New research from Bentley University, Massachusetts, USA, reveals that big pharmaceutical companies are more profitable than most Standard & Poor (S&P) 500 companies.
The research published in the Journal of the American Medical Association (JAMA) titled “Profitability of Large Pharmaceutical Companies Compared with Other Large Public Companies” has revealed that pharma profits are closer to other research-based companies and comparable to companies in the technology sector.
A critical examination of profits
The first of its kind study from the Center for Integration of Science and Industry at Bentley University critically examines the profitability of the companies that are responsible for the development, manufacturing, marketing and sale of most medicines.
These results have the potential to inform policies to ensure both the affordability and availability of essential medicines now and in the future.
Unaffordable medicine is an important issue
The study was undertaken in the context of a public opinion survey that revealed that 80% of respondents believe the profits made by pharmaceutical companies are a major factor contributing to the price of prescription drugs.
Dr Fred Ledley, director of the Center for Integration of Science and Industry, and the senior author of the study explained: “While there is extensive research on the health impacts of unaffordable drugs, there has been little research on the profitability of pharmaceutical companies.
“Developing policies to assure the affordability of essential medicines will also require an understanding of how reducing drug prices may impact the industry that makes these drugs available.”
Analysing the profits of 35 large pharma companies
The study compared the profits of 35 large pharmaceutical companies with those of 347 companies from the S&P 500 Index. During the period from 2000 through 2018, the pharmaceutical companies had a cumulative revenue of $11.5 trillion (€10.35 trillion) and cumulative net income of $1.9tr (€1.71tr).
Net income also called “earnings” reflects the difference between all revenues and expenses and is a company’s “bottom line” used in calculating earnings per share. Over this same period, the median net income margin (the percentage of revenue remaining after deducting all expenses) for pharmaceutical companies was 13.7% compared to 7.7% for S&P 500 companies, a difference of 6.1%.
However, when comparing pharmaceutical companies to those S&P 500 companies reporting research and development expenses and considering the effects of company size and time trends, the difference in median profits was 3.6%, and pharmaceutical companies were not more profitable than those companies in the technology sector or healthcare companies developing non-pharmaceutical products.
The combined market value of €2.16tr
Over the past five years, from 2014-2018, there was no significant difference in net income margin between pharmaceutical and S&P 500 companies.
These estimates of pharmaceutical profit margins were lower than those used by the National Academies of Science in their 2017 report, Making Medicines Affordable: a National Imperative.
The research focused explicitly on large pharmaceutical companies, who provide a large majority of all medicines. In 2018, these companies had a combined market value of $2.4tr (€2.16tr), directly employed 992,000 people, and expensed $120bn (€107.97bn) for the research & development of new medicines.
Pharmaceutical companies represent only one element of the pharmaceutical distribution system, which also includes pharmacy benefit managers, wholesalers, pharmacies, and healthcare providers as well as academic laboratories and biotechnology companies involved in basic and applied research leading to the development of new medicines.