chemical medicaments 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 U.S. dentist Horace Wells, stimulated the demand for more fine chemicals. During the Civil War, U.S. firms like Squibb were able to establish themselves profitably by providing advanced machinery and high-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, which were often only colored water, alcohol, and opiates, were generally ineffective and occasionally dangerous. The reliability of the new ethical suppliers, on the other hand, encouraged doctors to request 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 humanity, demand for these reliable drugs and vaccines soon increased. The germ theory of disease, based on the research of bacteriologists like Louis Pasteur, revolutionized medicine and drug therapy in the 20 years surrounding World War I. The laboratory isolation of disease organisms meant that physicians could diagnose patients by tracing illnesses to specific infectious organisms, and drug researchers finally had a clear therapeutic target. New knowledge of the manner in which chemical treatments operated in the body, based upon the research of the German scientist Paul Ehrlich, opened pathways of attack against these disease organisms. By World War I, "medical science," as this marriage of disease and therapeutic research came to be called, had created significant breakthroughs, especially in the development of vaccines and what Ehrlich called chemotherapy.

Larger pharmaceutical companies like SmithKline expanded clinical departments in response to the popularity and promise of medical science. They increased research into new drug therapies and quality-control activities. On the eve of World War I, however, these companies lagged far behind German manufacturers like Bayer in the development and patenting of new therapies. German companies had a long history of combining basic bacteriological research with the applied science of drug development. Unlike U.S. firms, they had did not hesitate to create exclusive markets for therapeutic inventions by patenting drugs in the United States and Germany. Novel treatments, such as the popular antisyphilitic arsenical drug, Salvarsan, discovered by Ehrlich and produced by chemical giant Hoechst, illustrated the potentially large new markets for "scientific" pharmaceuticals. During the war, when U.S. patent rights were suspended for German companies, U.S. pharmaceutical firms began to manufacture patented drugs invented in Germany, such as Salvarsan and Bayer aspirin, and reaped the profits.

In the time between World War I and II, American 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 capabilities to create new drug products for the expanding market. Major companies such as Squibb, Merck, Abbott, and Upjohn all had research staffs of about 20 people, with budgets of at least $100,000 by World War II. Nevertheless, the discovery of the two major drug treatments of the war years, the sulfanilimides and the antibiotics, both resulted from European research. Sulfa drugs, chemotherapeutic anti-infectives derived from coal tars, were first developed at Bayer in 1935. One of the most important drug therapies of the twentieth century, mold-derived anti-infective penicillin, was first isolated and described by Alexander Fleming in England in 1928. Sulfa drugs and antibiotics became cornerstones of the U.S. pharmaceutical industry between the 1930s and the 1950s.

Patent protection for the sulfas expired in the 1930s, and U.S. companies, including Merck and American Cyanimid, began the domestic manufacture of the anti-infectives. Meanwhile, a grant by the Rockefeller family brought penicillin to the United States, where scientists discovered how to mass-produce penicillin by deep fermentation rather than slow surface culture in a Peoria, Illinois, lab in 1941. Several drug companies, including Pfizer, Squibb, and Merck, quickly geared up to produce marketable quantities of the "wonder drug" for use by armies and general populations. By 1945, the U.S. drug manufacturing capacity had expanded so quickly that penicillin prices fell from $20 to $1 per dose, less than the labeled bottle containing it. This vastly expanded the productive capacity of pharmaceutical companies as well as the awareness of the potential market for antibiotics, and it led to U.S. domination of world markets after the war. Those factors resulted in the establishment of U.S. pharmaceutical firms as research, manufacturing, and marketing powerhouses.

The first important federal law governing drug production was a 1902 law that required the inspection and licensing of biologicals (vaccines and antitoxins) by a new federal agency, the Hygienic Laboratory, precursor of the National Institutes of Health (NIH). Soon thereafter, public outcry over the dangers of adulterated foods after the publication of Upton Sinclair's The Jungle secured the passage of the second major piece of legislation covering therapeutic drugs, the Pure Food and Drug Act of 1906. This act prohibited adulterated or misbranded food or drugs from interstate commerce and granted authority to ban dangerous drugs.

In 1937, a U.S. sulfanilimide producer, Tennessee-based Massengill Company marketed a sore-throat remedy that dissolved the sulfa drug in diethylene glycol, which was the main ingredient in radiator antifreeze in the 2000s. Apparently, the manufacturer chose this particular solvent because of its pretty red color and sweet taste. No clinical trials for toxicity were performed. More than 100 reported deaths from kidney failure resulted from its ingestion before investigators determined the source of the fatalities. Public clamor over the incident led to the passage of the Food, Drug, and Cosmetic Act of 1938. This legislation required that all drugs must submit to tests for proof of safety by the newly created Food and Drug Administration (FDA). Packaging was required to carry labels clearly describing the contents of the drug, how it should be administered, and possible side effects. Attendant legislation gave the Federal Trade Commission (FTC) responsibility for ensuring valid drug advertising. However, experience showed that most consumers did not bother to read the extensive labels on medication. As a result, the Durham-Humphrey Amendment of 1951 exempted prescription drugs from full labeling requirements. These drugs, which are dispensed only by a licensed pharmacist under the written direction of a physician, carried a "legend" label that read, "Caution: Federal law prohibits dispensing without a prescription." Legend drugs thereafter became another name for prescription or ethical drugs.

Despite regulatory hurdles, World War II and the sustained post-war economic dominance of the United States 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. A Pfizer employee actually found a profitable new treatment, terramycin, in a sample of dirt outside a company plant in Indiana. This and other "broad-spectrum" antibiotics, which are 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. According to the Pharmaceutical Manufacturers Association (PMA) in its 1980 Factbook, new drug introductions increased from an annual average of 10 to 30 in the 1940s to an average of 30 to 50 in the 1950s.

The array of new products available meant that individual physicians and pharmacists could not know all the available treatments at any one time. Pharmaceutical companies began to send out sales representatives, or "detail men," as both educators in new therapies and promoters of company brands. Spending large sums on free physician samples and advertising in professional journals led to increased brand loyalty on the part of doctors. This marketing structure was expensive but also supported high profits. Doctors, who were trained to think only of treatment regimens, were often unaware of drug prices and prescribed specific medication when less expensive, equally effective therapeutic alternatives existed. Even if pharmacists wanted to substitute a less expensive generic for a doctor's prescription, doing so made little sense for a drugstore's profitability, might anger the physician, and was illegal in some states. The relationship established in the 1940s and 1950s among drug companies, pharmacists, and doctors, therefore, tended to be self-perpetuating.

Fallout from another scandal, the Thalidomide crisis of 1962, however, placed more pressure on the industry. A popular European sleeping pill, Thalidomide was under investigation in 1962 by a U.S. firm, the William S. Merrell Company, which wanted to start U.S. sales of the drug. The company's tests revealed that the drug could cause severe birth defects in babies if taken by a pregnant woman. Despite the fact that the drug was never sold in the United States, its inadequate premarket testing in Europe and near-entry into the U.S. market revealed that a thin line of regulation was all that stood between dangerous drugs and the general public. As James Nielson wrote in The Handbook of Federal Drug Law in 1992, the Thalidomide disaster made it clear "that people were taking drugs" for which "neither the prescriber nor the manufacturer had a clear knowledge of their effects." The Thalidomide crisis, along with public dissatisfaction with exorbitant drug company profits, meant that "drugs never again received the universal public acceptance they had previously enjoyed."

The federal government responded to the uproar over the Thalidomide crisis by passing the Kefauver-Harris Amendments of 1962. These amendments to the Food, Drug, and Cosmetic Act of 1938 required pharmaceutical companies to prove 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 had to be fully reported, and human clinical subjects had to be informed of the dangers of involvement in trials before giving consent. The act also required that drugs must follow specific production guidelines called Good Manufacturing Practices (GMP). Manufacturing plants became subject to registration and inspection procedures. Finally, advertising for prescription drugs was placed under FDA supervision, while OTC drug advertising continued under FTC oversight. Pharmaceutical price controls included in Senator Estes Kefauver's original legislative proposal were dropped along the way.

The immediate effect of the Kefauver-Harris Amendments was to lower the rate at which pharmaceutical manufacturers introduced new drugs to the market drastically. 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. Despite this slump, by the 1980s reinvigorated research efforts using advanced techniques in "molecular biology and biochemistry were promising a new generation of highly effective drugs for specific ailments, or magic bullets." One of the magic bullets was SmithKline Beecham's Tagamet, an anti-ulcer medication that quickly became "one of the most widely prescribed pharmaceuticals in the world" and prompted an increase in the research investments of pharmaceutical companies from "$1 billion in 1976 to $4 billion in 1985."

These larger research budgets yielded a 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 Retin-A and Upjohn's Rogaine (used to treat male pattern baldness) created new markets for cosmetic drugs. Even standbys like aspirin enjoyed increased sales because studies showed its potential to avert some heart attacks.

Despite some victories, by the end of the 1980s the prospects for the preparations industry did not look bright. Decades of expensive applied research, a wide patent umbrella, strong overseas sales, and aggressive marketing sustained high profit and growth in the U.S. prescription pharmaceutical industry after World War II. The system produced important therapies that prolonged lives, banished ancient diseases, and made the aches and pains of living easier to bear for those who could afford to purchase them. Nonetheless, the highly structured corporate research, manufacturing, and marketing systems of industry leaders also required that wonderful new medications carry price tags considered by many to be inflated. Some analysts felt that price determined cost rather than the other way around. This trend continued into the 1980s. Thus, some industry critics claimed that the big-brand pharmaceutical companies charged unjustifiably high prices for drugs while spending more money on advertising, brand support, and lobbying efforts than they did on research and development. Thus, the prices of drugs were less related to cost inputs than to the need to maintain corporate structure. 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. Medications sold in Europe and the United States were reported to have price differentials exceeding 50 percent. Meanwhile, continued reports of industry profits increased efforts at reform. Industry analyst Robert Helms said in a 1992 Drug Topics article that "profits for the top ten drug companies averaged 15 percent of sales, compared to 4 percent for all other industries."

In 1991 legislation allowed state-funded Medicaid insurance programs to demand rebates from drug manufacturers for medications purchased by program recipients that resulted in downward price pressures. Standard & Poor's reported in its 1994 Industry Surveys that Medicaid accounted for about 15 percent of all U.S. pharmaceutical sales. Similar programs for the federal government's Medicare program were included in President Bill Clinton's 1993 health-care reform proposals. Downward pressures on drug prices were another result of the advent of privately managed care organizations such as health maintenance organizations (HMOs) in the 1980s and 1990s. These organizations increasingly adopted restrictive drug formularies (lists of drugs that could or could not be purchased by an organization) that stressed economical medication in therapeutic groups, often demanding discounts from manufacturers and the use of cheaper brands or generics to treat illness. These movements created what industry analyst Paul Hanson called a "strategic shift in power in pharmaceuticals from suppliers to consumers," in an April 1994 Chemical Week article.

The price- and consumer-oriented generics and OTC segments, in fact, were poised to benefit from the health-care reform movement. Beginning with the passage of the Drug Price Competition and Patent Term Restoration Act of 1984 (the Waxman-Hatch Act), the federal government attempted to increase industry competition and help supply less expensive drugs for the public by aiding the generally smaller and independent generics manufacturers. The act allowed generics companies to present a shorter version of the standard new drug application (NDA) to the FDA's anti-ulcer drug Zantac, which reached the open shelves of drugstores and groceries in the 1990s. Like generics, OTCs represented a significant price advantage over branded prescriptions. In addition, patients were more likely to diagnose and treat themselves with OTC drugs than to visit a doctor and receive a prescription. Fueled by these factors, sales of OTC drugs increased at a compound annual rate of 6 percent from 1985 to 1995. By 1995 the OTC segment was worth $9.6 billion and was expected to continue to see major growth.

U.S. drugmakers also faced the threat of increased regulation in the early 1990s, including price controls. Even though it was defeated in 1994, the Clinton administration's health care proposal had an indirect effect on the industry, inspiring wholesale belt-tightening and a rash of mergers and acquisitions. Furthermore, the industry's earnings growth slowed from an annual average of 18 percent from 1987 to 1992 to 9 percent from 1991 to 1993. Downsizing helped boost the earnings growth rate to 12 percent by 1995.

The pharmaceutical preparations industry continued to be dominated by existing large branded firms in the mid-1990s. Through buyouts and in-house start-ups, as well as a continuation of the merger movement begun in the late 1980s, large companies adjusted to both market changes and reform movements. Many of the larger companies, including industry leaders Marion Merrell Dow and Hoescht, moved quickly to buy or create generics divisions in the early 1990s. Industry sources estimated that approximately 40 percent of the generics market was already controlled by the leading branded pharmaceutical companies in 1992. Meanwhile, most major OTC companies were also prescription producers, and the majority of switches from prescriptions to OTCs were easily handled within these companies. The major companies moved to purchase smaller competitors as Roche did with Genentech or started their own innovative biotechnology companies. Some of the large companies in the industry stood to benefit from a number of new and important breakthrough drugs coming out of the majors' drug research pipelines; an aging population with greater drug demand; and what Standard & Poor's Industry Surveys called the "recession-resistant nature of the business.

By the late 1990s, this $265 billion industry of high stakes and potentially huge profits was marked with frenzied buyouts and turf wars. Hoover's Industry Snapshots reported that in 1996 alone, 27 U.S. mergers were valued at $9.4 billion, and mergers between U.S. and international companies were valued at $1.9 billion. The tremendous time and money investment required to bring a drug to market created a constant pressure on drug companies to have new products nearly approval-ready at about the time patents for current moneymakers expired.

The 1999 battle over Warner-Lambert illustrated the extent of this pressure. The company had a five-year marketing agreement with Pfizer Inc. to market its top-selling cholesterol-reducing drug, Lipitor. After Warner-Lambert made a $67 billion merger agreement with American Home Products, Pfizer initiated an $82 billion hostile takeover bid for Warner-Lambert in an attempt to derail the merger. A provision of the Warner-Lambert/American Home Products agreement required a $2 billion payment if either walked away from the deal. Pfizer sued Warner-Lambert, contending it violated a standstill provision when it failed to inform Pfizer of merger talks with American Home Products. The following week Warner-Lambert initiated a lawsuit, claiming the takeover offer was illegal and the information Pfizer used to make the offer was confidential to the Lipitor agreement.

On another battleground, AstroZeneca, maker of Tamoxifen, the only proven breast-cancer prevention drug, sued the Eli Lilly and Co. for "off-label" promotion of the same claim for its osteoporosis drug Evista. In 1997 the FDA denied approval of Evista for cancer prevention but granted its approval for use against osteoporosis. The FDA issued warning letters to the Eli Lilly Co. for implying the drug's cancer-prevention properties in a 1998 $40 million ad campaign. Sales representatives for Evista strongly implied it was proven to prevent cancer and even misrepresented its labeling to doctors. In July 1999 a federal judge granted a preliminary injunction to stop the advancement of unapproved claims.

Mergers and acquisitions continued to drive growth in the industry, although the pace slowed significantly beginning in 1999, when the value of deals totaled $133 billion. The value of mergers and acquisitions declined to $109 billion in 2000, $61 billion in 2001, and then rose to $71 billion in 2002. Of the $71 billion spent in 2002, Pfizer's purchase of Pharmacia accounted for $60 billion. The merger marked the first major deal in the industry since GlaxoWellcome merged with SmithKline Beecham in 2000.

Direct-to-consumer advertising became big business for pharmaceutical companies. The FDA enacted changes in 1997 that allowed a flood of prescription drug advertisements on television and radio. Promotional spending by the largest 14 companies increased at a rate of more than 32 percent each year between 1998 and 2001. In 2000, Merck spent $161 million to advertise Vioxx. Companies also invested up to $16 billion annually to entice doctors to prescribe their products. Reflective of the industry's increasing focus to attract doctors, the number of pharmaceutical representatives tripled between 1995 and 2003, even though the number of doctors remained relatively constant.

According to Drug Topics, industry research indicated that an average of 56,702 prescriptions were filled in drugstores in 2003 with an average price of $58.84. That year, Pfizer's Lipitor, which reduces cholesterol levels, continued to be the best-selling prescription drug in the United States, with sales of $10.3 billion. Merck's cholesterol drug, Zocor, held second place with $6.1 billion in sales. Other bestselling drugs were Prevacid, Celebrex, Nexium, Advair Diskus, Neurontin, and Effexor.

The pharmaceutical industry traditionally has been led by blockbuster drugs, but by the mid-2000s companies were facing patent expirations and subsequent declining revenues from their superstar products. Patent protection for many drugs that generated billions in sales was due to end by 2010 if it had not already expired. At the same time, fewer new drugs are hitting the market. According to statistics from the Pharmaceutical Research and Manufacturers of America (PhRMA), in the early twenty-first century it took 10 to 15 years of research to bring new pharmaceuticals to the market. Total research and development (R&D) spending from PhRMA's member companies in 2006 was estimated at $43 billion, and industry-wide investment that year was estimated at $55.2 billion.

The rising costs of health care and the aging of the U.S. population affected this industry. To help with prescription costs, pharmaceutical companies offered assistance such as free or discounted medications to a growing number of consumers in need. In 2003, approximately 18 million of the 3.1 billion prescriptions filled were handled this way. These free and discounted prescriptions were worth a combined $3.4 billion wholesale. By 2004, more than 22 million free and discounted prescriptions had been filled, with a combined wholesale value of $4.2 billion.

Current Conditions

In 2008, total revenues for the pharmaceutical preparation industry in the United States reached $145.3 billion, according to Supplier Relations US LLC. The estimated gross profit rate was 67 percent. Figures from Pharmaceutical Research and Manufacturers of America (PhRMA) showed that 72 percent of sales were from generic drugs. Regarding the state of the industry in 2009, president and CEO of PhRMA Billy Tauzin said, "America's pharmaceutical research and biotechnology companies are not immune to the challenges presented by our current economic crisis. However, the important work that we do every day in the battle with disease cannot stop. ... we remain committed today to finding tomorrow's cures, despite the incredible challenges that are posed by the current economy." PhRMA reported that in 2009 approximately 2,900 medicines were in development in the United States: 750 for cancer, 312 for heart disease and stroke, 150 for diabetes, 109 for HIV/AIDS, and 91 for Alzheimer's disease and dementia.

Health care reform was a major issue in the industry in the late 2000s and was expected to impact pharmaceutical companies into the second decade of the twenty-first century. Monday Morning reported in October 2009 that "The overhaul of the U.S. healthcare system is expected to boost prescriptions, because more people who were uninsured will have access to treatment, especially preventive medicines such as pills that lower cholesterol and diabetes drugs." Worldwide, the pharmaceutical market was expected to grow 4 to 6 percent in 2010, reaching $825 billion, and continue to grow 4 to 7 percent annually through 2013, according to a report by IMS Health.

Industry Leaders

Hundreds of companies are involved in the pharmaceutical preparations industry, employing about 180,000 people, but the top five companies generally account for more than 30 percent of U.S. sales. Buyouts and competition among the major pharmaceutical companies continued to shift the rankings from year to year, but a handful of giants provided consistent leadership in both the ethical pharmaceutical and OTC segments of the field.

Merck & Co. Inc.
Merck & Co. Inc., a traditional industry leader in prescription drug research, had sales of $18.5 billion in 2008. Merck was the number one drug maker in the United States in the 2000s and was one of the world's largest prescription drug companies. In the late 1990s Merck retained three joint-venture partnerships, sold its interest back to the Dupont Pharmaceutical Co. in another venture, and restructured a venture with Astra AB of Sweden. In the mid-2000s, some of its major drugs were Zetia, Vytorin, Fosamax, Vioxx, Singulair, Hyzaar, Propecia, and Arcoxia. In 2006 the company's cervical cancer vaccine, Gardacil, was added to the Vaccines for Children (VFC) program of the U.S. Centers for Disease Control and Prevention (CDC). Sales of Gardacil reached $235 million in 2006.

Merck originated as a German apothecary shop, and the family name was associated with pharmaceutical manufacturing for more than 300 years in that country. In 1891 George Merck began U.S. operations. During World War I, Merck avoided confiscation by giving the majority of its stock to the U.S. government, which sold it after the war to start American Merck. In the 1930s and 1940s, Merck created a name for itself with breakthroughs in the discovery and synthesis of vitamins, including B12 in 1948. Outside the drug area, Merck's Manual of Diagnosis and Therapy was a medical standard. Merck scientists also led in the synthesis of steroids and funded research that resulted in the discovery of streptomycin in 1943. Five Merck scientists received Nobel Prizes in the 1940s and 1950s for these and other pharmaceutical breakthroughs.

Merck's drug pipeline fell to a trickle and company fortunes slumped in the 1960s. However, renewed commitment to research and development, started by the new chairman, John Horan (1976), and continued by his biochemist successor, Roy Vagelos (1985), yielded important new therapies. Two of these, Vasotec, an anti-hypertensive, and Mevacor, which lowered cholesterol levels, reached annual sales of $1 billion each. One of the few large companies to take advantage of biotechnology breakthroughs, Merck began marketing the first genetically engineered human vaccine for hepatitis B late in the decade.

Rather than join the merger-and-buyout trend of the late 1980s and early 1990s, Merck sought to complement its industrial leadership in ethical pharmaceuticals by moving into joint ventures with companies like the chemical industry leader DuPont and the OTC leader Johnson & Johnson. However, Merck did buy mail-order drug distributor Medco Containment Services for $6.6 billion in 1993. Along with new supplier agreements with Managed Care Organizations (MCOs), this demonstrated that even giants like Merck were girding themselves for the changes caused by health-care reform. In 1992 Merck established what became known as "the Rahway pledge," vowing not to increase prescription drug prices faster than the general inflation rate. The company had several reasons for optimism as it entered the new century. With older patented drugs maintaining profitability, 14 new drugs introduced in the four years prior, and a continuing commitment to research and development expenditures, Merck continued to enjoy a position of strength. In late 2009 the company finally jumped on the merger and acquisitions bandwagon, merging with Schering-Plough Corp. The new firm continued to operate under the Merck name.

Bristol-Myers Squibb
With 2008 revenues of $20.5 billion, Bristol-Myers Squibb Company was a diversified firm with interests in medical devices and household products as well as pharmaceutical preparations. Bristol-Myers Squibb also sold health and beauty aids under the Clairol and Matrix essentials brands. Some of its top pharmaceutical drugs were Baraclude, Cardiolite, Pravachol, Taxol, and Videx.

Bristol-Myers Squibb was formed by the 1989 acquisition of Squibb by Bristol-Myers for $12.7 billion. Named for founder Edward Squibb, the older of the two companies traced its roots to a New York City firm that specialized in such anesthetics as pure ether and chloroform. William Bristol and John Myers launched the firm in 1887 and initially named it for its hometown, Clinton, New Jersey. After the merger, the company shed many of its consumer products to concentrate on pharmaceuticals, especially anti-cancer and high-blood-pressure drugs. In the late 1980s, the company's Oncogen subsidiary began testing DDI, an AIDS treatment. When the drug won FDA approval in 1991, it was released under the brand name Videx. In 1996 the company formed an alliance with the drug delivery company Sano Corp. to offer Bristol-Myers Squibb's anti-anxiety drug BuSpar in a transdermal patch. The company was acquired by Alticor Inc. in 2009.

Johnson & Johnson.
One of the largest pharmaceutical firms in the world, Johnson & Johnson also was an industry leader in OTC sales in the 2000s. The company had 2008 sales of $63.7 billion. Johnson & Johnson also managed to bring Tylenol back to its position as the best-selling nonprescription drug in the country in the 1990s. Other familiar OTC products from Johnson & Johnson include the athlete's foot medication Micatin and the sinus medication Sine-Aid. The company expanded its product line through the more than 30 company acquisitions it made in the span of the 1990s.

Headquartered in New Brunswick, New Jersey, Johnson & Johnson started when founder Robert Wood Johnson decided to begin to produce and distribute the plaster wound dressings he observed during the Civil War. High-quality sterile dressings, including the world famous Band-Aid, made the familiar Johnson & Johnson Red Cross logo ubiquitous in hospitals and home medicine cabinets. The company also successfully promoted the placement of first-aid kits in homes, railroad cars, and businesses.

Beyond Band-Aids, Johnson & Johnson became best known for its familiar line of baby-care products. The purchase of McNeil labs in 1959 expanded Johnson & Johnson's product line into prescription drugs like sedatives, muscle relaxants, and eventually the analgesic Tylenol, which went to OTC status in the 1960s. Other successful prescription introductions for the company have included the acne treatment Retin-A and the Ortho-Novum group of oral contraceptives.

Pfizer had $48.2 billion in 2008 revenue. Pharmaceuticals accounted for more than 85 percent of sales for the company, which was best known for its erectile dysfunction treatment Viagra. Other major sellers were the blood pressure-control drug Norvasec, the antidepressant Zoloft, and the antibiotic Zithromax. Pfizer co-marketed the cholesterol-reducing Lipitor, which was central to the Warner-Lambert takeover bid spurred by a merger agreement between Warner-Lambert and American Home Products. In 2009 Pfizer purchased former rival Wyeth for $68 billion.

Abbott Laboratories.
Abbott Laboratories was another leader in the pharmaceutical industry, reporting sales of $29.5 billion in 2008. Abbott produced Similac infant formula; antibiotics; synthetic hormones; and Norvir, a treatment for children with HIV and AIDS. Abbott marketed products in more than 130 countries and employed 69,000 people. The company spent $2.3 billion in 2006 on research and development in areas such as immunoscience, anti-infectives, neuroscience, and aging and degenerative diseases. Dr. Wallace C. Abbott founded Abbott in 1888. His "dosimetric granules," which enabled precise measurement of drug dosages, revolutionized the industry.

America and the World

According to research from the Pharmaceutical Research and Manufacturers of America, nearly 33 percent of sales from its member companies were in countries other than the United States in the early 2000s. The value of these products reached nearly $71 billion. The importance of international relationships illustrated the traditionally global character of the pharmaceutical industry. Like European and Japanese counterparts, U.S. companies historically produced, manufactured, and marketed in each other's backyard. Rather than directly invest in full-scale overseas operations, many formed joint licensing agreements or joint ventures with home companies overseas to manufacture and market products in other countries. In the 1990s U.S. OTC leader Warner-Lambert started a joint venture with the British company Glaxo to develop and market an OTC version of Glaxo's blockbuster anti-ulcer drug, Zantac. Many U.S. pharmaceutical firms, including Warner-Lambert, however, continued to have overseas production and marketing networks under their own control. Giants such as Merck, American Home Products, and Eli Lilly operated worldwide, while many European firms maintained extensive U.S. operations.

According to a report by IMS Health, China's pharmaceutical market was expected to grow by 20 to 21 percent annually through 2013. The growth was attributed to health care reform in that country that aimed to bring more preventative care and more readily available medical treatment to its citizens. Murray Aitken of IMS Health told Monday Morning in October 2009, "Even though it's fairly minimal coverage from our perspective, when you multiply by several hundred million, it's a market opportunity."

Research and Technology

The Pharmaceutical Research Manufacturers Association estimated that its member companies invested a record $50.2 billion in the research and development of new drugs in 2008. Industry-wide, that figure was $65.2 billion. The drug industry's ratio of research-to-sales ranked as the highest of all major domestic industrial groups at 20.3 percent in 2008. Although the federal government and academic institutions pursue both basic and applied research that often directly affects drug development, approximately 90 percent of new drugs come from the drug industry. However, analysts emphasize the importance of researchers who are financed by the National Institutes of Health (NIH), along with academic researchers who often have NIH and drug company financing, to initiating path-breaking drug developments, revolutionary cell-receptor research, and initial chemical trials.

For patented prescription producers, the actual research and development of new drugs, especially after the adoption of the 1962 FDA regulatory guidelines, was always an intricate process, sometimes referred to as "playing chess with nature." Company researchers began by screening or developing any number of New Chemical Entities (NCEs) that showed promise in a therapeutic class, on a specific disease, or with a specific cell receptor. Once one of these showed therapeutic potential, the company proceeded to move the new compound through a series of preclinical trials with animals to determine its toxicity at various doses. After initial testing, the research company generally patented its new chemical and announced to the FDA its intention to begin human trials. The potential drug then moved through three distinct phases of human clinical trials, often taking seven years. The process was designed to expose possible adverse reactions, determine safe and effective dosages for humans, and test treatment. Once an NCE successfully survived these trials, the company submitted a completed New Drug Application (NDA) to the FDA seeking final market approval for the new therapy. Notably, 19 of 20 NDAs did not survive the trials because of ineffectiveness or toxicity. Even after market approval, a fourth phase could result in a recall or new label warnings if the drug showed adverse reactions in the larger population.

By its own regulations, the FDA was supposed to complete an NDA review within six months. However, by the 1990s, review time in the understaffed agency had risen to more than two years. Thus, by the time a company's new drug reached the market, almost 10 of its 17 years of patent exclusivity had disappeared, a point drug companies used to justify high prices. To address this problem, and to raise more revenue to add review staff to the FDA, Congress passed the Prescription Drug User Fee Act in 1992. This legislation generated more than $325 million in five years and helped speed average NDAs by 10 months. The user fee program was refined under the Food and Drug Modernization Act of 1997, allowing the FDA to hire more reviewers to speed up approvals. In 1998 30 drugs received approval in an average of 11.7 months, compared with a 30-month average per drug before user fees. The law also required the FDA to attempt to review "priority" drugs within six months and to facilitate patent access to experimental drugs.

Drug delivery systems and biotechnology were two particularly active areas of research and development. Seeking ways to improve the therapeutic and economic performance of products, pharmaceutical companies began to expand beyond traditional delivery systems to inhalation, transmucosal, transdermal, and implantation methods. Examples include timed-release capsules, implantable pumps, computerized inhalers, and "lollipop" sedatives.

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