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A pharmaceutical company (or drug company) is a company licensed to discover, develop, market and distribute drugs.


Most large pharmaceutical companies were founded in the late 19th and early 20th centuries, and derive their market share from a few well-marketed preparations. There are currently more than 200 major pharmaceutical companies (see list). As in some other industries, economic pressures are forcing pharmaceutical companies toward greater efficiency.[1]

Biotechnology company

A biotechnology company is any company that uses biological systems, living organisms, or derivatives thereof, to make or modify products or processes for specific use. Often biotechnology companies produce pharmaceuticals. Typically a biopharmaceutical made in this manner is composed of very large molecules that are unstable and must be administered by injection in a physician's office.

Drug discovery

Drug discovery is the process by which drugs are discovered and/or designed. In the past most drugs have been discovered either by identifying the active ingredient from traditional remedies or by serendipitous discovery. The new approach has been to understand how disease and infection are controlled at the molecular and physiology level and to target specific entities based on this knowledge.

New drugs begin in the laboratory with chemists, scientists and pharmacologists who identify cellular and genetic factors that play a role in specific diseases[2]. "They search for chemical and biological substances that target these biological markers and are likely to have drug-like effects. Out of every 5,000 new compounds identified during the discovery process, only five are considered safe for testing in human volunteers after preclinical evaluations. After three to six years of further clinical testing in patients, only one of these compounds is ultimately approved as a marketed drug for treatment. The following sequence of research activities begins the process that results in development of new medicines:"

Target identification

"Drugs usually act on either cellular or genetic chemicals in the body, known as targets, which are believed to be associated with disease. Scientists use a variety of techniques to identify and isolate a target and learn more about its functions and how these influence disease. Compounds are then identified that have various interactions with drug targets helpful in treatment of a specific disease."

Target prioritization/validation

"To select targets most likely to be useful in the development of new treatments for disease, researchers analyze and compare each drug target to others based on their association with a specific disease and their ability to regulate biological and chemical compounds in the body. Tests are conducted to confirm that interactions with the drug target are associated with a desired change in the behavior of diseased cells. Research scientists can then identify compounds that have an effect on the target selected."

Lead identification

"A lead compound or substance is one that is believed to have potential to treat disease. Laboratory scientists can compare known substances with new compounds to determine their likelihood of success. Leads are sometimes developed as collections, or libraries, of individual molecules that possess properties needed in a new drug. Testing is then done on each of these molecules to confirm its effect on the drug target."

Lead optimization

"Lead optimization compares the properties of various lead compounds and provides information to help pharmaceutical and biotechnology companies select the compound or compounds with the greatest potential to be developed into safe and effective medicines. Often during this same stage of development, lead prioritization studies are conducted in living organisms (in vivo) and in cells in the test tube (in vitro) to compare various lead compounds and how they are metabolized and affect the body."

Drug development

Drug development is considered a costly and intensive process. Of all compounds investigated for use in humans only a small fraction is eventually approved, and only after heavy investment in pre-clinical development,clinical trials, and safety monitoring to determine the safety and efficacy of a compound. Most clinical trials are randomized and controlled. The cost for a new drug (new chemical entity) is estimated to be about $1 billion US$. This figure is however disputed.[3] Depending on a number of considerations, a company may apply for and be granted a patent for the drug or the process of producing the drug for about 20 years. Only after rigorous study and testing, which can take as long as 12 years, will governmental authorities grant permission for the company to market and sell the drug. In special circumstances, such as the search for effective drugs to treat AIDS, the Food and Drug Administration (FDA) has encouraged an abbreviated process for drug testing and approval called fast-tracking.[4]

Clinical testing is usually described as consisting of Phase I, Phase II and Phase III clinical studies.[5] In each successive phase, increasing numbers of patients are tested. There are a large number of firms that support clinical trials.

Phase I Clinical Studies

"Phase I studies are designed to verify safety and tolerability of the candidate drug in humans and typically take six to nine months. These are the first studies conducted in humans. A small number of subjects, usually from 20 to 100 healthy volunteers, take the investigational drug for short periods of time. Testing includes observation and careful documentation of how the drug acts in the body -- how it is absorbed, distributed, metabolized and excreted."

Phase II Clinical Studies

"Phase II studies are designed to determine effectiveness and further study the safety of the candidate drug in humans. Depending upon the type of investigational drug and the condition it treats, this phase of development generally takes from six months up to three years. Testing is conducted with up to several hundred patients suffering from the condition the investigational drug is designed to treat. This testing determines safety and effectiveness of the drug in treating the condition and establishes the minimum and maximum effective dose. Most Phase II clinical trials are randomized, or randomly divided into groups, one of which receives the investigational drug, one of which gets a placebo containing no medication and sometimes a third that receives a current standard treatment to which the new investigational drug will be compared. In addition, most Phase II studies are double-blinded, meaning that neither patients nor researchers evaluating the compound know who is receiving the investigational drug or placebo."

Phase III Clinical Studies

"Phase III studies provide expanded testing of effectiveness and safety of an investigational drug, usually in randomized, and blinded clinical trials. Depending upon the type of drug candidate and the condition it treats, this phase usually requires one to four years of testing. In Phase III, safety and efficacy testing is conducted with several hundred to thousands of volunteer patients suffering from the condition the investigational drug treats."

New Drug Application

"(NDA)/Marketing Authorization Application (MAA) NDAs (in the U.S.) and MAAs (in the U.K.) are examples of applications to market a new drug. Such applications document safety and efficacy of the investigational drug and contain all the information collected during the drug development process. At the conclusion of successful preclinical and clinical testing, this series of documents is submitted to the FDA in the U.S. or to the applicable regulatory authorities in other countries. The application must present substantial evidence that the drug will have the effect it is represented to have when people use it or under the conditions for which it is prescribed, recommended or suggested in the labeling. Obtaining approval to market a new drug frequently takes between six months and two years."

Orphan drug

There are special rules for certain rare diseases ("orphan diseases") involving fewer than 200,000 people in the United States. Because medical research and development of drugs to treat such diseases is financially disadvantageous, companies that do so are rewarded with tax reductions and a monopoly on that orphan drug for a limited time (seven years).

Post-approval surveillance

Some medications only show to have safety issues after they are marketed, as clinical trials are of a limited size, such as the 3,000 test subjects required by the FDA. Post-marketing surveillance ensures that after marketing the safety of a drug is monitored closely. In certain instances, its indication may need to be limited to particular patient groups, and in others the substance is withdrawn from the market completely.

After the FDA (or other regulatory agency for drugs marketed outside the U.S.) approves a new drug, pharmaceutical companies may conduct additional studies, including Phase IIIb and Phase IV studies.[6] "Late-stage drug development studies of approved, marketed drugs may continue for several months to several years."

Phase IIIb/IV Studies

"Phase IIIb trials, which often begin before approval, may supplement or complete earlier trials by providing additional safety data or they may test the approved drug for additional conditions for which it may prove useful. Phase IV studies expand testing of a proven drug to broader patient populations and compare the long-term effectiveness and/or cost of the drug to other marketed drugs available to treat the same condition."

Post-Market Studies

"Post-market studies test a marketed drug in new age groups or patient types. Some studies focus on previously unknown side effects or related risk factors. As with all stages of drug development testing, the purpose is to ensure the safety and effectiveness of marketed drugs."


Drug information

Drug information and data are provided by the FDA and are located at the Orange Book site. Drug information is commercially available at eKnowledgebase.


Diseases are classified by ICD-9 codes. These ICD codes are aggregated into approximately 500 diagnosis-related groupss (DRG) expected to have similar hospital use.

In 1991, the top 10 DRGs overall were:

These DRGs comprised nearly 30% of all hospital discharges. The complete list with prevalence rates is given in [7].

  • List of diseases


Industry revenues

2004 global dollar volume was $550 billion, a 7% increase over 2003—which in turn represented a 9% increase over 2002. US sales grew to $235.4 billion, a growth rate of 8.3% compared with 11.5% growth from 2002 to 2003 [8]. The United States accounts for 46% of the world's pharmaceutical market.

According to Teradata Magazine,[9] "By 2007, $40 billion in U.S. sales will be lost at the top 10 pharma companies as a result of the slowdown in R&D innovation and the expiry of patents on major products," ... "Taking a broader look across the industry, no fewer than 19 blockbuster drugs are expected to hit patent crisis by 2008. Analysis suggests that 150 mid-sized new compounds will be needed by 2007-2008 in the U.S. alone to plug this gap."

Top 10 pharmaceutical companies by sales

The top 10 pharmaceutical companies by 2004 sales are:

Rank Company Revenues R&D Spend
1 Pfizer $50.90 B $7.52 B
2 GlaxoSmithKline $32.70 B $5.19 B
3 Sanofi-Aventis $27.10 B $9.31 B
4 Johnson & Johnson $24.60 B $5.20 B
5 Merck $23.90 B $4.01 B
6 Novartis $22.70 B $3.48 B
7 AstraZeneca $21.60 B $3.80 B
8 Hoffman-LaRoche $17.70 B $5.09 B
9 Bristol-Myers Squibb $15.50 B $2.50 B
10 Wyeth $14.20 B $2.46 B

(Source: Wendy Diller and Herman Saftlas, "Healthcare: Pharmaceuticals," Standard & Poor’s Industry Surveys, 22 December 2005, 13)

Patents and Generics

Drugs are patentable. A typical patent lasts for 20 years. However, it often takes as long as 12 years to approve a drug for patient use. Patent protection allows the owner of the patent to charge high margins for the branded drug. When the patent for the drug runs out, a generic drug [10] is usually created by a competing company and released, causing the price to drop markedly. Often the owner of the branded drug will introduce a generic version before the patent runs out in order to get a head start in the generic market.

Medicare Part D

In 2003 the United States enacted the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), a program to provide prescription drug benefits to the elderly and disabled. This program is a component of Medicare (United States) and is known as "Medicare Part D." This program, set to begin in January 2006, will significantly alter the revenue models for pharmaceutical companies. Revenues from the program are expected to be $724 Billion between 2006 and 2015 [11].

Pharmaceuticals developed by biotechnological processes often must be injected in a physician's office rather than be delivered in the form of a capsule taken orally. Medicare payments for these drugs are usually made through Medicare Part B (physician office) rather than Part D (prescription drug plan).

Sales and marketing

The pharmaceutical industry is different

The pharmaceutical industry is different from most industries in that the products are usually not chosen by the consumers or paid for by the consumers. Physicians control the choice of many drugs through prescription writing. Private or public insurance often pays for most of the drugs. Moreover, insurance companies restrict the drugs that can be prescribed through the use of formularies. This along with the high margins for the industry make pharmaceutical marketing a complex discipline.

Advertising to physicians

Physicians are perhaps the most important players in pharmaceutical sales. They write the prescriptions that determine which drugs will be used by the patient. Influencing the physician is key to pharmaceutical sales. Historically, this was done with large pharmaceutical sales forces. A medium-sized pharmaceutical company might have a sales force of 1000 representaives. The largest companies have tens of thousands of representatives. Currently, there are approximately 100,000 pharmaceutical sales reps in the United States pursuing some 120,000 pharmaceutical prescribers.[12] Drug companies spend $5 billion annually sending representatives to physician offices.

Direct to consumer

Since the 1980s new methods of marketing for prescription drugs to consumers have become important. Patients are far less deferential to doctors and will inquire about, or even demand, to receive a medication they have seen advertised on television. In the United States recent years have seen an increase in mass media advertisements for pharmaceuticals.

The payers

Public and private insurers affect the writing of prescriptions by physicians through formularies that restrict the number and types of drugs that the insurer will cover. Not only can the insurer affect drug sales by including or excluding a particular drug from a formulary, they can affect sales by tiering, or placing bureaucratic hurdles to prescribing certain drugs. In January 2006, the U.S. will institute a new public prescription drug plan through its Medicare program. Known as Medicare Part D, this program engages private insurers to negotiate with pharmaceutical companies for the placement of drugs on tiered formularies.

Mergers, acquisitions, and co-marketing of drugs

A merger, acquisition, or co-marketing deal between pharmaceutical companies can occur if the companies have complementary capabilities. A small biotechnology company might have a new drug but no sales or marketing capability. Conversely, a large pharmaceutical company might have unused capacity in a large sales force due to a gap in the company pipeline of new products. It may be in both company's interest to enter into a deal to capitalize on the synergy between the companies. The difference between the value of the two companies after the deal and before the deal is known as the synergy value of the deal. News affecting the value of a pharmaceutical company can be obtained through PharmaSentry.


  • Accusations of forging or suppressing clinical trial results to maximise uptake of some medications;
  • Accusations of manipulating the market for their products by showering doctors with free gifts[13].
  • Too much advertising materials in the doctor's office, such as clocks, poster ads, etc.
  • Aggressive representation by pharmaceutical companies' salespeople (detailmen).
  • Sponsorship of medical schools, with influence on the curriculum to discourage the teaching of alternative medicines.
  • Increased number of drug tests on animals before FDA approval
  • Criticism for the price of patented AIDS medication, which could limit therapeutic options for patients in the Third World, where the most people have AIDS. Under World Trade Organization rules, a developing country has options for obtaining needed medications under compulsory licensing or importation of cheaper versions of the drugs, even before patent expiration(WTO Press Release). Pharmaceutical companies often offer much needed medication at no or reduced cost to the developing countries. Proposals to allow the manufacture generic AIDS drugs are not without controversy; it is sometimes claimed that this might cause pharmaceutical companies to move away from AIDS drug research and focus their research on other, more profitable areas. In March of 2001, South Africa was sued by 41 pharmaceutical companies for their Medicines Act, which allowed the import and generic production of cheap AIDS drugs. The case was later dropped after protest around the world.
  • Between 1980 and 1997, drug industry funding for academic research rose x8, as research costs rose, and the rate of federal support fell. Drug researchers not employed by pharmaceutical companies often look to companies for grants, and companies often look to researchers for studies that will make their products look good. 79% of papers written by independent researchers are favorable to new drugs. 98% of papers written by researchers sponsored by the drug companies are favorable. Sponsored researchers are rewarded by drug companies by putting them on symposium circuits to lecture, with the lecture scripts written by pharmaceutical companies. Some researchers who have tried to publish papers that show harmful effects of new drugs or cheaper alternatives have been threatened by drug companies with lawsuits.
  • Drug companies spent $900 million on consumer ads in the first half of 1999 alone. Pharmaceutical companies often fund non-profit "patient groups" that consume their drugs. Patient groups can advertise for the drug companies, and are unregulated by the Food and Drug Administration (FDA). Advertising directly to consumers, however, is strictly regulated in the United States by the FDA, as described in FDA Guidance for Industry on Consumer-Directed Broadcast Advertisements.
  • Where pharmaceutics have been shown to cause side-effects, civil action has occurred, especially in countries where tort payouts are likely to be large. Due to high-profile cases leading to large compensations, most pharmaceutical companies endorse tort reform.
  • The cost for a new drug (new chemical entity) is estimated to be about $1 billion US$. This figure is however hotly disputed.[14] Half of this figure are opportunity cost of capital, compunded by long development cycles. Moreover, all expenses for unsuccessful development of other drugs are included so that the figure represents the average expected cost of developing an approved drug in economic terms rather than the actual "out-of-pocket" expenses for a single drug.



  • Ray Moynihan, Alan Cassels: Selling sickness: How the world's biggest pharmaceutical companies are turning us all into patients". Nation Books, New York, 2005.
  • Merrill Goozner: The $800 million pill. [15] University of California Press, Berkeley, 2004, 297 S. ISBN 0-520-23945-8.
  • Marcia Angell: The truth about the drug companies. Random House, New York, 2004, 305 S. ISBN 0-375-50846-5.

Management, mergers, acquisitions, co-marketing deals

Sales and marketing

See also

External links

ca:Indústria farmacèutica de:Pharmaunternehmen es:Industria farmacéutica eo:Farmacia industrio fr:Industrie pharmaceutique

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