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