During the 20th century average life expectancy in developed countries increased by over 20 years. A significant part of this improvement can be attributed to pharmaceutical innovation. Few other industries can claim to have done as much for the well being of mankind.

At the turn of the millennium, prescription only or 'ethical' drugs comprised about 80% of the global pharmaceutical market by value and 50% by volume. Ethical products divide into conventional pharmaceuticals and more complex 'biological' agents and vaccines. The remainder were 'over the counter' medicines (OTCs) which may be purchased without prescription. Both ethical and OTC medicines may be branded or 'generic'.

Thus there are four broad types of industry player; ethical, OTC, generic and biotech. Each requires very different strategic capabilities. Producers of branded prescription drugs require strong research and development (R&D) and global sales and marketing infrastructure. Branded OTC drugs demand direct-to-consumer marketing capability. Generic companies focus on supply chain management and manufacturing cost leadership. Biotechs must create and defend intellectual property in specialised research fields. Because of the different attributes and cost structures involved, multinationals which own OTC and generics businesses generally operate them separately, frequently using another company name. Similarly, those that have acquired biotechs normally leave them to operate fairly autonomously.

Generally pharmaceutical innovations are expensive to produce but inexpensive to reproduce. The manufacturing cost of drugs is usually tiny compared with the amortised cost of R&D that led to the discovery. Setting prices that attempt to recoup R&D therefore looks like corporate greed in comparison with the very low prices that can be charged by generic manufacturers. Without the investment by the innovator there would be no modern medicines.

Typically it takes 12 years from discovery to marketing of a new chemical entity (NCE) with a desired characteristic to be an effective drug for a targeted disease process. The average cost for bringing a new NCE to market is in the order of US$1billion. During all the phases of development attrition occurs as promising agents fail particular hurdles so most R&D projects never result in a marketed drug. Of those that do, 80% fail to recoup their R&D investment.

The pharmaceutical industry is unusual in that in many countries it is subject to a 'monopsony' - there is effectively only one powerful purchaser, the Government. In the 1980s, Governments around the world began to focus upon pharmaceuticals as a politically easy target in their efforts to control rising healthcare expenditure, although drugs typically accounted for less than a tenth of that expenditure. Many countries introduced some form of price or reimbursement control and price increases began to be outlawed.

Business as usual is no longer an option when it comes to developing new prescription drugs. Pharmaceutical and biopharmaceutical companies are spending more on R&D than ever before, yet the number of new drug approvals has declined steadily.