Merck & Co., long a standard bearer for the U.S. pharmaceutical industry, earned $10 billion in profits last year. Pfizer, its larger peer, booked even more: $16 billion.
Across the top ranks of drugmakers, profits regularly add up to billions of dollars, if not tens of billions, making the sector one of the most lucrative in business.
Many Americans, a recent poll showed, see pharma companies' sizable earnings as a major reason why drug prices are high and so often climbing. Scrutiny of profits and prices has fueled much of the criticism faced by drugmakers, dragging Americans' regard for the industry to a two-decade low.
Pharma executives are quick to argue both points. Sizable profits, they counter, are needed to recoup the high expense for developing a new medicine, while rebates offered to insurers mean prices are growing slower than they might appear.
Two new pieces of research, published Tuesday in JAMA, attempt to offer a more nuanced accounting of pharma prices and the profits that result.
Drugmakers regularly enjoy significantly wider net income margins than other companies in the S&P 500, an analysis from researchers at Bentley University and the University of New Mexico found.
The median gross profit margin among the 35 drugmakers studied was 77%, easily more than double the 29% median calculated across 357 other companies in the S&P 500. Median net income margins, after accounting for taxes and costs like research and development, were 13.8% and 7.7%, respectively.
That's roughly on par with estimates from the U.S. Government Accountability Office, which in 2017 published a report that calculated drug company profit margins at between 15% and 20%, compared to between 4% and 9% for companies in other industries.
The difference in margins narrows when controlling for company size and when considering only those companies involved in research, the new JAMA research found. And, between 2014 and 2018, pharma profitability has shrunk to levels comparable with other industries.
"There's no question that pharma companies are more profitable than most companies in the S&P 500," said Fred Ledley, director of the Center for Integration of Science and Industry at Bentley University and a co-author of the JAMA paper, in an interview.
"But they're much more similar — in fact they're quite similar — to other research-driven technology companies where the business is innovation."
Ledley and colleagues did not attempt to directly link drug prices to their calculations of pharma profits, noting the difficulty in accounting for rebates or discounts in determining net prices
Research by another group from the University of Pittsburgh, however, helps fill the gap.
Between 2007 and 2018, sticker prices on a basket of some 600 brand-name drugs rose by an average of 159%, or roughly 9.1% per year. Because drugmakers offer sometimes hefty rebates on their products, list prices only tell part of the story — a roadblock others have run into in trying to depict rising drug costs.
Using data from SSR Health, however, the Pittsburgh researchers calculated an approximation of net prices: drugmaker net revenue per unit of drug. On that basis, net prices rose by a still-steep 60% over the 12-year span, or about 4.5% annually.
List, net drug price growth between 2007 and 2018
|All (n=602)||Insulins (n=7)||Cholesterol drugs (n=11)||Cancer drugs (n=44)||Multiple sclerosis drugs (n=4)|
|List price change (2007-2018)||159%||262%||278%||59%||439%|
|Net price change (2007- 2018)||60%||51%||95%||35%||157%|
SOURCE: "Changes in List Prices, Net Prices, and Discounts for Branded Drugs in the US, 2007-2018," JAMA
Recently, however, annual net increases have flattened to near consumer inflation levels, coinciding with rising rebates paid to insurers.
Still, the analysis shows "discounts haven't fully offset increases in list prices," said Inmaculada Hernandez, an associate director of the Center for Pharmaceutical Policy and Prescribing at the University of Pittsburgh, and co-author on the pricing paper, in an interview.
That was especially true for certain drug classes, like multiple sclerosis medicines and anti-inflammatory treatments, which saw substantial net price growth over the period studied. And slowing net price growth doesn't lessen the impact of high list prices for people who are uninsured, or are covered by high-deductible plans.
In a related editorial also published Tuesday, Merck CEO Ken Frazier described the approach taken by Hernandez and her colleagues as a "reasonably overall approximation of net pricing trends."
The veteran executive, who is viewed as one of the industry's most prominent leaders, acknowledged the public anger drugmakers face, but also criticized insurers for pushing costs onto patients.
"[P]erhaps nothing has galvanized the current groundswell of populist outrage more than the money patients must pay for their prescription drugs in retail pharmacies," he wrote.
Citing the downward trends in both net prices and profit margins, though, Frazier made the case that the new research showed companies are shifting to address criticisms.
"The biopharmaceutical industry is adjusting its business model in response to concerns about affordable access to medicines," he said, while offering support for rebate reform and caps to out-of-pocket spending.
One limitation to the research on pricing trends was which drugs researchers chose to include. In order to track prices over time, the University of Pittsburgh group looked first at drugs which were available before January 2007.
When including newer medicines that arrived over the time period, net price growth was higher, and discounts lower, Hernandez said.
Both of the JAMA papers were aimed at informing debate about how best to address drug affordability concerns through policy.
"To really understand how to bring drug prices down, we need to understand much more about their profits and their finances," said Bentley's Ledley.
As the U.S. presidential election approaches, pharma profits and pricing practices are a likely target for politicians in both parties.
Two bills in the U.S. Senate and House of Representatives would, in different fashion and by varying degree, restrict pharma's ability to freely price its products. A proposal under review by the Trump administration, meanwhile, would link reimbursement through public insurance to prices paid for drugs abroad.
Democratic candidates for President are also focused on curbing drug price growth and some, like Senator Bernie Sanders of Vermont, are contemplating more drastic changes for an industry that's historically been adept at moderating policies targeted at it.
Merck's Frazier argues the new research shows an industry attempting to self-correct. The question is whether that will be enough.