The research and development costs of a new drug
While the goods sold were less expensive for the pharmaceutical companies, they also spent more on research and development expenses (claimed to be anywhere between $985 million and $ 2.9 billion per new drug) as well as general and administrative expenses, as a percentage of revenue.
The median annual gross profit margins were markedly higher for the big pharma companies compared to other companies. However, the latter includes technology giants Amazon, Apple, Microsoft, and Google’s Alphabet, all of which have made successful forays into healthcare, returning high-profit margins.
The split up is as follows, for pharmaceutical and other firms: gross profit margin approximately 77% and 37% EBITDA margin: 29.4%vs 19% net income margin: 13.8% vs 7.7%
In other words, the median net income margin for the large pharma companies is nearly double that of the other companies. However, Alphabet, Apple, and Microsoft have net profit margins of 22%, 20%, and 28%, respectively
After adjusting for the size of the company and the year of calculation, and for companies that reported the expenditure on research and development, the gross profit margin continued to be higher, with a difference of 31% approximately between pharma and other companies (unadjusted difference, 39%), and a difference of 9% and 4% compared to the earlier 10% and 6% in the EBITDA and net income margins, respectively. Implications
The study highlights the higher profitability of large, fully integrated pharmaceutical companies compared to other companies in the S &P 500 Index in the study period. The most marked difference was in the gross profit margin, but the EBITDA margin is also more significant for pharma companies. Accounting for interest payments, taxes, and other expenses, the net income margin was also significantly higher. This is the company’s bottom line.
However, the analytic results vary with time, company size, and whether research and development expenses are reported for both datasets. Profits went down for large pharmaceutical firms over the last five years, but it is not clear if this is a significant change.
Drug prices do not directly reflect the list price (wholesale acquisition price) but are affected by the chain of distribution. The drug market in the US also accounts for much more of the global revenue from any given drug than the actual 47% of sales volume that it is responsible for.
The study did not include smaller firms that are conducting research, often under loss conditions, into novel therapeutic avenues. Thus, this does not mean that all pharmaceuticals are hugely profitable.
Many federal lawmakers have proposed various measures to establish ceilings for drug prices in the US. These include: importing drugs from Canada capping drug payments when they reach 120% of average drug prices in other countries setting a limit for out-of-pocket medication expenditure for older people at $2,000 prohibiting pay-for-delay deals - payments from branded medication manufacturers to generic biosimilar manufacturers to keep the latter out of the market and sustain their monopoly disclosing list prices in advertisements of drugs.
Unfortunately, most have met with opposition and are unlikely to be passed.
Given the extreme and, in the opinion of many experts, unjustifiable, increase in drug prices, class-action lawsuits have been filed against certain large manufacturers, including the company that produces the world’s number one selling drug. These legal challenges are often filed by the consumers who have to pay for the drugs, occurring when lawmakers seem to be either unwilling or unable to push through legislative measures to ensure fair drug pricing. This may mark a new era of a consumer-powered setting of drug prices. Journal reference:
Ledley FD, McCoy SS, Vaughan G, Cleary EG. Profitability of Large Pharmaceutical Companies Compared With Other Large Public Companies. JAMA. 2020;323(9):834–843. doi:10.1001/jama.2020.0442
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