How Profitable is Manufacturing Prescription Drugs?
How profitable prescription drug manufacturers should be allowed to be is a controversial topic in the United States. High prescription drug prices are often cited as one of the top concerns with the American healthcare system, with many low-income patients rationing medication because they can not afford to pay for it. However, drug manufacturers argue that attempts to reduce the price of prescription drugs could lead to a lack of innovation in the industry, resulting in fewer life-saving medications being developed. Just how profitable is the industry?
Pharmaceutical Companies Are More Profitable Than Most Other Industries
Research published in the “Journal of the American Medical Association” reported that between the years 2000 and 2018, the top 35 drug companies produced $11.5 trillion in revenue, of which $8.6 trillion was profit. The industry, which has been experiencing steady manufacturing sales growth, had almost twice the median net income margin as the 357 non-pharmaceutical companies in the S&P 500. However, they also noted that the profits of pharmaceutical companies are not very different than that of other research and innovation-driven technology companies.
Why the Controversy?
If pharmaceutical companies aren’t substantially more profitable than similar technology companies why are their profit margins so controversial? The reason is simple. While the products sold by technology companies are undeniably useful or desirable, people can live without them. For people with serious or chronic health conditions, prescription drugs play an important role in the quality of life and may even be required to remain living at all.
In 2019, the American public rated the pharmaceutical industry as the worst of the 25 worst industries in a Gallup opinion poll, unseating the federal government as the previous holder of this dubious honor. The public’s low opinion of the industry is based on factors such as the United States having the highest drug costs in the world, money paid to politicians by industry lobbyists and the opioid crisis.
Are Profits Trending Up?
While prescription drug companies are still very profitable, their profit margins have been coming closer to that of other similar industries in recent years. Part of the reason for this is changes in government healthcare programs such as Medicaid, Medicare and the Affordable Healthcare Act. However, while prices are not increasing at the same rate as before these changes, they are still increasing.
Are Profits Likely To Decrease?
Slashing prescription drug costs has long been a rallying cry of politicians, but so far, little has been done. President Joe Biden made campaign promises to repeal an exemption that allowed drug companies to avoid negotiating with Medicare. He also promised to find ways to reduce launch prices and cost increases.
Progressives, such as Bernie Sanders and Elizabeth Warren, have pushed for universal healthcare plans that would give the government enough purchasing power to force drug prices down. Additionally, Warren advocated for the government to mass-produce generic drugs to drive down costs.
Michael Bloomberg promoted changes in patent laws that would lower costs by making it possible for generic drugs to hit the market faster. Industry lobbyists oppose these plans, arguing that forcing the industry to be less profitable would lead to a lack of innovation and less incentive to produce new life-saving medications. Any significant changes are likely to face an uphill political battle.
What Is the Role of Insurance?
Insurance company policies play a large role in the price of prescription drugs. Most people can not afford to pay for brand-name drugs out of pocket, so industry profits largely rely on getting insurance companies to pay for them. Additionally, insurance companies have more purchasing power than individual consumers and can negotiate lower prices. The policy of most insurers requiring the purchase of generic drugs where available has driven down profits on brand-name drugs.
There are many factors that go into how profitable the pharmaceutical industry is and how profitable it will be in the future. Public opinion, insurance practices and government regulation will continue to play big roles in the future.
