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Market Challenges, Patients and Activists, and Industry Consolidation: 1980 - Present

June 20, 2005 | A version of this story appeared in Volume 83, Issue 25

Credit: Courtesy of FDA History Office
President Kennedy signing the 1962 Kefauver-Harris Amendments to the Food & Drug Act into law. He is handing the pen to former Sen. Estes Kefauver (D-Tenn.).
Credit: Courtesy of FDA History Office
President Kennedy signing the 1962 Kefauver-Harris Amendments to the Food & Drug Act into law. He is handing the pen to former Sen. Estes Kefauver (D-Tenn.).



During the past two decades, the pharmaceutical industry has brought a new wave of medicines to market that act on the central nervous system, offer treatment for viral and retroviral infections (including therapies for HIV/AIDS), and cure or delay the onslaught of cancer. At the same time, new biotech medicines such as interleukins and interferon have been able to mimic or support key features of the immune system. Likewise, compounds such as insulin that historically were extracted from animals can now be produced with greater purity by genetically modified organisms.

Methods employed for drug invention have also changed as combinatorial chemistry and high-throughput screening have automated many features of laboratory work. As a result, companies have increasingly battled to develop proprietary molecule libraries. Despite predictions that high research costs and tight government regulation would prevent new firms from joining the pharmaceutical industry, a wave of small biotech companies took center stage in the early 1980s. Their focus on molecular biology, genetics, and genomics soon drew the attention and involvement of established companies. By 2004, according to a survey conducted by the Biotechnology Industry Organization, some 50% of the research projects under way at major drug companies were based on biotechnology. The U.S. emerged as a leading site for biotech innovation, and European firms established joint ventures with American companies; in some cases, they even moved their research operations to North America.

LEGISLATIONPresident Kennedy signing the 1962 Kefauver-Harris Amendments to the Food & Drug Act into law. He is handing the pen to former Sen. Estes Kefauver (D-Tenn.).

Breakthrough medicines to treat cancer, such as angiogenesis inhibitors and drugs targeted to particular molecular features of cancer cells, and to fight HIV/AIDS, such as reverse transcriptase inhibitors and protease inhibitors, were made by a combination of rational design and fortuitous discovery. Several means of speeding up the process beckoned: computational chemistry, combinatorial chemistry, and high-throughput screening. Where little was known about the conformation of the target molecule, electronic databases were searched and quantum mechanical calculations were made using computers to model the target.

Databases also helped generate the structures of possible lead candidates. By the late 1980s, it appeared that a productive route to new therapies would be found in the automated mass production of compounds that are systematic variations of a particular molecular structure. So competitive advantage lay in the efficient design of syntheses to focus on the most likely candidates. New compounds generated by this approach were subjected to very fast screening, including a variety of physical tests as well as bioassays to determine how a compound would be metabolized in the human body, whether it would bind to the chosen target, and whether it would prove toxic to human beings. Although pharmaceutical companies have invested millions of dollars in these technologies, their worth in delivering new drugs recently has been called into question.

Alongside computational and combinatorial chemistry, genomics and biotechnology offered the possibility to revolutionize the discovery and manufacturing of therapeutics. The techniques and technologies employed in genetic and genomic drug research are oriented to the molecular structures of diseases, which represent knowledge gained over decades of biochemical research, and the molecular details of the genetic code, which represent knowledge gained through the relatively new science of molecular biology. Starting in the late 1940s, pharmaceutical firms relied on microorganisms to manufacture antibiotics like penicillin in deep-tank fermentation processes. New techniques of recombinant DNA now allow genetic engineers to make microbes that produce a far greater range of desired molecules. One future possibility in this field lies in gene repair by means of introducing engineered cells.

In addition to its laboratory impacts, biotechnology emerged as a distinct entrepreneurial business sector. Three events in 1980 were of particular importance. First, in a pivotal Supreme Court decision, the justices decided that genetically manipulated organisms could be patented. Second, Congress passed the Bayh-Dole Act, allowing recipients of federal research funding to secure patents. Third, Genentech--the first publicly traded biotechnology company--set a record in its initial public offering, as its stock price soared from $35 to $89 per share in two minutes.

Within a few years, several thousand biotech companies were founded in the U.S., raised funds from venture capitalists, and, in many cases, went public at early stages. Investors accepted surrogate markers for sales and income, including prominent scientists on boards of directors; patents on untested medicinal compounds; and ambitions to cure major diseases, including cancer, diabetes, and AIDS. The industry went through successive waves of boom and bust; yet by 2005, nearly 1,500 biotech companies were active in the U.S.

The sequence from university spin-off to venture-capital-funded firm to publicly traded company--pioneered so successfully by Genentech--was not followed universally. For example, by the early 1980s, European countries and the U.S. shared advanced capital markets, had well-educated scientists and physicians, and had high-tech-based medical treatment. A biotechnology sector did not immediately arise across Europe; instead, established pharmaceutical firms set up new in-house research labs and invested in partnerships with biotech ventures and academic research centers in North America. Without investors eager to take the risk of supporting new ventures, and in the face of strict national and state laws on effluents from production facilities, comparatively few small biotech companies were created in Europe until the mid-1990s. At that point, a combination of government subsidies and reduced regulatory oversight helped stimulate the growth of a biotech sector.

Simultaneous with the business challenge posed by new biotech firms, the pharmaceutical industry faced policy challenges from nongovernment organizations, led by disease-based activists. Patients with HIV/AIDS, breast cancer, and other diseases mobilized to focus research agendas on their illnesses, protest drug prices for life-saving therapies, and speed regulatory review. On the one hand, activists attacked the benign public perception of the industry as they confronted firms about their pricing policies and their apparent focus on the diseases and vanities of middle-aged and older citizens in developed countries. On the other hand, they promoted the Orphan Drug Act of 1983 and new regulations that sped regulatory approval of medicines in the 1990s, especially for potentially life-saving drugs. Intriguingly, comparatively fewer activists pushed for changes to drug regulation in European countries, perhaps due to more comprehensive health care coverage.

While their origins stretch back to the 1950s, generic pharmaceutical manufacturers became a significant industry only following the 1984 Drug Price Competition & Patent Term Restoration Act (Hatch-Waxman), which authorized FDA to approve generics without additional preclinical or clinical testing. As a result of the industry's growth, of the 10,357 approved drugs listed in the 2004 edition of FDA's Orange Book, 7,602 have generic counterparts. According to the Generic Pharmaceutical Association, drugs with annual sales of $35 billion will lose patent protection within three years. Large firms, including Eli Lilly and Merck, have experimented with owning generic companies; most recently, Novartis purchased two generics firms for a total cost of $8.3 billion.

As a result, the pharmaceutical industry has faced challenges on several fronts since 1980: from a new set of competitors in the biotech industry, from generics manufacturers, and from the end users of their products. The primary strategy for large firms has been to focus intensively on inventing new drugs and marketing approved molecules. Companies thus sold off the chemical, cosmetics, and other consumer goods divisions they had built up during the 1960s and '70s. For a brief period in the late 1990s, some firms advocated a so-called life sciences concept intended to find synergies among medical, agricultural, and industrial biotechnology; within a few years, however, this model was largely discarded. Safety and efficacy regulations that were once perceived as proximate causes for diversification and reduced profitability in pharmaceuticals were now viewed as driving consolidation and a singular focus on inventing and marketing blockbuster drugs.

Whereas it made sense to speak of an American, German, French, or British drug company as recently as a decade ago, mergers and greater cross-national R&D investments have since rendered such delineation largely irrelevant. Between 1985 and 2005, nearly 40 major mergers produced firms of an unprecedented size and scope in the pharmaceutical industry. In 1994, American Home Products joined with Ayerst and Wyeth; in 1995, Glaxo merged with Wellcome, and Pharmacia with Upjohn; in 1996, Novartis was formed out of Ciba-Geigy and Sandoz; in 1999, Aventis was created out of Hoechst and Rhne-Poulenc, formerly venerable independent German and French firms; in 2000, Pfizer merged with Warner Lambert before purchasing Pharmacia in 2003; and in 2004, Aventis was purchased by Sanofi-Synthlabo, itself the product of a long string of mergers and acquisitions. Nevertheless, the simultaneous emergence of new biotech companies has prevented monopolistic concentration in the industry; the combined worldwide market share of the top 30 pharmaceutical and biotechnology firms is just over 50%, and Pfizer, the largest pharmaceutical firm, had less than 10% of global sales in 2003.


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