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Author: Jean-Claude Muller, 穆卓Executive Editor at BtoBioInnovation  jcm9144@gmail.com

SPECIAL REPORT #20.7

Biopharmaceutical Profitability and Costs of R&D Success

Two recent back-to-back articles published in the Journal of the American Medical Association (JAMA) and some immediate comments have attracted our attention.

The first one entitled “Profitability of Large Pharmaceutical Companies Compared with Other Large Public Companies” authored by Fred D. Ledley, from the Center for Integration of Science and Industry at Massachusetts-based Bentley University, clearly states that large pharmaceutical companies were more profitable than other large companies. The reported study compared the annual profits of 35 large pharmaceuticals companies with 357 companies in the S&P 500 Index over the period from 2000 to 2018, using information from published annual financial reports.  Over the indicated period the 35 studied pharmaceutical companies reported cumulative revenues of $11.5 trillion, gross profit of $8.6 trillion, EBITDA of $3.7 trillion and net income of $1.9 trillion. The 357 S&P companies reported cumulative revenues of $130.5 trillion, gross profit of $42.1 trillion, EBITDA of $22.8 trillion and net income of $9.4 trillion.  Using a regression model the median annual profit margins of pharmaceutical companies were significantly greater than those of S&P 500 companies: 76.5% versus 37.4%, although the differences were smaller when correction controlling company sizes or R&D expense were introduced  Earnings before taxes and median net income : 13.7% versus 7.7% were similarly higher among pharmaceutical companies

The second one entitled “Estimated Research and Development Investment Needed to Bring a New Medicine to Market, 2009-2018, authored by Olivier J. Wouters and Martin McKee of the London School of Economics together with Jeroen Luyten of the Katholieke Universiteit Leuven (Belgium) suggest that it costs $1.3 billion in R&D investment to bring a drug to market. The study included 63 of 355 new (17.7%) therapeutic drugs and biological agents approved by the US FDA between 2009 and 2018 and developed by 47 different companies. The mean cost of developing a new drug has been the subject of numerous and vivid debates and recent estimates were ranging from $314 million to $2.8 billion. This study, after accounting for the costs of failed trials, indicates that the median capitalized R&D investment to bring a new drug to market was estimated at $985.3 million (683.6-1,228.9) and the mean investment at $1,335,9 million (1,042.5-1,637.5) in the base case analysis. Estimates by therapeutics (areas where more than five drugs were assessed) ranged from $765.9 million for neuroscience drugs to $2,77.6 million for antineoplastic and immunomodulating drugs. Data were accessed from the US Securities and Exchange Commission (SEC), Drugs@FDA database, and ClinicalTrials.gov, alongside published data on clinical trial success rates and were mainly accessible from smaller firms, from orphan drugs, from first-in-class drugs, from accelerated approvals and drugs approved between 2014 and 2018. The authors clearly admitted that their study had their limitations but stated “Greater transparency around R&D costs is essential for analysts to check the veracity of claims by companies that the steep prices (60% in the ten years ending in 2018) of new drugs are driven by high development outlays”.

These studies appeared in the general context of public opinion polls showing that most people believe the profits made by the biopharmaceutical industry mainly come from pricing hikes. For years this industry has been dealing with a disastrous reputation of least favoured sector, behind the US federal government itself,  on the bottom of a list of 25 industries and just barely ahead of the tobacco sector. Ledley recognized that the biopharmaceutical industry revenue and profit are only indirectly related to high prices in the US and that their revenues do not reflect the list price of medicines, but the net amounts received after rebates and discounts. It therefore came as no surprise, when right after the publication, several comments were issued, some supporting, some other harshly challenging the outcomes. The studies “paint a concerning picture about the relationships among rising drug prices, pharmaceutical industry profits, uncertainty about pharmaceutical R&D costs and lobbying and political donations to gain influence with legislators “ Yale Law School professor Deb Chaarushena and JAMA deputy editor Gregory Curfman wrote in an accompanying editorial.  Merck CEO Kenneth Frazier was more concerned by the fairness of the study. He explained that the estimation of the cost was incorrect because publicly traded companies report total R&D costs and not product-by-product expenses. The analysis was likely “enriched with niche drugs that are dissimilar from the broader population of drugs approved by the US FDA during the last decade” he wrote. Criticism also came because the authors factored in the cost of failures and the estimated probability of a successful outcome. Furthermore, the authors did not report return on equity, invested capital or assets which are important parameters when making comparison. David Cuttler, who was on the National Economic Council during the Clinton Administration, has also published an editorial in JAMA entitled “Are Pharmaceutical Companies Earning Too Much?”. Not necessarily said Cuttler. The drug pricing study found that over the last years they tracked (2014-2018), biopharmaceutical companies net incomes were “markedly” lower than they were years earlier. “This industry is adjusting its business model in response to concerns about affordable access to medicines and is still making substantial research and development investments “Frazier wrote.

The outcomes of the reported studies are quite different from the industry’s favourite numbers, regularly issued by the Tufts Center for the Study of Drug Development (Tufts CSDD). They will clearly be scrutinized by policy makers all over the world and put pressure on the biopharmaceutical industry which, for ever, has argued that government intervention will stifle innovation.

March 7, 2020

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