Profitability of Large Pharmaceutical Companies vs Other Large Public Companies | Drug Development | JN Learning | AMA Ed Hub [Skip to Content]
[Skip to Content Landing]

Profitability of Large Pharmaceutical Companies Compared With Other Large Public Companies

Educational Objective
To understand the profitability of large pharmaceutical companies.
1 Credit CME
Key Points

Question  How do the profits of large pharmaceutical companies compare with those of other companies from the S&P 500 Index?

Findings  In this cross-sectional study that compared the profits of 35 large pharmaceutical companies with those of 357 large, nonpharmaceutical companies from 2000 to 2018, the median net income (earnings) expressed as a fraction of revenue was significantly greater for pharmaceutical companies compared with nonpharmaceutical companies (13.8% vs 7.7%).

Meaning  Large pharmaceutical companies were more profitable than other large companies, although the difference was smaller when controlling for differences in company size, research and development expense, and time trends.

Abstract

Importance  Understanding the profitability of pharmaceutical companies is essential to formulating evidence-based policies to reduce drug costs while maintaining the industry’s ability to innovate and provide essential medicines.

Objective  To compare the profitability of large pharmaceutical companies with other large companies.

Design, Setting, and Participants  This cross-sectional study compared the annual profits of 35 large pharmaceutical companies with 357 companies in the S&P 500 Index from 2000 to 2018 using information from annual financial reports. A statistically significant differential profit margin favoring pharmaceutical companies was evidence of greater profitability.

Exposures  Large pharmaceutical vs nonpharmaceutical companies.

Main Outcomes and Measures  The main outcomes 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). Profit measures are described as cumulative for all companies from 2000 to 2018 or annual profit as a fraction of revenue (margin).

Results  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. In bivariable regression models, the median annual profit margins of pharmaceutical companies were significantly greater than those of S&P 500 companies (gross profit margin: 76.5% vs 37.4%; difference, 39.1% [95% CI, 32.5%-45.7%]; P < .001; EBITDA margin: 29.4% vs 19%; difference, 10.4% [95% CI, 7.1%-13.7%]; P < .001; net income margin: 13.8% vs 7.7%; difference, 6.1% [95% CI, 2.5%-9.7%]; P < .001). The differences were smaller in regression models controlling for company size and year and when considering only companies reporting research and development expense (gross profit margin: difference, 30.5% [95% CI, 20.9%-40.1%]; P < .001; EBITDA margin: difference, 9.2% [95% CI, 5.2%-13.2%]; P < .001; net income margin: difference, 3.6% [95% CI, 0.011%-7.2%]; P = .05).

Conclusions and Relevance  From 2000 to 2018, the profitability of large pharmaceutical companies was significantly greater than other large, public companies, but the difference was less pronounced when considering company size, year, or research and development expense. Data on the profitability of large pharmaceutical companies may be relevant to formulating evidence-based policies to make medicines more affordable.

Sign in to take quiz and track your certificates

Buy This Activity

JN Learning™ is the home for CME and MOC from the JAMA Network. Search by specialty or US state and earn AMA PRA Category 1 CME Credit™ from articles, audio, Clinical Challenges and more. Learn more about CME/MOC

Article Information

Corresponding Author: Fred D. Ledley, Center for Integration of Science and Industry, Bentley University, Jennison Hall 144, 175 Forest St, Waltham, MA 02452 (fledley@bentley.edu).

Accepted for Publication: January 14, 2020.

Author Contributions: Dr Ledley had full access to all of the data in the study and takes responsibility for the integrity of the data and the accuracy of the data analysis.

Concept and design: Ledley, McCoy.

Acquisition, analysis, or interpretation of data: All authors.

Drafting of the manuscript: Ledley, McCoy.

Critical revision of the manuscript for important intellectual content: All authors.

Statistical analysis: All authors.

Obtained funding: Ledley.

Administrative, technical, or material support: Ledley, McCoy.

Supervision: Ledley.

Conflict of Interest Disclosures: None reported.

Funding/Support: This work was supported by the National Biomedical Research Foundation.

Role of the Funder/Sponsor: The National Biomedical Research Foundation had no role in the design and conduct of the study; collection, management, analysis, and interpretation of the data; preparation, review, or approval of the manuscript; or decision to submit the manuscript for publication. The funder did not have the right to veto publication or to control the decision regarding to which journal the manuscript was submitted.

Disclaimer: The Center for Integration of Science and Industry at Bentley University does not receive corporate support.

Additional Contributions: The authors thank Steve Wasserman, MBA (Bentley University); Michael Boss, PhD (executive in residence, Bentley University); and Nancy Hsiung, PhD (executive in residence, Bentley University), for advice and critical reading of the manuscript. Mr Wasserman is faculty at Bentley University. Drs Boss and Hsiung received no compensation for their work at Bentley University or their role in this study. The authors also thank Bentley University undergraduate researchers Liam Fitzgerald, Jeremy Holden, and John Reddington for assistance in data collection and Danielle Solar, BA, for assistance in preparation of the manuscript.

Data Sharing Statement: All data used in this study are publicly available.

References
1.
National Academies of Sciences, Engineering, and Medicine.  Making Medicines Affordable: a National Imperative. Washington, DC: National Academies Press; 2018.
2.
Skyrocketing drug prices: year one of the Trump Administration [press release]. Washington, DC: Committee on Oversight and Government Reform; May 11, 2018.
3.
Sachs  R. Prescription drug policy: the year in review, and the year ahead. Health Affairs Blog website. https://www.healthaffairs.org/do/10.1377/hblog20190103.183538/full/. Published January 3, 2019. Accessed January 10, 2019.
4.
Kesselheim  AS, Avorn  J, Sarpatwari  A.  The high cost of prescription drugs in the United States: origins and prospects for reform.  JAMA. 2016;316(8):858-871. doi:10.1001/jama.2016.11237PubMedGoogle ScholarCrossref
5.
United States Government Accountability Office. Drug Industry: Profits, Research and Development Spending, and Merger and Acquisition Deals. Washington, DC: United States Government Accountability Office; 2017. https://www.gao.gov/assets/690/688472.pdf. Accessed June 13, 2018.
6.
Califf  RM, Slavitt  A.  Lowering cost and increasing access to drugs without jeopardizing innovation.  JAMA. 2019;321(16):1571-1573. doi:10.1001/jama.2019.3846PubMedGoogle ScholarCrossref
7.
Angell  M.  The pharmaceutical industry–to whom is it accountable?  N Engl J Med. 2000;342(25):1902-1904. doi:10.1056/NEJM200006223422509PubMedGoogle ScholarCrossref
8.
Sood  N, Shih  T, Van Nuys  K, Goldman  D. The Flow of Money Through the Pharmaceutical Distribution System. Los Angeles, CA: Leonard D. Schaeffer Center for Health Policy & Economics; 2017. https://healthpolicy.usc.edu/wp-content/uploads/2017/06/USC_Flow-of-MoneyWhitePaper_Final_Spreads.pdf. Accessed February 2, 2019.
9.
Chen  L.  The most profitable industries in 2016. Forbes. December 21, 2015. https://www.forbes.com/sites/liyanchen/2015/12/21/the-most-profitable-industries-in-2016/. Accessed February 15, 2019.
10.
Anderson  R. Pharmaceutical industry gets high on fat profits. BBC News. November 6, 2014. https://www.bbc.com/news/business-28212223. Accessed November 21, 2018.
11.
Kirzinger  A, Wu  B, Brodie  M. Kaiser health tracking poll – March 2018: views on prescription drug pricing and Medicare-for-all proposals. The Henry J. Kaiser Family Foundation website. https://www.kff.org/health-costs/poll-finding/kaiser-health-tracking-poll-march-2018-prescription-drug-pricing-medicare-for-all-proposals/. Published March 23, 2018. Accessed September 23, 2019.
12.
Kinch  MS, Haynesworth  A, Kinch  SL, Hoyer  D.  An overview of FDA-approved new molecular entities: 1827-2013.  Drug Discov Today. 2014;19(8):1033-1039. doi:10.1016/j.drudis.2014.03.018PubMedGoogle ScholarCrossref
13.
Lazonick  W, Hopkins  M, Jacobson  K, Sakinç  ME, Tulum  Ö. US pharma’s financialized business model. https://www.ineteconomics.org/uploads/papers/WP_60-Lazonick-et-al-US-Pharma-Business-Model.pdf. Institute for New Economic Thinking working paper No. 60. Published July 13, 2017. Accessed July 16, 2017.
14.
Koenker  R.  Quantile Regression. Cambridge, United Kingdom: Cambridge University Press; 2005.
15.
Bertrand  M, Duflo  E, Mullainathan  S.  How much should we trust differences-in-differences estimates?  Q J Econ. 2004;119(1):249-275. doi:10.1162/003355304772839588Google ScholarCrossref
16.
Conceptual Framework For Financial Reporting. Norwalk, CT: Financial Accounting Standards Board; 2018. https://www.fasb.org/resources/ccurl/515/412/Concepts%20Statement%20No%208.pdf. Accessed September 22, 2019.
17.
Kirzinger  A, Lopes  L, Wu  B, Brodie  M. KFF health tracking poll – February 2019: prescription drugs. The Henry J. Kaiser Family Foundation website. https://www.kff.org/health-costs/poll-finding/kff-health-tracking-poll-february-2019-prescription-drugs/. Published March 1, 2019. Accessed March 15, 2019.
18.
Pisano  G.  Science Business: the Promise, the reality, and the Future of Biotech. Boston, MA: Harvard Business School Press; 2006.
19.
Yu  NL, Atteberry  P, Bach  PB. Spending on prescription drugs in the US: where does all the money go? Health Affairs Blog. July 31, 2018. https://www.healthaffairs.org/do/10.1377/hblog20180726.670593/full/. Accessed September 23, 2019.
20.
Dusetzina  SB, Bach  PB.  Prescription drugs—list price, net price, and the rebate caught in the middle.  JAMA. 2019;321(16):1563-1564. doi:10.1001/jama.2019.2445PubMedGoogle ScholarCrossref
21.
Global pharmaceutical sales from 2016-2018, by region (in billion US dollars). Statista website. https://www.statista.com/statistics/272181/world-pharmaceutical-sales-by-region/. Accessed April 3, 2019.
If you are not a JN Learning subscriber, you can either:
Subscribe to JN Learning for one year
Buy this activity
jn-learning_Modal_Multimedia_LoginSubscribe_Purchase
Close
If you are not a JN Learning subscriber, you can either:
Subscribe to JN Learning for one year
Buy this activity
jn-learning_Modal_Multimedia_LoginSubscribe_Purchase
Close
With a personal account, you can:
  • Access free activities and track your credits
  • Personalize content alerts
  • Customize your interests
  • Fully personalize your learning experience
Education Center Collection Sign In Modal Right
Close

Name Your Search

Save Search
Close
With a personal account, you can:
  • Track your credits
  • Personalize content alerts
  • Customize your interests
  • Fully personalize your learning experience
jn-learning_Modal_SaveSearch_NoAccess_Purchase
Close

Lookup An Activity

or

Close

My Saved Searches

You currently have no searches saved.

Close
With a personal account, you can:
  • Access free activities and track your credits
  • Personalize content alerts
  • Customize your interests
  • Fully personalize your learning experience
Education Center Collection Sign In Modal Right
Close