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Pharmaceutical Industry
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The pharmaceutical or drug industry historically has been one of the most
innovative and profitable business sectors in the United States. Recent
developments, however, portend major changes in the nation's
pharmaceutical industry. Growing regulatory oversight, rising consumer
distrust over advertising claims, drug safety concerns, increased cost-
containment initiatives by government and private third-party payers,
mandated health technology assessments to determine coverage and
reimbursement policies, patent expirations of top-selling products, and the
implementation of the Medicare Part D drug benefit have influenced changes
in the industry's practices and strategies.
This entry describes the global sales and market share of the pharmaceutical
industry, the different classifications within the industry, and the future
outlook for the industry in light of the recent developments.

Global Pharmaceutical Sales

Global pharmaceutical sales grew by 7% in 2006, totaling more than $643
billion (all data reported in U.S. dollars) in sales, according to industry
estimates by IMS Health. This marked the third straight year of single-digit
revenue growth for the pharmaceutical industry, after 5 years of doubledigit
increases from 1999 to 2003. The worldwide pharmaceutical market is
dominated by the United States, with 44% of the world's market share,
followed by Europe, with 28%, Japan, 10%, Asia Pacific, 7%, Latin America,
5%, the Middle East and Africa, 3%, and Canada, 3%. The largest European
markets are France, Germany, Italy, the United Kingdom, and Spain. The Asia
Pacificregion includes fast-growing pharmaceutical companies, located in
India and China, which mainly
produce generic versions of drug products. Brazil is the largest market in
Latin America.
Classification of the Pharmaceutical Industry
The pharmaceutical industry, or pharma, includes three primary sectors: (1)
the traditional researchintensive pharmaceutical industry, (2) the research-
intensive biopharmaceutical industry, and (3) the
generic pharmaceutical industry. These sectors, however, are increasingly
becoming blurred
because of strategic company acquisitions, mergers, licensing agreements,
and other business
practices. For example, most traditional research-intensive pharmaceutical
companies manufacture
or license generic versions of their original products. The traditional
research-intensive industry is
attempting to gain market share and position in the biopharmaceutical
industry. And the generic
pharmaceutical industry is lobbying for legislation to facilitate the approval of
biogenerics (i.e.,
similar versions of biotech pharmaceutical products).
Traditional Pharmaceutical Industry
The traditional research-intensive pharmaceutical industry is also known as
the “brand-name” or
“innovator” pharmaceutical industry. The largest companies in this sector are
often referred to as
“Big Pharma.” They are represented by the trade association, Pharmaceutical
Research and
Manufactures of America (PhRMA). This sector focuses on the discovery,
development, and
production of new chemical entities and new biologic entities. These
multibillion dollar
corporations, however, are not limited solely to drug products or vaccine
sales. Many of these
corporations include other healthcare-related products, such as nutrition
products, dietary
supplements, diagnostics, medical devices, and other consumer products.
Relative rankings of the world's top pharmaceutical companies change yearly
due to sales, patent
expirations, mergers, acquisitions, and other practices. Based on 2007
rankings (compiled from
Fortune 500 lists), 12 pharmaceutical corporations accounted for 60% of the
total global
pharmaceutical sales. The leading companies-based on sales, headquarters
country, revenue, and
profit
billion,(as a percentage
20.7%; (2) of revenues)-were (1) Johnson & Johnson (U.S.), $53.3

Pfizer (U.S.), $52.4 billion, 36.9%; (3) GlaxoSmithKline (U.K.), $42.7 billion,
23.2%; (4) Novartis
(Switzerland), $37 billion, 19.4%; (5) Sanofi-Aventis (France), $37 billion,
13.6%; (6) Roche Group
(Switzerland), $34.7 billion, 18.1%; (7) AstraZeneca (U.K.), $26.5 billion,
22.8%; (8) Merck & Co. (U.S.),
$22.6 billion, 19.6%; (9) Abbott Laboratories (U.S.), $22.5 billion, 7.6%; (10)
Wyeth (U.S.), $20.4
billion, 20.6%; (11) Bristol-Myers Squibb (U.S.), $17.9 billion, 8.8%; and (12)
Eli Lilly (U.S.), $15.7
billion, 17%.
Seven of the top pharmaceutical companies are American-based, and the
five other top companies
are headquartered in Europe. Depending on the year, other leading research-
based pharmaceutical
companies include Bayer (Germany), Bochringer Ingelheim (Germany),
Schering-Plough (U.S.),
Baxter International (U.S.), Takeda Pharmaceuticals (Japan), Procter &
Gamble (U.S.), Astella Pharma
(Japan), and others.
The median profit margin for the leading pharmaceutical companies was
19.5%, which is well above
the median of 4% to 5% for most other industries. Median profit margins for
the pharmaceutical
industry have been about 17% to 18% since 2002 (with a slight dip to 14% in
2003). Industry profits
increased in the United States due in part to the passage of the Medicare
Part D prescription drug
benefit, which the industry helped pass.
The pharmaceutical industry asserts that its profits are in line with those of
other major industries in
consideration of its need for a reasonable return on its investment and
adequate revenue to
encourage risk and innovation in the business of drug discovery. Critics
counter that it is difficult to
consider such a routinely profitable industry as being risky.
The research-based pharmaceutical industry strongly supports innovative
drug research, swift
development and approval of drug products demonstrated to be safe and
effective, strong
intellectual property and patent protection, and access to medicines in an
open, competitive
market. It also supports federal legislation that would limit liability (e.g.,
limits on punitive damages
and on damage awards) for drug manufacturers. On the other hand, it
opposes restrictive drug
formularies, prior authorization policies for prescription drug coverage, limits
on prescription
reimbursement, price controls, and retail-level prescription drug importation
from foreign sources.
The U.S. Food and Drug Administration (FDA) is the federal agency that
reviews drug products for
approval in America, while patents on drug products (and related chemical
compounds, processes,
and other intellectual property) are granted by the U.S. Patent and
Trademark Office. Patents can be
granted anywhere along the development lifeline of a drug compound or
product. Patents are
granted for a period of 20 years from the date of filing, before patent term
restoration activities and
court challenges. The PhRMA states that due to lost patent time during the
protracted drug
approval process (estimated at 11 to 12 years by the FDA and up to 15 years
by the pharmaceutical
industry), the effective patent life of prescription drugs in the United States is
only about 11 or 12
years, as compared with more than 18 years for nondrug products. The FDA
can grant exclusive
marketing rights, or exclusivity, for certain time periods (ranging from 6
months to 7 years) to help
promote a balance between innovation in new chemical entities and generic
competition.
Biopharmaceutical Industry
The research-based biopharmaceutical industry is the newest sector and is
also referred to as the
“pharmaceutical biotechnology industry,” or “bio-pharma.” Its products are
usually termed biotech
pharmaceuticals or biological medicines. Biotech pharmaceuticals are
medicines derived from
living cells and proteins, the so-called large molecules. In comparison, the
traditional researchbased pharmaceutical industry discovers and produces
drug products based primarily on smallmolecule chemical substances.
Examples of biopharmaceuticals include monoclonal antibodies,
protein cell cultures, protein microbials, and bioengineered hormones.
Biopharmaceuticals are used
to treat a variety of medical conditions, though most current products are
marketed as specialty
medications indicated for cancers, anemia, heart disease, rheumatoid
arthritis, and less prevalent
diseases such as ankylosing spondylitis and Crohn's disease. A large
percentage of research and
development expenses (25-50% of revenue) is invested by the biopharma
industry as compared
with the traditional research-intensive pharmaceutical industry (which
averages about 18% of
revenue).
The U.S. market for biotech pharmaceuticals was $35 billion in 2006, a 17%
increase in growth from
2005, which was about two times the rate of the traditional research-
intensive pharmaceutical
industry. Biotech pharmaceuticals accounted for 12% of total prescription
sales, though the high
costs for some of these products can make them prohibitively expensive. For
example, treatment
with Genentech's Avastin (bevacizumab)-indicated for certain types of lung
cancer, advanced breast
cancer, or metastatic colorectal cancer-can cost $100,000 per patient per
year.
The top 10 biopharmaceutical companies, based on reported 2006 revenues,
were (1) Amgen ($14.3
billion), (2) Genentech ($7.6 billion), (3) Novo Nordisk ($6.5 billion), (4)
Genzyme ($3.2 billion), (5)
Gilead Sciences ($3 billion), (6) UCB Group ($2.7 billion), (7) Biogen Idec
($2.7 billion), (8) Serono
($2.5 billion), (9) MedImmune ($1.2 billion), and (10) Millennium ($220
million). Eight of these
companies are based in the United States. The exceptions are Novo Nordisk
(Denmark) and UCB
Group (Belgium).
Financial positions, relative rankings, and ownership can change quickly,
especially in the more
volatile biopharmaceutical sector. For example, Amgen's profits of almost $3
billion dropped by
19.7% from the levels achieved in 2005. Gilead Sciences and Genzyme also
experienced substantial
profit decreases during a 1-year period. The eighth-ranked biopharmaceutical
company-Seronowas acquired by Merck KGaA in 2006 and is now Merck
Serono (known as EMD Serono, Inc., in the
United States and Canada because Germany-based Merck KGaA is a different
company from the
U.S.-based Merck & Co., which has the rights to the name in North America).
Similarly, AstraZeneca
purchased MedImmune in 2007.
The biopharmaceutical industry has a similar product approval process to
that of other
pharmaceutical products. However, the approval time for a
biopharmaceutical ranges between 7
and 12 years from development to approval. The development and
manufacture of biologic
medicines is more complex and expensive than production of small-molecule
chemical entities,
which is one of the reasons for their high costs. Because biologics are
produced in living cells, it
would be very difficult for other manufacturers to duplicate the process
exactly in attempts to make
generic versions of biopharmaceuticals. Thus, biosimilars may be
therapeutically equivalent, rather
than chemically equivalent with original products. The FDA is in the early
stages of creating
regulatory procedures for the review and approval of biogenerics or bio-
similars, which are
“generic” (or, more aptly named “similar”) versions of the innovator biotech
pharmaceuticals.
However, it is likely to be years before that process is completed.
The major biotechnology trade association is the Biotechnology Industry
Organization (BIO), and its
multidisciplinary membership includes more than 1,100 biotech companies,
universities, research
organizations, and affiliates. In addition to biotech pharmaceutical firms, an
increasing number of
PhRMA companies are branching into pharmaceutical biotechnology because
of the rapid growth
of the industry and the lack of current processes to enable generic
competition. From 2005 to 2007,
Big Pharma companies spent $76 billion to acquire biotech companies. For
example, Novartis,
Wyeth, Abbot, and Eli Lilly have invested hundreds of millions of dollars each
in the formation of inhouse units for the development and manufacture of
biotech pharmaceuticals and the building of
new manufacturing facilities. Other Big Pharma companies have acquired
smaller biotech firms to
expand their pipelines.
The biopharmaceutical industry generally espouses similar position
statements as the traditional
research-intensive pharmaceutical companies with respect to support of
market-based pricing for
medicines, support of tax incentives to encourage investment in biotech-
derived medicines,
opposition to price controls for biotech drugs, and opposition to restrictive
reimbursement
programs. Similar to Big Pharma, the biotech pharmaceutical industry is
using late life-cycle
strategies to expand its product line and to extend the market life of its
products, such as the
second-generation anemia drug, EPO Aranesp (darbepoetin alfa), which is
manufactured by Amgen.
One area where the position of the biopharmaceutical industry differs from
those of the traditional
research-intensive pharmacy companies is with respect to policies on
separate reimbursement
mechanisms for drugs and biologicals.
Generic Pharmaceutical Industry
A generic drug product is defined as a product that is bioequivalent to a
referenced innovator
(brand name) drug product and is identical in active chemical ingredient,
strength, dosage form,
route of administration, quality, performance characteristics, safety, and
treatment indication.
Multisource generics are available for about three-quarters of drug products
approved by the FDA.
The generic pharmaceutical industry experienced a 22% growth in sales from
2005 to 2006.
Nationally, 63% of prescriptions dispensed in the United States in 2006 were
generic products,
though generics accounted for only 20% of prescription drug sales. Over the
past 20 years, the
sustained growth in use of generic drug products has been promoted as a
cost-saving measure by
managed-care organizations, private health insurance companies, state
Medicaid and other
government programs, pharmacy benefit management companies, and
others.
The pharmaceutical industry differentiates between unbranded generics and
branded generics.
Following approval of an abbreviated new drug application (ANDA) by the
FDA, unbranded
generics are manufactured by pharmaceutical companies unaffiliated (for
that product) with the
innovator company. The ANDA (and equivalent) process does not require the
applicant firm to
repeat the expensive preclinical and clinical research for the drug ingredients
and dosage forms that
were approved by the FDA for the application of the innovator company.
Rather, the generic
product must demonstrate bioequivalence. The median ANDA approval time
in 2006 was 16.6
months. Branded generics (called “authorized generics” by the industry) are
generic versions of the
innovator product that are manufactured by the innovator pharmaceutical
industry sponsor and/or
otherwise produced and distributed by one of its licensed partners. Branded
generics are not
required to undergo an abbreviated FDA approval process because the
innovator company is
selling the same product previously approved under a brand name. In 2006,
the top pharmaceutical
companies for unbranded generic drug products (accounting for 54% of
prescription dispensed and
10% of U.S. sales) were Teva Pharmaceuticals, Novartis (Sandoz division),
Mylan Laboratories,
Watson Pharmaceuticals, Pfizer (Greenstone division), Apotex Corporation,
Par Pharmaceuticals,
Mallinckrodt, Barr Labs, Boehringer Ingelheim, Actavis US, Qualitest Products,
and Hospira, Inc.
The main generic pharmaceutical industry trade association is the Generic
Pharmaceutical
Association (GPhA). The association states that the generic manufacturers
provide consumers with
safe, effective, quality drug products at lower costs. Generic drugs are
estimated to save U.S.
customers $8 to $10 billion yearly at the retail level, with more savings
realized when including
other pharmacy distribution outlets such as hospitals and nursing homes.
The generic
pharmaceutical industry supports efforts to promote free market forces and
supports the
development of an abbreviated regulatory approval process for biogenerics
or biosimilars. The
generic pharmaceutical industry wants faster FDA review times for ANDAs. It
is strongly opposed to
brand-name (research-intensive) drug industry efforts to extend patents and
other tactics to delay
market introduction of generic drug products, such as patent extensions for
minor changes in
formulations or processes and unsubstantiated citizen petitions to block FDA
approval of generic
applications. The unbranded generic industry has challenged the FDA's
regulatory policies in
approving authorized generics. The generic pharmaceutical industry claims
that by merely changing
their label, the brand-name companies compete with the first generic drug
company at a period in
which the first generic sponsor should have exclusive marketing rights (for
180 days) without
competition by any product other than the original brand label. It also
opposes foreign importation
of drug products at the retail level.
Future Implications
Mergers, acquisitions, and other consolidations among the major
pharmaceutical companies are
anticipated to continue, and the nature of the pharmaceutical industry is
changing. Fewer
blockbuster drug products (i.e., products with annual global sales of at least
$1 billion) have been
approved in recent years, with drugs in the research pipelines appearing less
promising for the
traditional research-based pharmaceutical industry than for the growing
biotech pharmaceutical
sector.
It has been estimated that Big Pharma lost $14 billion in sales as the result of
patent expirations and
increased generic competition in 2006. In the future, while the companies
will remain profitable,
revenues are likely to decline because many of their drug products are
coming off patent between
2008 and 2012 (e.g., Fosamax, Valtrix, Advair, Lipitor, Plavix, and Crestor).
In light of these patent expirations, more limited pipeline resources, and
declining sales, many
major pharma companies are reorganizing. In recent years, many companies
have attempted to
have leaner operations by laying off employees and streamlining programs.
Predicted trends for the pharmaceutical industry include the increased use of
outsourcing and
global licensing because of reduced regulatory monitoring and decreased
costs. The U.S.
pharmaceutical industry (research and generic) already outsources much of
its production to
offshore territories (e.g., Puerto Rico) and overseas countries, especially the
emerging markets of
India, China, and Eastern Europe. While the FDA inspects these facilities (for
drug products
legitimately sold in the United States), the oversight is less stringent than
the routine inspections in
U.S.-based corporations.
Last, the future outlooks of the pharmaceutical industry will include
increasing regulatory
consideration of biosimilars. The European Commission granted Sandoz
approval to market a
biosimilar version of epoetin alfa, or EPO (indicated for treatment of anemia)
in 2007, becoming the
first biogeneric product approved in the European EPO market. While
predicted to be a potential
blockbuster, the ultimate impact of this regulatory action is unknown.
Sandoz's Omnitrope
(somatro-pin, rDNA origin), a biosimilar version of Pfizer's human growth
hormone Genotropin, was
marketed under special rules in the United States and Europe in 2006. Its
sales, however, represent
less than 1% of the market. Perhaps its low market share was due to the
drug's relatively high price
and physician concerns about its bioequivalence. In 2007, legislation was
introduced in the U.S.
Congress (H.R. 1038 and S. 623, Access to Life-Saving Medicine Act) to
provide for the licensing of
therapeutically equivalent biological medicines, which would mandate the
FDA to create an
abbreviated approval process for biological products. However, Congress
took no action.
See also
Cost of Healthcare, Direct-to-Consumer Advertising (DTCA), Medicare Part D
Prescription Drug
Benefit, Pharmacy, Pharmacoeconomics, Prescription and Generic Drug Use,
U.S. Food and Drug
Administration (FDA)
Web Sites
Biotechnology Industry Organization (BIO): http://www.bio.org
Generic Pharmaceutical Association (GphA): http://www.gphaonline.org
IMS Health: http://www.imshealth.com
Pharmaceutical Research and Manufacturers of America (PhRMA):
http://www.phrma.org
U.S. Food and Drug Administration (FDA): http://www.fda.gov
Further Readings
Angell, Marcia. The Truth About the Drug Companies: How They Deceive Us
and What to Do
About It. New York: Random House2004.
“By the Numbers. Top 20 Pharmaceutical Companies Ranked by U.S. Sales,
October 2006 to
September 2007,” Modern Healthcare 38 ((1)) : 31, January 7, 2008.
Engelhardt, H. Tristram, and Garrett, Jeremy R., eds. Innovation and the
Pharmaceutical Industry:
Critical Reflections on the Virtues of Profit. Salem, MA: M and M Scrivener
Press2008.
Evans, Ronald P. Drug and Biological Development: From Molecule to Product
and Beyond. New
York: Springer2007.
Fulda, Thomas R., and Wertheimer, Albert I., eds. Handbook of
Pharmaceutical Public Policy. New
York: Pharmaceutical Products Press2007.
Shayne, Gad. Pharmaceutical Manufacturing Handbook: Production and
Processes. Hoboken, NJ:
Wiley2008.
Sloan, Frank A., and Hsieh, Chee-Ruey, eds. Pharmaceutical Innovation:
Incentives, Competition,
and Cost-Benefit Analysis in International Perspective. New York: Cambridge
University Press2007.
U.S. Government Accountability Office. New Drug Development: Science,
Business, Regulatory,
and Intellectual Property Issues Cited As Hampering Drug Development
Efforts. Report No. GAO07-49. Washington, DC: U.S. Government
Accountability OfficeNovember 2006.
Citation Information:
Crawford, & Crawford, S. Y. (2009). Pharmaceutical industry. In R. M. Mullner
(Ed.), Encyclopedia of
Health Services Research (1st ed.). Sage Publications.
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