Pharmaceutical Industry

GENERAL CHARACTERISTICS

INDUSTRY GROWTH

RESEARCH AND DEVELOPMENT (R&D)

ECONOMIC FEATURES

BIBLIOGRAPHY

The modern pharmaceutical industry in the United States originated during the 1818 to 1822 period when less than a dozen fine chemical manufacturers constructed factories in Philadelphia. History records Robert Shoemaker, producer of glycerin, as the first large-scale manufacturer in the period from 1818 to 1840. Medicines were previously manufactured in the laboratories of pharmacies where doctors and pharmacists compounded and administered drugs to patients and observed drug reactions. The Food and Drug Administration (FDA), which originated in 1902 by an act of U.S. Congress, regulates the modern pharmaceutical industry. (The agency is also a scientific and public health agency with oversight for the safety of most food products, radiation-emitting consumer products, cosmetics, and animal feed.)

Pharmaceutical firms are engaged in the discovery, manufacturing, and marketing of legal drugs, biologics (viruses, toxins, serums, and analogous products), vaccines, and medical devices such as pacemakers and prosthetics. Products are made for both humans and animals. Pharmaceutical products, both prescription and over the counter (OTC), account for a large share of the aggregate health care spending and represent major account items in international trade transactions of developed countries.

Pharmaceuticals as a percentage of total health care spending during 2002 comprised 12.8 percent in the United States, 14.5 percent in Germany, 15.8 percent in the United Kingdom, and 22.4 percent in Italy. Pharmaceutical spending in the United States grew at an average annual rate of 11 percent between 1970 and 2005. The industry is global and led all other industries in rent-seeking activities by spending nearly $1 billion from 1998 to 2004 on lobbying. Profit-seeking firms engage in strategic lobbying, a special case of rent seeking. Rent seeking is a selfishly motivated effort of one party (pharmaceutical firms) targeted at influencing another party’s (government regulators) decision. Economic agents will decide to invest in rent-seeking activities, such as lobbying, if the expected net present value of the effort is profitable at the margin. Global pharmaceutical trade grew at an average annual rate of 23 percent from 2000 to 2003 and was valued at $200 billion in 2002. More than 80 percent of pharmaceutical production and consumption occurs in North America, Western Europe, and Japan.

GENERAL CHARACTERISTICS

Several characteristics distinguish the pharmaceutical industry from other industries. A newly released pharmaceutical agent is usually available only by physician prescription. Patients in effect transfer decision-making authority on the appropriateness of medications for their ailments to the gate-keeping physicians (or pharmacists and nurses in some countries). Generally, a prescription may become available OTC (i.e., without physician prescription) for a non-chronic condition that is relatively easy to self-diagnose and has low potential for harm from self-medication under conditions of widespread availability.

Another important industry characteristic is the availability of health insurance coverage for prescribed medications. Most often, private insurers or government entities subsidize retail drug purchases. Consumers make a co-payment (a fixed sum for each prescription regardless of the full price) or pay a coinsurance (a fixed percentage of the full price) that is less than the full market price. Co-payments tend to vary depending on the drug classification. Consumer payment of far less than full cost of prescriptions creates the familiar “moral hazard” (excessive use) problem.

INDUSTRY GROWTH

The Centers for Disease Control (CDC) estimated that in 2005 more than 130 million Americans got prescriptions monthly. Physicians acting as the decision maker for patients and health insurance coverage of prescriptions create a market with fairly “inelastic product demand.” An inelastic product demand means that buyers’ percentage change in quantity purchase decisions are relatively insensitive to a given percentage price change that brought it about. Pharmaceutical product demand elasticity estimates vary depending on many factors, including the setting (e.g., inpatient versus outpatient or military versus noninstitutional population), brands versus generics, stringency of regulatory and provider reimbursements, and the strength of the consumption habits of consumers.

Some experts predict that the rise in insurance coverage is a major culprit in the undisciplined rising consumption of prescribed drugs. Other experts contend that the growth in prescription drug use is partly a function of greater marketing efforts of the drug firms. The pharmaceutical industry in 2003 spent $3.3 billion on direct-to-consumer advertising and marketing expenditures totaled $25.3 billion. Doctors’ prescribing habits are directly influenced by the probability of patient noncompliance, and advertising targeted at doctors and patients. Direct-to-consumer advertising reportedly slowed noncompliance rates. The U.S. drug firms spend a similar percentage of their sales revenue on advertising as on research and development.

The pharmaceutical industry manufactures innovative products with government-granted patent rights that may be extended after application approval from the FDA. Patents give researchers and inventors exclusive rights to market an invention for twenty years before others may duplicate and sell it. Therefore, producers of new drugs are free to limit the supply and set prices that reflect profit-maximizing mark-ups with exclusive marketing rights. Most pharmaceutical manufacturers in the United States are multinational enterprises operating globally across countries. In 2004 the Pharmaceutical Research and Manufacturers of America (PhRMA) recorded drug sales of $159 billion within the United States and $79 billion abroad. The industry boasts investment rate of return that is four times the magnitude of the typical Fortune 500 firm. Technological progress in this industry and in the broader health care sector has led experts to project the global pharmaceutical market sales to be $842 billion in 2010.

There were more than 700 companies operating in the “pharmaceutical preparations” industry in 2006. The leading ten firms accounted for more than 40 percent of total industry sales. Other factors in this industry include retail pharmacies, health care provider institutions, and wholesalers. According to a 2000 report, the pharmaceutical industry earned 80 percent of the drug sales directly from wholesalers, 12 percent from retailers, and 4 percent from hospitals. Consumers typically buy drugs from retail pharmacies but there has recently been a rising trend in purchased drug activities via the Internet and from mail-order services within and outside the United States. Prescription drug buyers consider nontraditional purchasing outlets more convenient and private relative to traveling to a retail drugstore. Physicians may suggest Internet pharmacies to some homebound patients in order to improve compliance.

RESEARCH AND DEVELOPMENT (R&D)

In the United States new drugs must be approved by the FDA. In order to satisfy safety and benefit considerations of the FDA, pharmaceutical companies conduct on average ten to fifteen years of research on a new medication. Approval of a new drug is a rigorous process and for every 5,000 to 10,000 compounds tested, only one receives FDA approval and becomes a new or improved treatment. The entire U.S. pharmaceutical industry spent an estimated $51.3 billion on research and development in 2005. Nearly 80 percent of global R&D spending takes place in the United States and the major portion of the remaining 20 percent occurs in Europe.

The drug discovery process begins with the screening of thousands of compounds and modifying them to raise disease-fighting activity and/or minimize undesirable side effects for patients. Both laboratory and animal studies may be used to evaluate a drug’s safety and efficacy during preclinical testing. Investigational new drugs go through a rigorous review by the FDA before moving to the clinical trials stage. Clinical trials of new medicines occur in three testing phases. Phase I includes drug tests in a small group of about 20 to 100 healthy volunteers to determine safety. During Phase II, 100 to 500 volunteer patients participate in controlled trials to determine whether the medicine effectively treats the disease. Phase III includes 1,000 to 5,000 patients taking the new drug and being monitored to confirm effectiveness and identify any side effects with comparison to patients in the placebo (inactive substance) group.

Drug development responds to the urgency and intensity of consumer demand, and economic harm, measured by disease-specific mortality, in the United States largely motivates the global distribution of drug development. The FDA approved 28 new drugs in 2005 and more than 350 medications became available for treating patients in the last decade. New medicines in development in 2006 included 682 to treat cancer, 531 to treat neurological disorders, 341 to treat infections, and 303 to treat cardiovascular disorders. One study in 2005 reported that new drugs generated 40 percent of the two-year gain in life expectancy achieved in 52 countries from 1986 to 2000.

When a company’s patent rights expire, other companies can imitate the drug and produce generic brands of the medication. According to PhRMA, the generics’ share of the U.S. prescription drug market was 57 percent in 2005. This share is expected to rise within the next decade as the rate of brand patent expirations increases.

ECONOMIC FEATURES

The discovery and manufacture of new drugs is a risky business without guaranteed profitability. The cost of developing one new medicine is estimated to be about $800 million (higher if genetically engineered) and on average, only three of every ten prescription medications available to treat Americans generate revenues that meet or exceed average R&D costs.

In the absence of patent protection, imitators could copy the new medication and manufacturers would lack practical incentives to invest millions of dollars on R&D of new drugs. Although patents nominally last for 20 years, the average effective patent life of prescribed medicines is only about 11.5 years due to time lost during the development and distribution of the new medicine to the market. Patent protection gives pharmaceutical manufacturers a monopoly status although generic drug makers can start preparing copies of drugs for FDA approval before patent expiration. A monopoly provides the patent owner with the sole right to manufacture the drug and determine the quantity to supply (hence the market price) according to its projected profit margin. The Treaty of Marrakech, signed in 2004 during the international trade negotiations, provided full patent protection for pharmaceutical products across industrialized nations as well as in the less-developed nations.

The pharmaceutical sector is controlled or strictly regulated by the government acting as a single buyer (payer) or a monopsony in countries with nationalized health systems (e.g., Canada, the United Kingdom). There are many end-users but they buy at government-regulated prices. Governments can regulate drug prices in a variety of ways. The most common methods of price regulation are reference pricing, formula pricing, capping or budgetary control, profit regulations and item-by-item negotiation. Reference pricing is a reimbursement rule where the government sets the maximum reimbursement for one drug by reference to the price of a comparable drug in the same market. Under formula pricing, governments use a wide criteria set, such as therapeutic novelty, to set drug prices. Capping or budgetary control would involve limiting reimbursement to the providers at a certain capitated level.

Other regulatory instruments generally target the profit margins of pharmaceutical companies and quality of manufacturing practices. For example, a 1990 law in the United States required drug manufacturers to apply on retail Medicaid prescriptions the largest discount they give any purchaser (the Medicaid drug rebate program). The U.K. government has used a rate of return regulation in which each firm negotiates with the government an allowed before-tax rate of return on its assets. Germany has used aggregate budget constraints and rollbacks. In this application, the government sets a tight overall budget and any amount above this budget would be deducted from payments to a third party (e.g., from the incomes of physicians, from the reimbursements to the drug manufacturers). These are all examples of government regulations to control drug prices and regulate excess profitability in the pharmaceutical industry.

The future pharmaceutical industry faces multi-faceted challenges that include setting and enforcing manufacturing standards; rapid patent expiration of widely used brand drugs; unregulated parallel trades (re-importation in the European context) that ignores intellectual property rights; highly fluid and unregulated Internet sales; shortage of pharmaceutical scientists; biotechnology drugs and genetically engineered products (As of 2006 the FDA had no generics approval process in place for patented biotechnology drugs whose patents are about to expire.); ineffective post-marketing surveillance; foreign manufacturing, regulatory, and pricing challenges of drugs for major diseases afflicting developing countries (e.g., AIDS and malaria); and counterfeit products.

Intellectual property abuse and counterfeiting, the fastest growing economic crime, is a $200 to $400 billion global industry. In 2006, the National Association of Boards of Pharmacy (NABP) reported that the prevalence of counterfeit medicines can range to over 10 percent of the drug supply globally. A dramatic growth of global counterfeit and piracy activities would seriously threaten the economic well-being of international pharmaceutical companies.

SEE ALSO Drugs; Industry; Medicine

BIBLIOGRAPHY

Armantier, Olivier, and Soiliou Daw Namoro. 2006. Prescription Drug Advertisement and Patient Compliance: A Physician Agency Approach. Advances in Economic Analysis & Policy 6(1). Article 5.

Civan, Abdulkadir, and Michael T. Maloney. 2006. The Determinants of Pharmaceutical Research and Development Investments. Contributions to Economic Policy & Analysis 5(1), Article 28.

DiMasi, Joseph A., Ronald W. Hansen, Henry G. Grabowski, and Louis Lasgna. 1991. Cost of Innovation in the Pharmaceutical Industry. Journal of Health Economics 10: 107–42.

Landsman, P. B., W. Yu, X. Liu, M. Teutsch, and M. L. Berger. 2005. Impact of 3-tier Pharmaceutical Benefit Design and Increased Consumer Cost-sharing on Drug Utilization. The American Journal of Managed Care 11(10): 621–628.

Lichtenberg, Frank R. 2005. The Impact of New Drug Launches on Longevity: Evidence from Longitudinal, Disease-Level Data from 52 Countries, 1982–2001. International Journal of Health Care Finance and Economics 5 (1): 47–73.

Lichtenberg, Frank R. 2006. Did CMS’ Functional Equivalence Decision Result in Equitable Payments? Journal of Pharmaceutical Finance, Economics & Policy 15(1): 7–20.

Okunade, Albert A. 2001. Cost-output Relation, Technical Progress, and Clinical Activity Mix of U.S. Hospital Pharmacies. Journal of Productivity Analysis 16(2): 167–193.

Okunade, Albert A. 2001. The Impact of 1990 Medicaid Drug Rebates Policy on Access to Prescription Drugs. Journal of Health & Social Policy 12 (3): 33–51.

Okunade, Albert A. 2003. Are Factor Substitutions in HMO Industry Operations Cost Saving? Southern Economic Journal 69(4): 800–821.

Okunade, Albert A., and Chutima Suraratdecha. 2006. The Pervasiveness of Pharmaceutical Expenditure Inertia in the OECD Countries. Social Science & Medicine 63 (July): 225–238.

Okunade, Albert A., and Murthy Vasudeva. 2002. Technology as a “Major Driver” of Health Care Costs: A Cointegration Analysis of the Newhouse Conjecture. Journal of Health Economics 21(1): 147–159.

Ringel, Jeanne S., Susan D. Hosek, Ben A. Vollaard, and Sergej Mahnovski. 2001. The Elasticity of Demand for Health Care. A Review of the Literature and Its Application to the Military Health System. Prepared for the Office of the Secretary of Defense. National Defense Research Institute. RAND Health.

Seget, Steven. 2006. Pharmaceutical Market Trends, 2006–2010: Key Market Forecasts and Growth Opportunities. London: URCH Publishing.

Albert A. Okunade

Mustafa C. Karakus

PHARMACEUTICAL INDUSTRY

In the public media and in discussions of healthcare ethics significant questions have been raised about some of the practices of the pharmaceutical industry in the early years of the twenty-first century. The increase in expenditures for medications in the United States appears to be one of the reasons for this attention. The expansion of direct-toconsumer advertising of prescription drugs, particularly on television, and the manner in which industry sales representatives relate to physicians are among the other factors that have focused attention on the industry.

Pharmaceutical companies are in the healthcare business. It therefore is not surprising that much of the interest in the ethics of the industry relates to the potential impact of company practices on the quality and cost of healthcare, access to healthcare, and the integrity of healthcare professionals. This entry discusses some of the major and recurring issues in studies of and commentaries on ethics and the pharmaceutical industry.

Relationships between Industry Representatives and Healthcare Professionals

Representatives of the pharmaceutical industry relate to healthcare professionals in a variety of ways, including personal visits with physicians, exhibits at professional meetings, industry-sponsored education on products, financial support for nonindustry educational programs, and employment of professionals as consultants. The general ethical concerns related to these relationships are whether the interactions are in the best interests of patients and the way the relationships should be managed or structured to prevent a negative impact on healthcare.

It has long been recognized in business ethics that when gifts are given by vendors or suppliers to purchasers, there is a serious risk of undermining the objectivity of the purchasers. Most corporate codes of ethics limit the kinds of gifts that may be offered and accepted to those of minimal or nominal value. Although physicians may not be purchasers as that term sometimes is understood, their decisions are directly related to the purchase of pharmaceutical products. As could be expected, therefore, the issue of gift giving has received particular attention in the context of efforts to prevent or limit inappropriate industry influence on healthcare professionals.

Studies consistently report that the acceptance of gifts or samples from pharmaceutical representatives is associated with the rapid prescription of a new drug, the prescription of fewer generic drugs, the use of more newer medications, and formulary requests for medications (Wazana). Although some healthcare professionals state that gifts and personal relationships do not influence their professional judgment about what is best for patients, research raises serious doubt about the validity of that assertion.

The responsibility to avoid practices that result in unnecessary conflicts of interest rests with both the industry and healthcare professionals. Professional healthcare providers have a responsibility to prevent other interests from compromising their ability to exercise independent objective judgment in their work, in other words, a responsibility to subordinate other interests to their commitment to provide good medical care. A pharmaceutical company, as a healthcare business, has a responsibility to interact with physicians and other healthcare professionals only in ways that do not lead to harm of patients or undermine the professionalism of medical practice.

By 2002 healthcare professionals, healthcare organizations, the pharmaceutical industry, and the federal government had begun major efforts to reform the interactions of company representatives with physicians in response to the concerns that have been identified here. Many hospitals developed policies clarifying and restricting the activities of industry representatives while on the hospital campus. The American Medical Association (AMA) undertook a major initiative to communicate its ethical guidelines on gifts to physicians, and the Ethics and Human Rights Committee of the American College of Physicians, and the American Society of Internal Medicine issued a position paper titled "Physician-Industry Relations" (Coyle). The industry trade association, the Pharmaceutical Research and Manufacturers of America (PhRMA), published its voluntary "Code on Interactions with Healthcare Professionals" (Pharmaceutical Research and Manufacturers of America). The U.S. Department of Health and Human Services (2002) drafted standards for pharmaceutical companies, the first of this kind, for marketing products to healthcare professionals.

Although there were differences among these efforts, they all were designed to limit abuses without prohibiting all interaction between the industry and healthcare professionals. There is a widespread belief that continued interactions are valuable and benefit patients, especially through the information that is provided to healthcare professionals by the industry about new products and the risks and benefits of these products. It remains to be seen whether these reforms will prevent undue industry influence on doctors' prescribing behavior.

It also remains to be seen whether a system that permits drug companies to function as a significant source of physician education despite the fact that those companies have an organizational self-interest in selling their drugs (especially their most profitable drugs) will continue to be accepted as reasonable and ethically supportable. For many observers it is irresponsible to expect unbiased information about their own products from drug companies. Although pharmaceutical companies have an interest in promoting good healthcare, their marketing practices are designed to sell their products.

Industry Sponsorship of Research

Another issue that has received significant attention in healthcare ethics is sponsorship of medical research by the pharmaceutical industry. As in the issue of the relationship between doctors and the pharmaceutical industry, the concern is whether the nature of the relationship undermines professionalism and scientific objectivity, a concern expressed most frequently about clinical trials. The way a trial is designed and/or the relationship of the clinical researcher to the sponsor may result in research that is neither good science nor in the public interest.

Much attention has been paid to financial conflicts of interest that result from the relationship of investigators to the companies that manufacture the medication and/or sponsor their research. When investigators are paid consultants to or regularly receive speaker honoraria from a company, when they have significant personal funds invested in company stock, or when the research compensation arrangement is such that they personally benefit significantly, their scientific and professional objectivity and independence may be compromised. In these situations there is an incentive to avoid reporting findings that make it less likely that the company will do well selling the product or continue to hire the investigator.

Ethical reflection on conflicts of interest has indicated that in most instances actual conflicts of interest are unrecognized and/or unintentional. That is, professionals do not choose deliberately to go against their primary responsibility. Instead, the nature of the context inclines one to other interests, often without conscious awareness. Most efforts to prevent or mitigate the potential negative effects of conflicts of interest therefore go beyond appeals to individual ethical integrity. Policies, procedures, and other safeguards have to be put in place.

One response to the growing concern about the financial interest of investigators was a decision made by several major medical journals in 2001 to revise and strengthen their policies regarding financial disclosure by authors. Authors are required to disclose the sponsorship of their studies and any relevant financial associations. Editors can use that information in making decisions about publication and to inform readers of potential bias if an article is published.

Another response to concern about conflicts of interest was a task force report approved in 2001 by the Executive Council of the Association of American Medical Colleges (AAMC). The AAMC Taskforce on Financial Conflicts of Interest in Clinical Research developed guidelines for medical school policies on financial conflicts of interest. In addition to requirements for reporting and monitoring, the task force recommended that institutional policies assume that an individual who has a significant financial interest in a study involving human subjects should not do that research. This assumption may be overcome in individual cases, but the researcher should have to persuade an institutional committee that his or her involvement is in the best interests of the subjects.

Although most of the emphasis has been on the responsibility of investigators to avoid conflicts of interest, there is a concomitant responsibility on the part of companies that sponsor research to avoid such conflicts. Companies have a responsibility to ensure that trials assessing the safety and efficacy of their medications are scientifically sound. They can do this by adopting policies and practices designed to prevent obstacles to the independence and objectivity of investigators. In addition to avoiding conflicts of interest for the investigators, companies need to avoid the other reported threats to scientific independence, such as industry control over or delay of publication of study results. The ethical burden of doing good research falls on both the sponsors and the clinical investigators.

Direct-to-Consumer Advertising of Prescription Drugs

At the beginning of the twenty-first century the only countries that permitted direct-to-consumer (DTC) advertising of prescription drugs were the United States and New Zealand. In 1997 the U.S. Food and Drug Administration (FDA) adopted more permissive rules on mass media advertising of prescription drugs, and in the following years DTC advertising increased significantly in the United States. The 1997 regulations permitted advertisements for prescription drugs without detailed medical information on risks and side effects. The question of whether such advertising is ethically and socially responsible is widely debated.

The Institute of Medicine (1998) described problems with healthcare quality as including underuse (failure to provide proven effective medicine), overuse (unnecessary interventions or treatments not indicated by symptoms), and misuse (interventions causing preventable complications). The primary criticism of DTC advertising of prescription drugs is that it may contribute to overuse or misuse because patients demand and sometimes get prescriptions for medications that are not appropriate in their circumstances. This leads to poor-quality care. The unnecessary use of brand-name drugs also leads to unjustified increases in healthcare costs with all the implications for healthcare access that follow from rises in those costs. The primary ethical argument for DTC advertising is that it improves the quality of healthcare because patients, through their informed questions about specific medications, assist physicians in avoiding underuse or misuse. In addition, some argue that it gives patients a much more active role in their healthcare.

Other concerns have been raised about the impact of DTC advertising. One is whether such advertising more commonly contributes to valuable interaction or puts an undue strain on the patient–physician relationship. There is also serious concern about whether specific advertisements educate consumers or mislead them and oversimplify. There is also the question of whether in a culture in which such advertising is common the result will be a heightened expectation that physicians can and should prescribe pills to cure all ills.

One study found that prescription drugs that were advertised heavily accounted for a significant proportion of the increase in pharmaceutical spending in the year studied. The same study found that the number of prescriptions for the most heavily advertised drugs grew at a rate several times higher than that of prescriptions for other drugs (National Institute for Health Care Management). This study did not try to determine whether the public health benefited from or was harmed by the growth in prescriptions of the heavily advertised drugs. There appears to be evidence that DTC advertising leads to increased use of the drugs advertised in most cases, but it is not clear whether that use is medically appropriate and cost-effective and how the patient–doctor relationship is affected.

The controversy about whether DTC advertising is good for public health and healthcare is related to other questions about the nature of a good healthcare system. Those who advocate a more rigorous evidence-based foundation for decisions about medical treatment are not likely to welcome the influence of popular marketing tactics and techniques or that of patients who expect to get specific brand-name medications. The same thing is true of those who are seeking the most effective allocation of limited healthcare resources. In contrast, those who believe that patients are best served by a consumer-driven model of healthcare are likely to welcome the contribution of advertising to consumer initiative in interactions with professionals.

Many healthcare professionals have not accepted the claim that DTC advertising contributes to improved patient care. Patients who demand a particular brand-name drug are not necessarily better-informed patients. Some advertising does not even indicate the condition or symptoms a medication is designed to address; little if any of it describers the success rate of a drug or the necessary duration of use. Furthermore, there is often no independent evidence that a more expensive brand-name product (the type that typically is advertised) is sufficiently superior to generic medications to justify the use of limited healthcare resources.

The basic question may be whether medicines are enough like other commodities that it is appropriate to advertise them in a similar manner. One major difference is that unlike consumer products, they have to be prescribed by a licensed professional. If the objective of DTC prescription drug advertising is a better-informed public, the informational nature of the marketing will be of central importance. If the objective is to contribute to improvement in the quality of healthcare, the advertising will be designed to prevent misuse and overuse as well as underuse.

Other Issues

Whereas the three issues discussed above have received the most attention in the literature on healthcare ethics, several other questions have been raised about the practices and standards of the pharmaceutical industry. Three additional concerns are noted below as examples of those issues.

MISUSE OF THE PATENT SYSTEM. Pharmaceutical companies have been accused of "gaming the drug patent system." (New York Times) The concern here is that drug companies are using questionable methods to extend the life of their most profitable patents. At least some of those methods are legal, taking advantage of existing interpretations of the law. One such method is to sue a generic company for infringing on patents for packaging or dosing schedules. Those suits automatically delay the introduction of the generic version into the marketplace for thirty months even if the suit is frivolous. Extending patent life may prove financially beneficial to the company but may be detrimental to public health by increasing healthcare costs and placing an unnecessary burden on available healthcare resources. The question is whether this is an ethically defensible practice for a health-related business even when it is legal.

PRICING. A related issue concerns pricing. The effort at the beginning of the twenty-first century to extend Medicare benefits to cover prescription drugs was driven in large part by the high cost of prescription drugs for many citizens over age sixty-five. The fact that the same drugs can be purchased in a neighboring country at a much lower price raises the question of whether the price in the United States is unnecessarily high. In addition, because the prices of pharmaceuticals are different for group purchasers from what they are in retail pharmacies, those who must purchase their prescription drugs at a local retail pharmacy pay the highest prices. This is a part of the bigger issue of equitable access to healthcare in the United States, but it also raises a serious question for the pharmaceutical industry: What constitutes fair pricing for prescription medicines?

RESEACH AND DEVELOPMENT. Pharmaceutical companies also have also been challenged in terms of their research and development agenda. There are two parts to this criticism: (1) that many of the drugs being developed are "metoo" medications, or prescription drugs that are slightly different formulations of existing drugs; and (2) that the new medications developed by the (multinational) industry are more likely to be lifestyle drugs for the wealthy world than drugs for serious diseases commonly found in poorer countries. Research programs in pharmaceutical companies on male impotence (Silverstein) and on baldness, for example, may have many more resources put into them than research programs on malaria. Because the industry both is a forprofit industry and accounts for a significant part of international efforts to meet the real healthcare needs of people, what is a responsible agenda for research and development?

Conclusion

A review of some of the ethical concerns about the pharmaceutical industry must focus on criticisms and questions related to industry practices. This focus does not deny that the industry has made significant contributions to public health through the development and marketing of important medications.

The concept of the stakeholder has come to occupy a central place in reflection on business ethics. Businesses have responsibilities to various stakeholders: all those who are affected significantly by company decisions and practices, including employees, investors, customers, suppliers, and the larger community. Although it is not always possible to satisfy the concerns and legitimate interests of all stakeholders all the time, it is not satisfactory to say that a company has only one key responsibility: to benefit the shareholders. Making the right decisions and keeping priorities straight when there have to be trade-offs in regard to different stakeholders is the hard work of business ethics.

Establishing the right priorities among stakeholder interests depends somewhat on the nature of the industry. Businesses in the healthcare industry, whether for-profit or not-for-profit, have a high-priority responsibility to protect public health and the integrity of the healthcare system. When specific practices of a health-related business appear to be placing the public health at unnecessary risk or to be undermining the public commitment to a good healthcare system, it is reasonable to question the ethical appropriateness of those practices. The variety and seriousness of the questions asked about practices of the pharmaceutical industry appear to indicate that for many people some industry practices mean unnecessarily risks for health and healthcare despite the industry's contributions to healthcare.

leonard j. weber

SEE ALSO: Advertising; Commercialism in Scientific Research; Corporate Compliance; Pharmaceutics, Issues in Prescribing

BIBLIOGRAPHY

Angell, Marcia. 2000a. "Is Academic Medicine for Sale?" New England Journal of Medicine 342: 1516–1518.

Angell, Marcia. 2000b. "The Pharmaceutical Industry—To Whom Is It Accountable?" New England Journal of Medicine 342: 1902–1904.

Blackett, Tom, and Robins, Rebecca, eds. 2001. Brand Medicine: The Role of Branding in the Pharmaceutical Industry. New York: Palgrave.

Bodenheimer, Thomas. 2000. "Uneasy Alliance—Clinical Investigators and the Pharmaceutical Industry." New England Journal of Medicine 342: 1539–1544.

Coyle, Susan L. (for the Ethics and Human Rights Committee, American College of Physicians, American Society of Internal Medicine). 2002. "Physician-Industry Relations." Annals of Internal Medicine 136: 396–406.

Holmer, Alan F. 2002. "Direct-to-Consumer Advertising— Strengthening Our Health Care System." New England Journal of Medicine 346: 526–528.

Institute of Medicine National Roundtable on Healthcare Quality. 1998. "The Urgent Need to Improve Health Care Quality." Journal of the American Medical Association 280: 1000–1005.

Kelch, Robert P. 2002. "Maintaining the Public Trust in Clinical Research." New England Journal of Medicine 346: 285–287.

New York Times. 2002. "Gaming the Drug Patent System." June 10, editorial, p. A24.

Silverstein, Ken. 1999. "Millions for Viagra, Pennies for Diseases of the Poor." The Nation, July 19, pp. 13–19.

U.S. Department of Health and Human Services, Office of Inspector General. 2002. "Draft OIG Compliance Program Guidance for Pharmaceutical Manufacturers." Federal Register 67: 62057–62067.

Wazana, Ashley. 2000. "Physicians and the Pharmaceutical Industry: Is a Gift Ever Just a Gift?" Journal of the American Medical Association 283: 373–380.

Wolfe, Sidney M. 2002. "Direct-to-Consumer Advertising— Education or Emotion Promotion?" New England Journal of Medicine 346: 524–526.

INTERNET RESOURCES

American Medical Association. 1990. "Gifts to Physicians from Industry." Updated 1998. Available from <http://www.amaassn.org>.

National Institute for Health Care Management. 2001. "Prescription Drugs and Mass Media Advertising, 2001." Available from <http://www.nihcm.org>.

Pharmaceutical Research and Manufacturers of America. 2002. "PhRMA Code on Interactions with Healthcare Professionals." <http://www.phrma.org>.

PHARMACEUTICAL INDUSTRY

PHARMACEUTICAL INDUSTRY. Production of substances for the prevention or treatment of disease or other human ailments began in the American colonies as an unspecialized craft. By the mid-twentieth century, however, it was largely the province of a few specialized corporate enterprises that depended on a flow of creative product developments from well-financed research laboratories. In the colonial period, physicians of limited training and even the keepers of general stores often compounded and distributed medicinal materials, but by about 1800, pharmaceutical production and distribution began to emerge as a specialized area of commerce.

During the second half of the nineteenth century, the character of production of pharmaceutical preparations again changed substantially. The large military demand during the Civil War encouraged large-scale, specialized, and mechanized production. The rapid growth and dispersion of the population in the late 1800s stimulated further entry of manufacturers into the field, many of whom were trained pharmacists or physicians. Around 1900 many new substances joined the pharmacopoeia, which reflected the influence of scientific work. Leadership in both scientific and commercial development came from Germany, Switzerland, and France. In the early twentieth century, a few American companies introduced research facilities, but they enjoyed only limited success competing against German and Swiss companies.

The two world wars did much to change the character and role of the American industry. The large military market and American and Allied civilian markets, cut off from the German suppliers, became the domain of American companies. Moreover, American patents held by German firms became available to American companies. The new therapeutic approaches that emerged during the first third of the century, including the development of chemicals that specifically attack disease-causing agents without harming the human host and the identification of vitamins and hormones, changed the general character of the pharmacopoeia. One of the most important new developments, antibiotics, was the product of British research from the late 1920s to the early 1940s, but leading American companies introduced commercial production of the first antibiotic, penicillin, during World War II. After the war, the leading companies introduced a number of important new antibiotics, which helped to place the American industry in a position of international leadership in innovation and sales.

About two dozen corporations came to dominate the industry. The drug industry grew rapidly and began to produce a host of new products that were effective in the prevention, treatment, and eradication of many deadly diseases. Drug therapy became important, widespread, and generally cost effective. The drug industry in the late twentieth century was a large, highly profitable, socially important, and politically powerful entity. As a result of these successes and some widely publicized failures, drug company activities became highly politicized.

The largest and most sophisticated multinational drug companies combined research and development with an elaborate network for distribution of information and products. The industry became increasingly international. Worldwide production doubled between 1975 and 1990, reaching $150 billion. Market growth proved nearly as robust. Debate continued in the early twenty-first century about the extent and appropriateness of the high profits of the industry, which were well above the average for all manufacturing industries as well as for Fortune 500 companies.

By the end of the 1980s, public concern over the cost of health care and growing interest in health care reform had increased markedly. This concern politicized federal agency and industry decisions. Drug makers typically offered price breaks to hospitals and health maintenance organizations, but pharmacists often faced huge markups. In the early 1990s, retail pharmacists and others brought price-discrimination suits against drug manufacturers. Analysts doubted the pharmacists would prevail in court because they suspected that the real intent behind such suits may have been to keep pressure on Washington to include some limits on differential pricing practices as part of health care reform.

Conservatives and industry spokespeople argued against government interference in the market, particularly through price controls. They claimed that without high profits, there would be little innovation. Liberals and consumer advocates pointed to the monopoly benefits of patent protection, evidence of oligopolistic behavior, and extensive government subsidization of research costs to back their claims that there should be price controls or profit limits set by the government.

Pricing decisions have always taken place within the context of patent laws, and in industrial countries, patent protection usually lasts sixteen to twenty years from the date of application. During this period, the company has exclusive marketing rights. Once the patent expires, a drug is much less profitable. Even when prices are high,

companies may claim products are cost-effective by pointing to the cost of alternative methods such as surgery and other treatments. Since the 1950s, debate over pharmaceutical profits has been tied to the question of whether high profitability is the result of monopoly or oligopoly. It is doubtful that any firm enjoys monopolistic status, but evidence suggests that some enjoy considerable market power.

The largely cordial relationship between government and the drug industry began to change in 1959 with the Kefauver hearings. Questions emerged about research practices, drug safety and effectiveness, and price disparities between brand-name drugs and generic equivalents. The Thalidomide disaster, widely publicized in 1961, heightened public concern. Such events led to a more complex approval process and stricter manufacturing guidelines in the attempt to ensure both the safety and efficacy of drugs.

Drug manufacturers have complained about such regulations as lengthy approval processes by claiming that they prevent marketing of potentially beneficial drugs. Many new drugs, however, are often essentially equivalent to existing drugs and are not necessarily more effective. The industry has often benefited from government policies. Pharmaceutical manufacturers have rightly noted that research and development is risky and expensive, but university laboratories, small companies, and the National Institutes of Health (NIH) bear much of the risk associated with the research and development of new drugs. These organizations do much of the initial screening of compounds for possible therapeutic efficacy. Once they discover a promising compound, they can sell or license it to the large drug companies. Furthermore, the government provides roughly half of all U.S. health-related research money, largely through the NIH. The NIH conducts drug-related research, and when promising compounds appear, companies bid for a license to market them. The industry benefits from a variety of tax breaks, including Section 936 of the U.S. Internal Revenue Code. Intended to promote economic development in Puerto Rico, Section 936 allows U.S. industries partial tax exemption on profits from operations in Puerto Rico and other U.S. possessions. Consumer advocates and policy-makers continue to debate these and other issues as they address the rising costs of health care.

BIBLIOGRAPHY

Abraham, John. Science, Politics, and the Pharmaceutical Industry: Controversy and Bias in Drug Regulation. New York: St. Martin's Press, 1995.

Blackett, Tom, and Rebecca Robins, ed. Brand Medicine: The Role of Branding in the Pharmaceutical Industry. New York: St. Martin's Press, 2001.

Gambardella, Alfonso. Science and Innovation: The US Pharmaceutical Industry during the 1980s. Cambridge, U.K.: Cambridge University Press, 1995.

Harris, Michael R., and Mark Parascandola. Medicines: The Inside Story. Madison, Wis.: American Institute of the History of Pharmacy, 1996.

Kaplan, Steven N., ed. Mergers and Productivity. Chicago: University of Chicago Press, 2000.

Schweitzer, Stuart O. Pharmaceutical Economics and Policy. New York: Oxford University Press, 1997.

Swann, John Patrick. Academic Scientists and the Pharmaceutical Industry: Cooperative Research in Twentieth-Century America. Baltimore: Johns Hopkins University Press, 1988.

Weatherall, Miles. In Search of a Cure: A History of Pharmaceutical Discovery. Oxford: Oxford University Press, 1990.

Resse V.Jenkins/a. e.

See alsoAcquired Immune Deficiency Syndrome (AIDS) ; Biochemistry ; Chemical Industry ; Clinical Research ; Food and Drug Administration ; Health and Human Services, Department of ; Health Care ; Medicine and Surgery ; Medicine, Military ; Pharmacy ; Pure Food and Drug Movement .

Pharmaceutical Chemistry

Pharmaceutical chemists are involved in the development and assessment of therapeutic compounds. Pharmaceutical chemistry encompasses drug design, drug synthesis , and the evaluation of drug efficacy (how effective it is in treating a condition) and drug safety. Prior to the nineteenth century, schools of pharmacy trained pharmacists and physicians how to prepare medicinal remedies from natural organic products or inorganic materials. Herbal medications and folk remedies dating back to ancient Egyptian, Greek, Roman, and Asian societies were administered without any knowledge of their biological mechanism of action. It was not until the early 1800s that scientists began extracting chemicals from plants with purported therapeutic properties to isolate the active components and identify them. By discovering and structurally characterizing compounds with medicinal activity, chemists are able to design new drugs with enhanced potency and decreased adverse side effects.

Drug discovery is the core of pharmaceutical chemistry. The drug discovery process includes all the stages of drug development, from targeting a disease or medical condition to toxicity studies in animals, or even, by some definitions, testing the drug on human subjects. Typically, conditions that affect a larger percentage of the population receive more attention and more research funding. Antiulcer drugs and cholesterol-reducing agents are currently the therapeutic areas of greatest emphasis. To develop a drug to target a specific disease, researchers try to understand the biological mechanism responsible for that condition. If the biochemical pathways leading up to the disease are understood, scientists attempt to design drugs that will block one or several of the steps of the disease's progress. Alternatively, drugs that boost the body's own defense mechanism may be appropriate.

How do chemists "discover" drugs? Often there is an existing remedy for a condition, and scientists will evaluate how that drug exerts its actions. Once the drug's structure is known, the drug can serve as a prototype or "lead compound" for designing more effective therapeutic agents of similar chemical structure. Lead compounds are molecules that have some biological activity with respect to the condition under investigation. However, the lead compound may not be effective in combating the disease, or it may produce undesirable side effects. Lead optimization involves chemical modifications to the lead compound to produce a more potent drug, or one with fewer or decreased adverse effects.

Computers have transformed the drug discovery process. Rational drug design involves computer-assisted approaches to designing molecules with desired chemical properties. Rational drug design is based on a molecular understanding of the interactions between the drug and its target in biological systems. Molecular modeling software depicts three-dimensional images of a chemical. Mathematical operations adjust the positions of the atoms in the molecule in an attempt to accurately portray the size and shape of the drug, and the location of any charged groups. Chemists can vary the atoms or groups within the model and predict the effect the transformation has on the molecular properties of the drug. In this way, new compounds can be designed.

Advances in technology have made it possible for medicinal chemists to synthesize a vast number of compounds in a relatively short time, a process referred to as combinatorial chemistry. In this technique, one part of a molecule is maintained, as different chemical groups are attached to its molecular framework to produce a series of similar molecules with distinct structural variations. Combinatorial libraries of these molecular variants are thus created.

Every chemical that is synthesized must be tested for biological activity. In vitro testing involves biological assays outside a living system. For example, if the desired effect of a drug is to inhibit a particular enzyme, the enzyme can be isolated from an organ and studied in a test tube. New technologies have made it possible to assay large numbers of compounds in a short period. High-throughput drug screening allows pharmaceutical chemists to test between 1,000 and 100,000 chemicals in a single day! A compound that demonstrates some biological activity will undergo further tests, or it may be chemically modified to enhance its activity. As a consequence, chemical libraries consisting of potentially therapeutic compounds are developed. Each of these compounds can then serve as leads for the development of new drugs to be screened.

Once a drug shows promise in vitro as a therapeutic agent, it must also be screened for toxic properties. Adverse drug side effects are often due to the interaction of the drug with biological molecules other than the desired target. It is very rare that a drug interacts with only one type of molecule in a living system. Drug selectivity refers to the ability of the compound to interact with its target, not with other proteins or enzymes in the system. To investigate drug toxicity, animal studies are performed. These studies also estimate mutagenicity, that is, whether the compound under investigation damages genetic material.

Rarely does a drug pass through a biological system unchanged. Most drugs undergo chemical transformations (in a process known as drug metabolism ) before they are excreted from the body. The drug transformation products (metabolites ) must be identified so that their toxicological profiles can be determined.

Since the 1970s more attention has been given to drug formulation and methods of drug delivery. Historically, drugs have been administered orally, as a pill or a liquid, or in an injectable form. The goal of drug-delivery systems is to enable controlled and targeted drug release. Today, many medications are commonly introduced as inhalants or in a time-release formulation, either encapsulated in a biodegradable polymer or by means of a transdermal patch.

Once scientists and government regulatory agencies have determined the drug candidate to be relatively safe, it can enter into clinical trials. The clinical stage involves four phases of testing on human volunteers. Animal studies and in vitro testing continue during clinical investigations of a drug. Drug-therapy evaluation is very costly and time consuming. Phase I clinical trials evaluate drug tolerance and safety in a small group of healthy adult volunteers. Phase II trials continue to assess the drug's safety and effectiveness in a larger population. Volunteers participating in phase I trials understand that they are receiving experimental therapy. While those patients involved in phase II clinical trials are made aware of the medication and any known side effects, some of the volunteers may be administered a placebo (a compound with no pharmacological activity against the condition being treated) rather than the drug being studied. In a blind study, only the physician administering therapy knows whether the patient is receiving the drug or a placebo. Both groups of patients are monitored, and physicians or clinicians evaluate whether there is significant improvement in the condition of the group receiving the experimental drug, compared with those individuals who were administered a placebo. In a double-blind study, neither the physician nor the patient knows whether the drug, a placebo, or a related remedy has been administered. Therapy is monitored by an outside group.

Phase III and phase IV clinical trials involve larger populations. During phase III trials, which can last two to eight years, a drug is often brought to market. Phase IV studies continue after the drug is being marketed.

The field of pharmaceutical chemistry is diverse and involves many areas of expertise. Natural-product and analytical chemists isolate and identify active components from plant and other natural sources. Theoretical chemists construct molecular models of existing drugs to evaluate their properties. These computational studies help medicinal chemists and bioengineers design and synthesize compounds with enhanced biological activity. Pharmaceutical chemists evaluate the bioactivity of drugs and drug metabolites. Toxicologists assess drug safety and potential adverse effects of drug therapy. When a drug has been approved for human studies, clinicians and physicians monitor patients' response to treatment with the new drug. The impact of pharmaceutical chemistry on the normal human life span and on the quality of life enjoyed by most people is hard to overestimate.

see also Combinatorial Chemistry; Computational Chemistry; Molecular Modeling.

Nanette M. Wachter

Bibliography

Vogelson, Cullen T. (2001). "Advances in Drug Delivery Systems." Modern Drug Discovery 4(4):49–50, 52.

Williams, David A., and Lemke, Thomas L. (2002). Foye's Principles of Medicinal Chemistry, 5th edition. Philadelphia: Lippincott Williams & Wilkins.

Wolff, Manfred E., ed. (1996). Burger's Medicinal Chemistry and Drug Discovery, 5th edition. New York: Wiley.

PHARMACEUTICAL INDUSTRY

The pharmaceutical industry in the United States dates back to the early 1800s. Opium was routinely prescribed in the United States as far back as the eighteenth century; however, concoctions known as "patent medicines" did not make an appearance until the nineteenth century. Patent medicines became very popular; they bore names such as "Carter's Little Liver Pills." During this time many pharmaceutical companies were founded in the Midwest, including Parke Davis, Eli Lilly, and Upjohn Company.

As the industry developed, New York City was an important center of trade in drugs; Philadelphia also emerged as a home for about six pharmaceutical manufacturers. Pharmacy schools, which began to open in several states between 1821 to 1859, probably contributed to the growth of the pharmaceuticals industry. (The American Journal of Pharmacy began publication in 1825.) Another probable factor in the growth of the industry was the prodigious amount of drugs used during the American Civil War (1861–1865). By 1870 there were almost 300 pharmaceutical manufacturers in existence.

During the early nineteenth century, several new drugs quickly came into common use. Some of these were opiates, which were later greatly restricted during the twentieth century. Morphine was first commercially produced in the 1830s. After the invention of the hypodermic needle in the 1860s, morphine use became more widespread as it could be easily injected into the patient. Another (subsequently) restricted drug, cocaine, was first commercially produced in the 1880s. When it was first introduced, it became very popular— physicians thought that it was harmless. (Until it was found to be addictive, cocaine was even used as an ingredient in the soft drink Coca-Cola.) In 1898, another opiate, heroin, was commercially available from the Bayer Company.

The dangers of opiates were not acknowledged until the 1900s, in part because there were no laws regulating the drug industry until the 1870s and 1880s. The Pure Food and Drug Act of 1906, the Shanghai Opium Convention of 1909, The Hague Opium Treaty, and the Harrison Narcotic Act (both in 1912) were all early attempts by the U.S. government to regulate drug manufacturing and distribution.

Several advancements in drug production were developed during the late nineteenth century which furthered development of the industry. Pharmaceutical manufacturers attempted to standardize batches of medicines between the various companies. In 1888 another improvement came in the form of a machine that produced pills of uniform dose and purity. Later, during the early twentieth century over-the-counter drugs were developed and marketed. Products, such as aspirin and laxatives, greatly increased the availability of medicines to the general public.

Following World War I (1914–1918) demand influenced the rapid commercial expansion of the pharmaceuticals industry. The number of chain drugstores increased during the 1920s and, as the industry grew, it consolidated; several drug companies merged. By the 1930s, market research became important in the industry; consumers wanted new medicines that could help two or more symptoms at a time. Sulfa drugs, designed to fight bacteria, were also developed during this period and became the choice for treatment of infections until the mid-1940s, when penicillin was commercially developed and marketed.

In 1937 over 100 Americans were killed when treated with a drug that had a toxic solvent in it. This resulted in stricter governmental regulations to improve drug testing. Changes included passing the Food, Drug, and Cosmetic Act of 1938, which was enforced by the Food and Drug Administration (FDA).

World War II (1939–1945) caused an upsurge in demand for the new antibiotic drug, penicillin, which was first marketed in 1946. (The major producer of penicillin was the Pfizer Company.) New medicines continued to appear after the war. Almost 500 new drugs entered the market between 1950 and 1959. With this expansion came advanced marketing tactics— pharmaceutical companies began to advertise drugs on television. As the pharmaceutical market grew, so increased the level of government regulation. In the 1950s and 1960s several new FDA laws were passed to further regulate the testing, certification, and prescription of drugs.

In the mid-1980s, the FDA was reorganized due to allegations of deficient practices. One issue examined by the reorganized FDA was the use of generic drugs, which, according to "The American Druggist," accounted for almost 45 percent of all prescriptions by the mid-1990s.

In the 1990s the pharmaceutical industry focused on the research and development of new drugs, especially drugs for treating diseases common to an elderly population, as well as cancer and AIDS. Biotechnology began to make an impact in the drug industry, as companies such as Amgen, Inc., and Chiron Corporation were founded. Competition resulted in the merging, restructuring, and downsizing of many pharmaceutical companies.

See also: Pure Food and Drug Act

FURTHER READING

Cray, William C. The Pharmaceutical Manufacturers Association: the First 30 Years. Washington, DC: Pharmaceuticals Manufacturers Association, 1989.

Foner, Eric, and John A. Garraty, eds. The Reader's Companion to American History. Boston, MA: Houghton Mifflin Co., 1991, s.v. "Drug."

McConnell, Stacy A., and Linda D. Hall, eds. Dun & Bradstreet/Gale Industry Reference Handbooks: Pharmaceuticals. Detroit: The Gale Group, 1998.

Mez-Mangold, Lydia. A History of Drugs. Totowa, NJ: Barnes & Noble, 1986.

"Phrma: Publications: Industry Profile 1998, Chapter 1," [cited January 31, 1999] available from the World Wide Web @ www.phrma.org/publications/industry/profile98/chap1.html#improved/.