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Do companies in the pharmaceutical supply chain earn excess returns?

ABSTRACT: Rising drug spending has led to increased calls to curtail drug costs. However, it is unclear where to target policy solutions. We estimated excess returns (the extent to which a firm's profits are higher than expected given the risk associated with their investments) for manufacturers and middlemen in the pharmaceutical supply chain to determine who is making excessive profits. Excess returns were calculated as the difference between return on invested capital and the expected returns given risk, which is known as the weighted average cost of capital. We compared excess returns for manufacturers and middlemen to the average for S&P 500 companies. We find that both manufacturers and middlemen have higher excess returns in 2013-2018 compared with the S&P 500. However, if we treat research and development (R&D) as an investment rather than an expense, we find that excess returns for pharmaceutical manufacturers are lower than the S&P 500 (1.7% vs. 3.6%), but biotech manufacturers (9.6%), wholesalers (8.1%), and insurers/PBM/retailers (5.9%) continue to have significantly higher excess returns compared to the S&P 500. Our findings suggest public policies that promote competition in all areas of the pharmaceutical supply chain are important avenues for curtailing drug spending.

SUBMITTER: Sood N

PROVIDER: S-EPMC7780918 | biostudies-literature | 2021 Jan

REPOSITORIES: biostudies-literature

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Do companies in the pharmaceutical supply chain earn excess returns?

Sood Neeraj N Mulligan Karen K Zhong Kimberly K

International journal of health economics and management 20210104 1

Rising drug spending has led to increased calls to curtail drug costs. However, it is unclear where to target policy solutions. We estimated excess returns (the extent to which a firm's profits are higher than expected given the risk associated with their investments) for manufacturers and middlemen in the pharmaceutical supply chain to determine who is making excessive profits. Excess returns were calculated as the difference between return on invested capital and the expected returns given ris ...[more]

PMID: 33394339

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Project description: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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Do companies in the pharmaceutical supply chain earn excess returns?

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Do companies in the pharmaceutical supply chain earn excess returns?

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