SIC 2834
PHARMACEUTICAL PREPARATIONS



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, namely pharmaceutical preparations, promoted primarily to the dental, medical, or veterinary profession; and pharmaceutical preparations promoted primarily to the public.

NAICS Code(s)

325412 (Pharmaceutical Preparation Manufacturing)

Industry Snapshot

Since World War II, which established the American drug industry 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 labs created enormous demand for pharmaceuticals, while patent protection and sophisticated marketing structures maintained sales and profits. The high cost of drug development and marketing, though, tended to concentrate industry earnings in several large firms. Even with strict regulatory oversight and periodic crises, like the Thalidomide scare of 1962, the American pharmaceutical industry, or at least its major players, managed to remain both profitable and beneficial to world health, while avoiding the price controls commonplace in other industrialized nations.

The trend toward corporate mergers gained momentum at the end of the century, allowing companies to shift from depending heavily on one or two drugs for the bulk of their sales. The major pharmaceutical companies also had the capital to fuel corporate alliances with biotechnology companies offering platform technologies with potential to produce new drugs. By the year 2000, 20 percent of research and development dollars was spent on such research collaborations, according to reports by Advancetech Monitor.

Prescription drug sales rose 11.8 percent in 2002, to $192.2 billion, up from $172.0 billion the previous year. The industry has shown consistent and substantial growth over the previous five years, and is expected to continue to grow. Despite the economic downturn of the early 2000s, the pharmaceutical industry has remained robust. The aging population of the United States bodes well for the industry as prescription drug purchases are expected to increase significantly in the coming years. However, major drug companies are facing challenges associated with loss of patent rights. Numerous high profile patents will expire before 2010, leaving room for generic brands to grab a larger segment of the market.

Organization and Structure

Pharmaceutical production and employment was concentrated in the northeast states of 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 and 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—they combine 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). More novel 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—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 had 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.

Division and segmentation also characterized the industry. Some of this was the result of federal regulation, while 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 (such as 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) enjoy 17-year protection 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 included 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 were generics, markedly cheaper chemical and therapeutic equivalents of patented prescription drugs that go into production once brand name therapies have come "off-patent." Generics' share of the prescription drug market was expected to increase from 22 percent in 1985 to more than 66 percent by the turn of the century.

In addition to drugs for human consumption, pharmaceutical companies produce drugs for the veterinary market. Accounting for a relatively small percentage of overall industry sales—nearly $1.6 billion in 1995, according to the U.S. Census Bureau's Current Industrial Reports —many drug industry leaders either maintained specific animal health divisions or were involved in the animal health care industry.

Beginning in the early 1980s, a new force entered the pharmaceutical arena—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. Knowledge of a specific protein's function in the body—to stimulate infection-fighting cells or block a destructive internal process, for example—allowed physicians to induce desired reactions in patients by injecting biotechnology-produced cloned proteins, or "Magic bullets," into the body. Though 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 our most stubborn diseases, biotechnology companies were the target of buyouts, mergers, and joint ventures in the 1980s and 1990s. In one such move, industry giant Roche purchased controlling interest in biotechnology pioneer Genentech in 1990.

Background and Development

Prior to the late nineteenth century, the American pharmaceutical industry barely resembled its current structure. Simple chemical compounds such as iodine chlorate, along with plant extracts such as quinine, constituted the prime ingredients of available remedies. However, these drugs lacked specific scientific formulas. Thus a doctor's order for a medication might not yield the product intended. To offset this problem, doctors often dispensed medicines in addition to prescribing them. But 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 obligingly offer his own remedy for purchase. Some traditional treatments, like digitalis, remain part of the pharmacological arsenal.

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 (those with 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 an American dentist, Horace Wells, stimulated demand for more fine chemical capacity. During the Civil War, American firms like Squibb were able to establish themselves profitably by providing advanced machinery and 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—often only colored water, alcohol, and opiates—were generally ineffectual and occasionally dangerous. The reliability of the new ethical suppliers, on the other hand, induced doctors to begin requesting 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 mankind, demand for these reliable drugs and vaccines soon increased. The germ theory of disease, based upon the research of bacteriologists like Pasteur, revolutionized medicine and drug therapy in the 20 years immediately before and after World War I. Laboratory isolation of disease organisms meant that physicians could diagnose patients by tracing illnesses to specific infectious organisms, while 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 up 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. And, unlike American firms, they had no compunction about creating exclusive markets for therapeutic inventions by patenting drugs in the United States and Germany. Novel treatments, such as the popular anti-syphilitic arsenical drug, Salvarsan, discovered by Ehrlich and produced by chemical giant Hoechst, illustrated the potentially large new markets for "scientific" pharmaceuticals. When, during the war, most German companies had American patent rights suspended, American pharmaceutical firms began manufacturing patented drugs invented in Germany (like Salvarsan and Bayer aspirin) and reaping 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 area capabilities to create new drug products for the expanding market. Major companies like Squibb, Merck, Abbott, and Upjohn all had research staffs of about 20 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. The 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. Both the sulfa drugs and antibiotics became cornerstones of the American pharmaceutical industry from the 1930s to the 1950s.

Patent protection for the sulfas expired in the 1930s, and American companies, including Merck and American Cyanimid, began domestic manufacture of the anti-infectives. Meanwhile a grant by the Rockefeller family brought penicillin to America, where, in a Peoria, Illinois, lab in 1941 scientists discovered how to mass-produce penicillin mold by deep fermentation (as opposed to the slower surface culture). 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 American manufacturing capacity for drugs 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 on the part of pharmaceutical companies and the awareness of the potential market for antibiotics, and it led to American domination of world markets after the war. Those factors resulted in the establishment of American pharmaceutical firms as research, manufacturing, and marketing powerhouses.

The first important federal law governing drug production came in 1902 with a law requiring 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 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, an American sulfanilimide producer, the Massengill Company of Tennessee, marketed a sore throat remedy that dissolved the sulfa drug in diethylene glycol, now the main ingredient in radiator antifreeze. 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 this 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. Experience showed, however, 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, to be dispensed only by a licensed pharmacist under 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 America's sustained postwar economic dominance 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 them samples of dirt from all corners of the world on the chance that some might contain new molds from which to extract antibiotics. In fact, a Pfizer employee did find a profitable new treatment, terramycin, in a sample of dirt outside a company plant in Indiana. This and other "broad-spectrum" antibiotics, 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. Trained to think only of treatment regimens, doctors, often unaware of drug prices, prescribed medication where cheaper and equally efficacious therapeutic alternatives existed. Even if pharmacists wanted to substitute a cheaper 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 between drug companies, pharmacists, and doctors, therefore, tended to perpetuate itself.

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 an American 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 mother. Despite the fact the drug was never sold in the United States, its inadequate premarket testing in Europe and near-entry into the American 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 "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 both 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 would have to be fully reported, and human clinical subjects had to be informed of the dangers of involvement in trials before giving consent. Additionally, the act required that drugs must follow specific production guidelines, called Good Manufacturing Practices (GMP). Manufacturing plants became subject to both registration and inspection procedures. Finally, advertising for prescription drugs was placed under FDA supervision, while OTC drug advertising continued under FTC oversight. The price controls for pharmaceuticals included in Senator Kefauver's original legislative proposal were dropped along the way.

The immediate effect of the Kefauver-Harris amendments was to drastically lower the rate at which pharmaceutical manufacturers introduced new drugs to the market. 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 whole 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 baldness treatment Rogaine created new markets for cosmetic drugs. Even standbys like aspirin enjoyed increased sales as a result of studies that 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 had sustained high profit and growth in the American prescription pharmaceutical industry since World War II. The system produced important new therapies that prolonged lives, banished ancient diseases, and made the aches and pains of modern existence easier to bear for those who could afford to purchase these new medications. But the highly structured corporate research, manufacturing, and marketing systems of industry leaders also required that wonderful new medications carry, what seemed to many, improperly inflated price tags. Some analysts felt that price was determining costs rather than the other way around. This trend continued into the 1980s. Thus, some industry critics claimed that the big brand pharmaceutical companies were charging unjustifiably high prices for drugs while spending more money on advertising, brand support, and lobbying efforts than they did for research and development. The prices of drugs were less related to cost inputs, therefore, than to companies' needs to maintain corporate structures. 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 America were reported to have price differentials exceeding 50 percent. Meanwhile, continued reports of industry profits added fuel to reform fires. According to industry analyst Robert Helms, quoted in a 1992 Drug Topics, "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 and 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 Clinton's 1993 health care reform proposals. Downward pressures on drug prices also resulted from the advent of private managed care organizations such as health maintenance organizations (HMOs) in the 1980s and 1990s. Standard and Poor's estimated that HMO enrollment alone may top 50 percent of the population by the year 2000. 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. Both of these movements created what one industry analyst, Paul Hanson, in an April 1994 Chemical Week article called a "strategic shift in power in pharmaceuticals from suppliers to consumers."

The price-and consumer-oriented generics and over-the-counter (OTC) segments, in fact, were poised to benefit from the health care reform movement. At least since the passage of the Drug Price Competition and Patent Term Restoration Act of 1984 (commonly called the Waxman-Hatch Act), the federal government attempted to increase industry competition and help supply cheaper 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 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 the 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. The OTC segment was expected to grow by more than 45 percent from $9.6 billion in 1995 to $14.0 billion by the year 2000.

U.S. drugmakers also faced the threat of increased regulation—including price controls—in the early 1990s. While it was defeated in 1994, the Clinton administration's health care proposal did have 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 bigger companies, including industry leaders Marion Merrell Dow and Hoescht, moved swiftly 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 prescriptions to OTC switches could easily be carried out within these companies. As Roche did with Genentech, the majors also moved to purchase smaller competitors or start their own innovative biotechnology companies. Along with 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 and Poor's Industry Surveys called the "recession-resistant nature of the business" boded well for at least some of the industry's large companies.

By the late 1990s, this $265 billion industry of high stakes and potentially huge profits was marked with frenzied buy-outs 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 money-makers 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 topselling 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 the only proven breast-cancer prevention drug tamoxifen, 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.

Current Conditions

In 2002 Pfizer's Lipitor, a cholesterol reducer, once again held the top spot as the best-selling prescription drug in the United States. Lipitor led sales with $6.1 billion, an 18.6 percent increase from the previous year. Merck's cholesterol reducer, Zocor, held second place with $4.2 billion in sales. The pharmaceutical industry has been led by these kinds of blockbuster drugs; however, companies are facing patent expirations and subsequent declining revenues from their superstar products. Drugs that generated an estimated $35 billion in sales during 2002 have lost or will lose patent protection by 2007. At the same time, fewer new drugs are hitting the market. An estimated 47 new prescription drugs hit the market in 2002—one third the number that were introduced in 1997.

Direct-to-consumer advertising has become 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 over 32 percent each year between 1998 and 2001. In 2000 alone, Merck spent $161 million to advertise its drug Vioxx. Companies have also invested heavily on wooing doctors, with annual spending estimates as high as $16 billion. Reflective of the industry's increasing focus on snuggling up to doctors, the number of pharmaceutical representatives tripled between 1995 and 2003, even though the number of doctors remained relatively constant.

Mergers and acquisitions continue to drive growth in the industry, although the pace has slowed significantly since 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 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 Glaxo Wellcome merged with SmithKline Beecham in 2000. Pharmacia's incorporation into Pfizer, planned to be complete by 2004, will make the Pfizer the largest pharmaceutical company in the world.

Industry Leaders

Hundreds of companies are involved in the pharmaceutical preparations industry, but the top five companies generally account for more than 30 percent of American 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 and Co., Inc., a traditional industry leader in prescription drug research, had sales of $51.8 billion in 2002, a tremendous increase from its $8.6 billion in 1991. Merck was the number-one drug maker in the United States and was one of the world's largest prescription drug companies. The company introduced five new drugs in 1998. That year the company also retained three joint-venture partnerships, sold its interest back to the Dupont Pharmaceutical Co. in another venture, and re-structured a venture with Astra AB of Sweden.

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 American operations. In 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 by making breakthroughs in the discovery and synthesis of vitamins, including B12 in 1948. Outside the drug area, Merck's Manual of Diagnosis and Therapy became 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. But renewed commitment to research and development, started by 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 chemical industry leader DuPont and OTC leader Johnson & Johnson. However, Merck did buy mail-order drug distributor Medco Containment Services for $6.6 billion in 1993. This, and new supplier agreements with Managed Care Organizations (MCOs), showed that even giants like Merck were girding themselves for the changes wrought by health care reform. In 1992 Merck established what would become 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.

With 2002 revenues of $18.1 billion, Bristol-Myers Squibb Company is a diversified firm with interests in medical devices and household products as well as pharmaceutical preparations, which comprised some 70 percent of company sales. The company's top ethical drugs in the early 1990s were Capoten, a hypertension treatment, and Pravachol, a cholesterol-lowering drug. Bristol-Myers Squibb also sells health and beauty aids under the Clairol and Matrix essentials brands.

Bristol-Myers Squibb was formed via 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 drug delivery company Sano Corp. to offer Bristol-Myers Squibb's anti-anxiety drug BuSpar in a transdermal patch. The company's top products in 1998 were the cholesterol-reducer Pravacol, with $1.6 billion in sales; the chemotherapy drug Taxol, with sales of $1.2 billion; and type II diabetes treatment Glucophage, with sales of $861 million.

One of the largest pharmaceutical firms in the world, Johnson & Johnson, also was an industry leader in OTC sales in the late 1990s. The company had 2002 sales of $36.3 billion. Prescription to OTC switches for its popular yeast infection treatment Monistat 7 and its anti-diarrheal Immodium promised to improve its OTC position even further. 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 got its start when founder Robert Wood Johnson decided to begin the production and distribution of 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 bathroom 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 $32.4 billion in 2002 sales and more than 98,000 employees. Pharmaceuticals accounted for more than 85 percent of sales for the company, which was best known for its impotence treatment Viagra. Other major sellers were the blood pressure-control drug Norvasec, antidepressant Zoloft, and the antibiotic Zithromax. Pfizer co-marketed cholesterol-reducing Lipitor—the drug central to the Warner-Lambert takeover bid spurred by a merger agreement between Warner-Lambert and American Home Products.

Abbott Laboratories was another leader in the pharmaceutical industry in 1998, with sales revenues of $12.5 billion. 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 more than 56,000 people in 1998. The company spent more than $1 billion in 1999 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.

Workforce

Work in the preparations segment of the pharmaceutical industry is concentrated in the largest companies. Merck and Squibb have been described as fulfilling places to work because of their aggressive research departments. Merck did, however, endure a 15-week strike by its unionized workers in 1985. Johnson & Johnson has also enjoyed a solid reputation as an employer, offering progressive child care and maternity leave policies. The industry employed 167,245 people in 2001, up from 114,119 in 1997.

America and the World

Industry analysts estimated in 1999 that American pharmaceutical firms accounted for more than 30 percent of the $265 billion pharmaceuticals market, while the domestic market consumed approximately 65 percent of this output.

The formal economic integration of European Union countries did not immediately fulfill industry expectations. Before unification, American companies selling or producing in Europe navigated a minefield of conflicting national price controls (most European countries have national health care systems that control costs), quality standards, and approval requirements for each new drug introduction, while also worrying about adequate patent protection.

Nevertheless, progress was made toward the creation of a free market in Japan, the country with the highest per capita consumption of pharmaceuticals in the world with more than 20 percent of the global market. In 1998 the Pharmaceutical Research and Manufacturers of America collaborated with Members of Congress and U.S. government officials to promote a market-based health-care system, helping to produce the Summit Report on the Enhanced Initiative on Deregulation. In the report, the Japanese Government recognized the freemarket system as a valuable tool for bringing new medicines to the Japanese market.

The importance of international relationships illustrated the traditionally global character of the pharmaceutical industry. Like European and Japanese counterparts, American companies historically produced, manufactured, and marketed in each other's backyard. Rather than directly investing 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 American OTC leader Warner-Lambert started a joint venture with British Glaxo to develop and market an OTC version of Glaxo's block-buster anti-ulcer drug Zantac. Many American 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.

Research and Technology

Though 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 that the importance of researchers financed by the National Institutes of Health (NIH) in initiating path-breaking drug developments and the role of academic researchers (often with both NIH and drug company financing) in revolutionary cell-receptor research as well as initial chemical trials cannot be denied.

The Pharmaceutical Research Manufacturers Association estimated in 1999 that its member companies invested $24 billion annually—20 percent of domestic sales—in the research and development of new drugs. The drug industry's ratio of research-to-sales ranks as the highest of all major domestic industrial groups.

For patented prescription producers, the actual research and development of new drugs, especially after the adoption of the 1962 FDA regulatory guidelines, had always been 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, and 19 of 20 did not because of ineffectiveness or toxicity, the company submitted a completed New Drug Application (NDA) to the FDA seeking final market approval for the new therapy. 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. By the 1990s though, review time in the understaffed agency had risen to over two years. Thus, by the time a company's new drug reached 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 in order 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 aim to review "priority" drugs within 6 months and to facilitate patent access to experimental drugs.

Drug delivery systems and biotechnology were two particularly active areas of research and development in the late 1990s. 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.

Further Reading

"About Abbott." Abbott Laboratories Company Web Site, 1999. Available from http://www.abbott.com .

"About Pharmacia & Upjohn." Pharmacia and Upjohn Company Web Site, 1999. Available from http://www.pharmacia.se .

Alger, Alexandra. "Giding the Lilly." Forbes, 1 November 1999.

"Analysts: Prospects are Improving for Pharmaceutical Industry." Chain Drug Review, 28 April 2003, RX2-3.

Barrett, Amy. "Can Big Pharma Cure Its Legal Migraines?" Business Week, 22 July 2002, 76.

"Biotechs and Drug Makers Provide Economic Remedy." Business North Carolina, February 2003, 52-53.

Bristol-Meyers Squibb Company Web Site, 1999. Available from http://www.bms.com .

Engler, Yves. "The Pharmaceutical Drive to Drug." The Humanist, May-June 2003, 39-40.

"Fewer New Drugs Hit the Market in 2002." Health & Medicine Week, 7 April 2003, 36.

Galewitz, Phil. "Warner-Lambert Sues to Cut Pfizer Out of Deal." The Ann Arbor News, 30 November 1999.

"Generic Firms on Offensive." Chain Drug Review, 17 March 2003, RX16.

Hoover's Company Profiles. Hoover's, Inc., 2003. Available from http://www.hoovers.com .

Knox, Noelle. "Warner Asks Pfizer to Drop Bid." The Ann Arbor News, 10 November 1999.

McKinley, Ed. "Growth and Consolidation for Fine Chemicals." Chemical Processing On the Web, July 1999. Available from http://www.chemicalprocessing.com .

"Pfizer Initiates $82.4 Billion Offer with Warner-Lambert." PR Newswire, 4 November 1999.

PhRMA Annual Report 1999. Washington: Pharmaceutical Research and Manufacturers Association, 1999.

"A Prescription for Reputation—A Corporate PR Focus is Helping Remedy Pharma's Image Woes." PR Week, 18 November 2002, 19.

"Recently Published Reports Reveal Industry Insights into Successful Strategies for Pharmaceutical and Biotechnology Research Alliances." Business Wire, 19 October 1999.

"Rx Sales Grow 11.8 Percent in '02." Chain Drug Review, 17 March 2003, RX1-2.

Simons, John. "King of the Pill." Fortune, 14 April 2003, 94+.

Sivy, Michael. "The Other Cash: Big Drug Stocks have been Hammered. But Are They Bargains?" Money, 1 July 2002, 57+.

Storck, William J., and Ann M. Thayer. "Stocks Fall in First Quarter." Chemical & Engineering News, 14 April 2003, 18-19.

Sweeney, Stephen E. "Integrating E-Marketing into the Pharmaceutical Space." Medical Marketing & Media, October 2002, S5-7.

Van Arnum, Patricia. "The Search for APIs Drive Pharmaceutical Mergers and Acquisitions." Chemical Market Reporter, 17 March 2003, FR2-6.



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