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Large drugmakers could lose $1 trillion in sales and still be the most profitable industry, analysis shows

The findings refute assertions that a reduction in drug spending would endanger access to life-saving drugs.

Jeff Lagasse, Associate Editor

Large, brand-name drug manufacturers would still be the most profitable industry sector even with $1 trillion fewer sales, all while maintaining current research investments, finds a new analysis of publicly reported financial data by researchers at West Health Policy Center and Johns Hopkins Bloomberg School of Public Health.

This builds on previous research by the Government Accountability Office and the Congressional Budget Office finding the pharmaceutical industry has among the highest profit margins and returns of any industry group. This time, researchers specifically looked at a list of 23 large drug manufacturers -- defined as those that mostly market brand-name drugs, are members of the PhRMA trade association, are publicly traded, and do not solely focus on orphan drugs.

Using a measure called Return on Invested Capital (ROIC), which considers a company's net operating profit after taxes to its total invested capital, the team compared returns among the large drug manufacturers in the analysis with other industries.

They found that from 2011-2019, large drug companies were the most profitable industry, with a combined ROIC of 17.3%; the next most profitable industries (accommodation and food services and professional, scientific, and technical services) each had an ROIC of 15.3%. The average ROIC across industries, excluding large drug companies, was 11.5%.

WHAT'S THE IMPACT

While the pharmaceutical industry has claimed that federal legislative proposals to reduce drug spending would endanger access to life-saving drugs, the findings here refute that assertion.

Comparing the large drug manufacturers to the next most profitable industries, researchers conclude these companies could lose $758 billion in sales revenue and still be more profitable than any other industry.

Adjusting the analysis to apply to all brand name drug manufacturers -- since the 23 companies included in the work represent 72% of branded sales -- the researchers determined all brand name drug companies could collectively lose $1.05 trillion in sales revenue and still maintain that profit edge over other industries.

They also examined the level of investor risk among large drug manufacturers, using a financial indicator called a beta, which measures the volatility of a company's performance to the stock market as a whole. A beta of 1 means a company or industry tracks the market exactly, while a beta above 1 is a more volatile investment than average and a beta below 1 is a less-risky investment.

The team found the large drug companies in the analysis were less risky than 75% of other industries, with a sales-weighted average beta of .61.

THE LARGER TREND

After reviewing tens of millions of insurance claims for the country's 49 most popular brand-name prescription drugs, a team from Scripps Research Translational Institute found in June that net prices rose by a median of 76% from January 2012 through December 2017 -- with most products going up once or twice a year.

The substantial price increases were not limited to drugs that recently entered the marketplace, as one might expect, or to those lacking generic equivalents. And the increases often were "highly correlated" with price bumps by competitors.

Meanwhile, a January study from the National Opinion Research Center, or NORC, at the University of Chicago found hospitals are badly suffering under the weight of drug prices and drug spending, which seem to be on a steady and often times steep upward cl

The average total drug spending per hospital admission increased 18.5% between FYs 2015 and 2017, from $468.50 to $555.40, spawning roughly $1.8 million in new spending for the average hospital.

Twitter: @JELagasse

Email the writer: jeff.lagasse@himssmedia.com