Just before the holidays, the U.S. Government Accountability Office (GAO) released a new report about the biopharmaceutical industry entitled Profits, Research and Development Spending, and Merger and Acquisition Deals (Report). GAO is nonpartisan federal agency that works to assist Congress. More information about GAO, their mission, and values, can be found here.
This new Report will be of interest to anyone following the conversation surrounding drug pricing controversies. Part of what makes drug pricing controversies, well, controversial is the thought that drug companies are profiting more than they should. Or, in any event, are enjoying profit margins far in excess of other industries.
The Report does not take on the normative aspects of these issues, but does provide some useful data.
The Report examined data from 2006-2015 and found that average profit margins for most biopharmaceutical companies increased during this period. That said, there were big disparities between the top 25 companies and the other biopharmaceutical companies examined. GAO found the following regarding average profit margins for:
- All drug companies in 2015 was 17.1%
- The largest 25 companies in 2015 was 20.1%
- The remaining companies in 2015 was 8.6%
For comparison and context, GAO examined the profit margins of other industries. They looked at both the largest 500 companies by 2015 revenue and also singled out the software industry “because, like the drug industry, it has been cited as having high R&D investment and low production and distribution costs, though caution should be taken in making this comparison.” Here’s what GAO found:
- Average profit margins for the 25 largest software companies was roughly 21.7% from 2006-2014, and then decreased to 13.4% in 2015
- Average profit margins for the largest 500 companies (excluding pharmaceutical, biotechnology and software companies) was 8.9% in 2006 and decreased to 6.7% in 2015
These findings are helpful.
While they do support the contention that some biopharmaceutical companies profit on average far more than companies in other sectors, the data suggest a need for disaggregation. Not all biopharmaceutical companies are alike. 20.1% profit margins are a lot bigger than 6.7% margins, but 8.6% margins are much closer. Furthermore, given the disparities between the profit margins of the largest 25 biopharmaceutical companies and everyone else, to focus on an industry average of 17.1% provides an incomplete picture.
Other aspects of the Report, including its estimates regarding the pharmaceutical industry’s R&D spending (spending grew slightly by 8% over the course of 2008-2014) and estimates regarding R&D expenditures relative to other industries (pharmaceutical companies reported spending more than “other comparably large, R&D-intensive sectors”) are also interesting.
The Report is worth a look for those following these issues. And, as it was requested by Congress, it’s reasonable to expect that it will play a role in future conversations on the Hill.
Rebecca E. Wolitz is a Fellow in the Center for Law and the Biosciences
 U.S. Gov’t Accountability Office, GAO-18-40, Drug Industry Profits, Research and Development Spending, and Merger and Acquisition Deals 15, 17 (2017). This “[e]stimate is based on an analysis of 403 companies in the market continuously from 2006 through 2015. Profit margins were weighted by companies’ reported pharmaceutical and biotechnology sales revenue for each year. Bloomberg calculates profit margin as (net income/revenue)*100. This ratio is computed on a post-tax basis.” Id. at 17 n.32.
 Id. at 17-18.
 Id. at 19.
 Id. at 29. Though it is unclear whether this calculation excludes biotechnology companies. See p. 31.
 Id. at 31. See p. 32 for a helpful table.