Global Competition and the United States Pharmaceutical Industry

By Ramrattan, Lall; Szenberg, Michael | American Economist, Fall 2006 | Go to article overview

Global Competition and the United States Pharmaceutical Industry


Ramrattan, Lall, Szenberg, Michael, American Economist


1. Introduction

Most studies embed pharmaceutical companies within firms in different industries in studies of innovation, prices, and returns to make up for sample size and to infer aggregate industry performance from market structure. But the industry structure appears fragmented at best, with wave of mergers occurring to confront globalization and intellectual property rights (The Economist (US), June 23, 2001). Information about the structural direction that the industry will take resides within the brain cells of the CEOs of major companies.

The endogenous growth model predicts nonrivalrous behavior for R&D behavior in a national and global setting. This information translates into process and product innovation at the level of the firm, where R&D, advertising, and productivity are the driving forces for success. We have collected time series from 1980-1999 for 7 firms: Abbot Laboratories, American Home Products, Bristol-Myers Squibb, Eli Lilly, Merck, Johnson and Johnson, and Pfizer to investigate rivalry among them. We statistically fitted four equations corresponding to four hypotheses and found that smaller firms tend to set their R&D and advertising budgets taking Merck's previous outlays as given. However, when Total Factor Productivity is investigated for the same period, large firms tended to react to small firms, reaffirming concerns in the literature regarding size versus innovation.

2. Background

The U.S. Pharmaceutical Industry has enjoyed economies from the aging baby boomer population, aggressive R&D, advertising and productivity efforts; and now from the opportunities available in the global economy. The potential opportunities and challenges for pharmaceutical innovation are tremendous. Groundbreaking advances in technology have led to unprecedented pharmaceutical discoveries. Yet a major concern is that regulations by the FDA will generate low returns to investments in R&D. For instance, the rate of return in the late 1970s fell by a third to its 1960 levels, and the cost of discovering and developing new drugs increased 18-fold (Business Week, February 21, 1977).

During the 1980s, the pharmaceutical industry received a boost from the Reagan administration that lengthened the patents on prescription drugs and hastened the pace of approving generic drugs to substitute for drugs with expired patents. The immediate result in the 1980s was that R&D expenditure in drugs was about 10% of the industry's sales, versus 3% for all manufacturing industries (S&P Industry Survey, January 1985, H16). But the FDA's Center for Drug Evaluation and Research (CDER) still regulates the industry brand name, generic prescriptions and OTC drugs, placing a heavy time delay on production. The time it takes to develop a new drug has almost doubled from its 1960 levels. The actual trend is 8.1 years in the 1960s, 11.6 years in the 1970s, 14.2 years in the 1980, and a stable 14.9 years during 1990-1996 (Pharmaceutical Industry Profile, 2000, VI). CDER claimed that with the user-fee approach in the mid-1990s, where the applicant pays the government for its review, they have doubled the number of new drugs approved and halved the review time (FDA Consumer, September-October 1997, 21). Other policies such as the streamlining of the IND and the International Conference on Harmonization also reduced review time. However, the review time continues to generate concern. The industry's strategy is:

1. To have an ample supply of R&D projects and patents in the pipeline,

2. To lobby Congress and get extension of time on their patents in order to recoup their investment costs,

3. To allow the speedy approval of generic drugs in order to substitute for drugs whose patent has expired, and

4. To make drugs available before approval possible in special cases such as in the HIV cases in South Africa.

3. Globalization Effects

At the firm level, big changes such as NAFFA have not noticeably affected firms in the pharmaceutical industry relative to firms in other industries such as the textile, shoes, autos, and steel industries. …

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