Are Drug Companies Too Profitable?
New research shows that drug companies make way more profit than similar public companies
With the coronavirus outbreak dominating the headlines, there is a mad push to develop a vaccine and test drugs to treat this seemingly untreatable viral illness. Some studies have shown some promise, but as of right now, treatment for the Coronavirus is mainly supportive.
If, however, a drug to treat this infection is found, its expense will inevitably be very high. Now, it is true that it costs a lot of money to take a drug to market, and drug companies need to recoup that cost and make a profit. That is, after all, why a drug company — or any company, for that matter — is in business. The question is, though, are drug companies like any other company? New research has shed some light on the answer to this question.
In a study published March 3 in JAMA, researchers from Bentley University compared the profits of 35 large pharmaceutical companies with those of 357 large, nonpharmaceutical companies from 2000 to 2018. The main outcomes of the study were revenue and 3 measures of annual profit: gross profit (revenue minus the cost of goods sold); earnings before interest, taxes, depreciation, and amortization (EBITDA; pretax profit from core business activities); and net income, also referred to as earnings (difference between all revenues and expenses).
Here are their findings:
- From 2000 to 2018, 35 large pharmaceutical companies reported cumulative revenue of $11.5 trillion, gross profit of $8.6 trillion, EBITDA of $3.7 trillion, and net income of $1.9 trillion. while
- 357 S&P 500 companies reported cumulative revenue of $130.5 trillion, gross profit of $42.1 trillion, EBITDA of $22.8 trillion, and net income of $9.4 trillion.
- The median gross profit margin for the drug companies was 76.5% vs 37.4% for the S&P 500 companies. The median EBITDA margin for drug companies was 29.4% vs 19% for the S&P 500 companies. The median net income margin was 13.8% for the drug companies vs 7.7% for the S&P 500 companies.
- When the researchers factored in company size, year, and considered only companies reporting research and development costs, the differences were smaller, but still substantial.
This raises a lot of important questions, one of which was the subject of an accompanying editorial in JAMA: do the drug companies make too much money? Is this profitability too much?
In business, there is no such thing as too much profit. The more profit a company can make, the better. Heck, my entire retirement plan relies on companies making as much profit as possible so their stock prices can rise, and my investments in those stocks can rise in value.
At the same time, when you are in the business of making life-saving medications, does that change the implication? When there are so many people who struggle to pay for their medications — medications without which they will die — do the drug companies have a responsibility to make sure their products are affordable?
There needs to be a balance between what is good for the investor and what is good for the patient.
I have seen this conundrum over drug prices personally when I was in private practice. Many of my patients were elderly on fixed incomes. They needed their inhalers to help them breathe, but they could not afford the exorbitant prices, many times over $200 per inhaler per month. I tried to help them out with as many samples as I could give them, but it was never enough. Many times, there were no other generic alternatives, and when an inhaler finally went generic, I would jump for joy. Still, I felt so bad for them, and there was little that I could do as a doctor to help them.
Now, the pharmaceutical companies counter — correctly, I must add — that it costs hundreds of millions of dollars to take a drug to market, and if the drug doesn’t work out, all that cost is lost. In the same issue of JAMA, researchers confirmed this: They studied 63 of 355 new therapeutic drugs and biologic agents approved by the US Food and Drug Administration between 2009 and 2018, and they found that the estimated median capitalized research and development cost per product was $985 million, counting expenditures on failed trials.
That’s almost a billion dollars….per drug. If the company can’t make a profit on this investment, there will be no incentive to develop new treatments to treat all sorts of illnesses. And many of these drugs — such as antibiotics — have changed the course of human history. In fact, the lack of a profit on many generic drugs are part of the reason why there are so many shortages of vital medications. At the same time, if you make your drug so expensive, like Mylan did with the EpiPen, many people will not be able to afford it, which is counterproductive to the whole point of being in the business of producing life-saving medications.
Where do we go from here? The point of this research is not to demonize pharmaceutical companies. Politicians may like to demonize the drug companies, but that is not what I am trying to do. At the same time, I think there needs to be balance between what’s good for the investor and what’s good for the patient. If we work together, I am sure we can find a way to make a healthy profit for the drug company and not have people ration their insulin because it costs hundreds of dollars a month. We have to find a way, and it would behoove the pharmaceutical industry to be good citizens in this effort.
The opinions expressed in this post are my own, and they do not reflect those of my employer or those institutions with which I am affiliated.