NCPA - National Center for Policy Analysis

Drug Industry Profits Aren't Excessive

July 11, 2002

In recent years, consumer groups and public health advocates have charged that drug companies make significantly more profits than companies in other industries. However, Galen Institute researchers say drug company profits are in line with other major industries. They also found that the research-based pharmaceutical industry pays more taxes than other industries and reinvests more of its profits in research and development (R&D) than other industries.

For example:

  • The average profit margin of the pharmaceutical companies in the Fortune 1000 list is 16 percent -- measuring profits as a percent of revenue.
  • This is in line with the profit margins of the banking (13 percent), diversified financial (11 percent), tobacco (11 percent), and real estate (10 percent) industries.
  • According to the Pharmaceutical Research and Manufacturers of America (PhRMA), the industry's total tax liability (as a percent of income subject to U.S. tax) is 33.8 percent, and the industry pays more tax than 97 percent of all industries (PhRMA, 7/17/00).

The research-based pharmaceutical industry spends a significant percentage of its sales revenues on R&D. Recent research by the Tufts Center for the Study of Drug Development shows that the costs of developing a new drug exceed $800 million, with an average of 11 years from creation to market.

There is a direct link between gross profitability and pharmaceutical R&D spending. Over the last 40 years, gross profit margins and R&D outlays have mirrored one another. As pharmaceutical companies make more money, they spend more on research. Profits earned by a company serve as a source of funds to support R&D investments, and some managers base R&D budgets on current cash flow or sales.

Source: Joe Moser, "Links Between Drug Company Profitability and Investments in Research: A Fact Sheet," Galen Institute, July 2, 2002.

 

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