Dividend policy is concerned with financial policies regarding paying cash dividend in the present or paying an increased dividend

at a later stage. Whether to issue dividends and what amount, is determined mainly on the basis of the company's inappropriate profit (excess cash) and influenced by the company's long-term earning power. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program. If there are no NPV positive opportunities, i.e. projects where returns exceed the hurdle rate, and excess cash surplus is not needed, then finance theory suggests management should return some or all of the excess cash to shareholders as dividends. This is the general case, however there are exceptions. For example, shareholders of a "growth stock", expect that the company will, almost by definition, retain most of the excess earnings so as to fund future growth internally. By withholding current dividend payments to shareholders, managers of growth companies are hoping that dividend payments will be increased proportionality higher in the future, to offset the detainment of current earnings and the internal financing of present investment projects. Management must also choose the form of the dividend distribution, generally as cash dividends or via a share buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms may elect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash; see Corporate action. Financial theory suggests that the dividend policy should be set based upon the type of company and what management determines is the best use of those dividend resources for the firm to its shareholders. As a general rule, shareholders of growth companies would prefer managers to have a share buyback program, whereas shareholders of value or secondary stocks would prefer the management of these companies to payout surplus earnings in the form of cash dividends.

Concept
Coming up with a dividend policy is challenging for the directors and financial manager a company, because different investors have different views on present cash dividends and future capital gains. Another confusion that pops up is regarding the extent of effect of dividends on the share price. Due to this controversial nature of a dividend policy it is often called the dividend puzzle. Various models have been developed to help firms analyze and evaluate the perfect dividend policy. There is no agreement between these schools of thought over the relationship between dividends and the value of the share or the wealth of the shareholders in other words. One school consists of people like James E. Walter and Myron J. Gordon (see Gordon model), who believe that current cash dividends are less risky than future capital gains. Thus, they say that investors prefer those firms which pay regular dividends and such dividends affect the market price of the share. Another school linked to Modigliani and Miller holds that investors don't really choose between future gains and cash dividends

Relevance of dividend policy[

Dividends paid by the firms are viewed positively both by the investors and the firms. The firms which do not pay dividends are rated in oppositely by investors thus affecting the share price. The people who support relevance of dividends clearly state that regular dividends reduce uncertainty of the shareholders i.e. the earnings of the firm is discounted at a lower rate, k e thereby increasing the market value. However, its exactly opposite in the case of increased uncertainty due to non-payment of dividends. Two important models supporting dividend relevance are given by Walter and Gordon.

Walter's model
Walter's model shows the relevance of dividend policy and its bearing on the value of the share.

Assumptions of the Walter model

1. Retained earnings are the only source of financing investments in the firm, there is no external finance involved. 2. The cost of capital, k e and the rate of return on investment, r are constant i.e. even if new investments decisions are taken, the risks of the business remains same. 3. The firm's life is endless i.e. there is no closing down. Basically, the firm's decision to give or not give out dividends depends on whether it has enough opportunities to invest the retain earnings i.e. a strong relationship between investment and dividend decisions is considered.

Model description
Dividends paid to the shareholders are reinvested by the shareholder further, to get higher returns. This is referred to as the opportunity cost of the firm or the cost of capital, k e for the firm. Another situation where the firms do not pay out dividends, is when they invest the profits or retained earnings in profitable opportunities to earn returns on such investments. This rate of return r, for the firm must at least be equal to ke. If this happens then the returns of the firm is equal to the earnings of the shareholders if the dividends were paid. Thus, it's clear that if r, is more than the cost of capital k e, then the returns from investments is more than returns shareholders receive from further investments. Walter's model says that if r<k e then the firm should distribute the profits in the form of dividends to give the shareholders higher returns. However, if r>k e then the investment opportunities reap better returns for the firm and thus, the firm should invest the retained earnings. The relationship between r and k are extremely important to determine the dividend policy. It decides whether the firm should have zero payout or 100% payout. In a nutshell : If r>ke, the firm should have zero payout and make investments. If r<ke, the firm should have 100% payouts and no investment of retained earnings. If r=ke, the firm is indifferent between dividends and investments.

Mathematical represent
Walter has given a mathematical model for the above made statements :

where, P = Market price of the share D = Dividend per share r = Rate of return on the firm's investments ke = Cost of equity E = Earnings per share'

The market price of the share consists of the sum total of: the present value of an infinite stream of dividends the present value of an infinite stream of returns on investments made from retained earnings.

Therefore, the market value of a share is the result of expected dividends and capital gains according to Walter.

Criticism
Although the model provides a simple framework to explain the relationship between the market value of the share and the dividend policy, it has some unrealistic assumptions. 1. The assumption of no external financing apart from retained earnings, for the firm make further investments is not really followed in the real world. 2. The constant r and ke are seldom found in real life, because as and when a firm invests more the business risks change.

Gordon's Model
Myron J. Gordon has also supported dividend relevance and believes in regular dividends affecting the share price of the firm

The Assumptions of the Gordon model

Gordon's assumptions are similar to the ones given by Walter. However, there are two additional assumptions proposed by him : 1. The product of retention ratio b and the rate of return r gives us the growth rate of the firm g. 2. The cost of capital ke, is not only constant but greater than the growth rate i.e. k e>g.

Model description
Investor's are risk averse and believe that incomes from dividends are certain rather than incomes from future capital gains, therefore they predict future capital gains to be risky propositions. They discount the future capital gains at a higher rate than the firm's earnings thereby, evaluating a higher value of the share. In short, when retention rate increases, they require a higher discounting rate. Gordon has given a model similar to Walter's where he has given a mathematical formula to determine price of the share.

Mathematical representation
The market prices of the share is calculated as follows:

where, P = Market price of the share E = Earnings per share b = Retention ratio (1 - payout ratio) r = Rate of return on the firm's investments ke = Cost of equity br = Growth rate of the firm (g)

Therefore the model shows a relationship between the payout ratio, rate of return, cost of capital and the market price of the share.

Conclusions on the Walter and Gordon Model

Gordon's ideas were similar to Walter's and therefore, the criticisms are also similar. Both of them clearly state the relationship between dividend policies and market value of the firm.

Capital structure substitution theory & dividends

The capital structure substitution theory (CSS) describes the relationship between earnings, stock price and capital structure of public companies. The theory is based on one simple hypothesis: company managements manipulate capital structure such that earnings-per-share (EPS) are maximized. The resulting dynamic debt-equity target explains why some companies use dividends and others do not. When redistributing cash to shareholders, company managements can typically choose between dividends and share repurchases. But as dividends are in most cases taxed higher than capital gains, investors are expected to prefer capital gains. However, the CSS theory shows that for some companies share repurchases lead to a reduction in EPS. These companies typically prefer dividends over share repurchases.
[3]

Mathematical representation
From the CSS theory it can be derived that debt-free companies should prefer repurchases whereas companies with a debt-equity ratio larger than

should prefer dividends as a means to distribute cash to shareholders, where D is the companys total long term debt

is the companys total equity is the tax rate on capital gains is the tax rate on dividends

Low valued, high leverage companies with limited investment opportunities and a high profitability use dividends as the preferred means to distribute cash to shareholders, as is documented by empirical research

Conclusion
The CSS theory provides more guidance on dividend policy to company managements than the Walter model and the Gordon model. It also reverses the traditional order of cause and effect by implying that company valuation ratios drive dividend policy, and not vice-versa. The CSS theory does not have 'invisible' or 'hidden' parameters such as the equity risk premium, the discount rate, the expected growth rate or expected inflation. As a consequence the theory can be tested in an unambiguous way.

Irrelevance of dividend policy

The Modigliani and Miller school of thought believes that investors do not state any preference between current dividends and capital gains. They say that dividend policy is irrelevant and is not deterministic of the market value. Therefore, the shareholders are indifferent between the two types of dividends. All they want are high returns either in the form of dividends or in the form of re-investment of retained earnings by the firm. There are two conditions discussed in relation to this approach : decisions regarding financing and investments are made and do not change with respect to the amounts of dividends received. when an investor buys and sells shares without facing any transaction costs and firms issue shares without facing any floatation cost, it is termed as a perfect capital market

Two important theories discussed relating to the irrelevance approach, the residuals theory and the Modigliani and Miller approach.

Residuals theory of dividends

One of the assumptions of this theory is that external financing to re-invest is either not available, or that it is too costly to invest in any profitable opportunity. If the firm has good investment opportunity available then, they'll invest the retained earnings and reduce the dividends or give no dividends at all. If no such opportunity exists, the firm will pay out dividends. If a firm has to issue securities to finance an investment, the existence of floatation costs needs a larger amount of securities to be issued. Therefore, the pay out of dividends depend on whether any profits are left after the financing of proposed investments as floatation costs increases the amount of profits used. Deciding how much dividends to be paid is not the concern here, in fact the firm has to decide how much profits to be retained and the rest can then be distributed as dividends. This is the theory of Residuals, where dividends are residuals from the profits after serving proposed investments. This residual decision is distributed in three steps: evaluating the available investment opportunities to determine capital expenditures.

evaluating the amount of equity finance that would be needed for the investment, basically having an optimum finance mix. cost of retained earnings<cost of new equity capital, thus the retained profits are used to finance investments. If there is a surplus after the financing then there is distribution of dividends.

Extension of the theory

The dividend policy strongly depends on two things: investment opportunities available to the company amount of internally retained and generated funds which lead to dividend distribution if all possible investments have been financed.

The dividend policy of such a kind is a passive one, and doesn't influence market price. the dividends also fluctuate every year because of different investment opportunities every year. However, it doesn't really affect the shareholders as they get compensated in the form of future capital gains.

Conclusion
The firm paying out dividends is obviously generating incomes for an investor, however even if the firm takes some investment opportunity then the incomes of the investors rise at a later stage due to this profitable investment.

Modigliani-Miller theorem
The ModiglianiMiller theorem states that the division of retained earnings between new investment and dividends do not influence the value of the firm. It is the investment pattern and consequently the [7] earnings of the firm which affect the share price or the value of the firm.

Assumptions of the MM theorem

The MM approach has taken into consideration the following assumptions: 1. There is a rational behavior by the investors and there exists perfect capital markets. 2. Investors have free information available for them. 3. No time lag and transaction costs exist. 4. Securities can be split into any parts i.e. they are divisible 5. No taxes and floatation costs. 6. The investment decisions are taken firmly and the profits are therefore known with certainty. The dividend policy does not affect these decisions.

Model description[
The dividend irrelevancy in this model exists because shareholders are indifferent between paying out dividends and investing retained earnings in new opportunities. The firm finances opportunities either through retained earnings or by issuing new shares to raise capital. The amount used up in paying out dividends is replaced by the new capital raised through issuing shares. This will affect the value of the firm in an opposite way. The increase in the value because of the dividends will be offset by the decrease in the value for new capital raising.

Pharmaceutical industries
The pharmaceutical industry develops, produces, and markets drugs or pharmaceuticals licensed for [1] use as medications. Pharmaceutical companies are allowed to deal in generic and/or brand medications and medical devices. They are subject to a variety of laws and regulations regarding the patenting, testing and ensuring safety and efficacy and marketing of drugs. The wordpharmaceutical comes from the Greek word pharmakeia. The modern transliteration of pharmakeia is pharmacia.

History[edit source | editbeta]

The earliest drugstores date to the Middle Ages. The first known drugstore was opened by Arabian pharmacists in Baghdad in 754,[2]and many more soon began operating throughout the medieval Islamic world and eventually medieval Europe. By the 19th century, many of the drugstores in Europe and North America had eventually developed into larger pharmaceutical companies. Most of today's major pharmaceutical companies were founded in the late 19th and early 20th centuries. Key discoveries of the 1920s and 1930s, such as insulin and penicillin, became massmanufactured and distributed. Switzerland, Germany and Italy had particularly strong industries, with the UK, US, Belgium and the Netherlands following suit. Legislation was enacted to test and approve drugs and to require appropriate labeling. Prescription and non-prescription drugs became legally distinguished from one another as the pharmaceutical industry matured. The industry got underway in earnest from the 1950s, due to the development of systematic scientific approaches, understanding of human biology (including DNA) and sophisticated manufacturing techniques. Numerous new drugs were developed during the 1950s and mass-produced and marketed through the 1960s. These included the first oral contraceptive, "The Pill", Cortisone, bloodpressure drugs and other heart medications. MAO inhibitors, chlorpromazine (Thorazine),haloperidol (Haldol) and the tranquilizers ushered in the age of psychiatric medication. Diazepam (Valium), discovered in 1960, was marketed from 1963 and rapidly became the most prescribed drug in history, prior to controversy over dependency and habituation. Attempts were made to increase regulation and to limit financial links between companies and prescribing physicians, including by the relatively new U.S. Food and Drug Administration (FDA). Such calls increased in the 1960s after the thalidomide tragedy came to light, in which the use of a new anti-emetic in pregnant women caused severe birth defects. In 1964, the World Medical Association issued its Declaration of Helsinki, which set standards for

clinical research and demanded that subjects give their informed consent before enrolling in an experiment. Pharmaceutical companies became required to prove efficacy in clinical trials before marketing drugs. Cancer drugs were a feature of the 1970s. From 1978, India took over as the primary center of pharmaceutical production without patent protection.[3] The industry remained relatively small scale until the 1970s when it began to expand at a greater rate.[citation needed] Legislation allowing for strong patents, to cover both the process of manufacture and the specific products, came into force in most countries. By the mid-1980s, small biotechnology firms were struggling for survival, which led to the formation of mutually beneficial partnerships with large pharmaceutical companies and a host of corporate buyouts of the smaller firms. Pharmaceutical manufacturing became concentrated, with a few large companies holding a dominant position throughout the world and with a few companies producing medicines within each country. The pharmaceutical industry entered the 1980s pressured by economics and a host of new regulations, both safety and environmental, but also transformed by new DNA chemistries and new technologies for analysis and computation.[citation needed] Drugs for heart disease and for AIDS were a feature of the 1980s, involving challenges to regulatory bodies and a faster approval process. Managed care and Health maintenance organizations (HMOs) spread during the 1980s as part of an effort to contain rising medical costs, and the development of preventative and maintenance medications became more important. A new business atmosphere became institutionalized in the 1990s, characterized by mergers and takeovers, and by a dramatic increase in the use of contract research organizations for clinical development and even for basic R&D. The pharmaceutical industry confronted a new business climate and new regulations, born in part from dealing with world market forces and protests by activists in developing countries. Animal Rights activism was also a challenge. Marketing changed dramatically in the 1990s. The Internet made possible the direct purchase of medicines by drug consumers and of raw materials by drug producers, transforming the nature of business. In the US, Direct-to-consumer advertising proliferated on radio and TV because of new FDA regulations in 1997 that liberalized requirements for the presentation of risks. The new antidepressants, the SSRIs, notably Fluoxetine (Prozac), rapidly became bestsellers and marketed for additional disorders. Drug development progressed from a hit-and-miss approach to rational drug discovery in both laboratory design and natural-product surveys. Demand for nutritional supplements and so-called

alternative medicines created new opportunities and increased competition in the industry. Controversies emerged around adverse effects, notably regarding Vioxx in the US, and marketing tactics. Pharmaceutical companies became increasingly accused of disease mongering or over-medicalizing personal or social problems.[4]

Research and development[edit source | editbeta]

Main articles: Drug discovery and Drug development Drug discovery is the process by which potential drugs are discovered or designed. In the past most drugs have been discovered either by isolating the active ingredient from traditional remedies or by serendipitous discovery. Modern biotechnology often focuses on understanding the metabolic pathways related to a disease state or pathogen, and manipulating these pathways using molecular biology or biochemistry. A great deal of early-stage drug discovery has traditionally been carried out by universities and research institutions. Drug development refers to activities undertaken after a compound is identified as a potential drug in order to establish its suitability as a medication. Objectives of drug development are to determine appropriate formulation and dosing, as well as to establish safety. Research in these areas generally includes a combination of in vitro studies, in vivo studies, and clinical trials. The amount of capital required for late stage development has made it a historical strength of the larger pharmaceutical companies.[5] Often, large multinational corporations exhibit vertical integration, participating in a broad range of drug discovery and development, manufacturing and quality control, marketing, sales, and distribution. Smaller organizations, on the other hand, often focus on a specific aspect such as discovering drug candidates or developing formulations. Often, collaborative agreements between research organizations and large pharmaceutical companies are formed to explore the potential of new drug substances. More recently, multi-nationals are increasingly relying on contract research organizations to manage drug development.[6] In parallel to such outsourcing, developers are looking at new paradigms for collaboration, including transcelerate[7] and adopting new technologies such as site mapping analytics[8] and novel approaches to site assessment.[9] The U.S. NIH website (clinicaltrials.gov) lists over 11,000 open/active industrysponsored trials[10] and according to the ViS Research institute, there are over 400,000 diseasespecific research centers, globally.[11]

The cost of innovation[edit source | editbeta]

Drug companies are like other companies in that they manufacture products that must be sold for a profit in order for the company to survive and grow. They are different from some companies

because the drug business is very risky. For instance, only one out of every ten thousand discovered compounds actually becomes an approved drug for sale. Much expense is incurred in the early phases of development of compounds that will not become approved drugs.[12] In addition, it takes about 7 to 10 years and only 3 out of every 20 approved drugs bring in sufficient revenue to cover their developmental costs, and only 1 out of every 3 approved drugs generates enough money to cover the development costs of previous failures. This means that for a drug company to survive, it needs to discover a blockbuster (billion-dollar drug) every few years.[12] Drug discovery and development is very expensive; of all compounds investigated for use in humans only a small fraction are eventuallyapproved in most nations by government appointed medical institutions or boards, who have to approve new drugs before they can be marketed in those countries. In 2010 18 NMEs (New Molecular Entities) were approved and three biologics by the FDA, or 21 in total, which is down from 26 in 2009 and 24 in 2008. On the other hand, there were only 18 approvals in total in 2007 and 22 back in 2006. Since 2001, the Center for Drug Evaluation and Research has averaged 22.9 approvals a year.[13] This approval comes only after heavy investment in pre-clinical development and clinical trials, as well as a commitment to ongoing safety monitoring. Drugs which fail part-way through this process often incur large costs, while generating no revenue in return. If the cost of these failed drugs is taken into account, the cost of developing a successful new drug (New chemical entity or NCE), has been estimated at about 1.3 billion USD[14](not including marketing expenses). Professors Light and Lexchin reported in 2012, however, that the rate of approval for new drugs has been a relatively stable average rate of 15 to 25 for decades.[15] Industry-wide research and investment reached a record $65.3 billion in 2009.[16] While the cost of research in the U.S. was about $34.2 billion between 1995 and 2010, revenues rose faster (revenues rose by $200.4 billion in that time).[15] A study by the consulting firm Bain & Company reported that the cost for discovering, developing and launching (which factored in marketing and other business expenses) a new drug (along with the prospective drugs that fail) rose over a five-year period to nearly $1.7 billion in 2003.[17] According to Forbes, development costs between $4 billion to $11 billion per drug.[18] These estimates also take into account the opportunity cost of investing capital many years before revenues are realized (see Time-value of money). Because of the very long time needed for discovery, development, and approval of pharmaceuticals, these costs can accumulate to nearly half the total expense. Some approved drugs, such as those based on re-formulation of an

existing active ingredient (also referred to as Line-extensions) are much less expensive to develop. Calculations and claims in this area are controversial because of the implications for regulation and subsidization of the industry through tax credits and federally funded research grants.[19]

"Me-too" drugs[edit source | editbeta]

Competition between pharmaceutical companies has resulted in "me-too" drugs, which are defined as chemically-similar compounds or compounds with the same mechanism of action as an existing, approved chemical entity.[20] Much of the me-too drug phenomenon is actually a result of independent parallel research at rival companies.[21][22] It may take 10 or more years for a drug to go from discovery to FDA approval, and if a new clinical pathway is discovered, multiple companies often will simultaneously develop a drug treatment within this pathway, leading to several similar drugs arriving on the market within a short period of time.[23] Critics of the pharmaceutical industry suggest that "me-too" drugs are only brought to market because their development is cheaper and less risky than drugs with a novel mechanism of action.[24] However, proponents point to the cost benefits of market competition between similar drugs. When a second drug arrives on the market, the manufacturer of the first drug no longer has a monopoly, and the resulting competition puts a downward pressure on pricing.[25] To be approved by the FDA, second and third entrants also need to offer advantages over the existing therapy, such as fewer side effects or more convenient dose schedules.[25]

Controversies[edit source | editbeta]

Due to repeated accusations and findings that some clinical trials conducted or funded by pharmaceutical companies may report only positive results for the preferred medication, the industry has been looked at much more closely by independent groups and government agencies.[26][27] In response to specific cases in which unfavorable data from pharmaceutical company-sponsored research was not published, thePharmaceutical Research and Manufacturers of America have published new guidelines urging companies to report all findings and limit the financial involvement in drug companies of researchers.[28] US congress signed into law a bill which requires phase II and phase III clinical trials to be registered by the sponsor on the clinicaltrials.gov website run by the NIH.[29] Drug researchers not directly employed by pharmaceutical companies often look to companies for grants, and companies often look to researchers for studies that will make their products look favorable. Sponsored researchers are rewarded by drug companies, for example with support for

their conference/symposium costs. Lecture scripts and even journal articles presented by academic researchers may actually be 'ghost-written' by pharmaceutical companies.[30] Researchers who have tried to reveal ethical issues with clinical trials, or publish papers showing harmful effects of drugs and who saw themselves as whistleblowers have faced or been threatened with lawsuits from drug companies, or have lost their jobs.[31] For example, Dutch medical researcher Dr. Koos Stiekema was sued by the pharmaceutical company Organon for violating his confidentiality agreement, after he discussed his concerns about a clinical trial design with three ethics committees in 1999. Organon's other experts agreed that the trial design was safe, and a court in Amsterdam awarded Organon 550,000 for the trial-delay costs that resulted from Stiekema's disclosures.[32] The award was overturned on appeal; the court ruled that Stiekema's breach of confidentiality was "justified by a higher interest."[33] In the United States, corporate whistleblowers are given a percentage of any fines levied.[34] Since 2008, pharmaceutical companies have been increasing the cost of name-brand prescriptions to offset declining revenues as out-of-patent drugs become available as generics.[35] Simultaneously, pharmaceutical manufacturers are taking increasing advantage of tax havens to avoid taxation.[36] An investigation by ProPublica found that at least 21 doctors have been paid more than $500,000 for speeches and consulting by drugs manufacturers since 2009, with half of the top earners working in psychiatry, and about $2 billion in total paid to doctors for such services. AstraZeneca, Johnson & Johnson and Eli Lilly have paid billions of dollars in federal settlements over allegations that they paid doctors to promote drugs for unapproved uses. Some prominent medical schools have since tightened rules on faculty acceptance of such payments by drug companies.[37]

Product approval[edit source | editbeta]

Main article: Food and Drug Administration In the United States, new pharmaceutical products must be approved by the Food and Drug Administration (FDA) as being both safe and effective. This process generally involves submission of an Investigational new drug filing with sufficient pre-clinical data to support proceeding with human trials. Following IND approval, three phases of progressively larger human clinical trials may be conducted. Phase I generally studies toxicity using healthy volunteers. Phase II can include Pharmacokinetics and Dosing in patients, and Phase III is a very large study of efficacy in the intended patient population. Following the successful completion of phase III testing, a New Drug Application is submitted to the FDA. The FDA review the data

and if the product is seen as having a positive benefit-risk assessment, approval to market the product in the US is granted.[38] A fourth phase of post-approval surveillance is also often required due to the fact that even the largest clinical trials cannot effectively predict the prevalence of rare side-effects. Post-marketing surveillance ensures that after marketing the safety of a drug is monitored closely. In certain instances, its indication may need to be limited to particular patient groups, and in others the substance is withdrawn from the market completely. Questions continue to be raised regarding the standard of both the initial approval process, and subsequent changes to product labeling (it may take many months for a change identified in post-approval surveillance to be reflected in product labeling) and this is an area where congress is active.[39] The FDA provides information about approved drugs at the Orange Book site.[40] In many non-US western countries a 'fourth hurdle' of cost effectiveness analysis has developed before new technologies can be provided. This focuses on the efficiency (in terms of the cost per QALY) of the technologies in question rather than their efficacy. In England NICE approval requires technologies be made available by the NHS, whilst similar arrangements exist with the Scottish Medicines Consortium in Scotland and the Pharmaceutical Benefits Advisory Committee in Australia. A product must pass the threshold for cost-effectiveness if it is to be approved. Treatments must represent 'value for money' and a net benefit to society. There is much speculation[41] that a NICE style framework may be implemented in the USA in an attempt to decrease Medicare and Medicaid spending by balancing benefits to patients versus profits for the medical industry. In the UK, the British National Formulary is the core guide for pharmacists and clinicians.

Orphan drugs[edit source | editbeta]

Main article: Orphan drug There are special rules for certain rare diseases ("orphan diseases") involving fewer than 200,000 patients in the United States, or larger populations in certain circumstances. [42] Because medical research and development of drugs to treat such diseases is financially disadvantageous, companies that do so are rewarded with tax reductions, fee waivers, and market exclusivity on that drug for a limited time (seven years), regardless of whether the drug is protected by patents.

Legal issues[edit source | editbeta]

Where pharmaceutics have been shown to cause side-effects, civil action has occurred, especially in countries where tort payouts are likely to be large. The top 20 pharmaceutical cases account for over $16 billion in recoveries. Due to high-profile cases leading to large compensations, most

pharmaceutical companies endorse tort reform. Recent controversies have involved Vioxx and SSRIantidepressants.

Industry revenues[edit source | editbeta]

[43]

For the first time ever, in 2011, global spending on prescription drugs topped $954 billion, even as growth slowed somewhat in Europe and North America. The United States accounts for almost half of the global pharmaceutical market, with $340 billion in annual sales followed by the EU and Japan.(pdf) Emerging markets such as China, Russia, South Korea and Mexico outpaced that market, growing a huge 81 percent.[44] According to IMS the global pharmaceutical industry can reach to US$1.1 trillion by 2014.[45] Pfizer's cholesterol pill Lipitor remains a best-selling drug world wide.[dubious discuss][needs
update]

Its annual sales were $12.9 billion, more than twice as much as its closest competitors: Plavix, the blood thinner from Bristol-Myers Squibb and Sanofi-Aventis; Nexium, the heartburn pill from AstraZeneca; and Advair, the asthma inhaler from GlaxoSmithKline.[44] IMS Health publishes an analysis of trends expected in the pharmaceutical industry in 2007, including increasing profits in most sectors despite loss of some patents, and new 'blockbuster' drugs on the horizon.[46] Teradata Magazine predicted that by 2007, $40 billion in U.S. sales could be lost at the top 10 pharmaceutical companies as a result of slowdown in R&D innovation and the expiry of patents on major products, with 19 blockbuster drugs losing patent.[47]

Market leaders in terms of healthcare revenue[edit source | editbeta]

This article is outdated. Please update this article to reflect recent events or newly available information. (May 2013)

Main article: List of pharmaceutical companies The following is a list of the 20 largest pharmaceutical and biotech companies ranked by healthcare revenue. Some companies (e.g.,Bayer, Johnson and Johnson and Procter & Gamble) have additional revenue not included here. The phrase Big Pharma is often used to refer to companies with revenue in excess of $3 billion, and/or R&D expenditure in excess of $500 million.
Revenu e Rank 2008[48] Total Revenues(USD millio
ns)

Company

Countr y

Healthcare R&D 2006(USD millio

ns)

Net income/ (loss) 2006(USD millio

ns)

Employe es 2006

Revenu e Rank 2008[48]

Company

Countr y

Total Revenues(USD millio

ns)

Healthcare R&D 2006(USD millio

ns)

Net income/ (loss) 2006(USD millio

ns)

Employe es 2006

Pfizer

USA

67,809

7,599

19,337

122,200

Novartis

Switzerlan d

53,324

7,125

11,053

138,000

Merck & Co.

USA

45,987

4,783

4,434

74,372

Bayer

Germany

44,200

1,791

6,450

106,200

GlaxoSmithKli United ne Kingdom

42,813

6,373

10,135

106,000

Johnson and Johnson

USA

37,020

5,349

7,202

102,695

Sanofi

France

35,645

5,565

5,033

100,735

HoffmannLa Roche

Switzerlan d

33,547

5,258

7,318

100,289

AstraZeneca

United Kingdom

26,475

3,902

6,063

50,000+

10

Abbott Laboratories

USA

22,476

2,255

1,717

66,800

11

Bristol-Myers Squibb

USA

17,914

3,067

1,585

60,000

12

Eli Lilly and

USA

15,691

3,129

2,663

50,060

Revenu e Rank 2008[48]

Company

Countr y

Total Revenues(USD millio

ns)

Healthcare R&D 2006(USD millio

ns)

Net income/ (loss) 2006(USD millio

ns)

Employe es 2006

Company

13

Amgen

USA

14,268

3,366

2,950

48,000

14

Boehringer Ingelheim

Germany

13,284

1,977

2,163

43,000

15

ScheringPlough

USA

10,594

2,188

1,057

41,500

16

Baxter International

USA

10,378

614

1,397

38,428

17

Takeda Pharmaceutical Japan Co.

10,284

1,620

2,870

15,000

18

Genentech

USA

9,284

1,773

2,113

33,500

19

Procter & Gamble

USA

8,964

n/a

10,340

29,258

SUM

497,519

70,843

110,077

1,342,700

AVERAGE

24,876

3,542

5504

67,135

Market leaders in terms of sales[edit source | editbeta]

The top 15 pharmaceutical companies by 2008 sales are:[16][49]
Rank Company Sales ($M) Based/Headquartered in

Rank

Company

Sales ($M)

Based/Headquartered in

Pfizer

43,363

United States

GlaxoSmithKline

36,506

United Kingdom

Novartis

36,506

Switzerland

Sanofi-Aventis

35,642

France

AstraZeneca

32,516

United Kingdom

HoffmannLa Roche

30,336

Switzerland

Johnson & Johnson

29,425

United States

Merck & Co.

26,191

United States

Abbott

19,466

United States

10

Eli Lilly and Company 19,140

United States

11

Amgen

15,794

United States

12

Wyeth

15,682

United States

13

Bayer

15,660

Germany

14

Teva

15,274

Israel

Rank

Company

Sales ($M)

Based/Headquartered in

15

Takeda

13,819

Japan

Patents and generics[edit source | editbeta]

Depending on a number of considerations, a company may apply for and be granted a patent for the drug, or the process of producing the drug, granting exclusivity rights typically for about 20 years.[50] However, only after rigorous study and testing, which takes 10 to 15 years on average, will governmental authorities grant permission for the company to market and sell the drug.[51] Patent protection enables the owner of the patent to recover the costs of research and development through high profit margins for the branded drug. When the patent protection for the drug expires, a generic drug is usually developed and sold by a competing company. The development and approval of generics is less expensive, allowing them to be sold at a lower price. Often the owner of the branded drug will introduce a generic version before the patent expires in order to get a head start in the generic market.[52] Restructuring has therefore become routine, driven by the patent expiration of products launched during the industry's 'golden era' in the 1990s and companies' failure to develop sufficient new blockbuster products to replace lost revenues.[53]

Medicare Part D[edit source | editbeta]

In 2003 the United States enacted the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), a program to provide prescription drug benefits to the elderly and disabled. This program is a component of Medicare (United States) and is known asMedicare Part D. This program, set to begin in January 2006, will significantly alter the revenue models for pharmaceutical companies. Revenues from the program are expected to be $724 billion between 2006 and 2015.[54] Pharmaceuticals developed by biotechnological processes often must be injected in a physician's office rather than be delivered in the form of a capsule taken orally. Medicare payments for these drugs are usually made through Medicare Part B (physician office) rather than Part D (prescription drug plan).

Mergers, acquisitions, and co-marketing of drugs[edit source | editbeta]

A merger, acquisition, or co-marketing deal between pharmaceutical companies may occur as a result of complementary capabilities between them. A small biotechnology company might have a new drug but no sales or marketing capability. Conversely, a large pharmaceutical company might have unused capacity in a large sales force due to a gap in the company pipeline of new

products. It may be in both companies' interest to enter into a deal to capitalize on the synergy between the companies.

Prescriptions[edit source | editbeta]

In the U.S., prescriptions have increased over the past decade to 3.4 billion annually, a 61 percent increase. Retail sales of prescription drugs jumped 250 percent from $72 billion to $250 billion, while the average price of prescriptions has more than doubled from $30 to $68.[55]

Publications[edit source | editbeta]

The drug company Merck & Co. publishes the Merck Manual of Diagnosis and Therapy, the world's best-selling medical textbook, and the Merck Index, a collection of information about chemical compounds.

Marketing[edit source | editbeta]

A promotional item given to a psychiatrist

Main article: Pharmaceutical marketing Pharmaceutical companies commonly spend a large amount on advertising, marketing and lobbying. In the US, drug companies spend $19 billion a year on promotions.[28] Advertising is common in healthcare journals as well as through more mainstream media routes. In some countries, notably the US, they are allowed to advertise directly to the general public. Pharmaceutical companies generally employ sales people (often called 'drug reps' or, an older term, 'detail men') to market directly and personally to physicians and other healthcare providers. In some countries, notably the US, pharmaceutical companies also employ lobbyists to influence politicians. Marketing of prescription drugs in the US is regulated by the federal Prescription Drug Marketing Act of 1987.

To healthcare professionals[edit source | editbeta]

Currently, there are approximately 81,000 pharmaceutical sales representatives in the United States[56] pursuing some 830,000 pharmaceutical prescribers. A pharmaceutical representative will often try to see a given physician every few weeks. Representatives often have a call list of

about 200300 physicians with 120180 targets that should be visited in 12 or 3 week cycle. The number of pharmaceutical sales reps has been shrinking between 2008 and 2010, an estimated 30% industry wide reduction has occurred and current estimates are there may only be 60,000 pharmaceutical sales reps in the United States.[56] In 2008, Senator Charles Grassley began an investigation about unreported payments to physicians by pharmaceutical companies. Grassley led a Congressional Investigation which found that well-known university psychiatrists, who had promoted psychoactive drugs, had violated federal and university regulations by secretly receiving large sums of money from the pharmaceutical companies which made the drugs.[57] The New York Times reported that Dr. Joseph Biederman of Harvard University had failed to report over a million dollars of income that he had received from pharmaceutical companies.[58] Weeks later, Business Week reported that Grassley alleged that Alan Schatzberg, chair of psychiatry at Stanford University, had underreported his investments in Corcept Therapeutics, a company he founded.[59] Dr. Schatzberg had reported only $100,000 investments in Corcept, but Grassley stated that his investments actually totalled over $6 million. Dr. Schaztberg later stepped down from his grant which is funded by the National Institutes of Health (NIH).[60]Similarly, Dr. Charles Nemeroff resigned as chair of the psychiatry department at Emory University after failing to report a third of the $2.8 million in consulting fees he received from GlaxoSmithKline. At the time he received these fees, Dr. Nemeroff had been principal investigator of a $3.9 million NIH grant evaluating five medications for depression manufactured by GlaxoSmithKline.[61] The book Bad Pharma also discusses the influence of drug representatives, how ghostwriters are employed by the drug companies to write papers for academics to publish, how independent the academic journals really are, how the drug companies finance doctors' continuing education, and how patients' groups are often funded by industry.[62]

To insurance and public health bodies[edit source | editbeta]

Private insurance or public health bodies (e.g. the NHS in the UK) decide which drugs to pay for, and restrict the drugs that can be prescribed through the use of formularies. Public and private insurers restrict the brands, types and number of drugs that they will cover. Not only can the insurer affect drug sales by including or excluding a particular drug from a formulary, they can affect sales by tiering or placing bureaucratic hurdles to prescribing certain drugs as well. In January 2006, the U.S. instituted a new public prescription drug plan through its Medicare program known as Medicare Part D. This program engages private insurers to negotiate with pharmaceutical companies for the placement of drugs on tiered formularies.

In 2008, for the first time, Charles Grassley asked the American Psychiatric Association to disclose how much of its annual budget came from drug industry funds. The APA said that industry contributed 28% of its budget ($14 million at that time), mainly through paid advertising in APA journals and funds for continuing medical education.[63]

To retail pharmacies and stores[edit source | editbeta]

Commercial stores and pharmacies are a major target of non-prescription sales and marketing for pharmaceutical companies.

Direct to consumer advertising[edit source | editbeta]

Main article: Direct-to-consumer advertising Since the 1980s new methods of marketing for prescription drugs to consumers have become important. Direct-to-consumer media advertising was legalised in the FDA Guidance for Industry on Consumer-Directed Broadcast Advertisements. Internationally, many pharmaceutical companies market directly to the consumer rather than going through a conventional retail sales channel.

Controversy about drug marketing and lobbying[edit source | editbeta]

There has been increasing controversy surrounding pharmaceutical marketing and influence. There have been accusations and findings of influence on doctors and other health professionals through drug reps, including the constant provision of marketing 'gifts' and biased information to health professionals;[64][65] highly prevalent advertising in journals and conferences; funding independent healthcare organizations and health promotion campaigns; lobbying physicians and politicians (more than any other industry in the US[66]); sponsorship of medical schools or nurse training; sponsorship of continuing educational events, with influence on the curriculum;[67] and hiring physicians as paid consultants on medical advisory boards. To help ensure the status quo on U.S. drug regulation and pricing, the pharmaceutical industry has thousands of lobbyists in Washington, DC that lobby Congress and protect their interests. The pharmaceutical industry spent $855 million, more than any other industry, on lobbying activities from 1998 to 2006, according to the non-partisan Center for Public Integrity.[68] Some advocacy groups, such as No Free Lunch, have criticized the effect of drug marketing to physicians because they say it biases physicians to prescribe the marketed drugs even when others might be cheaper or better for the patient.[69] There have been related accusations of disease mongering[4] (over-medicalising) to expand the market for medications. An inaugural conference on that subject took place in Australia in 2006.[70] In 2009, the Government-funded National Prescribing Service launched the "Finding

Evidence Recognising Hype" program, aimed at educating GPs on methods for independent drug analysis. A 2005 review by a special committee of the UK government came to all the above conclusions in a European Union context[71] whilst also highlighting the contributions and needs of the industry. There is also huge concern about the influence of the pharmaceutical industry on the scientific process. Meta-analyses have shown that studies sponsored by pharmaceutical companies are several times more likely to report positive results, and if a drug company employee is involved (as is often the case, often multiple employees as co-authors and helped by contracted marketing companies) the effect is even larger.[72][73][74] Influence has also extended to the training of doctors and nurses in medical schools, which is being fought.[75] It has been argued that the design of the Diagnostic and Statistical Manual of Mental Disorders and the expansion of the criteria represents an increasing medicalization of human nature, or "disease mongering", driven by drug company influence on psychiatry.[76]The potential for direct conflict of interest has been raised, partly because roughly half the authors who selected and defined the DSM-IV psychiatric disorders had or previously had financial relationships with the pharmaceutical industry.[77] The president of the organization that designs and publishes the DSM, the American Psychiatric Association, recently acknowledged that in general American psychiatry has "allowed the biopsychosocial model to become the bio-bio-bio model" and that the gifts from drug reps are little more than "kickbacks and bribes".[78]

Regulatory capture[edit source | editbeta]

Chapter three of the book Bad Pharma describes the concept of "regulatory capture," whereby a regulator such as the Medicines and Healthcare products Regulatory Agency (MHRA) in the UK, or the Food and Drug Administration (FDA) in the United States ends up advancing the interests of the drug companies rather than the interests of the public. The author, Ben Goldacre, writes that this happens for a number of reasons, including the revolving door of employees between the regulator and the companies, and the fact that friendships develop between regulator and company employees simply because they have knowledge and interests in common. The chapter also discusses surrogate outcomes and accelerated approval, and the difficulty of having ineffective drugs removed from the market once they have been approved.[79] He argues that regulators do not require that new drugs offer an improvement over what is already available, or even that they be particularly effective.[80]

Pharmaceutical fraud[edit source | editbeta]

See also: List of largest pharmaceutical settlements in the United States

Pharmaceutical fraud involves activities that result in false claims to insurers or programs such as Medicare in the United States or equivalent state programs for financial gain to a pharmaceutical company. There are several different schemes[81] used to defraud thehealth care system which are particular to the pharmaceutical industry. These include: Good Manufacturing Practice (GMP) Violations, Off Label Marketing, Best Price Fraud, CME Fraud, Medicaid Price Reporting, and Manufactured Compound Drugs. The Federal Bureau of Investigation (FBI) estimates that health care fraud costs American taxpayers $60 billion a year.[82] Of this amount $2.5 billion was recovered through False Claims Act cases in FY 2010. Examples of fraud cases include the GlaxoSmithKline $3 billion settlement,Pfizer $2.3 billion settlement and Merk $650 million settlement. Damages from fraud can be recovered by use of the False Claims Act, most commonly under the qui tam provisions which rewards an individual for being a "whistleblower", or relator (law).[83] Antipsychotic drugs are now the top-selling class of pharmaceuticals in America, generating annual revenue of about $14.6 billion. Every major company selling the drugs Bristol-Myers Squibb, Eli Lilly, Pfizer, AstraZeneca and Johnson & Johnson has either settled recent government cases, under the False Claims Act, for hundreds of millions of dollars or is currently under investigation for possible health care fraud. Following charges of illegal marketing, two of the settlements set records last year for the largest criminal fines ever imposed on corporations. One involved Eli Lillys antipsychotic Zyprexa, and the other involved Bextra. In the Bextra case, the government also charged Pfizer with illegally marketing another antipsychotic, Geodon; Pfizer settled that part of the claim for $301 million, without admitting any wrongdoing.[84] On 2 July 2012, GlaxoSmithKline pleaded guilty to criminal charges and agreed to a $3 billion settlement of the largest health-care fraud case in the U.S. and the largest payment by a drug company.[85] The settlement is related to the company's illegal promotion of prescription drugs, its failure to report safety data,[86] bribing doctors, and promoting medicines for uses for which they were not licensed. The drugs involved were Paxil, Wellbutrin, Advair, Lamictal, and Zofran for off-label, non-covered uses. Those and the drugsImitrex, Lotronex, Flovent, and Valtrex were involved in the kickback scheme.[87][88][89] The following is a list of the four largest settlements reached with pharmaceutical companies from 1991 to 2012, rank ordered by the size of the total settlement. Legal claims against the pharmaceutical industry have varied widely over the past two decades, includingMedicare and Medicaid fraud, off-label promotion, and inadequate manufacturing practices.[90][91]

Company

Settlement

Violation(s)

Year

Product(s)

Laws allegedly violated (if applicable)

GlaxoSmithKline[92]

$3 billion

Off-label promotion/ failure to disclose safety data

2012 Avandia/Wellbutrin/Paxil

False Claims Act/FDCA

Pfizer[93]

$2.3 billion

Off-label promotion/kickbacks

2009

Bextra/Geodon/ Zyvox/Lyrica

False Claims Act/FDCA

Abbott Laboratories[94]

$1.5 billion

Off-label promotion

2012 Depakote

False Claims Act/FDCA

Eli Lilly[95]

$1.4 billion

Off-label promotion

2009 Zyprexa

False Claims Act/FDCA

Developing world[edit source | editbeta]

The role of pharmaceutical companies in the developing world is a matter of some debate, ranging from those highlighting the aid provided to the developing world, to those critical of the use of the poorest in human clinical trials, often without adequate protections, particularly in states lacking a strong rule of law. Other criticisms include an alleged reluctance of the industry to invest in treatments of diseases in less economically advanced countries, such as malaria; Criticism for the price of patented AIDS medication, which could limit therapeutic options for patients in the Third World, where most of the AIDS infected people are living. However, a better policy ofprice discrimination would benefit to both patients and companies. In September 2008 the Open Source Drug Discovery Network was launched in India to combat infectious diseases common to developing countries.

Patents[edit source | editbeta]

See also: Criticism of patents Patents have been criticized in the developing world, as they are thought to reduce access to existing medicines.[96] There is mixed evidence on the efficacy of patents to stimulate pharmaceutical innovation, with recent evidence suggesting that patent grants slow down innovation.[97] Reconciling patents and universal access to medicine would require an efficient international policy of price discrimination. Moreover, under the TRIPS agreement of the World

Trade Organization, countries must allow pharmaceutical products to be patented. In 2001, the WTO adopted the Doha Declaration, which indicates that the TRIPS agreement should be read with the goals of public health in mind, and allows some methods for circumventing pharmaceutical monopolies: via compulsory licensing orparallel imports, even before patent expiration.[98] In March 2001, 40 multi-national pharmaceutical companies brought litigation against South Africa for its Medicines Act, which allowed the generic production of antiretroviral drugs (ARVs) for treating HIV, despite the fact that these drugs were on-patent.[99] HIV was and is an epidemic in South Africa, and ARVs at the time cost between 10,000 and 15,000 USD per patient per year. This was unaffordable for most South African citizens, and so the South African government committed to providing ARVs at prices closer to what people could afford. To do so, they would need to ignore the patents on drugs and produce generics within the country (using a compulsory license), or import them from abroad. The Indian pharmaceutical company Cipla audaciously offered to make the drugs at 350 USD per patient per year, roughly 1/40th of the lowest price available from a patent holder, which stunned the world community. After massive international protest in favour of public health rights (including the collection of 250,000 signatures by MSF), the governments of several developed countries (including The Netherlands, Germany, France, and later the US) backed the South African government, and the case was dropped in April of that year.[100]

Nigerian clinical trial[edit source | editbeta]

See also: Kano trovafloxacin trial litigation In 1996, a pediatric clinical trial conducted on behalf of Pfizer tested the antibiotic Trovan allegedly without first obtaining the informed consent of participants or their parents.[101][102][103][104]

Charitable programmes[edit source | editbeta]

Charitable programs and drug discovery & development efforts are routinely undertaken by pharmaceutical companies. Some examples include:

"Merck's Gift," wherein billions of river blindness drugs were donated in Africa[105] Pfizer's gift of free/discounted fluconazole and other drugs for AIDS in South Africa[106] GSK's commitment to give free albendazole tablets to the WHO for, and until, the elimination of lymphatic filariasis worldwide. In 2006, Novartis committed USD 755 million in corporate citizenship initiatives around the world, particularly focusing on improved access to medicines in the developing world

through its Access to Medicine projects, including donations of medicines to patients affected by leprosy, tuberculosis, and malaria; Glivec patient assistance programmes; and relief to support major humanitarian organisations with emergency medical needs.[107] However, some NGOs such as Mdecins Sans Frontires do not routinely accept corporate donations of medicines. More precisely, they do not become reliant on such supplies of medicines because the supply is dependent upon the fluid, profit-driven charities of said pharmaceutical companies, and thus may dry up during a critical or otherwise important time. The book An Imperfect Offering: Humanitarian Action for the 21st Century by ex-MSF president James Orbinski describes this in detail.

Pharmaceutical industry in popular culture[edit source | editbeta]

As for many other major industries since the middle of the twentieth century, the pharmaceutical industry has been stereotyped as a global shadowy force in numerous western fiction works. Notorious films such as The Fugitive (1993) and Resident Evil and novels/films such as The Constant Gardener characterize this trend.

Industry associations[edit source | editbeta]

European Confederation of Pharmaceutical Entrepreneurs (EUCOPE) Drug Information Association (DIA) European Generic Medicines Association European Federation of Pharmaceutical Industries and Associations (EFPIA) European Pharmaceutical Market Research Association (EphMRA) International Federation of Pharmaceutical Manufacturers and Associations (IFPMA) Japan Pharmaceutical Manufacturers Association (JPMA) New York Health Products Council (NYHPC) Pharmaceutical Research and Manufacturers of America (PhRMA)

Irish Pharmaceutical Healthcare Association (IPHA) Regulatory authorities[edit source | editbeta] Main article: Regulation of therapeutic goods
International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) European Medicines Agency (EMEA) Therapeutic Goods Administration (Australia) (TGA) U.S. Food and Drug Administration (FDA)

Ministry of Health, Labour and Welfare (Japan) Medicines and Healthcare products Regulatory Agency (MHRA) Central Drugs Standards Control Organisation (India) (CDSCO) Ukrainian Drug Registration Agency [1]