IN 1938 WITH THE PASSAGE OF THE FOOD, DRUG, AND COSMETIC ACT, CONGRESS AUTHORIZED THE FOOD AND DRUG ADMINISTRATION (FDA) TO PERFORM A PREMARKET SAFETY REVIEW OF ALL NEW DRUG COMPOUNDS. AFTER THE THALIDOMIDE TRAGEDY IN THE 1960'S, FDA REGULATION OF ETHICAL DRUGS BECAME MORE STRINGENT. A MAJOR FACTOR IN THIS REGARD WAS THE PASSAGE OF THE KEFAUVER-HARRIS AMENDMENTS TO THE FOOD, DRUG, AND COSMETIC ACT IN 1962. THESE AMENDMENTS REQUIRED FIRMS TO DEMONSTRATE THE EFFICACY AND SAFETY OF ALL NEW DRUGS TO THE FDA AND IMPOSED REGULATORY CONTROLS ON THE CLINICAL RESEARCH PROCESS AND ON DRUG ADVERTISING AND LABELING. VARIOUS SUPPLY SIDE SHIFTS AND STRUCTURAL CHANGES IN DRUG INNOVATION HAVE OCCURRED IN TERMS OF PHARMACEUTICAL FIRM SIZE AND MULTINATIONAL ACTIVITIES OF PHARMACEUTICAL FIRMS. FDA REGULATION OF ETHICAL DRUGS HAS HAD SOME ADVERSE EFFECTS ON THE STRUCTURE OF PHARMACEUTICAL INNOVATION. HIGHER COSTS AND RISKS RELATED TO DRUG INNOVATION SINCE 1962 HAVE OPERATED AS A BARRIER TO COMPETITION THROUGH NEW PRODUCT INTRODUCTION. AS A CONSEQUENCE, THE SUPPLY OF NEW DRUGS HAS NOT ONLY DECLINED BUT IT ALSO HAS BECOME MORE CONCENTRATED OVER TIME IN LARGER MULTINATIONAL FIRMS THAT ARE BETTER ABLE TO WORK IN A STRINGENT REGULATORY ENVIRONMENT. GIVEN THE RAPID SPREAD OF HEALTH AND SAFETY REGULATIONS THROUGHOUT ALL SECTORS OF THE ECONOMY, FURTHER ATTENTION TO THE ADVERSE EFFECTS OF REGULATION ON THE COMPETITIVE STRUCTURE OF THE PHARMACEUTICAL INDUSTRY SEEMS DESIRABLE. DATA ON ETHICAL DRUGS IN THE UNITED STATES AND THE UNITED KINGDOM AND REFERENCES ARE PROVIDED. (DEP)