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April 01, 2008 (Vol. 28, No. 7)

Defending Pharma Companies

Innovation Is Alive and Well in the Therapeutic Drug Industry

  • Marc-André Gagnon’s point of view piece in the February 15 issue of GEN maintains that, by and large, pharmaceutical companies have departed from the mission of developing innovative therapeutics in favor of marketing me-too drugs so as to maximize earnings. At first blush this might seem true, but the evidence points to the contrary.

    Gagnon makes the point that the pharmaceutical industry “has a great monopolistic capacity.” Citing Alfred D. Chandler’s 2006 book, Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical Industries, Gagnon states that “barriers to entry have been so high since the 1920s that not one new company has managed to become one of the world’s top 30 pharmaceutical firms since then.” That statement is simply not true.

    A list of the world’s 50 largest pharmaceutical companies (size determined by the volume of healthcare revenue reported for 2006) was obtained from Wikipedia, and financial data contained therein were confirmed by accessing the archives of the U.S. Securities and Exchange Commission.

    Dates of company origin were obtained from various sources, including company histories archived by Funding Universe. Of the 30 largest companies on that list, three—Teva, Eisai, and Alcon—were formed in 1935, 1941, and 1945, and represented the twenty-first, twenty-fifth, and twenty-seventh largest companies, respectively.

    Two biopharmaceutical companies on that list, Genentech and Amgen, were formed more recently and placed nineteenth and fourteenth, with revenues of $9.3 billion and $14.3 billion, respectively. Genentech, founded in 1976, achieved revenues that were almost as large as the $10.6 billion reported by Schering-Plough (16 on the list), whose U.S. origin dates back to 1876.
    Amgen, founded in 1980, was larger than Schering-Plough, and its revenues were almost as large as the $15.7 billion reported by Eli Lilly (13 on the list), also founded in 1876. Other rapidly growing biopharma companies moving up fast on the list include Genzyme and Gilead Sciences, each reporting over $3 billion of revenue for 2006. Genzyme (33 on the list) was founded in 1981, and Gilead Sciences (35 on the list) was founded in 1987.

    Gagnon implies that compared to other industries, acquisitions/mergers are especially characteristic of the pharmaceutical industry. He writes, “Access to the market is so restrained that smaller firms have no choice but to let themselves be bought by bigger players.” Acquisitions and mergers are common in practically every mature industry, but every so often a newcomer ventures forth, finds a niche, and becomes a major player.

    Moreover, as I discussed last year in this column (April 15, 2007, pg. 6), while a few companies may dominate an industry, it does not guarantee who will be ahead a few years later. Dramatic turnover has become increasingly common among the leaders in any given industry.

    Stressing the extensive amount of funds the pharmaceutical industry spends on marketing and sales, Gagnon claims that, “Research and development have become secondary for the dominant firms.” That is hardly the case.

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