Financial History Issue 113 (Spring 2015) - Page 35

By Michael A. Martorelli Making and Selling Medicines In the closing decades of the 19th century, the American pharmaceutical industry consisted of hundreds of companies selling tinctures, ointments, tablets and syrups to treat conditions such as consumption, diphtheria and indigestion. Most firms were quite skillful at using aggressive advertising in mass market magazines and newspapers to sell their products, regardless of the safety or efficacy of those nostrums. Fewer were able to use the emerging Merck & Co. © Bettmann/CORBIS Most domestic providers of prescription pharmaceuticals, over-the-counter medicines, simple hospital supplies and sophisticated medical devices have long been organized as for-profit entities and owned by public stockholders. Making a profit from providing these products has never been considered inappropriate, although critics have been vocal in challenging the prices the companies charge for their products. On several occasions in the 20th century, changes made in the system for regulating the safety and efficacy of drugs has had a substantial impact on the success of that industry. But none of those laws challenged the participants’ rights to earn a profit. Iconic drug companies such as Abbott Laboratories, Eli Lilly and Upjohn date their founding to the last quarter of the 19th century. These and other well-known manufacturers of drugs and hospital supplies, such as Johnson & Johnson and Merck, date their Initial Public Offerings (IPOs) to years as early as 1919 and as late as 1963. The commercial production of sophisticated medical devices dates only to the mid-20th century. Leading firms such as Baxter International and Medtronic date their founding back to the 1930s, but they also completed IPOs in the early 1960s. By the middle of the 1960s, investors interested in participating in the growth of the healthcare industry could buy stock in more than a dozen publicly held manufacturers of drugs, hospital supplies and medical devices. first and second generation managements were prospering by internalizing the lessons of pharmacology and immunology to create effective products, and pushing the bounds of science by creating cooperative research relationships with credible academic institutions. Filled vials of swine flu vaccine come off the assembly line at Merck, Sharp and Dome, October 2, 1976. knowledge of biology and chemistry to develop medicines that effectively treated disease. Among the dozens of long-forgotten organizations producing alcohol and/or narcotic-based “remedies” were a number of firms dedicated to the high-quality production and sale of innovative products with tangible benefits. In the last two decades of the century, men with names such as Abbott, Lilly, Merck and Upjohn were able to distinguish their eponymous drug companies from firms such as Dr. D. Jayne & Sons, Lanman & Kemp and the Toiletine Company by accomplishing that task. Like many of their entrepreneurial colleagues, these men funded their start-up companies with personal assets and money from relatives, friends and partners. But the management teams who built upon the initial successes achieved by these companies, like their contemporaries in other industries, would eventually find the need to tap the country’s lucrative equity market for additional growth capital. Even after the passage of the Pure Food and Drug Act of 1906, many purveyors of ineffective medicines continued to sell their products. However, a growing share of pharmaceutical sales were being generated by the relatively small number of innovative product development organizations such as those noted above. Their In 1827, Heinrich Emma