Category:Pharmaceutical Industry

Sector Overview - Pharmaceutical Giants

‘There were times not long ago that drug companies were merely the size of nations. Now, after a frenzied two-year period of pharmaceutical mega-mergers, they are behemoths, which outweigh entire continents. The combined worth of the world’s top five drug companies is twice the combined GNP of all sub-Saharan Africa and their influence on the rules of world trade is many times stronger because they can bring their wealth to bear directly on the levers of western power.’ ^[1]

The pharmaceutical industry is one of the most profitable industries in both the US and Great Britain. Gross Profit margins of some of the leading pharmaceutical companies in recent years has been around 70 to 80 percent. ^[2]

The global drugs market is controlled by corporate behemoths such as Pfizer, Bristol-Myers Squibb, Bayer, Merck & Co, Pharmacia, Novartis, Johnson&Johnson, Abbott Laboratories, American Home Products, Eli Lilly, Schering-Plough, GlaxoSmithKline and Allergan. Their market domination enables them to dictate drug prices . In past years, pharmaceutical prices have risen faster than the rate of inflation. The fact that there is very little price elasticity (the elasticity of demand tells us how much the quantity demanded changes when the price changes) associated with price increases is a major factor contributing to the high profitability of the pharmaceutical industry. A patient will not change the demand for a product with a small change in price when there are no close or available substitutes. Actual manufacturing costs of medicines are relatively low. ^[3]

The big pharmaceutical companies’ profits can be even higher due to limited competition in the pharmaceutical industry caused by strict patent laws [when a company owns a patent for a key drug, profits can mount up since the company faces no competition] and high barriers for small firms [new competitors] to enter the industry. In addition, through a recent and ongoing wave of mergers and acquisitions the big companies intensify the process of consolidation [limiting competition in the so-called free market even further]. Also, more frequently strategic alliances (less costly than mergers and acquisitions) are being formed with small biotech companies in order to reap the (new) economic benefits biotechnology offers. The drug giants cannot keep track of all new developments themselves, but want to keep their pipelines full.^[4]

Advertising and lobbying

According to the Wall Street Journal:

The dearth of new products has led the industry to invest heavily in marketing and legal tactics that squeeze as much revenue as possible out of existing products. Companies have raised prices; the average price per pill has risen 63% since 2002, according to Michael Krensavage, Raymond James analyst. Companies raised advertising spending to $5.3 billion in 2006 from $2.5 billion in 2001 and since 1995 have nearly tripled the number of industry sales representatives to 100,000.

The industry spent $155 million on lobbying from January 2005 to June 2006, according to the Center for Public Integrity, on "a variety of issues ranging from protecting lucrative drug patents to keeping lower-priced Canadian drugs from being imported." The industry also successfully lobbied against allowing the federal government to negotiate Medicare drug prices, the center said. The lobbying has drawn fire from politicians, doctors and payers, and damaged the industry's public image.^[5]

References