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This week's cover story is a comprehensive review of and outlook for the global pharmaceutical industry by Selena Class, deputy executive editor of IMS Company Profiles, a publication from IMS Health (see page 18). IMS is a leading market research and consulting firm that focuses on the pharmaceutical and health care industries. This is the second such review C&EN has published; the first appeared in 2002.
The pharmaceutical industry is a critical component of the chemical enterprise. The industry employs a huge number of research chemists; indeed, the pharmaceutical industry has been for some time the most vibrant employment marketplace for chemists. Big pharma's R&D expenditures dwarf those of the traditional chemical industry. And the pharmaceutical and biotech industries are the major customers of the fine and custom chemicals segment of the chemical industry.
Make no mistake, pharmaceuticals are a very good business to be in. According to Class, the industry saw its global sales rise 9% to reach $491.8 billion in 2003. Although the 9.7% growth in earnings for the first nine months of 2004 at the pharmaceutical companies C&EN tracks is off from the giddy levels seen at the end of the 1990s, it is growth that most other industries can only dream of. And the 22.3% profit margin seen at those companies through the first three quarters of 2004 is spectacular by any standard. However, neither the earnings growth nor the profit margins are likely to be sustainable as the industry evolves over the next 10 years.
The pharmaceutical industry that Class profiles and that C&EN writes about on an almost weekly basis is an industry in a state of flux, one that must respond creatively to the many challenges facing it. Class points to a number of specific troubles the industry experienced in the past year:
◾ FDA's order to place "black box" warnings on all antidepressants because of increased risk of suicidal behavior in younger patients.
◾ Loss of half of the injectable flu vaccine for the U.S. as a result of quality control problems at a Chiron facility in the U.K.
◾ Merck's withdrawal of its COX-2 inhibitor Vioxx because of an increased risk of heart attack and stroke after long-term use of the drug.
Merck's Vioxx debacle, as chronicled by the Wall Street Journal and other publications, could become to the pharmaceutical industry what the 1984 Bhopal disaster was to the chemical industry or the 1979 Three Mile Island accident was to the nuclear industry. Merck's callous approach to defending its profitable drug in the face of clear evidence of the dangers the drug posed is a public relations disaster that will tarnish the entire industry's reputation for years to come.
The structural problems the industry faces, though, are much more intractable than a damaged reputation. Everyone knows that drugs cost too much in the U.S., and sooner or later, something more substantive than states reimporting drugs from Canada will have to be done about it.
According to Class, for the 12 months ending in June 2004, the U.S. spent $228.7 billion on drugs, 46% of total global sales. Japan spent $55.4 billion (11.1%); Germany, $27.8 billion (5.6%); France, $26.4 billion (5.3%); the U.K., $18.4 billion (3.7%); and Italy, $17.9 billion (3.6%). On a per capita basis over that period, the U.S. spent $780 on drugs; Japan, $436; Germany, $339; France, $440; the U.K., $306; and Italy, $308. On average, Japan, Germany, France, the U.K., and Italy spent $376 per capita on drugs during the period, less than half that spent in the U.S. Every one of those countries impose some sort of price controls on drugs.
Just as important, the industry is not as innovative as it once was. According to IMS, just 30 new chemical entities (NCEs) were launched worldwide as drugs in 2003, the lowest number in more than 20 years. Through August 2004, Class reports, only 14 NCEs were launched, strongly suggesting that the 2004 total is unlikely to be much higher than in 2003. Class also reports that of the New Drug Applications approved by FDA in 2002, only 22% were for NCEs, with the majority being new formulations or line extensions of existing products.
Pharmaceuticals are an important component of the high standard of living we enjoy in the developed world. The pharmaceutical industry is justifiably proud of many of its products. The industry must understand, however, that changes in the way it does business are essential and urgent.
Thanks for reading.
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