Components of Pharmaceutical Innovation

Pharmaceuticals Industry

Political and Social Context of Innovation

Where Pharmaceuticals are Today

Components of Pharmaceutical Innovation


Social institutions

Cultural Beliefs

Economic Forces

International Relations

This paper covers the background and development of the pharmaceutical industry in the United States. It will cover the social facts and institutions, political actors, economic forces, environmental realities and, most important, the demographics and income levels which have driven pharmaceutical innovation in the United States.

Where Pharmaceuticals are Today

Healthcare expenditures today have become a major segment of all developed economies. In the United States, over 15% of GDP, or over $2 trillion, is spent on healthcare every year (Pear, 2004). This is significantly higher than other developed countries: in the European Union, the average is 10% of GDP (Economist, 2007). A great part of the expenditure — and profits — in our healthcare system go to the pharmaceutical industry, which accounts for $300 billion, or 15%, of the total healthcare expenditure in the United States (Economist, 2007).

The key issues for this nation with the pharmaceutical industry are as follows:

While accounting for 15% of total healthcare expenditures, over 50% of profits go to the pharma companies.

The cost ($800 million) and time (13 years on average) from inception to regulatory approval by the FDA impose a significant barrier to faster and better introduction of drugs.

The rising need due to an aging population collides with the increased costs, which have not been addressed on an outpatient basis by Medicare (for patients over 64) or by private or public insurance for those under 65.

The U.S. accounts for half of global pharmaceutical expenditures, despite being only 5% of the world’s population. Drug prices in the U.S. are higher than any other country in the world. Should Americans continue to pay the costs of drug development for the rest of the world?

Pharmaceutical companies today are facing a dearth of new products to replace current product revenues, challenges to patent situations, and a diminishing number of multi-billion dollar markets for new drugs. The future will require more targeted approaches, more specific disease focus, and shorter, less-expensive development cycles.

Components of Pharmaceutical Innovation


The age group over 65 is the fastest-growing segment of the U.S. population (Bureau, U.S. Census, 2001). The U.S. has more people over 65 than any other country other than China. This fact of a large and aging population is important to medical care because older people use much more health care than younger people. From age 50 to age 60, for example, the average expenditure per person increases by a factor of 7 (Reinhardt, 2000).

The correlation between age and health care expenditures in the 30 OECD countries is illustrated in the following graph (Reinhardt, 2000):

Social institutions

Healthcare was provided by private means through to the 1960’s. The coming of the Great Society ushered in Medicare and Medicaid, which started by supporting the medical expenses of seniors (65+) and those in the bottom 20% of the income level of the United States.

Private healthcare insurance began during the 1940’s, during World War II. At that time, wage controls made it impossible for companies to offer higher salaries, so they offered healthcare insurance as an inducement. After World War II, it became common for most Americans to receive their healthcare through their employer. With nearly full employment and long careers at the same company, healthcare was generally a non-issue for most working or retired Americans.

This relationship began to break down in the 1980’s, as healthcare expenditures soared (therefore giving impetus to companies to reduce healthcare costs), and workers began to move to different companies more often. if, in the meantime, the worker’s health preconditions changed, it could be difficult or impossible for that person to retain health coverage.

The FDA was created in 1966 as a result of the Thalidomide birth defects scandal. The FDA’s charter was to insure that drugs were “safe” and “efficacious.” Although the first goals were fairly modest, the FDA has now turned into a formidable barrier to entry of new drugs and medical devices.

Although many individuals with untreated illnesses are willing to take the risk of taking a new drug, the mandate of the FDA to “prove” safety results in a significant delay from the time of inception to final introduction on the market. The debate in society is: drugs faster with lower safety, or drugs safer with perhaps thousands dying untreated? The typical answer in the U.S. is a muddle — fast-track for those drugs which are able to get through politically, with a slow shuffle for the rest.

Cultural Beliefs

The U.S. uses more drugs, does more procedures, and tries to prolong life more than any other developed country. The U.S. performs 4 times the number of hysterectomies as other developed countries, 4 times the number of cardiac interventions (surgeries and angioplasty), and 8 times the number of breast removals or lumpectomies for cancer as compared to Europe.

The first response in the U.S. is to “do something, anything.” This is not the case in the UK, for example, which spends only 1/2 the amount per capita as the U.S. On health care (Economist, 2007). In the UK, the first thought is “do nothing,” while in the U.S., it is “do anything.” The result? Overprescription of pharmaceuticals.

The second cultural phenomenon in the U.S. is that 60% of all lifetime health expenditures hear are made in the last year of a person’s life. That is because in the U.S., unlike other developed countries, patients and their families are willing to undergo heroic measures to prolong life, even if for a few days or weeks (Hoover, 2002). While only 5% of Medicare patients die in any one year, costs hover around 30% of all Medicare expenses for those few patients.

Pharmaceuticals play a key role in extending life, even for a short period of time. One only need look at the drugs needed for each of over 5 million CHF (congestive heart failure) patients to see how much a typical senior must spend on drugs; these can include beta blockers, statins, diuretics, anti-platelet agents, aspirin, and anti-depression drugs.

Economic Forces

Pharmaceuticals exist in a competitive environment. The first healthcare decision is: does this patient receive any care at all? Pharmaceuticals are generally the first line of healthcare in a continuous path from drugs to in-hospital care to surgery to more drastic measures (like radiation for oncology).

Pharmaceutical companies have relied in the past on “blockbuster” drugs which provide tremendous sales and profits. Pfizer, which sells Lipitor, had $12 billion of sales for that drug alone — the largest sales of any pharmaceutical product worldwide.

Now, faced with Lipitor off patent and other statin drugs from competitors, Pfizer is facing a problem of how to replace that blockbuster drug. Given the high costs and time, Pfizer has few good choices (Herper, 2007).

International Relations

The U.S. protects the pharmaceutical industry by paying high prices and insuring — through several methods — that it is difficult for Americans to import drugs from other countries where drug prices may be lower.

Since the U.S. is largely a private-insurance country, there is a sort of free market for pharmaceuticals. Medicare sets prices through the CPT mechanism, but the prices for new drugs which are set by Medicare, and observed by other third-party players, are high as compared to other countries.

Part of the reason that U.S. prices are higher than elsewhere is that the government takes a much larger role in other major OECD countries, such as France, the UK, Canada and Germany. In those countries, the health ministry negotiates and publishes prices — generally much less than those in the United States. In developing countries, such as Mexico, a larger private-pay market and low incomes dictate that local branches of the pharma companies charge lower prices in order to stay in the market.

There are two constant irritations in U.S. pharma companies’ relationships internationally:

Some developing nations, such as India, Brazil and South Africa, are chipping away at the patent situation, trying to shorten the time until the drugs can be brought out in generic form.

The U.S. has supported high prices as the cost for innovation. Since other countries are not playing along, this means that their citizens are benefiting from the innovation paid by Americans.


Big Pharma is at a crossroads today. The previous “great” chronic diseases, like diabetes, heart disease, infectious disease (viral and bacterial) have now been tackled by “blockbuster” drugs.

The high regulatory pressures, price pressures and lack of future such blockbuster markets dictates that pharma companies will have to innovate a lot more in niches — more products, smaller markets. The large pharma companies which grew up in a time of plenty will therefore have to radically change how they do business, from increasing acquisition (which doesn’t always work), cooperative agreements, exemptions from regulatory approval, and other such measures.

At the same time, pharma companies must find a solution to work with fast-growing, important developing markets in such a way that innovation can still be paid for, while the developing countries get the drugs they need. A good precursor for this is anti-retroviral drugs against AIDS in Southern Africa. Realizing that they could not use patent law to enforce their claims, most big pharma companies came to an understanding with the governments which met everyone’s goals.


Bureau, U.S. Census. (2001). An Aging World. Washington, DC: U.S. Census Bureau.

Economist. (2007, October 25). The Pharmaceutical Industry: Beyond the Pill. Economist, p. n.p.

Economist. (2007). World Atlas. London: Economist.

Herper, M. (2007, October 29). Drug Drought. Forbes, p. n.p.

Hoover, D.R. (2002). Medical expenditures during the last year of life: findings from the 1992-1996 Medicare Current Beneficiary Survey – Cost of Care. Health Services Research, n.p.

Pear, R. (2004, January 9). Health Spending Rises to 15% of Economy, a Record Level. New York Times, p. n.p.

Reinhardt, U.E. (2000). Medicare: Its Financing and Future. Health Affairs, n.p.

Pharmaceuticals Industry

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