What Is a Drug? Definition in Pharmeceuticals and How They Work

What Is a Drug?

A drug, or pharmaceutical, is a substance used to prevent or cure a disease or ailment or to alleviate its symptoms. In the U.S., some drugs are available over-the-counter while others can be purchased only with a doctor's prescription. Drugs can be taken orally, via a skin patch, by injection, or via an inhaler, to name the most common methods.

The pharmaceutical industry, which is concerned with the development and marketing of drugs, is a key component of the health sector, which is the most profitable industry in the U.S. economy, with American drug companies bringing in an estimated $334 billion in revenues for 2021.

A drug may also refer to an illegal or restricted substance used by individuals recreationally or to get high.

Key Takeaways

  • Drug development and marketing is a key component of the health sector, which is the most profitable U.S. industry at $334 billion in revenues in 2021.
  • A new drug can be patented for 20 years after its discovery or invention.
  • After 20 years, generic equivalents can be sold at lower prices.

Understanding Drugs

The development of new and improved drugs, or pharmaceuticals, is a complex and costly business in the U.S. Some of the biggest American corporations, such as Johnson & Johnson, Pfizer, Merck, AstraZeneca, Bristol-Meyers Squibb, and Eli Lilly, are in the business of researching, testing, manufacturing, and marketing new drugs.

In addition, biotechnology has evolved in recent years as a major new branch of the drug business. Biotechnology companies concentrate on research and development (R&D) of new cures based on genetic manipulation. The big players in the field include Amgen, Gilead Sciences, Biogen, and Novartis Corp.

In the United States, prescription drugs must be approved by the Food and Drug Administration (FDA). The agency's Center for Drug Evaluation and Research (CDER) acts as a consumer watchdog.

How Drugs Get to the Market

On average, it takes about 10 years and costs about $1 - $2+ billion for a new drug (known in the pharmaceutical industry as a new indication) to make it from its initial discovery to a doctor's office, according to estimates from the U.S. government. The drug development process has five main stages, including three phases of clinical trials:

In the development and discovery phase, researchers explore new possibilities. They may investigate unexpected effects of existing drugs, test new molecular compounds, or create new technologies that allow drugs to work differently in the body.

In the preclinical research phase, when a potential new drug is identified, researchers determine the correct dosages and methods of administration, side effects, interactions with other drugs, and effectiveness. They also study the drug’s absorption, metabolization, and excretion characteristics.

$1-2+ billion

The estimated cost of getting a new drug from the research lab to the doctor's office is $1 - $2+ billion.

Clinical Trials

In the clinical research phase, the company first tests the substance in the lab, or "in vitro," and sometimes on animals, or "in vivo." Depending on the outcome, the drug may then be tested on human subjects in clinical trials to determine whether it is safe and effective.

The phase 1 clinical trial or study is the first phase in the long and grueling process of drug approval. While the primary objective of phase 1 studies is to establish the safety profile of the investigational drug, these studies also enable vital information about the drug’s effects and chemistry to be collated. This information can be used to facilitate the design of well-controlled and scientifically valid phase 2 studies, the next step in the drug development process

Phase 2 in the clinical trial process focuses on how effective the drug is. Phase 3 trials are used to compare the treatment of the new drug to the current established treatment of the medical problem. A follow-up Phase 4 may be conducted that looks at the effects of the drug on the population after it has been approved by the FDA. All phases of a clinical trial only begin after the extensive research and development (R&D) phase of pharmaceutical companies, which can be lengthy and costly.

A drug that passes that hurdle is submitted to the CDER for review via a a New Drug Application (NDA). The agency employs pharmacologists, chemists, statisticians, physicians, and other scientists who conduct an independent and unbiased review of the drug and the documentation submitted with it. That process typically takes six to 10 months to complete.

The drug company will be allowed to sell the drug if the CDER determines that the drug’s benefits outweigh its risks. It is then responsible for monitoring reports on the drug's effectiveness and unanticipated side effects.

Name Brand vs. Generic Drugs

Drugs sold in the U.S. may be name-brand or generic. A name-brand drug can be patented for 20 years after its discovery or invention. Once the patent expires, other manufacturers can produce and market generic equivalents of that drug.

Generic equivalents are increasingly prescribed as they become available in the U.S. because of their relatively low cost. Generics are required to have the same medicinal ingredients, and therefore the same therapeutic effects, to receive FDA approval for sale as substitutes.

Orphan drug status is a status designated by the FDA that gives companies researching cures for rare diseases a seven-year window of exclusive marketing rights post-approval, reductions in certain application fees, and tax incentives

Drug Prices

The price of prescription drugs is a source of great financial stress for many Americans, and therefore it has become one of the biggest political issues of the era. Health insurance prevents many Americans from bearing the full brunt of retail drug prices, though the coverage varies widely. In any case, drug costs are a major factor in the increase in health insurance premiums.

The most expensive prescription drugs in 2022, according to goodrx.com, a healthcare website, include Zokinvy, Hutchinson-Gilford progeria syndrome treatment, at $89,480 per month; Myalept, a treatment for lipodystrophy, at $77,496 per month; and Mavenclad, a treatment for relapsing forms of multiple sclerosis, at $63,993 per month.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Statista. "Domestic and international revenue of the U.S. pharmaceutical industry."

  2. S&P Global. “Healthcare SPACs Face 2022 Hurdles; Biopharma Set for Q4’21 Revenue Rise.”

  3. U.S. Food and Drug Administration. “CDER: The Consumer Watchdog for Safe and Effective Drugs.”

  4. Congressional Budget Office. “Research and Development in the Pharmaceutical Industry.”

  5. U.S. Food and Drug Administration. “The Drug Development Process.”

  6. U.S. Food and Drug Administration. “Step 1: Discovery and Development.”

  7. U.S. Food and Drug Administration. “Step 2: Preclinical Research.”

  8. U.S. Food and Drug Administration. “Step 3: Clinical Research.”

  9. U.S. Food and Drug Administration. “CDER 21st Century Review Process: Desk Reference Guide,” Page 7.

  10. U.S. Food and Drug Administration. “Frequently Asked Questions About CDER.”

  11. CDER Small Business and Industry Assistance. “Patents and Exclusivity.” FDA/CDER SBIA Chronicles, May 2015, pp. 1.

  12. GoodRx Health. “The 20 Most Expensive Prescription Drugs in the US.”

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.