When patients can't afford the drugs, but drug companies can't cut their prices, who should foot the bill?

"The pharmaceuticals world, once I entered it, got me by the throat and wouldn't let me go. It had everything: the hopes and dreams we have of it; its vast, partly realised potential for good; and its pitch-dark underside, sustained by corporate cant, hypocrisy, corruption and greed."

Powerful stuff. But for the literary feel to the writing you could be reading a passage from a Socialist Workers' Party manifesto. But this is John le Carré explaining why he chose the doings of a dodgy drug company as the theme for his most recent novel, The Constant Gardner.

Drug companies arouse strong passions. In the 1970s their unpopularity rivalled that of the tobacco and arms industries: a peculiar response to an enterprise that aims to combat disease. The industry had acquired a reputation, sometimes justified, for commercial ruthlessness. The incentives that its marketing men offered doctors to prescribe their products were occasionally indistinguishable from bribes. The size and transnational make-up of the industry gave it scope for shunting money and materials around in a way that confused even the governments of developed countries.

Increasing public antagonism, particularly in the wake of thalidomide, forced the industry to address its shortcomings in Europe and North America. Pricing was closely scrutinised; codes of practice on gifts to doctors were introduced. Even the activities of developing-world subsidiaries are probably now cleaner than they were - although, as the South African HIV drugs affair demonstrates, the collective mindset of the companies remains unremittingly market-driven.

On the other hand, what else should it be? They are, after all, commercial organisations.

Humans have long been medicating themselves, but the roots of the contemporary pharmaceuticals business lie in the 19th-century chemical industry, especially in Germany. The physician and scientist Paul Ehrlich spoke of "magic bullets" that would attack diseased tissue while leaving its healthy counterpart untouched. The acceptance of Louis Pasteur's germ theory of disease fostered a growing realisation that many of the battles against illness might be won by waging chemical warfare against microbes.

Academic research laboratories might generate therapeutic ideas, but only industry can turn them into potential medicines, test them and finally market them. Neither the plant nor the expertise required to do this comes cheap. The companies grew. They became international. Some began to generate ideas and to fund research in basic science. The cost of developing drugs kept rising.

Thalidomide helped to push costs through the roof. Governments insisted on stringent regulation. They now demand vast amounts of data on safety and toxicity before licensing preparations. The ten or 12 years it can take to get a medicine to the pharmacy shelves mean that the research and development cost of a new product averages more than £350 million. Only a fraction of a percent of all compounds evaluated eventually receive a product licence and only a small proportion turn into real money spinners.

It is hardly surprising that the industry has seen a succession of mergers: Smith, Kline and French with Beecham; Glaxo with Wellcome; and, biggest of the lot, the recent fusion of these two giants. New biotech companies are being founded, many by small groups of academics eager to exploit their own research. Some flourish, some fail and some are swallowed by existing multinationals. The process seems set to continue.

With or without these mergers, the turnover of the industry continues to grow. In the United Kingdom, between 1980 and 1997, medicines as a proportion of National Health Service spending went from 8.8 per cent to 12.2 per cent. In absolute terms the bill increased from £826 million to £5.5 billion. As an exporter, the UK industry supplies almost 7 per cent of the world's drugs, representing more than double the home market.

Spending on R&D - now running at almost 30 per cent of sales - is equally impressive. Aerospace, the next nearest, manages less than 10 per cent. The industry is science-based, high-tech, research-oriented and profitable, so why is it still viewed with suspicion?

There is the reliance on animal testing; the intense use of sales promotion; and the charge of making profits out of illness. There is also the public's enthusiasm for alternative medicine, although distaste for the drug companies predates that. In the end, people go with what works. How many diabetics rely on chanting mantras or massaging pressure points when there is insulin to be had?

Perhaps the biggest conundrum facing this highly globalised industry is how to handle its dealings with developing countries. Last month, in an effort to drum up interest, the aid agency Medécins sans Frontières held a conference on ways of stimulating research and development on neglected diseases. Its director Jean-Michel Piedagnel said that more than 95 per cent of the 15 million deaths a year from infectious diseases occur in the developing world, yet R&D targeted at these major diseases has not made much progress.

There is general agreement that the drug industry alone cannot be held responsible for solving the medical problems of developing countries. As one commentator noted, nobody criticises Toyota for not giving cars to the poor. And while public sector organisations such as universities can generate ideas, they are not and should not be manufacturing enterprises. "You need to understand regulations, marketing and the technology of scaling up to industrial production," says Richard Lane, head of international programmes at the Wellcome Trust. "That expertise only resides in the industry."

One remedy is the public-private partnership based on creating a virtual not-for-profit company. "This acts like the manager of a research programme in a pharmaceuticals company," Lane says. "But decisions on whether to pursue a line of investigation depend not on profit, but on the public good." Money to finance such projects can come from governments or charitable foundations. Private-public projects on malaria and TB are already showing promise.

The decoding of the human genome is another stimulus to drug development. As the precise functions of genes are identified, researchers will look for ways of blocking or enhancing their actions. Many in the industry also believe doctors will eventually prescribe according to an individual's particular genetic make-up, choosing the drug most likely to work and least likely to cause adverse effects.

The coming decades will be dominated by industries that process and use information. Molecular biology and genetics are also about information: the data stored in our genetic material and required to keep us functioning. Our cells process these data in prodigious amounts, delivering their instructions in the form of chemical messages.

The task of the pharmaceuticals industry is, increasingly, to read these messages, and influence them. It too is part of the 21st-century information business.

From milk and honey to multinational in less than a century

At the beginning of the last century a family of New Zealanders, the Nathans, had a successful business manufacturing dried milk under the brand name Defiance. In 1906 they wanted to relaunch it with a short name, ending in "o". They chose Lacto, Latin for milk, but the Trade Marks Office would not accept it. So they went for Glaxo instead.

The pharmaceuticals company that grew out of the Nathans' infant-food business is now among the biggest of the big. By the end of the century Glaxo Wellcome had an annual turnover of more than £8 billion, which its merger with SmithKline Beecham will double.

Historian Edgar Jones has charted the extraordinary rise of Glaxo in his book The Business of Medicine .

His research, begun in 1994, was commissioned by Sir Paul Girolami, a sometime chief executive of Glaxo, who felt the company had been compared unfairly with rival Merck.

Jones denies this has compromised his work, saying that, although Glaxo paid for the project, it did so at arm's length through a grant administered by the London School of Economics' business history unit. There was no interference and he had access to all but the most confidential files.

He identifies several key steps in Glaxo's evolution, starting in 1924 with its first pharmaceutical product, Osterlin, a vitamin D supplement developed by analytical chemist and quality-control chief Harry Jephcott to enhance the company's infant foods.

In 1940, Glaxo became interested in mass producing penicillin. Through that, it moved on to discovering new products. Its first success came in 1963 with Betnovate, a drug for the treatment of skin conditions such as eczema and psoriasis. But even this was not a major seller. Infant foods still dominated the business.

By this time, Glaxo had taken over another company, Allen and Hanbury's, with a research team working on an asthma drug. Ventolin was launched in 1969 and was Glaxo's first popular success, leading to more spending on research. The other key date Jones identifies was the launch of ulcer drug Zantac in 1981, which allowed it to start investing in the United States.

Jones believes the company's success is due to the quality of its scientists and the unsnobbish, meritocratic culture created by the Nathans.

But excellent science was not enough. Commercial awareness was necessary and this did not come until the arrival of people such as Girolami in the late 1970s. He pursued the high-risk strategy of pricing Zantac above Tagamet, a rival ulcer product, on the grounds that it was superior. Glaxo made a mint. Jones's book stops at 1985, so Glaxo's recent mergers are mentioned only briefly.

Glaxo is aware that the escalating costs of developing drugs might curb innovation. To prevent this, Jones says: "At its Stevenage labs, Glaxo has meeting places dedicated to the exchange of ideas. I think it is aware of the dangers of getting too big."

The Business of Medicine is published by Profile Books, £25.00.