Overview of the global pharmaceutical industry: markets and inventiveness

 

The modern pharmaceutical industry came of age with the introduction of regulations demanding that new pharmaceutical products be proven both safe and effective before they can be marketed and sold.  In the United States such legislation was introduced in 1962 with an amendment to the Food, Drug and Cosmetics Act.[1]   Since the introduction of the requirement that pharmaceutical products demonstrate efficacy in order to gain approval the industry has been a major driver of advances in health technology and spending on research and development.  In 2002 the global pharmaceutical industry generated over 400 billion dollars in revenue and invested roughly 16% of that amount, or 40 billion dollars, into research and development for new drugs.[2]

 

Investment in research

In addition to the 60 billion dollars spent on drug development by industry, pharmaceutical companies also benefit from billions of dollars in government spending.  The United States National Institute of Health (NIH) spent over 20 billion dollars in research and development in 2001, a significant portion of which went to drug development.[3]  Much of the government-funded research is directed toward basic science that produces understandings of disease processes that can be used as a basis for developing new drugs.[4]  Government funding is, though, also used to directly subsidize the cost of drug development.[5]  A 1998 Boston Globe article reports that 45 of the 50 top-selling medicines introduced between 1992 and 1997 received government funding for some stage of their development.[6]

 

Firm Structure

A small number of large pharmaceutical companies account for the bulk of new drug development and pharmaceutical sales.  In 1994 the top 10 firms accounted for 34% of sales.  Between 1963-1999 the top 4 firms accounted for almost 20% of new chemical entities (NCE) approved in the United States and only 20 firms accounted for close to 60% of NCEs invented world-wide.[7]  Currently, companies based in the United States account for just under half of global drug development.  The US accounted for well over half of all internationally accepted drugs invented between 1970 and 1992.  The bulk of the remaining drug development activities took place in the European Union, with Japan a distant third.[8]  Recent mergers mean that an increasingly small number of companies control global drug development and sales.

 

Over the past 15 years the rapid development of biotechnology has created a market space for smaller pharmaceutical firms, generally pursuing the development of one drug.  Large pharmaceutical companies have had limited success innovating with this technology, possibly because it continues to change at a rapid pace.  However, the cost of bringing a new drug to market runs into the hundreds of millions of dollars, and because there is a significant risk that the drug will fail to win approval, many small companies with only one drug candidate have had difficulty finding sufficient capital to develop their drugs.  Partnerships between the large pharmaceutical companies and small biotechnology companies allow the large pharmaceutical companies to gain access to the latest technology and allow biotechnology companies to finance the development of their drugs.[9]

 

Markets

As Table 1.1 demonstrates, global pharmaceutical sales are highly stratified by region, with North America, the European Union and Japan accounting for 85% of global pharmaceutical sales in 2002.  The growth in pharmaceutical sales, averaging 8% in 2002, has also been significantly higher than the rate of inflation in most ODEC countries.  The introduction of increasing numbers of drugs that must be taken for the lifetime of the patient,[10] along with increased in per-capita health problems due to the aging of the population in most developed countries, is leading to a high rate of growth in the number of prescriptions written and rapid growth in pharmaceutical sales.[11]  In the United States and most other developed countries pharmaceuticals are the fastest growing component of the health care budget.[12]  The high cost of pharmaceuticals is a significant issue even in developed countries with significant economic resources.[13]

 

 

Innovation

There is conflicting evidence as to the rate at which pharmaceutical innovation is increasing.  One way to measure innovation in the pharmaceutical industry is to examine rates of drug approval by the United States Food and Drug Administration (FDA).  The FDA must approve all prescription medicines sold in the United States.  Evaluation of the FDA’s data show, on the one had, an increasing rate of NCE approvals but virtually no growth in the rate of inventiveness for the most innovative class of drugs. 

 

In the five years between 1989 and 1994, the FDA approved 350 new drugs.  In the following five years, between 1995 and 1999, 569 new drugs were approved, an increase of 219.  However only 7 of the 219 additional new drugs can be considered truly innovative in that they provide a substantial medical benefit over existing therapies.[15]  Overall, between 1989 and 1999 the pharmaceutical industry invented 153 NCEs that can be considered highly innovative and 208 NCEs that can be considered moderately innovative.  The remaining drugs given approval were reformulations of existing chemical compounds.  This suggests that the rate of innovation is not increasing for the most innovative class of products.  However, the pharmaceutical industry remains an important locust innovation, introducing an average of 15 breakthrough and 20 non-breakthrough drugs each year.[16]

 

Conclusion

The picture of the pharmaceutical industry that emerges from this brief review is of a highly profitable, highly innovative industry dominated by a small number of multinational drug development corporations.  Virtually all drugs that reach the market and wide spread use come through these corporations.  The drugs that have been invented by this industry have saved hundreds or thousands of lives and make life more pleasant for millions of people on a daily basis.  It is also clear that the benefit that is derived from this industry is highly skewed towards the developed world.  Most of these drugs are sold and consumed in rich countries.  Whether the industry can be persuaded to find ways of providing more benefit to the developing world, and whether the model presented by these companies can be adapted for use in poorer regions, remains an open question.

 

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