The Pharmaceutical Business   2 of 13  
     1. The market
Graph of production
Figure 3. Growth of the UK market for medicine.
Pharmaceutical companies research, develop, manufacture and market medicines. Medicines are products which improve health: they prevent illness, reduce pain or treat diseases. Although they are usually obtained on prescription, some are sold directly to the public over the counter.
How big is the market?
The market for medicines is growing strongly, reflecting increased demand for health care. This reflects the impact of people living longer and having higher incomes. Figure 3 gives some data on the market for medicines.
Keeping ahead of the game
Pharmaceutical manufacturing operates in a rapidly changing, high technology environment. Research and Development (R&D) of new products is vital for the company to maintain its competitive position. The graph in figure 4 shows how much the pharmaceutical industry spends on R&D compared with other UK manufacturing sectors.
Chart of R&D spending
Figure 4. How spending on R&D in the pharmaceutical industry compared to other manufacturing industries, 2002 (source: ONS).
This high level of R&D spending helps to explain why the pharmaceutical industry is so successful. Success can be measured in a number of ways. One might be by comparing the increase in output (adjusted for inflation) in pharmaceuticals compared with the whole manufacturing sector. The output of the pharmaceutical industry has increased by over 60% in real terms between 1992 and 2001. Real terms mean that the figures have been adjusted for inflation. This is considerably more than the increase of about 11% for the manufacturing sector as a whole.
Graph of trade balances
Figure 5. UK industry trade balances, 1971 – 2002.
How does the economy benefit?
Pharmaceutical companies make an important contribution to the UK economy. Pharmaceutical manufacturing has grown as a proportion of the UK's Gross Domestic Product (GDP). In 1960 this sector represented 0.36% of the UK GDP; by 2001,ot represented 0.6%. One way to see the importance of this industry is to look at its contribution to what is called the UK’s external balance. A significant proportion of the UK’s pharmaceutical output is sold to other countries. So the industry makes an important contribution to the UK Balance of Payments - the account which shows the flows of payments into and out of the UK.

Figures 5 and 6 provide some data on the pharmaceutical industry’s contribution to the UK Balance of Payments.

Figure 5 shows the trade balances for the pharmaceutical industry and for all UK trade. Notice that trade as a whole has been in deficit since 1983 (i.e. we have been importing more than we have been exporting). However, the pharmaceutical balance has been constantly positive. So we have been exporting more pharmaceutical products than we have been importing. What is more, the balance is slowly becoming more positive. This picture is reinforced by the data in figure 6 which shows the widening gap between pharmaceutical exports and imports.
Year Pharmaceutical
exports
£ million		 Pharmaceutical
imports
£million
1981 852 298
1982 978 375
1983 1074 470
1984 1222 542
1985 1426 590
1986 1533 679
1987 1621 786
1988 1735 876
1989 2016 1062
1990 2258 1158
1991 2556 1371
Year Pharmaceutical
exports
£ million		 Pharmaceutical
imports
£million
1992 2993 1663
1993 3710 2019
1994 4005 2304
1995 4939 2812
1996 5386 3107
1997 5455 3192
1998 5860 3418
1999 6332 4260
2000 7215 4901
2001 9144 6405
2002 10030 7446
Figure 6. UK pharmaceutical trade and UK manufactured exports.
Assignment trigger 1a

Look at Figure 3. Approximately how much has the UK market in medicines grown between 1960 and 2002? What might explain these figures? Look at Resource 2 for more information.

Check your answer

Look at the data contained in figures 4, 5 and 6.Take the data in figure 6 and draw a graph showing how pharmaceutical exports and imports have grown between 1981 and 2002. Try to explain what the data is saying. Think about how these data could be used to evaluate the success of the pharmaceutical industry? Does the data provide any ideas about why the pharmaceutical industry is successful? (Hint: look at figure 4 and think about what it is telling you).

Check your answer
Our experts' view Close

Figure 3 shows that the UK market for medicine has grown from being worth £94 million in 1960 to being worth £10,335 million in 2002. This could be interpreted as showing a growth in the region of 10,995% over the period. However, this is misleading. The data is in £ million and so does not take inflation into account. So one explanation for the data is the impact of inflation over the time period. Resource 2 provides some additional data to help get a more a realistic view of the growth of the market - it shows that the UK market for medicines represented 0.36% of GDP in 1960 but that this had grown to 0.99% by 2002. This suggests that the figures do reflect substantial real growth in the market for medicines. This could be explained by the growth in real incomes over the time period and perhaps by related changes in expectations which have been fed by the development of new medicines by the pharmaceutical companies. Also the changing age structure of the population might have had an impact since older people tend to consume more medicines.
Our experts' view Close

Figure 4 shows that the UK pharmaceutical industry spends far more on R&D than other manufacturing sectors. Pharmaceuticals spent £3,304 million compared to Machinery & Equipment which spent £767 million, TV, Radio and Communications which spent £957 million and Aerospace which spent £1,347 million in 2002. So the pharmaceutical industry spent 52% of the total R&D spend of £6,375 million.

Figure 5 shows that Trade Balance of the pharmaceutical industry is positive i.e. the industry exports more than it imports, that this positive balance has been growing and that the trade balance for the whole manufacturing sector is strongly negative.

The data suggest that there could be a link between the level of R&D spending and the external trade performance of the pharmaceutical industry. Both figures 5 and 6 suggest that the UK pharmaceutical industry is more competitive than other sectors of UK manufacturing - this could reflect the fact the pharmaceutical companies spend so much more on R&D. This could be developed further once you have looked at the later material on how value is added, the importance of quality control and how companies aim to improve productivity.