The pharmaceutical industry has two distinct functions: research and development (R&D), and manufacturing. Some firms are primarily engaged in R&D, while others concentrate on manufacturing. The largest and best-known pharmaceutical firms do both.
Research-oriented firms include the large, well-known drug producers, which are often multinational firms with a presence in the three largest drug markets—the United States, Europe, and Japan. Others are smaller, and usually younger, firms that are attempting to develop a narrower range of products. This grouping includes most biotechnology firms, few of which have so far succeeded in bringing the results of their research to market. Among the manufacturers are firms producing generic drugs—products that are in many ways equivalent to existing drugs whose patents have expired.
The number of pharmaceutical manufacturers is large; the Department of Commerce listed nearly 1,500 in 1997. This might suggest that the industry is highly competitive. But the number of pharmaceutical compounds is also very large. The Physician's Desk Reference lists 1,300 different distinct compounds. In spite of the large number of drug products, there are so many therapeutic classes that the number of products that are substitutes for one another, and hence compete with each other, is small. So though the industry as a whole is highly competitive, individual products are less so.
Another remarkable characteristic of the pharmaceutical industry is its high rate of investment in R&D, with a correspondingly rapid pace of product innovation. U.S. firms, for example, spent over $21 billion in R&D in the United States and abroad in 1998, an increase of nearly 11 percent from the year before. Expenditures in 1999 were estimated to be over $24 billion, an annual increase of 14 percent. These investments represent a 12 percent share of total revenue, a share that is nearly double that of most other industries, including office equipment, electronics, and telecommunications companies. This rate of investment has enabled the U.S. pharmaceutical industry to produce nearly half of all patented drugs that were introduced globally between 1975 and 1994.
The high rates of innovation that characterize the pharmaceutical industry result from high rates of return on investment in R&D, which create the incentives necessary to conduct this research. This implies that R&D will typically flow to clinical areas characterized by relatively large markets—either large numbers of patients; or purchasers willing to pay prices that, in the long run, cover the costs and risks of these investments. Smaller markets or markets that are unable to pay such prices will rarely attract these investments.
The Orphan Drug Act was enacted by Congress in 1984 to create incentives to encourage manufacturers to develop products for diseases affecting relatively small numbers of patients. Following the act's passage, many drugs were developed and introduced addressing these relatively rare diseases. To replicate the act's success in a broader international context, however,
STUART O. SCHWEITZER
Barral, P. E. (1996). Twenty Years of Pharmaceutical Research Results Throughout the World. Paris: Rhone Poulenc Foundation.
Physicians Desk Reference, 54th edition (2000). Montvale, CA: Medical Economics Company.