Real global expenditures on pharmaceutical R&D began rising substantially in the 1980s and nowhere more dramatically than in the USA where R&D spending was doubled during the 5-year period from 1986 to 1990. In 1992, the US Pharmaceutical Manufacturers Association predicted that US companies would invest close to $11 billion in R&D (PMA, 1992). Investment in pharmaceutical R&D is not without its rewards. The global market for pharmaceuticals was estimated to be $150 billion in 1991. More than 70% of this consumption took place in developed countries, with developing countries accounting for less than 20% of world consumption. Drug consumption has grown across the board since 1975, but a majority of the increase has come from a doubling of per capita consumption in Europe and the USA, and a trebling of per capita consumption in Japan.2
Over the past 30 years, 90% of marketable (i.e. patented and approved) new chemical entities (NCEs) have come from just ten countries. These include the USA, Japan and eight European countries. These are the only countries that have a significant research base, the existence of which is a function of the presence of large, integrated multinational companies. These companies have the unique capability of mustering the significant human and financial resources necessary to withstand the long lead-times and financial risk prevalent in the pharmaceutical industry.
Eastern Europe and the former USSR make up the next most significant group of producer countries, yet their production of NCEs appears to have fallen off dramatically in the 1980s. There are only another dozen or so countries that have any innovative capabilities whatsoever. A number of
2 Details in this review of global pharmaceutical R&D are derived from a publication prepared for the United Nations Industrial Development Organization (Ballance et at, 1992).
developing countries, including Korea, Mexico, China, India and Argentina, belong to this group. It must be emphasized, however, that these countries produced only 20 new pharmaceuticals in the last 30 years, or 1 % of the global total. It is probable that the long lead-time involved in drug development and the considerable risk involved in pursuing a single therapeutic target or screening strategy, mean that such small-scale efforts are hit or miss. Hobbelink's (1990) review of the 'merger mania' in the pharmaceutical industry and the rise and fall of the independent biotechnology 'boutique' in the 1980s and early 1990s in the USA supports the contention that economies of scale in drug research and development tend to favor the development of large, vertically integrated multinational pharmaceutical companies.
In addition, the sheer cost of developing a marketable pharmaceutical is a prohibitive factor limiting the involvement of small firms in substantial pharmaceutical R&D. In a study of pharmaceutical R&D costs in the USA, DiMasi et al. (1991) gathered proprietary data on 93 randomly selected NCEs that entered clinical testing during the 1970-82 period and came to market in the 1980s and early 1990s. Including out-of-pocket costs, time costs and the costs of NCEs abandoned during the development process, the capitalized cost of producing a marketable NCE in the 1980s came to $231 million (in 1987 dollars). Over half of the total expenditure represented the opportunity cost of funds locked up in pre-clinical and clinical R&D, a process of 12 years in length.
An earlier study utilizing a comparable methodology found an average cost of $101 million (in 1987 dollars) for NCEs tested between 1963 and 1975 (as updated by DiMasi et al, 1991). The increase in time required to market an NCE, two extra years, is responsible for roughly one-quarter of this increase in costs. Over 60% of the cost increase, however, is a result of increased out-of-pocket costs. Drug development in the 1990s is likely to continue to be an increasingly costly and time-consuming process. In a study of the returns and risks to pharmaceutical R&D, Grabowski and Vernon (1990) suggest that the after-tax return on investment in the industry approximates its cost of capital: at 9%. The study revealed that only three of ten marketed NCEs are likely to recoup investment costs. Burgeoning expenditures on R&D in the pharmaceutical industry have been accompanied by a gradual slowing in the rate of innovation.
The rate of approval of NCEs has steadily dropped on a world-wide basis in the past three decades. The world's pharmaceutical industry produces about 50 new NCEs each year. In the USA and Europe roughly only half as many NCEs were brought to market in the 1980s as in the 1960s. Japan is the exception to this trend. The Japanese increased their output of NCEs by two-thirds in the 1980s. Perhaps a more important indicator of the strength of R&D programs is the ability to generate 'consensus products' which are products that are introduced into at least six of the world's major pharmaceutical markets. Less than 10% of all NCEs introduced meet this qualification. By this measure, the pharmaceutical industry of the USA was by far the most important source of innovation in pharmaceutical products during the 1970-83 period, producing 42% of 'consensus products', four times the number mustered by its next closest competitor.
Nevertheless, the pace of innovation has slowed and many of the drugs in use today were actually discovered more than 20 years ago. Ballance, et al. (1992) suggest that this raises questions about the potential for eroding profits as the companies' patents expire. For example, in 1992 Imperial Chemical Industries (ICI) saw sales of its best-selling drug Tenormin fall rapidly as a result of vigorous competition from generic drugs (The Economist, 1992). When combined with a lack of promising NCEs in the conventional drug 'pipeline', as is the case at ICI which is looking at a dry spell of a year or two before a new product breaks through, the 1990s may be an interesting decade in the pharmaceutical industry.
The relative dearth in new ideas coming out of the traditional pharmaceutical sector does not apply to the biotechnology sector where scores of small firms are generating new ideas for pharmaceutical applications. Whether the 1990s will prove to be the decade in which the biotechnology industry fulfills its promise is beyond the scope of this chapter. Instead, the chapter explores the possibility that plants and other natural products might prove a promising source of compounds for the drug 'pipeline'. An investigation of the methods of drug development serves to put the role of these natural products into perspective.
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