BioPharma, Policy

Biopharma industry profitability in line with other R&D-heavy sectors, study finds

The study found that the sector’s profitability is similar to those in areas like tech, even while it outpaces most of the S&P 500. Its lead author said that policy solutions to high drug prices need to balance affordability with ensuring drugmakers can make medicines available.

Money pile and medicine pills representing medical expenses

Even outside of election seasons, the prices drugmakers charge for medicines and the revenues and profits they rake in attract public scrutiny, much of it negative. But a new study indicates that while the biopharma industry’s profits outpace those of most sectors, they remain in line with those of industries that depend on research and development.

The study, conducted by researchers at Bentley University in Waltham, Massachusetts, and at the University of New Mexico, was published Tuesday in the Journal of the American Medical Association.

The researchers compared the profits of 35 large drugmakers with those of 347 companies from the S&P 500 Index, over the period from 2000 to 2018. The overall net income margin for the drugmakers was 13.7%, compared with 7.7% for S&P 500 companies, reflecting a difference of 6.1%. But when compared with companies in other sectors that depend on R&D, the difference shrank to 3.6%, and drugmakers were not more profitable than technology or non-pharmaceutical healthcare companies. And between 2014 and 2018, there was no significant difference in net income margin between drugmakers and S&P 500 companies. In fact, the 13.8% median annual net income margin for drug companies was lower than those of large tech companies like Apple, Alphabet and Microsoft, which respectively had median net income margins of 19.2%, 21.9% and 27.6%.

“If you compare pharma companies to everyone else in the S&P 500, they are more profitable than other big companies,” said lead author Dr. Fred Ledley, director of Bentley’s Center for Integration of Science and Industry, in a phone interview. “But when you do controls, compared to companies in similar size, and take into account changes over time and also take into account those other companies that are investing in R&D spending money on innovation and creating products that the public needs in the future, in fact pharma companies are virtually indistinguishable and very similar to those of the tech sector.”

The study, one of several in the latest issue of JAMA examining prescription drug pricing, comes just days after a survey by the Kaiser Family Foundation found that 80% of respondents said drugmakers’ profits are a major factor contributing to prescription drug prices. Majorities – albeit smaller ones – also cited R&D costs, profits made by middlemen such as pharmacy benefit managers and costs of marketing and advertising.

Still, the study provides a more complex picture. “It’s our observation that these companies look like those companies in innovation businesses, and that explains why the profit is similar,” Ledley said, noting that biopharma companies are also competing for investment with other R&D-based sectors. “These are companies competing for that same capital and investment, and in our society, they are expected to provide very similar returns.”

In terms of policies that address the issue of high drug prices, what is needed, he said, is to strike a balance between ensuring the industry can develop new drugs and ensuring people have access to them. “You cannot cripple the industry that we need to make these drugs available, but at the same time, we need to make these drugs affordable,” he said.

Photo: gerenme, Getty Images