Drug Money

Name three big pharmaceutical companies off the top of your head.

Can't think of them?  That's okay, I couldn't either without some heavy research.  Sure, we may all know Johnson and Johnson, but firms like Merck & Co., Pfizer Inc., and GlaxoSmithKline not only aren't acknowledged by the public, but are almost completely forgotten without searching through the Wall Street tickers.

We know their products though.  They barrage us with ads during our favorite television shows.  They treat our passing sicknesses, our chronic diseases, and our cancers.  They help us to survive.  Yet whether their advertising causes our headaches, or their meds cure them, how many of us know exactly how they make a profit?

The short answer is by selling their drugs.  The long one requires a bit more of an explanation.  Revenue streams for the large firms above often begin with smaller, start-up manufacturers of new medication.  These small companies take on the risk of crafting a new drug and then usually undergo the first phase of FDA regulated testing on their own.  One would then think that, if successful, each small firm would simply continue testing and eventually market and sell their new medication.  However, a more stringent series of regulations were added to the FDA Act in 1962 called the Kefauver Harris Amendment which makes that scenario much more difficult for a small organization.  The Kefauver Harris Amendment forced pharmaceutical companies to prove the efficacy of their drugs before marketing and selling them to the public, and thereby requires a much more thorough series of tests and studies for any potential new medicine.  Therefore, after small firms create a promising new drug, they tend to license the production, marketing, and sale of that product to one of the large firms like Johnson and Johnson, which take on the responsibilities of further testing.  In this fashion, the large companies with ample capital are often composed of thousands of smaller ones which supply the innovation.  After the new medications are thoroughly tested and put on the market, the companies can start to generate the huge profits.

There are, of course, costs to those profits.  The above testing requires very large capital investments, and with testing comes failure.  The FDA has made research and development a costly endeavor and in the same way, government price caps on medication prices have also affected the bottom line of pharmaceutical companies.  Lucky for US based companies, the federal government is actually fairly lax in their price controls of medications which allows Americans more new medicine launches with shorter wait times for those launches.  Other nations aren't as relaxed about how much the public pays for drugs, however, and through the international price differences, a market for drug importation becomes not only very viable, but very profitable.  Nations with cheaper drug prices have begun to ship drugs over to the United States for sale, whether it be legally or illegally, and those shipments knock down the profits of local pharmaceutical companies.  One final main cost is the rise of the generic market which is made up of companies who challenge the patents of name brand drugs in order to market and sell other medications with similar make-up for a much lower cost.  Ongoing controversy still exists about ways to work around generics, like large firms creating their own generics or offering preferred customer cards to their consumers which allow patients to pay much smaller co-pays for drugs which remain much more expensive.

The big drug companies run a complicated economic game.  They are made up of thousands of smaller subsidiaries with their own products and staff.  They compete against organizations which create very similar products for a much smaller price and succeed through work arounds and advertising.  Most disconcerting of all is how much they control our lives.  And we don't even quite know how each of them operates and uses our money.

Hopefully this article has illuminated at least some of the intricate web of production upon which large firms like Johnson and Johnson, Merck & Co., Pfizer Inc., and GlaxoSmithKline operate upon.  And if nothing else, at least you could tell someone three big name pharmaceutical companies.

Information for this article was obtained from:

http://www.nber.org/reporter/fall06/danzon.html

http://www.emedicinehealth.com/fda_overview/article_em.htm

and

http://www.economist.com/node/10567536

-Spencer Swan