In a previous blog post, I discussed the complicated nature of drug pricing and the public relations issues that the biotech and pharma industries face. Issues include high-priced drugs and accusations of price gouging as well as unusually or unnecessarily high profits stemming from supposed greed within the biotech and pharma industries. In this blog, I want to provide a few examples of profits, how these profit margins compare to other industries, and the ethics of profiting from potentially life-saving and necessary therapies.
As I pointed out previously, drug pricing is unusually complex. While it is true that manufacturer pricing tends to be a black box, that is, pharma companies closely guard how they price their products, this price is rarely passed on, in full, to the patient. Instead, insurers cover what co-pays do not which is typically a fraction of the whole cost. The involvement of insurance companies as well as government entities (Medicare and Medicaid) are also undoubtedly taken into consideration for drug pricing. Other complicating factors such as intellectual property, foreign market pricing, and drug development costs must be factored in to how drugs are priced by the manufacturer.
In large part due to this lack of transparency, consumers have griped about drug pricing and pointed to pharma profits as being too high, excessive, or, perhaps, unethical.
An article posted by the BBC  in 2014 took the pharma industry to task by highlighting Pfizer’s 2013 profit margin of 42% as evidence of their greed and profiteering. However, as stated in the same article, this figure is inflated due to Pfizer’s spin-off and profit from their animal health branch, Zoetis, which netted Pfizer $10.5B that year. Neglecting this influx of cash, their profit margin came in at 24% which the author claims as “spectacular”. While higher than some industry peers, or other biotech/pharma companies, this is not atypical from profit margins of other industries according to BusinessInsider  listing “Software and Tech” at 26.9% and “Beverage and Tobacco” at 29.2%. In terms of industry peers, BI lists pharma and biotech’s average profit margin at 19.3% which is generally in line with most other S&P500 sectors.
In terms of sales, from 2010 to 2013, Pfizer’s sales revenue dropped from $67B all the way to $52B, a drop of over 22% . Since 2013, Pfizer’s profit margin has dipped as low as 9.4% in the 4th quarter of 2014 . In fact, by their financials, in addition to the cash influx from Zoetis, Pfizer cut roughly $5B from their liabilities in 2013 by reducing “Unusual Expense” which inflated their net income for the year, thus boosting their profit margin. So, while their overall revenue was declining, their net income shot up for one year, and the BBC decided to pick this anomaly as their benchmark.
In terms of increasing profits year over year, a recent article from Forbes  suggested that biotech and pharma companies are facing an uphill battle to increase yearly profits. From their calculations, the top 15 biotech companies only posted a year over year profit increase of 2.4%; dramatically lower than annual profits Apple posted between 2010 and 2012 at 78.5% 66%, 44.6%, and 9.2%, respectively . So, while their sales and revenues are in the billions of dollars, their revenues, over a yearly basis, are not increasing as dramatically as the public may perceive them to be.
The underlying issue here, however, is the ethicality of profiting, no matter to what extent, at the expense of patients in need. The argument boils down to if an average profit margin of 19.3% for the biotech/pharma industry is too high and ethical to do so. On one hand, cutting-edge therapeutics should be provided to patients in need at the lowest cost possible. Therapies should never be a burden to the patients that require them. After all, if the cost is too prohibitive to even get it to a patient, what is the point of developing a therapy? On the other hand, these industries are still composed of businesses that rely on profits to continue to develop innovative technologies, attract the best qualified, most intelligent talent to the their organization, and deliver on the promise to save lives and improve global health.
Of course there’s always room for criticism and room for improvement. Non-profit entities have shown promise for reducing costs associated with drug development and reducing risk for larger companies, but their effectiveness has yet to be proven as the number of non-profit companies remains low. Also, many companies such as Pfizer and Abbvie participate in prescription assistance programs that provide their drugs for free to needy patients unable to afford them.[7,8] In these cases, the drug industry has provided ways to reduce the price burden on the patient.
The Center for Healthcare Innovation remains unbiased, objective and neutral. In future posts, I will continue to look at drug pricing and focus on the issue of high-priced drugs and how this affects public perception of pharma as well as increases costs throughout the healthcare system.