Pharmaceuticals

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Pharmaceuticals

INDUSTRIAL CODES

NAICS: 32-5412 Pharmaceutical Preparations Manufacturing

SIC: 2834 Pharmaceutical Preparations

NAICS-Based Product Codes: 32-54121, 32-54124, 32-54127, 32-5412A, 32-5412D, 32-5412G, 32-5412L100, 32-5412P, 32-5412T, 32-5412V, and 32-5412W

PRODUCT OVERVIEW

From a broad perspective medical chemical products can be divided into four industries: Medicinals and Botanicals, Pharmaceutical Preparations, Diagnostic Substances, and Biological Products. Medicinals and botanicals are substances produced from chemicals or plants. That industry manufactures products in bulk and sells its output to the pharmaceuticals industry, among others. Diagnostic substances are specially formulated chemicals and agents employed by the medical profession for discovering the presence of diseases or for testing patients. Pregnancy test kits sold to the public are an example of a consumer product from this industry. Irradiated substances injected into the blood stream so that computer axial tomography scans (CAT scans) can be interpreted precisely and the heart and its arteries are clearly visible to the surgeon during a cardiac catheterization procedure, for example, are diagnostic products made for institutional uses in medicine. Biological products are very similar to diagnostic substances but are used in research and in chemicals processing applications. The products thought of as drugs are made by the pharmaceuticals preparations industry. Under the North American Industrial Classification System (NAICS), these industries are sandwiched between Pesticides and Paints and Coatings. Two of the pioneers in this industry, Bayer and Hoechst, began as dye works, most of the other companies began as pharmacies.

Origins

The English word for pharmaceuticals derives from the Greek word for remedy, pharmakon. The medical and pharmaceutical arts developed together using herbal remedies and preparations, with the roots of the art extending back five millennia before the current era to the original Sumerian civilization which arose in Mesopotamia. The practice of medicating the sick no doubt arose long before that time, but writing and recording such things came with civilization. Herbaria, books recording the names of herbs and in what situations to use them, go back to the dawn of history.

Pharmacopoeia has always been preeminently a pragmatic art based on actual results, although the theories used to explain the effectiveness of this medicine or that have changed over time. Traditional views held that health is the consequence of the proper balance of a single energy, a vital force, such as the traditional Chinese concept of chi or in European practice a spirit. Alternatively practitioners in the past theorized that bodily health was the result of interacting but different forces such as the medieval humors (blood, phlegm, yellow bile, and black bile).

The modern approach emerged with the Swiss physician, Paracelsus (1493–1541). Paracelsus began to see the body as based on chemical processes. That view eventually triumphed in modern medicine because modern pharmacopoeia is based on biochemical analysis. Traditional views, however, persist in modern forms as well. Holistic doctors attribute psychological, environmental, and social forces as important influences. Such views are sometimes supported by the so-called placebo effect that may produce cures with medications that have no active ingredients.

As early as the thirteenth century, the occupations of doctors and pharmacists came under regulation under Frederick II, the Holy Roman Emperor. He issued an edict in 1240 regulating medical education and certifications; forbade doctors from financial ownership of, or profiting in any way from, pharmacies; and regulated the quality of medicines, specifically prohibiting the sale of diluted medications. The edict indicates the presence of pharmacists in medieval Europe as established commercial enterprises needing regulation. By the time modern scientific pharmacopoeia emerged in the nineteenth century, and the first pharmaceutical companies arose, the practice of preparing medications and selling them in stores was universal.

The modern industry began in the 1800s. Merck had its origins in 1816 in Germany and was established as Merck & Company in the United States in 1891. Smith-Kline began in 1865, Hoechst in 1883, Miles Laboratories in 1884. Wyeth started out in 1860 as a pharmacy and became a producer by preparing ahead of time, large quantities of preparations sold frequently. Eli Lilly was the first commercial producer of insulin. He started his business in 1776 after a career as a pharmacist. Johnson & Johnson began selling surgical dressings and Bristol-Myers's ethical (prescription) medicines in 1887. Squibb, which later became part of Bristol-Myers, had begun in 1858. G.D. Searle began in 1888 as a seller of syrups. And Bayer, in Germany, began to diversify from dyes into medicines, selling aspirin in 1899.

Special Aspects of this Industry

Pharmaceutical preparations are under the regulatory control of the U.S. Food and Drug Administration (FDA), part of the U.S. Department of Health and Human Services (DHHS). The FDA regulates pharmaceuticals, both prescription and over-the-counter, but since 1994, oversees though no longer strictly regulates, food supplements and vitamins. Such products only come under FDA purview if the product contains new substances—those not already widely distributed before October 15, 1994. Where the FDA does regulate, the producer must conform to an elaborate process of scientific review. Three phases of clinical review take place followed by an FDA approval process. Medical, chemical, pharmacological and toxicological, and statistical reviews are undertaken in parallel or in iterations.

Based on data from the Pharmaceutical Research and Manufacturers of American (PhRMA), new drugs take an average of 12 years to move from invention to its introduction to the market with full FDA approval. Of 5,000 substances that undergo pre-clinical testing, five reach clinical testing and one is approved. Pre-clinical testing takes 3.5 years, the three phases of clinical testing consume 6 years, and the FDA's approval requires 2.5 years. In Phase I 20 to 80 healthy people are tested, in Phase II 100 to 300 volunteer patients are tested, in Phase III the numbers increase to 1,000 to 3,000 volunteer patients. Occasionally products already approved may have to be tested further after marketing has commenced. The FDA's own data on the duration of its review processes indicate the average time for review ranges from 6 months to 13 months depending on whether accelerated or standard review processes are being followed. The FDA's review times have substantially shortened since the 1980s.

This data underlies the industry's contention that new drug products require very substantial investment in time and money—the recovery of which must be by selling approved drugs at high prices. PhRMA estimates that costs of developing a drug ran $802 million in 2001, up from $318 million in 1987. Data published in Social Trends & Indicators USA, in 2001, indicate the industry spent the equivalent of 19.6 percent of retail sales on R&D and 12.4 percent of retail sales on promotional expenditures, including direct advertising to consumers and sales and marketing to physicians.

Drug prices for the elderly have been regulated by federal legislation since the beginning of 2006 under the Medicare and Medicaid Drug Insurance Program, administered by the DHHS. Medicaid provides subsidies to low-income individuals. As of April 2006, 30 million Medicare recipients were enrolled in the program, with an additional 5.8 million individuals covered by Veterans Administration drug programs. According to figures published by the New York Times, federal estimates were putting the value of the Medicare Drug Program at $9.64 billion per year for the 2007–2016 period; these moneys in part subsidizing program participants and in part providing incentives to insurance companies to participate. This legislative activity—undoubtedly subject to change in the second decade of the twenty-first century—will have an impact on the industry in ways not yet clearly foreseeable.

The Baby Boom generation, the largest population group, ranged in age from 43 to 61 in 2007. As this group ages, the population as a whole will grow older on average. The Census Bureau, in projecting population figures out to the year 2010, estimates that four of six age groups under age 45 will decline as a percent of total population by that year. The exceptions will be the group aged 14 to 17, which will remain the same as in 2000, and the group 18 to 24 which will increase by a slender 0.5 percent. All of the older age groups, from 45 up, will show increases, with the biggest increase in those aged 45 to 64, projected to grow by 26.5 percent between 2000 and 2010. Those 65 and older are expected to increase by 13.2 percent. Such demographics will inevitably play a major role in the growth of the pharmaceuticals industry. They have already caused the industry to grow at much higher rates than the economy as a whole.

MARKET

Market information is based on reliable statistical data available from 1998 forward and with details from 2001 to 2006 from the Census Bureau's Current Industrial Reports (CIR). The data are at the manufacturing level, usually referred to as industry shipments. To understand the retail market, double the shipments data to get a rough estimate of the retail level for prescription and OTC sales, but not for shipments of bulk products, which are either transfers between companies or exports. Net imports must be added, because in 2006, every dollar exported was matched by three dollars in imports.

Shipments in 1998 came in at $65.7 billion growing to $127.1 billion by 2006—a rate of growth of 8.6 percent per year. Growth in the earlier period was more rapid. From 1998 to 2001 (shipments of $90.26 billion) growth took place at 11.1 percent per year, whereas from 2002 to 2006 at 7.1 percent per year. Figure 174 illustrates the growth from 2001 to 2006.

The data show domestic shipments divided into three major categories: prescription drugs, non-prescription (OTC) drugs, and bulk shipments. The very small bulk shipments category showed the most rapid annual growth in this period (21% per year); OTC products grew at the lowest rate (4.4%); and the prescription category second (7.2% annually). For perspective, in the 2001 to 2006 period, Gross Domestic Product (GDP) grew 5.5 percent, nondurable products at 6.1 percent, and food at 5.8 percent per year. OTC drugs underperformed these measures, while prescription drugs and the category as a whole performed better—especially so for what is a mature industry. The aging population and lifestyle changes, among them drug use to modify youth behavior, to enhance sexual function, and to control obesity and obesity-related diseases with chemicals are contributing factors to this growth.

As shown in Figure 175, prescription drugs dominate the pharmaceutical preparations industry, its share of this category has always been high. During this period the OTC segment was losing dollar share. There are some indications that they were once significantly higher. A 1991 study commissioned by the Environmental Protection Agency, using data derived from private market research estimates, put the OTC share in that year at 27.5 percent. It is possible, however, that in that study the OTC segment was not defined exactly as it is in the Current Industrial Reports or that price increases in prescription drugs have caused the downward shift in the OTC share in the sixteen-year period that had elapsed.

Apparent Consumption

Apparent consumption is calculated by reducing shipments by exports and increasing the result by imports. Apparent consumption in the United States was $92.8 billion in 2001 and $148.3 billion in 2006. With these adjustments the market growth rate jumps from 7.1 to 9.8 percent per year, substantially higher than GDP. In this same period, exports grew at a rate of 12.1 percent but imports at a rate of 29.4 percent per year. In 2001, $1 in exports was matched by $1.40 in imports; by 2006, the ratio was $1 to $2.90. The central topic of debate preceding Congressional passage of the Medicare Drug Program in 2005 centered on importing drugs from abroad because they are priced lower there. Very little attention was paid to actual imports of drugs by the pharmaceutical companies themselves. In this industry, however, as in many others, off-shoring of production was and continues to occur.

Product Detail

According to the nine major industry categories into which the Census Bureau divides pharmaceuticals, data for 2006 indicate that the largest categories for prescription drugs are drugs associated with the nervous system and sense organs (23.5%), with tumors, glands, and metabolism (20.1%), with respiratory ailments (14.6%), and with digestive and genito-urinary systems (12.1%). In the much smaller OTC segment, the largest category was vitamins and food supplements (33.7%), nervous system and sense organs (16.6%), respiratory systems (13.8%), and skin-related conditions (13.6%). The OTC category accounted for 72 percent of all vitamins and supplements sold and 60 percent of all remedies sold for skin care. Pain relievers fall into the nervous system/sense organs category but they are also associated with other categories.

KEY PRODUCERS/MANUFACTURERS

Unlike other major advanced-technology industries that are highly consolidated such as airlines, autos, and computer software, the pharmaceuticals industry features many competing companies.

Pfizer Inc.

The top-ranked firm is Pfizer Inc. with $48.4 billion in worldwide sales in 2006, of which $45.1 billion was in human pharmaceuticals ($25.4 billion in the United States), had a market share of approximately 13 percent, but was by no means dominant. The company began in 1849 as a fine chemicals producer and was an important manufacturer of citric acid when, in the 1940s, it took on the task of producing penicillin, a difficult to manufacturer anti-bacterial agent. The company succeeded and became established in the pharmaceuticals industry. Pfizer produces fifty-two separate medicines addressing some forty categories or conditions. Pfizer's brand names include Benadryl, Viagra, Zoloft, and Zyrtec. Pfizer's Lipitor, a cholesterol-lowering medication, is the top-ranked pharmaceutical product in the United States. Zoloft, an anti-depressant, is ranked sixth; and Celebrex, a non-steroidal anti-inflammatory drug, is ranked tenth. Pfizer's Viagra is also the leading treatment for erectile dysfunction.

GlaxoSmithKline

This is a U.K.-based global company with sales of £23.2 billion (US$37.1 billion) in 2006. The company formed when Glaxo Wellcome and SmithKline Beecham merged in 2001. Glaxo originated as Joseph Nathan and Co. in 1873. Glaxo was originally a brand name for a dried milk product. Wellcome was founded in 1880 in London by a U.S. pharmacist. These two companies merged in 1995. SmithKline began as a pharmacy in Philadelphia in1830. Beecham, established in the United Kingdom in 1865, sold laxatives. SmithKline and Beecham Group merged in 1989. The company has forty brands of prescription medications as well as more than ninety OTC brands. Its top selling brand is Advair, an asthma medication.

Novartis AG

Novartis, a Swiss corporation, is the world's third-ranking pharmaceuticals company. Novartis was formed by the merger of two other Swiss companies in 1996, Ciba-Geigy and Sandoz. In 2005 Novartis also acquired rights to a portfolio of over-the-counter drugs from Bristol-Myers Squibb, including Excedrin, a painkiller. Novartis's sales in 2006 were $37.0 billion. The company's top prescription drug brands are Diovan, Gleevec, and Lotrel. Diovan and Lotrel are used to treat high blood pressure; Gleevec is used in the treatment of leukemia and stomach cancer.

Sanofi-Aventis

The French company, Sanofi-Aventis is ranked fourth in the world and is the leading pharmaceutical company in Europe. The company had sales in 2006 of €28.4 billion (US$36.1 billion). It is the result of a merger between Sanofi, itself the conglomeration of several French companies and the U.S. Sterling Winthrop, and Aventis, which was formed by the merger of the German Hoechst and the French Rhône-Poulenc. Sanofi-Aventis' top three drugs are Plavix, a heart medicine, ranked seventh overall in the United States; Tritace, a treatment for hypertension; and Eloxatine, a cancer treatment drug.

F. Hoffman-La Roche Ltd.

Ranked fifth in the world is F. Hoffman-La Roche Ltd., a Swiss company with revenues in 2006 of CHF 42.1 billion (approximately US$34.7 billion). The company was founded in 1896. The company offers thirty-six prescription products, including Valium. Its top-selling products are MabThera, a treatment for lymphoma; MabTheraRA, a drug for treating rheumatoid arthritis; Herceptin, a treatment for breast cancer; and Avastin, a treatment for colorectal cancer.

The pharmaceuticals industry is fragmented rather than consolidated. The top five companies represent approximately one-third of the world market. The next five companies, completing the top ten, include AstraZeneca PLC, a British corporation, and four American companies: Johnson & Johnson, Merck & Company, Inc., Wyeth, and Eli Lilly and Company. Nearly 723 pharmaceutical companies operate in the United States with some 900 production establishments.

MATERIALS & SUPPLY CHAIN LOGISTICS

The relationship between the Pharmaceutical Preparations and the Medicinal and Botanical Manufacturing industries is intimate. Pharmaceuticals' principal input materials, as measured in dollars, come from the Medicinal and Botanical Manufacturing industry in the form of bulk-delivered antibiotics, vitamins, and bulk shipments of other drugs or precursor chemicals that are later combined into preparations by the pharmaceutical companies. This is an industry in which minute quantities of active ingredients have major effects on health. The value of a medicine has almost no relationship with its weight. In discussions of bulk shipments quantities are small and transportation cost as a percent of total value is very low. Pharmaceuticals are produced in twenty-seven states and in every region. As transportation costs pose no obstacle, imports are playing a growing role. Net imports represented 2.9 percent of apparent domestic consumption in 2001 and 16.7 percent in 2006. These goods come principally from Europe.

DISTRIBUTION CHANNEL

Physical distribution of pharmaceuticals follows a classic three-tier arrangement, with producers shipping to wholesalers, wholesalers to retail channels, typically drug stores, which sells products to the customer. OTC goods are displayed in stores so that customers have direct access to the products. Prescription medications move through pharmacies maintained by the drug stores. In the late 1990s and early 2000s, mass merchandisers and warehouse clubs became important in this market as well because these stores sell prescription drugs and maintain pharmacies. Stores specializing in vitamins and food supplements represent a distinct distribution system for this segment of the OTC market. The most prominent and largest such company is General Nutrition Centers, Inc. (GNC), a retailer with $1.3 billion in sales.

In this context, business distribution, including sales and marketing outreach, involves contact with physicians as a principal activity. Physicians are not only those who decide which prescription products will be purchased, they are also actively involved in recommending OTC goods to patients. Pharmaceutical producers, therefore, maintain large sales forces to reach doctors to keep them fully informed of emerging products. Thus in addition to a three-tier distribution system, the industry also engages in a two-tier sales and marketing effort.

KEY USERS

As in distribution, a kind of dual involvement between doctor and patient characterizes this sector. Doctors are key users of medications in using pharmaceuticals as professional tools. The patient's role is similarly ambiguous. Most people take prescription medications passively because they are told to do so. Individuals who develop adverse reactions to a prescription may cause the doctor to switch to an alternative. Beyond this limited context, however, patients exercise little choice—despite efforts by pharmaceutical companies to recruit the patient as an influencer of the doctor. The largest user group for prescription drugs is the elderly because drug consumption increases as the body's performance begins to decline.

In the small over-the-counter segment of this industry, the patient acts more independently by selecting his or her own remedy. Their choice is largely determined through experience from parents or other family members, or is sometimes influenced by the advice of a pharmacist, from personal study and experimentation.

ADJACENT MARKETS

Dieting and exercise regimens represent markets adjacent to pharmaceuticals because those who are healthy tend not to need drugs. An entire branch of medical practice, known as holistic medicine is aimed at health maintenance with minimal chemical and surgical interventions. Practitioners of holistic medicine believe the patient's physical, mental, and spiritual aspects are interconnected and all three must be treated to help the patient heal.

RESEARCH & DEVELOPMENT

Mainline pharmaceutical companies describe themselves with the phrase "research-based" to distinguish themselves from lesser producers who merely manufacture medications from licenses obtained from others. In this industry R&D is a central activity consuming substantial portions of total money spent. Based on data from PhRMA the industry spent $52.2 billion on R&D in 2006—19.4 percent of domestic sales. The range of activity is extremely wide, but according to PhRMA, major areas of concentration in 2006 included medications aimed at controlling Alzheimer's disease, breast cancer, colorectal cancer, coronary artery disease, cocaine addiction, and Lennox-Gastaut syndrome (a very rare but severe form of epilepsy that usually manifests before a child is four years old).

CURRENT TRENDS

Perhaps the most notable trend in this industry is public disaffection with rising pharmaceutical prices. These have become visible as the population is aging. More and more people are entering a medication-intensive period of life; the costs of paying for drugs has become ever larger slices of incomes, especially for those retiring and thus experiencing decreases in income. The phenomenon has resulted in Congress passing the Medicare Drug Program in 2005. This program allowed those on Medicare to purchase prescription drug insurance. After paying monthly premiums, patients would only have to pay part of the cost of their medications. The issue, however, has not gone away in the time since. The costs of medication represented only 10 percent of total health expenditures in 2005, but a larger share of this expenditure actually falls on the consumer than do other costs which are covered by insurance through Medicare. Bringing costs in line with budgets, with or without greatly increased federal subsidies, will surely be the trend of the second decade of the twenty-first century.

Within the demographic context of the period 2006–2016, trends are emerging pointing at the possible collision of remedies. An example of this issue comes from the early 2000s. Traditional nonsteroidal anti-inflammatory drugs (NSAIDs) taken principally to reduce arthritis pain caused stomach problems because ingredients in the drugs attacked two enzymes. Of these inhibitions of the first, COX-2, reduces arthritis pain and swelling, which is desired; while inhibition of the second, COX-1, which protects the stomach lining, causes stomach pain, ulcers, and bleeding, which is not desired. Because NSAIDs have unwelcome side-effects, new formulations of these drugs emerged. These only targeted COX-2 and became known as COX-2 inhibitors. Merck's Vioxx and Pfizer's Celebrex are products using this new approach. Some time after the products' introduction, however, Merck discovered, in clinical trials, that patients developed cardiovascular conditions after taking the product for 18 months.

On the basis of this finding, Merck withdrew the products from the market. Pfizer continued to sell Celebrex although it confirmed cardiac problems accompanying its use. Pfizer chose not to withdraw Celebrex however, citing the medicine's value as a pain reliever. The company chose instead to rely on doctors to make final decisions on whether to prescribe the product. Lawyers were busy attempting to put together class-action lawsuits to take on Pfizer. The issue, however, illustrates how, with increasing complexity and ever-more scientific clinical trials tracking the effectiveness of drugs, more such interactions may be discovered and will add new layers of complexity to an already complex business.

TARGET MARKETS & SEGMENTATION

Pharmaceutical companies in the late 1990s and in the early 2000s had been targeting consumers of prescription drugs with advertising, while continuing their massive efforts to target those who really sell or order the use of the product, the prescribing physician. This targeting has taken the form of informing the public of benefits associated with name-brand drugs, suggesting how these might help a particular condition. Given the very-large number of drugs on the market and the number of complex complaints from which people suffer, this approach is aimed chiefly at high-profile conditions, including weight control products, menstrual conditions, heart conditions capable of being mitigated by lowering cholesterol, and erectile dysfunction. To what extent this targeting approach is successful is difficult to determine. In addition to advertising the industry chiefly targets the medical profession by selling directly to doctors and attempting to reach them through medical media.

Over-the-counter medicines are targeted at the public with advertising timed to coincide with the onset of specific conditions, such as early winter colds and allergies in spring and fall. Pain medications are promoted year-around.

RELATED ASSOCIATIONS & ORGANIZATIONS

American Association of Pharmaceutical Scientists, http://www.aapspharmaceutica.com

American Pharmacists Association, http://www.aphanet.org//AM/Template.cfm?Section=Home

Drug Information Association, http://www.diahome.org/DIAHome

National Pharmaceutical Association, http://www.npha.net

Pharmaceutical Research and Manufacturers of America (PhRMA), http://www.phrma.org/about_phrma

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