Big drug companies are highly R&D intensive, and actually make net less profit adjusting for risk – stronger IPR is non-negotiable

Normal Profits Start with profits. The left argues that there is plenty of money for the industry to develop drugs, even if its revenues are significantly lowered as a result of price controls or reduced intellectual property protection. They rationalize this assertion with claims of excess profits and wasted spending. U.S. Rep. Katie Porter (D-CA), deputy chair of the Congressional Progressive Caucus, issued a scathing report in 2021 titled “Killer Profits,” attempting to make the case that the industry makes too much money.5 Two years earlier, the Center for American Progress made the same claim that “Big Pharma Reaps Profits.”6 More recently, the self-described “democratic socialist” Senator Bernie Sanders (VT) has claimed that “Greedy pharma firms rip off Americans.”7 The reality is that, when adjusting for risk and comparing it to other industries, pharmaceutical firms’ profits are not excessive, nor are drug prices driving up overall healthcare expenditures. Researchers Sood, Mulligan, and Zhong compared excess profits of pharmaceutical companies and S&P 500 firms.8 They defined excess profit as “higher than expected profits given the risk associated with their investments” and found that pharmaceutical companies’ excess profits were actually 1.7 percentage points lower than the 3.6 percent average among S&P 500 firms.9 By contrast, researchers found that the excess profits of middlemen in the U.S. biopharmaceutical supply chain—insurers, pharmacy benefit managers, and retailers—averaged 5.9 percent from 2013 to 2018. Moreover, an analysis in PLosONE found that pharmaceutical “returns were substantially lower than [those of ] the other eight health care industries.”10 Despite today’s rhetoric, prescription medicines have accounted for only about 14 percent of U.S. healthcare spending in recent years, and that share is expected to remain stable going forward.11 Similarly, the research firm Altarum found in a 2020 report that the retail pharma share will likely remain stable in the 9 percent range through most of this decade, with non-retail expenditures also roughly stable in the 4.5 to 4.9 percent range. (Fig. 1.) This puts the United States right in line with other OECD nations.12 Others, such as Dean Baker, attack the industry for spending too little money on R&D for drug development and too much on stock buybacks and marketing. In arguing that the industry wastes money on marketing, Baker notes that industry marketing costs are comparable to research expenditures, and that if the industry just reduced advertising, it could reduce drug prices. This sentiment is no doubt fueled by pharma’s extensive use of television advertising. Yet, over the last 10 years, the annualized return on the Standard & Poor’s (S&P) Biotech Index averaged 7.95 percent and the Pharmaceutical Select Index averaged 3.29 percent, both lower than the S&P 500 index return of 12.49 percent, which undercuts the argument that stock buybacks are being used to “prioritize short term financial returns,” as one article contended.13 When it comes to marketing, the charge is just as specious. An analysis in JAMA Network, which included all promotional activities, physician education, advertising, and unbranded disease awareness campaigns as “medical marketing,” puts the total of these activities (many of which have significant value to patients) at one-third of R&D expenditures.15 When looking just at pharmaceutical advertising, total spending reached was $6.58 billion in 2020, a small fraction of the $122 billion the industry invested in R&D in the United States that year.16 Opponents of large drug companies also claim that the companies are not investing in R&D. The progressive think tank Roosevelt Institute has argued that, “as prices have skyrocketed over the last few decades, these same companies’ investments in research and development have failed to match this same pace.”17 In reality, from 2012 to 2016, drug sales increased $5.8 billion a year, while R&D actually increased $6.8 billion a year.18 Drug companies in America are highly R&D intensive and have become even more so, with their R&D-to-sales ratio increasing from 11 percent in 2006 to 20 percent in 2018.19 The ratio for the top 20 U.S. drug companies increased from 15 percent in 2006 to 23.6 percent.20 Further, while drug revenues increased 56 percent from 2006 to 2018 (in nominal dollars), R&D increased by 85 percent, and it is the largest firms, not the smallest, that are the most R&D intensive.21 The non-partisan Congressional Budget Office reports that “In 2019, the pharmaceutical industry spent $83 billion dollars on R&D. Adjusted for inflation, that amount is about 10 times what the industry spent per year in the 1980s.”22 In fact, America’s pharmaceutical industry is the most R&D-intensive industry in the world, investing over 20 percent of its sales into R&D each year, which accounts for 18 percent of the total U.S. business R&D investment.