Pharmaceutical Industry Overview

Introduction

The pharmaceutical industry is involved in the discovery, development, manufacture, marketing, and sale of medically useful drugs. Some companies are very large and are involved in all of these functions, while others are much smaller and concentrate on drug research and development. For many years, the pharmaceutical industry has been the most profitable business sector in the United States.

How Does the Business Work?

Pharmaceutical companies seek out substances with potential medical value. These substances may be found by accident, purposely designed, or substances with suspected medical properties that have not yet been fully investigated. Oftentimes, the initial research work is done by universities. Once a potential drug is identified, a pharmaceutical company will investigate it further through laboratory testing, animal testing, and eventually human trials, if warranted. The investigation determines the effectiveness of the drug, safety, side effects, and proper dosing. If the drug is effective and does not have debilitating or deadly side effects, the company seeks approval from the Food and Drug Administration to sell and market the drug. If approval is given, the company continues to monitor the safety and effectiveness of the drug. In some countries the drug must also prove its cost effectiveness. Drugs that are costly but provide only marginal benefits may not receive approval. Of all the potential drugs investigated only a very few are ever developed into a marketable drug. The total cost of developing a drug that receives approval is between $1.7 billion and $2.2 billion. Once drugs are approved, the pharmaceutical companies hold patent to them for 20 years. After that, other companies may manufacture generic versions of the drug. The 20-year patent allows companies to recoup their costs and make a profit. Keep in mind that profits from the successful drugs must also cover the costs of the failed ones and you can buy drugs at online pharmacy.

Challenges and Opportunities

Future pharmaceutical trends are rapidly diverging from familiar operational patterns. Many blockbuster, or high profit drugs like Lipitor, Zyprexa, Levaquin, and Plavix, were developed in recent decades and made billions of dollars in revenue for the pharmaceutical companies. However, the patents on most of the big earners will soon expire. In the past, pharmaceutical companies kept drugs in the development pipeline so that as patents expired new drugs came to market. Unfortunately, most of the big companies in the pharmaceutical industry cut their research budgets during the last decade. Now they face significant revenue declines. Patents for drugs that produce $30 billion in revenue will expire in 2011. Over the next five years, patents that bring in $142 billion a year will expire and there are few money makers to replace them. The pharmaceutical industry is dealing with this issue in several ways. First, expect to see more mergers in the industry. There have already been several. Second, look for big companies to acquire or partner with smaller biotechnology companies that do have drugs in the pipeline. These smaller companies need the marketing expertise and the sales force of the larger firms to bring their drugs to market successfully. Third, look for the large companies to diversify their income streams. Many already manufacture medical devices and others, such as Johnson and Johnson and Merck, are getting into the business. Johnson and Johnson also acquired a vaccine manufacturer. Look for others to pursue vaccine producers as well. This is a steady business with significant growth potential as new vaccines are developed. Fourth, companies will exploit the pharmaceutical trends and technology that reduce drug development cost. New cellular pathway research, disease target discoveries, and understanding of the human genome are allowing companies to design drugs from scratch. Computer modeling can now reduce testing and development costs and bring drugs to market much quicker. These reduced costs will allow companies to exploit the field of personalized medicine profitably. Fifth, expect big companies to partner more on drug development instead of competing. AstraZeneca and Merck are already partnering to combine two of their cancer drugs into one treatment. Sixth, pharmaceutical companies will exploit emerging markets in a bid to replace lost revenue. In Europe and the US, the industry is already under pressure to lower prices. But, as demand for pharmaceuticals rises in places like China, India, and Africa, new sales might offset slimmer profit margins in the developed world.

Conclusion

The pharmaceutical industry will see a rough period for the next few years as it adjusts to new trends. However, the smaller biotech firms may still do well in the near term. New research breakthroughs in numerous diseases and reduced drug development costs should eventually return the big pharmaceutical companies to their accustomed place as some of the most profitable companies in the world.