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The Changing Economics of Medical Technology
and innovation, which will result in dramatic improvements in health, quality of life, and the economic well-being of our country. This nation can ill afford policies that discourage innovation in the pharmaceutical industry.
Those of us in the pharmaceutical industry frequently find ourselves having to develop a primer on the industry, its economics, and the nature of the discovery process. There is very little recognition, for example, that the R&D risk is enormous in our industry. Few people realize that it takes an average of 12 years and $230 million to develop a new drug (1). Nor do people realize that 7 of every 10 products that do reach the marketplace never recover the average cost of development. Most discouraging is that the message must be repeated in so many different ways. In the light of much-needed academic analyses—now planned or under way—of such subjects as the pharmaceutical industry's risks versus returns, I am hopeful that the economics of innovation in medicine will some day be better understood.
In the meantime, several broad-based initiatives are essential for drug innovation: we need increased government collaboration and support of basic biomedical research; we need better and broader science education at all levels; we need more equitable treatment for U.S. industry in world trade; and we need stronger worldwide protection of intellectual property—patents, copyrights, and trademarks. These are the specific issues of this paper.
Progress on these issues rests first on public policy, and any policy actions that affect the research-based pharmaceutical industry should be grounded firmly on an understanding of the economics of innovation in medicine. Merck & Co., Inc., the world's largest prescription drug company, is well positioned to contribute to such understanding. Merck has first-hand knowledge of the realities of the global marketplace, the challenges of research, and the economic policy environment that is conducive to success in business competition and in fighting disease.
THE COMPETITIVE, COSTLY SEARCH FOR NEW DRUGS
Let us approach public policy in the context of a global pharmaceutical industry. Merck, for example, does business in nearly 200 countries, and about half of its sales are made outside the United States. The company is part of an enormous industry: annual sales of ethical drugs for human use by all pharmaceutical companies worldwide are estimated at $120 billion (2). The industry is highly competitive, with no company holding as much as 5 percent of the world market (2). Even though Merck ranks number one worldwide, with 1989 sales of approximately $6.6 billion, its market share is only 4.7 percent.
This competition forces those who want to succeed to be aggressive in the search for new drugs—a search that is increasingly expensive. In 1989 U.S.-based pharmaceutical companies spent $7.3 billion on R&D (3), ex