Drugs Manufacturing

ally not relevant to the decision-making process
of the consumer.

The demand for drugs should continue to grow
as the aging U.S. population continues to place
more emphasis on health care. A recent national
survey found that one of the reasons employers’
drug benefit costs rose rapidly between 1990 and
1992 was that the employee population was get-
ting older, and older people tend to use more
drugs.'? Also, the drugs market continues to be
based on need rather than on price. These market
forces have enabled drug sales to rise steadily and
drug manufacturers to increase prices consistently.

Price increases. Drug prices have grown faster
than prices of other manufactured products, in
part because of price-insensitive demand and in
part because of the lack of price-based competi-
tion in the supply of patented drugs. Patents af-
ford new drugs a period during which imitation
drugs cannot be used as substitutes. This protec-
tion eliminates the ability of rival firms to com-
pete through the use of lower prices. From 1985
to 1993, producer prices in the drugs-manufac-
turing industry grew at more than 4 times the
rate of those in nondurable manufactured goods,
with prices of pharmaceutical preparations grow-

ing even faster.'? (See chart 4.) Explosive price
growth for the industry’s products allowed for
high profit margins despite increases in employ-
ment, wages, and research and development costs.

The rapid growth of wholesale prices for drugs
led to increases in consumer prices of prescrip-
tion drugs at a rate 4 times that of retail prices
for all nondurable goods since 1980.'4 While
consumer prices for over-the-counter drugs did
not grow as fast as the prices of prescription
drugs, their growth rate was twice as fast as that
for all nondurable goods over the same period.
Since 1992, drug prices have increased at a much
slower rate.

Technology. The most rapid period of techno-
logical advancement in the production methods
of drugs occurred in the 1950’s and 1960’s, but
continuous strides have been made in the tech-
nology used to discover drugs throughout the past
four decades. The most important recent devel-
opment was the introduction of biotechnology
in the early 1980’s. Biotechnology, which is the
productive use of living organisms and their
byproducts, has led to the discovery of drugs that
would have remained unknown in prior decades.
The progress made has been astounding, with

Chart 2. Real average hourly earnings of production workers In drugs manufacturing and total
manufacturing , 1947-93
Constant dollars ‘Constant dollars
(1982 = 100) (1982 = 100)
$1 $n
L Drugs
$10 manufacturing 7] $10
gob + $9
$8 Total | $8
manufacturing
7 497
sek + $6
ss + $5
“er + $4
$0 L CS Oe ee ee 5 as ae
1947 ‘49 ‘51 ‘S39 '55 '57 59 ‘61 ‘63 ‘65 ‘67 ‘69 71 73 '75 ‘77 79 ‘81 ‘83 ‘85 ‘87 ‘89 ‘91 ‘99

16 Monthly Labor Review March 1995



Work on the current Administration’s proposal
for health-care reform began early in 1993.
Drugs-manufacturing employment was virtually
unchanged in 1993 and 1994, after the industry
added nearly 9 percent to employment over the
previous 2 years. Although the drugs-manufac-
turing industry was not influenced directly by
previous medicare legislation, the proposed new
health care reform was expected to have a much
more significant impact on the industry. Because
provisions of this reform were directed at phar-
maceuticals, and because doubts surround its
time of implementation, drugs-manufacturing
payrolls were probably affected in 1993 and 1994
in anticipation of its impact.

Foreign competition. A prominent long-term
issue concerning employment in the drugs-manu-
facturing industry is the increased competition
that is emerging from foreign drug companies.
Pharmaceutical imports into the United States
have grown at a faster rate than U.S. drug ex-
ports since 1985, culminating in trade deficits for
the industry in 1992 and 1993.*3 (See chart 5.) The
recent passage of the North American Free Trade
Agreement (NAFTA) and the ratification of the Gen-
eral Agreement on Tariffs and Trade (GATT) are
making it easier for foreign drug manufacturers
to participate in U.S. markets. These agreements,
however, make involvement of U.S. drug compa-
nies in foreign markets more practical as well.
Trade has had both positive and negative ef-
fects on employment in the drugs-manufactur-
ing industry in countries throughout the world.
Canadian pharmaceutical firms added jobs be-
fore the ratification of NAFTA, under free trade
with the United States from 1989 to 1992.4 Also,
the Irish pharmaceutical industry, one of that
country’s strongest exporters, is expecting to in-
crease its work force under GATT.*> And Cana-
dian manufacturers of generic drugs plan to in-
crease their participation in the attractive U.S.
generic drug market because of the early 1993
passage of a Canadian law extending patent pro-
tection for brand-name drugs to 20 years.7° By
contrast, the United Kingdom’s pharmaceutical

Footnotes

industry is faced with manufacturers moving off-
shore and jobs being eliminated in a single Eu-
ropean market confronted by overcapacity in
production.>” And with the possibility of more for-
eign involvement in the U.S. pharmaceuticals mar-
ket under new trade agreements, U.S. drug compa-
nies could see further declines in their share of
domestic markets. Finally, patent applications origi-
nating outside the United States have increased their
share of total drug-related patents applied for in
the United States between 1979 and 1992.38

On the other hand, the possibility of increas-
ing U.S. market share abroad under new trade
agreements may counterbalance the loss of do-
mestic market share or even be the source of new
jobs. Export-related employment represented
nearly 16 percent of the drugs-manufacturing
work force in 1989, and 13.5 percent of the
industry’s shipments were related to exports.??
The Pharmaceutical Research and Manvufactur-
ers of America maintains that the industry is the
most competitive U.S. industry in international
markets and the world leader in innovation.” If
this is true, the recent easing of trade barriers
may work to the U.S. drug companies’ advantage.

SHIELDED BY THE RELATIVELY inelastic demand
for health care products, the drugs-manufactur-
ing industry has added high-paying, high-skilled
jobs throughout the past three decades, despite
recessions and structural changes in the economy.
While drug manufacturers continued to add jobs
in the 1990’s, job growth once thought of as cer-
tain could be challenged by some of today’s is-
sues. Increased competition from generic drugs
and international companies, in addition to a re-
formed health care system, could have a nega-
tive impact on the industry and cause companies
to consider eliminating jobs. But increased de-
mand from previously uninsured citizens and re-
imbursed medicare patients, as well as freer in-
ternational trade, could have a positive effect on
the industry, enabling it to continue employment
growth. These challenges have led BLS to project
that drugs-manufacturing employment will grow
slower in the future than it has in the past. 1

1 The drugs-manufacturing industry is defined in the
Standard Industrial Classification Manual (Executive Of-
fice of the President, Office of Management and Budget,
1987), pp. 137-39.

2. Employment data cited in this article are taken from the
Current Employment Statistics survey and appear in Em-
ployment, Hours, and Earnings, United States, 1909-1994,
Vols. I and i, Bulletin 2445 (Bureau of Labor Statistics,
September 1994), The article uses annual averages for year-
to-year comparisons. Employment estimates are for the 50
States and the District of Columbia; therefore, the 22,000

drugs-manufacturing employees in Puerto Rico are not in-
cluded in the estimates.

3 Meir Statman, Competition in the Pharmaceutical In-
dustry: The Declining Profitability of Drug Innovation
(Washington, pc, American Enterprise Institute for Public
Policy Research, 1983), p. 59.

For further analysis of employment in the health serv-
ices industry, see David R. H. Hiles, “Health services: the
real jobs machine,” Monthly Labor Review, November 1992,
pp. 3-16, especially p. 6.

Monthly Labor Review March 1995 21



Drugs Manufacturing

Profits. The relatively large profit margins of
the drugs-manufacturing industry provide capi-
tal for the large amounts of research required to
develop drugs. However, the rapid growth in
profits (operating income) of drug manufactur-
ers in the late 1980’s slowed temporarily in the
early 1990’s.?! (See chart 3.) Also, operating in-
come, although nearly flat in 1992, resumed its
strong growth pattem in 1993.” Without the abil-
ity to increase prices as they had in the past, and
under the pressures wrought by generic drugs,
managed care, and the expiration of patents, drug
companies contained costs by slowing employ-
ment growth, thereby allowing profits to return
to their historical rates. In 1993, the industry
added its fewest number of jobs in 7 years.

Competition from generic drugs. The growing
medical and consumer acceptance of generic drugs
Presents a challenge to established, brand-name
drugs-manufacturing companies. The 17-year
patent protection afforded new drugs has shielded
the products of these companies from competi-
tion. Patents not only protect profits, but also
make possible long product life cycles, which
allow for the entrenchment of the product in the
market without the initial threat of competition.

Once the patent protection period is over, ge-
neric drugs become a threat to brand-name drugs
because they are less expensive. Two reasons
explain why generics are more affordable. First,
generic drug companies copy brand-name drugs
when their patents expire, instead of devoting
large amounts of resources to research and de-
velopment. Second, because generic drug manu-
facturers have to gain a share of what is essen-
tially a monopoly market built during the first
17 years of a drug’s existence, the generic drug
must be priced low enough to draw consumers
away from a known brand.

Generic drugs represent a choice for the con-
sumer—a goal achieved by the repeal of anti-
substitution laws in the 1970's. These State laws,
which prohibited the replacement of brand-name
drug prescriptions with prescriptions for generic
drugs, were eliminated to save the consumer
money.”3 Now more widely accepted, generic
drugs have ushered in an era of increased price-
based competition for market share in the phar-
maceuticals industry. It is likely that in the fu-
ture, expanded competition from generic drugs
in the postprotection segment of the market will
keep brand-name pharmaceutical companies’
rates of return closer to their costs of capital.24

Chart 4. Producer price indexes for nondurable manufactured goods, drugs, and pharmaceuticals,

annual averages, 1985-93

Index

(December 1984 = 100)
200

Index
(December 1984 = 100)
200

1993

18 Monthly Labor Review March 1995



Chart 3. Indexes of eales and operating income for drugs manufacturing, 1974-93

n i Ll 1 1 n L

L 1 1 r 1 1 1 1

Index Index
(1974 = 100) (1974 = 100)
800 800
700 | + 700

0
1974 75 76
SOURCE: Bureau of the Census.

7 78 $79 ‘80 ‘81

‘82 83 (‘84 85 «86878889

33 percent of research projects of major phar-
maceutical companies in 1992 being based on
biotechnology, compared with a mere 2 percent
in 1980. Most of the drugs discovered through
biotechnology have come from small, new firms
that concentrate their investigations using this re-
search technique.!5

Because of the complexity of biotechnologi-
cal research and the time required to obtain Fed-
eral approval to introduce new drugs, little of the
output from the 1980’s has reached consumer
markets. Just 14 biotechnology medicines had
been approved by 1991, while 132 were await-
ing approval.'© Technological advancements
have enabled the drugs-manufacturing industry
to develop better and more sophisticated drugs,
but have not sped up the drug development proc-
ess. Thus, unlike the situation in most other
manufacturing industries, where technological
advances lead to increased productivity and the
need for fewer workers, in the drugs-manufac-
turing industry manufacturers may require more
workers in order to be able to follow through on
the development of improved drugs.

Research and development. The research-ori-
ented drugs-manufacturing industry increased its

percentage of net sales spent on research and
development from 6.1 percent in 1980 to 9.7
percent in 1991.!7 The industry invests in re-
search and development at nearly twice the av-
erage rate of all manufacturing. In spite of this,
the rapid price growth of pharmaceutical prod-
ucts over the past two decades has enabled drug
manufacturers to earn 2 to 4 times the profits of
the average manufacturing firm.'*

The rising cost of bringing new drugs to mar-
ket is a major concer to an industry dependent
on patent protection and long product life cycles
to be profitable. The Pharmaceutical Research
and Manufacturers of America reported that “it
still takes 12 years and an average of $231 mil-
lion to develop a new drug.”!? With the dramatic
increase in market share attained by generic drugs
in the past decade, brand-name drugs-manufac-
turing companies have devoted more resources
to the research and development of new drugs.
Despite already high levels of investment, the
drugs-manufacturing industry still increased re-
search and development as a percentage of net sales
by 59 percent from 1980-91.2° These investments
were intended to help ease the situation produced
by products that faced increasing competition after
their exclusive patent protection expired.

Monthly Labor Review March 1995 17



Drugs Manufacturing

dustry to grow into the next century at less than
half the rate it did over the 1979-92 period. Newly
emerging factors, such as health care reform and
international competition, will challenge the indus-
try and its historic pattern of employment growth.

Health care reform. The current debate over
health care reform has brought about uncertainty
regarding future employment growth in drugs
manufacturing. The immediate concern comes
from the growing political and market pressures
on the cost of drugs.?” Health care reform plans
are still in the early stages, and implementation
may be years away. Initial proposals for reform
include granting drug prescription benefits to
medicare patients, requiring rebates from brand-
name drug companies to the medicare system,
and establishing a special advisory council to
monitor the prices of new drugs, which enter the
market facing little or no competition.?8 While
not calling for direct controls on drug prices, the
reform does entail a radical change in the avail-
ability of and treatment associated with health
care and seems likely to have a major impact on
the prescription drugs market.

The short-term effects of reform on employ-
ment in the drugs-manufacturing industry are
uncertain, The pressure to keep prices, and likely

payrolls, under control may be offset by a rise in
demand from previously uninsured citizens and
the growing number of elderly consumers. In
1990, the number of persons over 65, while ac-
counting for just 12 percent of the total popula-
tion, consumed 36 percent of the dollars spent
on health care.2? Health care reform proposals
that affect new drugs are being approached cau-
tiously so that the industry’s commitment to re-
search and development is not hindered.*° Re-
search on new drugs may take on more importance
for brand-name companies if generics continue
toencroach upon the market share of drugs that are
beyond the patent-protection period.

Previous legislation provides little insight into
possible effects of the currently proposed health
care reform on employment in drugs manufac-
turing. Neither the introduction of medicare in
1966 nor the implementation of the Medicare
Prospective Payment System in 1983 included
specific provisions about pharmaceuticals. The
1966 reform excluded drugs from medicare pay-
ments?! and the 1983 reform dealt mainly with
the establishment of medicare prospective pay-
ments for hospitals’ inpatient operating costs.*?
In both cases, employment in the drugs-manu-
facturing industry continued to grow rapidly af-
ter the reform was implemented. (See chart 1.)

Chart 5. Balance of trade for drugs manufacturing, 1985-93

-200

Millions
Millions
of dollars of dollars
800 800

1986 1987 1988 1989 1990

SOURCE: U.S. Department of Commerce.

20 Monthly Labor Review March 1995



Stephen Heffler

Stephen Heffler is an
economist formerly
employed in the Office of
Employment and
Unemployment Statistics,
Bureau of Labor Statistics.

Drugs manufacturing:
a prescription for jobs

Since 1964, employment in drugs manufacturing has grown
through recessions and structural changes to the economy,

while the industry has continued to make profits,

invest in research and development, and pay above-average wages

he job market has shrunk in many manu-

facturing industries over the past 50 years,

but the drugs-manufacturing industry has
shown healthy employment gains year after year.
Not only are jobs being created in this relatively
small industry, but many are high paying, high
skilled, and research oriented. The industry
surged through the past four recessions with re-
markable profit margins and substantial job
growth. It also added jobs during the structural
change in the economy that has occurred over
the past few decades.

The market pressures facing the drugs-manu-
facturing industry are different from those fac-
ing most manufacturing industries. The supply
of drug products is not necessarily based on the
concept of normal market competition, under
which demand is sensitive to changes in price.
Instead, consumer demand depends mostly on
relief from ill health, which shows little response
to price changes. Despite the differences in mar-
ket pressures, the industry faces new challenges
in the 1990’s from increased competition and
proposed health-care reform. As a result, there
is a serious question whether the industry can
continue its robust employment growth of the
past four decades or whether it will react to the
challenges by slowing employment growth or
decreasing payrolls.

This article presents a brief history of the
drugs-manufacturing industry from 1964, when
its rapid growth began, to 1994, and offers de-

12 Monthly Labor Review March 1995

tails behind the industry’s growth since 1980. It
surveys the changing conditions within the in-
dustry and explores possible future impacts on
employment.

Industry composition

The drugs-manufacturing industry (SIC 283) is a
component of the chemicals and allied products
industry (SIC 28), accounting for nearly 25 per-
cent of employment in the latter in 1993.! The
drugs-manufacturing industry is divided into
three parts with total 1993 employment of
264,800, or 1.5 percent of manufacturing em-
ployment.” (See table 1.) The largest part is phar-
maceutical preparations (SIC 2834), which ac-
counted for 81 percent of total drugs-manufacturing
employment in 1993. Pharmaceutical prepara-
tions are manufactured drug products purchased
either over the counter or by prescription and
used in human or veterinary health care. Most of
these products are in a form intended for final
consumption and are marketed to both profes-
sionals and consumers.

The pharmaceutical preparations segment is
the driving force behind the employment trends,
the profit and sales movements, and the product
costs of the drugs-manufacturing industry. Be-
cause of this substantial influence, the charac-
teristics of the segment are used throughout this
article as a basis for analyzing the drugs-manu-
facturing industry.



Drugs Manufacturing

5 Based on data on average weekly wages from the BLS
Es-202 program. These data appear in Employment and
Wages: Annual Averages (Bureau of Labor Statistics, vari-
‘ous issues).

6 Based on data on average hourly earnings from the BLs
Current Employment Statistics survey. Earnings were de-
flated using the Consumer Price Index for Urban Wage Earn-
ers and Clerical Workers (cri-w, 1982 = 100).

7 Based on Bis Occupational Employment Statistics (oEs)
estimates for 1980, 1983, 1986, 1989, and 1992. The last
year data were available was 1992 because the ozs program
gathers data in 3-year cycles.

8 Industrial Production and Capacity Utilization,
G.17(419) (Board of Governors of the Federal Reserve Sys-
tem, various releases).

° Quarterly Financial Report for Mining, Manufacturing,
and Trade Corporations (Bureau of the Census, various
releases).

10 Pharmaceutical Research and Manufacturers of
‘America, “Modern Medicines: Saving Lives and Money,”
The Case for the Pharmaceutical Industry, 1993, p. 1.1.

\! See Hiles, “Health services,” p. 4.

'2 Greg Muirhead, “Employers’ Drug Benefit Costs per
Employee Jump,” Drug Topics, May 3, 1993, p. 58.

3 Based on pis Producer Price Index estimates with De-
cember 1984 = 100. Monthly data are available beginning
in 1986.

\4 Based on Bis Consumer Price Index estimates, 1982
84 = 100.

'S Pharmaceutical Research and Manufacturers of
America, “Biotechnology: Its Importance and Its Chal-
lenges,” The Case for the Pharmaceutical Industry, 1993,
p.21.1.

6 Ibid.

Selected Data on Research and Development in Indus-
try: 1991, nse 93-322 (National Science Foundation, 1993),
p. 18.

18 Quarterly Financial Report, various releases.

'° Pharmaceutical Research and Manufacturers of
America, “Modern Medicines,” p. 5.

+ 20 Selected Data on Research and Development in Indus-
try. p. 18,

21 Quarterly Financial Report, various releases.

22 Operating income is defined as net sales, receipts, and
operating revenues, less (1) all operating costs and expenses,
and (2) depreciation, depletion, and amortization of prop-
erty, plant, and equipment.

22 Monthly Labor Review March 1995

23 Statman, Competition in the Pharmaceutical Industry,
Pp. 65-66.

24 Ibid, p. 65.

25 “Do We Pay Too Much for Prescriptions,” Consumer
Reports, October 1993, p. 668.

2% See James C. Franklin, “Industry Output and Employ-
ment,” Monthly Labor Review, November 1993, pp. 41-57,
especially p. 54; and U.S. Industrial Outlook: 1993 (U.S.
Department of Commerce, January 1993), p. 43-3.

27 "Do We Pay Too Much for Prescriptions,”

28 “nus Official Justifies Necessity of Monitoring Break-
through Drug Prices,” ana Health Care Daily, November 17,
1993.

29 Martha Glaser, “Employers Put New Controls on
Mounting Retiree Prescription Costs,” Medical Economics
Publishing: 1993, May 17, 1993, p. 69.

30 “Monitoring Breakthrough Drug Prices.”

31 Rashi Fein, Medical Care, Medical Costs (Cambridge,
Ma, Harvard University Press, 1986), p. 74.

2 Louise B, Russell, Medicare's new hospital payment
system: Is it working? (Washington, Brookings Institution,
1989), p. 8.

33 Trade and Employment (Bureau of Labor Statistics,
Bureau of the Census, various issues), tables | and 5.

34 “Study This: The Hurtin’s About to End,” The Finan-
cial Post, December 11, 1993, p. 7.

35 “Sutherland Confident of carr Agreement; Manufac-
turing May Make Most Job Gains,” /rish Times, December
15, 1993, p. 1.

36«Drug Companies; Rebels with a Pill,” The Economist,
‘Oct. 30, 1993, p. 76.

37 “ux Pharmaceutical Investment Under Threat,” Phar-
maceutical Business News, September 20, 1993.

38 Patenting Trends in the United States, 1963-1991 (U.S.
Patent and Trademark Office, September 1992), p. a4. Ap-
plications for patents are distributed in the year they are filed
and are more likely to reflect changes in technological ac~
tivity compared to patents granted. Also, fractional counts
are used in order to eliminate multiple patent counts across
different fields.

3 Exports from Manufacturing Establishments: 1988 and
1989, ax89-1 (U.S. Bureau of the Census, November 1992),
p. 24,

4° Pharmaceutical Research and Manufacturers of
America, “America’s Pharmaceutical Industry: A Key Com-
petitive Force," The Case for the Pharmaceutical Industry,
July 1992, p. 1.



In 1976, Congress created tax credits under
Section 936 of the Internal Revenue tax code
for U.S. companies operating in U.S. territo-
ties. The purpose of Section 936 was to create
jobs, attract capital investments from the main-
Jand, and further develop the economies of U.S.
possessions. (See Sean Holton, “Puerto Rico
would lose tax break to statehood; loss of lu-
crative credit is top issue in upcoming vote to
test sentiment,” The Houston Chronicle, Nov.
7, 1993, p. 23A.) Pharmaceutical companies
used the opportunity to establish manufactur-
ing plants in Puerto Rico, and by 1993, they
employed 22,000 workers. (Puerto Rico is not
included in U.S. job counts, but employment
estimates are prepared by the Commonwealth
under the Current Employment Statistics pro-
gram.) The credit was attractive to drug com-
panies because their low per-unit raw material,
manufacturing, and shipping costs made pro-
duction at a remote site feasible, and the large
profit margins they required to recover their
costly research investments would be covered
by the credit.

The Pharmaceutical Research and Manufac-
turers of America claims that the tax credit has
had a positive impact on all economies in-
volved. The organization maintains that the
credit created thousands of indirect jobs in
Puerto Rico during the past two decades, al-
lowed thousands of mainland jobs to support
exports to the territory, and was a key aid to
international competitiveness. The credit also
has been a positive influence on research and

Drugs-manufacturing jobs in Puerto Rico

development investments. (See Pharmaceutical
Research and Manufacturers of America, “Ben-
efits of Section 936, The Case for the Pharma-
ceutical Industry, July 1992, pp. 1-4.) Oppo-
nents of Section 936, however, have attacked
the law by claiming that the tax credit has sac-
rificed high-paying jobs in the drugs-manufac-
turing industry on the U.S. mainland.

The pharmaceutical industry has been the
largest beneficiary of the tax credit in Puerto
Rico, without providing a proportional increase
in jobs for Puerto Ricans. In a study of the ef-
fects of Section 936 in Puerto Rico, the Gen-
eral Accounting Office determined that phar-
maceutical corporations eligible for the tax
credit received nearly half of all estimated tax
benefits accruing from Section 936 in 1989. Yet
the industry employed less than 18 percent of
the Section 936 manufacturing work force, de-
spite the fact that nearly all pharmaceutical
firms in Puerto Rico benefited from that sec-
tion of the tax code. (See Tax Policy: Puerto
Rico and the Section 936 Tax Credit, GAO/GGD-
93-109 (General Accounting Office, 1993), pp.
47-50.) Also, these same pharmaceutical com-
panies received $71,678 in tax credits per em-
ployee, while compensation per employee was
$33,757. (See Tax Policy, pp. 52-53.)

Recently, Congress weakened the Section
936 credit in an attempt to reduce the Federal
deficit and tied the payment to the size of a
firm’s payroll. The impact this will have on
the pharmaceutical industry in Puerto Rico is
unknown.

This situation is markedly different from that of
the 1950's and 1960's, when rates of return were
much higher than the cost of capital.
Manufacturers of generic drugs have made
impressive gains in market share, accounting for
40 percent of prescriptions filled in 1992, com-
pared with 15 percent in 1983.7 This is partly
because brand-name drugs remain more expen-
sive and there have been no replacements for
drugs coming off patent protection. Not only are
Canadian and other exporters of generic drugs
attracted to the U.S, pharmaceutical market, but
also, foreign and U.S. brand-name companies
alike recently have become involved in other as-
pects of the market. For example, one major trend
has been the merger of drug manufacturers with
companies that provide low-cost drug benefit
services. Also, the rapid growth of managed
health care has contributed to the rising market
share of génerics, as insurance plans that utilize

managed care require the use of generics when-
ever they are available. Indeed, generic drugs
have had such an impact that the drugs-manu-
facturing industry is scrambling to boost its rev-
enue and defend its earnings by selling more
units, brand name or generic.

Newly emerging factors

The pattern of employment growth in the drugs-
manufacturing industry over the past three dec-
ades may not continue in the face of new chal-
lenges. Both the Bureau of Labor Statistics and
the Department of Commerce expect employ-
ment to continue to » grow in the industry over the
next 5 to 15 years.”° The share of total employ-
ment in the industry held by professional and tech-
nical occupations is expected to continue to increase
as well, with research and development taking on
added importance. However, BLS projects the in-

Monthly Labor Review March 1995



other two components of the drugs-manufactur-
ing industry over the past decade. The segment’s
share of total drugs-manufacturing employment
declined by 2 percentage points, as less than 8
percent was added to employment from 1980 to
1993. Because medicinal chemicals and botani-
cal products are used predominately as elements
in the manufacture of pharmaceuticals and in
diagnostics, rather than by consumers concerned
with their health, price-based competition plays
a larger role within the segment than in the drugs-
manufacturing industry as a whole. Despite in-
creasing consumer interest in products with natu-
ral ingredients, this competition was a factor in
keeping employment growth in medicinal chemi-
cals and botanical products below that of the rest
of the drugs-manufacturing industry.

High-paying, high-skilled jobs. In 1993, a
worker in the drugs-manufacturing industry
earned wages averaging $944 per week, about
$320 more than the average for the whole manu-
facturing sector.> The difference was some $60
in 1980. Even workers involved directly in pro-
duction earned more than their counterparts
across all manufacturing industries. Average
hourly earnings for production workers in drugs
manufacturing were $14.68 in 1993, compared
with $11.74 for the manufacturing sector. Ad-
justed for inflation, from 1980 through 1993, av-
erage hourly earnings for production workers in
the industry increased by $1.03. Over the same
period, real average hourly earnings in manufac-
turing declined by $0.48.° (See chart 2.)

The increase in earnings of workers in the
drugs-manufacturing industry was accompanied
by a shift toward professional and technical oc-
cupations.” (See table 2.) While the largest per-
centage of employment is still in production and
support occupations, most new jobs created since
1980 have been in professional and technical
occupations. More than 40,000 jobs were added

in these occupations from 1980 through 1992,
while fewer than 14,000 were added in produc-
tion, operating, and related occupations during
the same period. Thus, the percentage of work-
ers in production-related occupations in the
drugs-manufacturing industry declined to just 33
percent in 1992, from nearly 40 percent in 1980.

Factors affecting employment growth

Employment in drugs manufacturing has regis-
tered steady growth primarily because the de-
mand for pharmaceutical products has increased
in bad times as well as good. Output in the in-
dustry increased at a rate more than 1-1/2 times
that of all manufacturing industries in the past
decade.’ Also, drug companies have been able
to raise prices on this growing production to keep
profits high. Thus, they have avoided the down-
sizing and restructuring common among manu-
facturing industries in recent years. The discus-
sion that follows explores these and other factors
that have enabled the drugs-manufacturing in-
dustry to add significant numbers of well-pay-
ing jobs to the economy. Also addressed is the
likely impact of such factors over the next few
years.

Demand for drugs. Over the past 13 years, real
sales of pharmaceuticals have increased by more
than 100 percent.’ (See chart 3.) Drug treatment,
as an alternative to other forms of medical treat-
ment, has taken on more importance in the past
few decades. Prescription and over-the-counter
drugs are now used in many medical situations
that once were treatable only through inpatient
or outpatient hospital care. For example, the de-
velopment of drugs to treat bleeding ulcers has
drastically reduced the need for surgery for this
condition.'° Because the third-party payment sys-
tem exists within the drugs market, as in the over-
all health care market,"! the cost of drugs is usu-

Table 2. Percent distribution of employment in drugs manufacturing, by occupation,

selected years, 1977-92

‘Occupational group i977_| 1980 | 1983 | 1986 | 1989 | 1992
Production, operating, and related occupations 96.7 39.6 39.2 357 | 353 33.3
Professional and technical occupations . .... . 23.8 24.7 25.4 259 | 288 32.2
Clerical and administrative support 19.8 18.4 16.7 174 | 175 15.7
Managerial and administrative occupations . 104 11.0 10.0 11.3 | 107 10.5
Sales and related occupations . 63 28 35 5.0 44 5.2
Service occupations 44 35 36 33 28 27
Agricultural and related occupations .. - - 8 7 8 5

Note:

Columns may not add to 100, due to rounding. Dash indicates less than 0.5 percent.
Source: Occupational Employment Statistics program, Bureau of Labor Statistics.

Monthly Labor Review March 1995



Drugs Manufacturing

— — <=
Chart 1. Employment Indexes for drugs manufacturing and total manufacturing, 1947-94
ao Index
1947 = 100) 1947 = 1
350 allah
Drugs
300 F manufacturing 7 300
250 k — 250
Medicare
200 F Prospective | 200
Payment
L System 4
150 f+ Total | 150
manufacturing
| rmmnennrninny
100 bag” = = 100
Drug, and
r Cosmetic
Act
Fe a OO
1947 ‘49 61 53 55 57 ‘89 61 63 65 67 69 71 73°75 77 79 81 83 85 87 BO D1 OB

of the 1974-75 recession and extended a few
months into the recovery. However, even this 2.9-
percent loss was small compared with the aver-
age loss of more than 8 percent in manufactur-
ing during its peak-to-trough periods over the
past two decades.

Besides being relatively immune to business
cycles, employment in the drugs-manufacturing
industry was not adversely affected by the struc-
tural changes that took place in numerous indus-
tries over the past decade. Many large manufac-
turing corporations were forced to restructure in
the face of less prosperity during the 1980’s. The
drugs-manufacturing industry, however, continued
to flourish without downsizing or restructuring.

Similarity to health services. Essentially, the
stellar performance of the drugs-manufacturing
industry has mirrored that of the health services
segment of the services industry.’ Since 1986,
the drugs-manufacturing industry has added 28
percent to employment, compared with 34 per-
cent in health services. Both face consumer mar-
kets in which demand is relatively insensitive to
changes in price, but is driven instead primarily
by health care needs. In an economy focused on
improvements in productivity and cost contain-

14. Monthly Labor Review March 1995

ment, the unique laws of demand pertaining to
drugs manufacturing and health services helped
provide an employment hedge throughout the
past decade, as many other industries were forced
to downsize and streamline to compete.

Component industries. While the trends in the
large pharmaceutical preparations segment re-
flected those in the drugs-manufacturing indus-
try as a whole, the two smaller components grew
more slowly; nevertheless, all three far outper-
formed the average for manufacturing. The di-
agnostic and other biological products segment
grew by nearly 25 percent from 1980 to 1993,
yet saw its share of total drugs-manufacturing
employment fall by 1 percentage point. Employ-
ment movements within the segment were simi-
lar to those of the pharmaceutical preparations
segment during each of the past four recessions,
declining only during the 1982 recession. While
products from the diagnostics segment may or
may not be packaged for retail sale, the segment
is similar in its behavior to the pharmaceutical
Preparations segment in that demand depends
mostly on need rather than price.

The medicinal chemicals and botanical prod-
ucts segment grew much less quickly than the



Diagnostic and other biological products (SIC’s
2835, 2836), the second part of the drugs-manu-
facturing industry, employed 28,500 workers in
1993, or 11 percent of total employment in the
industry. Establishments in the diagnostic and
other biological products segment manufacture
products used in diagnosing or monitoring hu-
man or veterinary health. Most of the products
produced by this segment are used for testing
rather than for therapy.

The last part of the drugs-manufacturing in-
dustry is medicinal chemicals and botanical prod-
ucts (SIC 2833), which accounted for just 7 per-
cent of drugs-manufacturing employment
(19,700 employees) in 1993. The focus of com-
panies within this segment is the manufacturing
and processing of organic and inorganic chemi-
cals and botanical drugs used in the composition
of pharmaceutical and diagnostic products. These
products are usually not intended for professionals
orconsumers, but rather, are used most often in the
makeup of other manufactured drug products.

Employment

Historical trends. The mid-1960’s marked a
significant turning point for the drugs-manufac-
turing industry during its upward growth trend.
(See chart 1.) While growth averaged just 2,000
jobs per year in the decade before 1964, the in-
dustry added more than 4,000 per year, on aver-
age, from 1964 through 1986. The primary rea-
sons for the changing growth pattern in employment
during the 1960's were increased third-party health

insurance coverage provided by employers and
the implementation of medicare, which did not
cover drugs, but allowed for greater access to
them by enabling beneficiaries to use money that
they would otherwise have spent on doctor or
hospital bills. Also, a 1962 amendment to the
Food, Drug, and Cosmetic Act placed new re-
strictions on drug development, making drugs
safer for public use.? Finally, technological in-
novations relating to production methods, which
had limited the need for more workers in the
1950’s and early 1960’s, slowed in the mid-
1960’s, and more emphasis was placed on labor-
intensive research and development.

Both drugs-manufacturing and total manufac-
turing employment grew during the 1987-89 pe-
riod. However, from 1990 through 1993, the
drugs-manufacturing industry added 8,000 jobs
per year, on average, a marked difference from
the average loss of 347,000 jobs per year across
all manufacturing industries. The accelerated
employment growth in drugs manufacturing af-
ter 1986 resulted from a variety of factors, in-
cluding rapidly rising drug prices, increased ac-
cess to export markets, and the large number of
patent-protected products.

Performance during recessions. Through each
of the past four recessions, the drugs-manufac-
turing industry not only did not lose jobs, but in
fact had slight employment gains; the largest oc-
curred during the 1990-91 recession (2.5 per-
cent). The industry did experience one short pe-
tiod of significant losses that began in the middle

Table 1. Annual average employment in drugs manufacturing and all manufacturing, selected years, 1973-93
[Numbers in thousands}
1973 1978 1983 1988 1993
sc Percent Percent Percent Percent Percent | Percent
Industry of of of of of ch
code Employ Employ- Emptoy- Employ- Employ- lange,
drugs drugs drugs drugs drugs | 1973-93
ees manu- ces manu- ees manu- eos manu- eos manu-
ltacturing facturing lacturing {facturing ltacturing
All manufacturing 20,154.0 20,505.0 18,432.0 19,314.0) 18,003.0 a1
283 Drugs manufacturing....| 161.4] 100 1872] 100 201.3] 100 227.6] 100 264.8] 100 64
2834 Pharmaceutcal
preparations ....... 128.1] 79 1497/80 1595| 79 168.1] 83 215.3] 81 68
2835, 2836 | Diagnostic and other
biological products... yes] 11 aia} 4 232] 12 ait} 9 205} 11 54
2893 Medicinal chemicals and
botanical products .... 148] 9 164] 9 186| 9 184] 8 19.7| 7 33
Percent
1973 1978 1983 1988 1993 change,
1973-83
Drugs manufacturing as a
percentage of all
manutacturing......... 8 9 14 1.2 15 88
Nore: Percent distributions may not add to 100, due to rounding.

Monthly Labor Review March 1995 13