Pharma Feels Pressure To Produce

The pharmaceutical industry is one of the largest revenue producers in the world and, in the United States, the pharmaceutical portion of the health care sector employs hundreds of thousands and is a major contributor to our gross domestic product.

We anticipate there is still significant opportunity for growth in the long term but at what price? The R&D costs are huge and, in some cases, approach nearly 20 percent of annual revenue. Large U.S. pharmaceutical companies appear vulnerable to increasing competition especially as key patents near expiration.

The companies face accelerating costs to develop new “blockbuster” drugs, increased competition from generic drug makers, risks associated from potential lawsuits relating to adverse side effects or even death, skyrocketing U.S. Food and Drug Administration approval procedures and expensive marketing campaigns.

Patents are especially important to the pharmaceutical industry since they are necessary to protect huge investments needed to develop new drugs. Patent protection has a significant impact on the commercial success of a company.

Patents are the core instrument used for protection in the competition between the “originator” and “generic” company. Beyond that, and according to Wikipedia, a generic drug can be produced and distributed before patent expiration. The generic drug can have a patent on the formulation but not on the active ingredient.

Generic drug companies incur fewer costs in creating the equivalent drug and can maintain profitability at a lower cost to consumers. Having more generic drug options means more cost-savings to consumers. Generic drugs cost about 30 percent to 80 percent less than brand name drugs.

This is especially important for Third World countries, where incomes are substantially lower than in the United States. One example is Plavix, a blood-thinner to reduce potential heart attacks. A generic company in India is producing the equivalent and selling it in Southeast Asia at a small fraction of the cost.

We believe pharmaceutical companies around the world are experimenting and feverishly trying to develop new breakthroughs in medicine, everything from new cancer treatments to delaying the aging process.

Major pharmaceuticals are trying to invent maintenance drugs so users are locked into a regimen for the remainder of their lifetimes, for example, drugs to control blood pressure or cholesterol.

While maintenance drugs create steady revenue streams for the originating pharmaceutical company, the drugs are becoming more difficult and expensive to bring to market, especially a global one.

The United States hosts the headquarters two of the largest pharmaceutical companies in the world -- Pfizer logged annual revenue of $71.1 million (total includes Wyeth) and Johnson & Johnson posted revenue of $63.7 million, as reported in mid-2009.

Two pieces of recent legislation have made it easier for generic drug approval.

The U.S. Drug Price Competition and Patent Term Restoration Act (known as the “Hatch-Waxman Act”), standardizes procedures for recognition of generic drugs. The applicant files an Abbreviated New Drug Application with the FDA seeking to demonstrate the therapeutic equivalence to a specified, previously approved drug.

In 2007, the FDA launched the Generic Initiative for Value and Efficiency. This legislation uses existing resources to help the FDA to modernize and expedite the drug approval process.

U.S. pharmaceutical companies are under increasing pressure as patents near expiration and as other countries around the world circumvent existing patents.

The subject of generic equivalents is a double-edged sword. On one hand, it helps to cut prescription drug costs to consumers; however, on the other hand, major pharmaceutical firms need to come up with new and exciting breakthroughs to stay competitive in a global market.

The number of direct and indirect employees in the United States relating to this industry is staggering. America can ill-afford another financial crisis as we witnessed in the automobile, financial, and publishing industries.

Only time will tell if U.S.-based pharmaceutical companies have the capability to compete in our global economy.

Note: This post came to We Mean Business from TechMan who follows industry trends.