When the media writes about pharma companies’ profitability, it is usually as an accusation. In most industries the ability to stay out of the red would prompt admiration, but there is widespread distaste about profit-making anywhere in the healthcare sector, as well as more justifiable concern about the high price of some new medicines. As a result, the pharma industry attracts headlines such as: “Pharmaceutical industry gets high on fat profits”, which came from BBC News last year.
There is no doubt pharma is remarkably profitable. The industry rates well compared with the average profit margins in other industries. Only banking emerges with higher margins than pharma, while in other industries, such as retailing, margins are consistently in low single digits.
Granted, pharma is a low-volume, high-margin industry. But beyond that, the usual justification the pharma industry gives is that investor risks are high so the corresponding profits must be too. The industry is among the biggest investors in R&D, and the chances of any one drug making it to market are small. Yet at a big company level, risks are not particularly high. Whereas other industries, such as car-making and retailing, have lurched from bankruptcy to bankruptcy in recent years, the biggest research-based pharma companies have remained consistently profitable. Indeed, it is the generic companies, with their lower R&D spend, that have struggled.
There is a fear factor in pharma at present, however. The market has changed rapidly over the past few years as a result of patent expiries and pricing pressures. Our industry comparison suggests pharma is one of the two industries, along with oil and gas, where margins have fallen in recent years. That has led to a more defensive attitude. But look at more recent results for pharma and the trend has reversed again. Average pharma margins in 2014 were 20.2%; not quite back to 2010 levels, but not far off.
That said, much of the recent revival in the average is owing to just one company: Gilead. In 2014 its profit margin hit 60%, largely on the back of stellar sales of its expensive hepatitis C treatment, Solvadi. Take away Gilead, and the rest of the industry’s margins were still in decline in 2014. The industry average also hides a wide variety of results. While high-performers such as Gilead, Novo Nordisk and Amgen have delivered consistently high margins, AstraZeneca was down to slim single digits in 2014, while others, such as Merck & Co, have seen their fortunes swing from year to year.
Look beyond the big companies and those variations get bigger. Although there are still plenty of smaller pharma companies in the world delivering double-digit margins, there is also a fair sprinkling of companies that are marginally – or not at all – profitable. These are the companies ignored by those headlines, but whose more perilous existence justifies the industry’s reputation for risk-taking.
Ana Nicholls is chief healthcare analyst, Economist Intelligence Unit
This article was published in the May issue of PharmaTimes Magazine. You can read the full issue here.