Although pharmacies could be found all the way back until to the Middle Ages (probably to Baghdad during the Islamic Golden Age around the year 750), it wasn't until the beginning of the 20th century and the important discoveries of insulin and penicillin in the 1920s and 1930s that the development of the modern pharmaceutical industry really began.
Development of Insulin
The discovery of how to use insulin injections to manage diabetes occurred in 1921, as a result of the work of Canadian Frederick Banting and American medical student Charles Best. Before the production of insulin in the 1920s, diabetes was essentially a death sentence. As a result of their work, Banting was awarded the Nobel Prize in 1923 (splitting the money with Best), and Eli Lilly and Company began producing insulin. Ironically, Banting released the patent, allowing free commercial production for all competing firms--an action uncharacteristic of modern pharmaceutical firms.
Development of Penicillin
Alexander Fleming discovered penicillin in 1928, when he demonstrated that penicillium notatum, a common mold, if grown in the correct substrate, could have antibiotic properties. The production of penicillin was troublesome until the chemical structure was determined by Dorothy Crowfoot Hodgkin, in the early 1940s, and until Austrailian Howard Florey's team of scientists discovered a mass-production method. Eli Lilly and Company and Merck &Co. were among the first producers of penicillin, and worked towards increasing production for WWII. In 1942, there was only enough penicillin in the U.S. for 10 patients; by 1944 and the invasion of Normandy, the U.S. pharmaceutical industry had produced 2.3 million doses of penicillin.
The FDA and Pharmaceutical Firms
The beginning of pharmaceutical industry was marred by what came to be known as the "elixir sulfanilamide disaster" in 1937, leading directly to the involvement of the FDA in the growing pharmaceutical industry. In 1937, S. E. Massengill Company, a pharmaceutical manufacturer, prepared a concoction of sulfanilamide using diethylene glycol (DEG) as a solvent. Diethylene glycol is poisonous to humans, and although this was common knowledge even at the time, it was unknown to Harold Watkins, the company's head pharmacist. Since at that time there was no requirements for premarket testing for medicines, the product hit the shelves (without any animal testing), resulting in the deaths of more than 100 people. As a result, President FDR signed into affect the Food, Drug and Cosmetic Act on June 24, 1938, allowing the FDA new authority over drugs by mandating premarket review and banning false therapeutic claims on drug labels.
Beginning of Modern Pharmaceuticals
In the 1960s and 1970s, increased regulation on the pharmaceutical companies lead to the beginning of required clinical trials to show drug efficacy and safety before marketing. This was probably a reaction to the thalidomide tragedy in the 1960s, where women given thalidomide as a painkiller/tranquilizer for insomnia, coughs, colds and as a anti emetic against morning sickness, produced a generation of children with birth defects. Probably more than 10,000 children were affected, leading to deformities such as phocomelia (congenital disorders involving the limbs). As a result, in 1964 the World Medical Association issued the Declaration of Helsinki, establishing clinical research protocols and the principle of informed consent.
Beginnings of "Big Pharma"
By the 1970s, most governments begin to put in place strong patent systems, designed to give pharmaceutical firms incentives to innovate and develop new and effective medicines. By the 1980s, pharmaceutical firms had become well-established, but small pharmaceuticals were struggling for survival due to the rising costs of research and development required to patent a new drug for market. As a result, during the 1980s pharmaceutical manufacturing became more and more consolidated due to merger and takeover activity, leading to the domination of the pharmaceutical industry (as it remains) only by large firms.