The Average Profit Margin of Pharmaceuticals
Pharmaceutical profit margins vary widely, from less than zero to more than 40 percent, depending on the size of the company and whether it’s a powerhouse like Pfizer or Novartis or a startup still in the research and development phase. The average net profit margin for drug companies, including pharmaceuticals and biotech, was about 12.5 percent to 14 percent, according to a January 2018 study by New York University’s Stern School of Business. But many companies have margins far greater than that. Gilead Sciences and Amgen are among the most profitable drug makers, with net margins of about 35 to 45 percent.
The Stern School analysis of industry profits makes a distinction between “drugs (pharmaceutical)” and “drugs (biotechnology),” but the difference in profit margins is small. The survey includes 185 pharmaceutical companies with an average net profit margin of 14.05 percent, and 459 biotechs with an average net margin of 12.57 percent.
The difference between pharmaceutical companies and biotechs is somewhat fuzzy. Both make drugs, but they go about it differently. Pharmaceutical companies tend to use chemical processes to produce medicines, while biotech firms look for biological agents like bacteria to come up with and manufacture drugs. In practice, when analysts discuss drugs or pharmaceuticals, they frequently lump pharma and biotech together.
The largest five drug companies (pharmaceutical and biotech) in the world by revenue in 2017 were Johnson & Johnson, Roche, Pfizer, Novartis, and Sanofi, according to a ranking by Statista.com. Among the most profitable companies are Gilead Sciences, Amgen, Novartis, Biogen, and Bristol-Myers Squibb, according to Biospace.com.
Pharmaceutical companies have some of the highest profit margins in the world, a distinction that has earned the industry criticism from both politicians and consumers, who often complain about the high prices of prescription drugs. According to a November 2017 report by the U.S. Government Accountability Office, consumer spending on drugs has doubled since the 1990s, mainly due to the high cost of prescriptions.
The same study pointed out that revenues and profit margins in the industry are on the rise. "We looked into changes in the drug industry and found that pharmaceutical and biotechnology sales revenue increased from $534 billion to $775 billion between 2006 and 2015," the GAO reported. "Additionally, 67 percent of drug companies increased their annual profit margins during the same period—with margins up to 20 percent for some companies in certain years." Spending on research and development increased as well, to $89 billion in 2014, from $82 billion in 2008.