How Government Regulations Impact the Drug Sector

Most governments around the world impose regulations on pharmaceutical companies, in an effort to protect their public from harmful drug effects. These regulations often prolong the process for bringing new pharmaceuticals to market.

In the United States, the Food and Drug Administration (FDA) ensures that new drugs are rigorously tested for safety and efficacy, with an aim towards minimizing side effects.

Key Takeaways

  • Nearly all governments have some type of pharmaceutical regulatory body aimed at protecting citizens from the deleterious effects of harmful drugs.
  • In the United States, the Food and Drug Administration (FDA) is responsible for ensuring pharmaceutical companies thoroughly test new products for efficacy and safety.
  • The drug development process often takes 10 years.
  • Drugs typically undergo human trials before they are approved.

As a result of this testing, most new drugs are researched and investigated for 10 years before they are brought to market and made readily available to consumers.

Specifically, drugs must undergo human trials intended to discover potential side effects and accurately gauge treatment efficacy. During any point in the multi-iterative testing process, if a new drug lacks effectiveness or triggers undesirable side effects, the company may elect to conduct further laboratory research in an effort to achieve superior results. Since this can be rather costly, companies often consider whether it makes fiscal sense to continue their attempts to achieve desirable results, or whether they should shift their resources elsewhere.

Research and Development

Throughout the research and development process, pharmaceutical companies must cultivate reliable sources of financing. This typically comes from loans, investments, or revenue from the sale of products that have already been approved. Generally speaking, long-established drug manufacturers with profitable product lines do not need to rely on outside investors, unlike smaller startups drug companies, which frequently raise venture capital funds to bankroll their efforts.

Mergers and acquisitions (M&As) are frequent occurrences in the pharmaceutical space. This activity can greatly benefit both smaller and newer companies, as well as larger, more established corporations. Big companies may seize opportunities to acquire profitable new products, while small companies may enjoy financial boosts and marketing expertise that larger partners can offer.

As a rule, because of high regulatory expenses, companies have a strong incentive to offer support to only the most promising drugs. Not surprisingly, M&As usually only happen after a new drug has already shown strong potential for success in trials.

The FDA oversees the approval of many types of products, including dietary supplements, vaccines, tobacco products, and over-the-counter medications.

Orphan Drugs

Some drugs benefit from additional government incentives. Orphan drugs receive special consideration from the FDA, which encourages pharmaceutical companies to develop treatments for rare diseases. These incentives may include quicker approval time, as well as financial assistance.

Furthermore, companies are often permitted to charge substantially higher prices for orphan drugs, which stimulates greater profitability than would be possible without such government intervention. Consequently, the development of orphan drugs traditionally grows at faster rates than the development of traditional pharmaceuticals.

Overall, government regulation of the drug sector has resulted in longer, more-expensive product development processes that favor treatments for rare illnesses. All approved drugs have been rigorously tested by the FDA in an ongoing effort to protect consumers from harmful or ineffective treatments.

Article Sources
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  1. U.S. Food and Drug Administration. "Development & Approval Process—Drugs." Accessed May 26, 2021.

  2. PhRMA. "Biopharmaceutical Research and Development: The Process Behind New Medicines," Page 22. Accessed May 26, 2021.

  3. U.S. Food and Drug Administration. "Conducting Clinical Trials." Accessed May 26, 2021.

  4. U.S. Food and Drug Administration. "What Does FDA Regulate?" Accessed May 26, 2021.

  5. U.S. Food and Drug Administration. "Designating an Orphan Product: Drugs and Biological Products." Accessed May 26, 2021.

  6. America's Health Insurance Plans. "Drug Prices for Rare Diseases Skyrocket While Big Pharma Makes Record Profits." Accessed May 26, 2021.

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