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Original Investigation
March 3, 2020

Profitability of Large Pharmaceutical Companies Compared With Other Large Public Companies

Author Affiliations
  • 1Center for Integration of Science and Industry, Department of Natural & Applied Sciences, Bentley University, Waltham, Massachusetts
  • 2Department of Management, Bentley University, Waltham, Massachusetts
  • 3Department of Accountancy, Bentley University, Waltham, Massachusetts
  • 4Department of Accounting, University of New Mexico, Albuquerque, New Mexico
  • 5Department of Mathematical Sciences, Bentley University, Waltham, Massachusetts
  • 6Center for Integration of Science and Industry, Department of Mathematical Sciences, Bentley University, Waltham, Massachusetts
JAMA. 2020;323(9):834-843. doi:10.1001/jama.2020.0442
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.

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