HKS Affiliated Authors


March 3, 2020, Paper: "Some of the most valuable innovations known to medicine have come from the pharmaceutical industry. Yet, the cost of those innovations places new drugs out of reach for many patients and significantly burdens others. Are pharmaceutical companies earning too much? Deciding whether pharmaceutical companies earn too much money is complicated.  In this issue of JAMA, 2 reports take different approaches to the question. In one article, Ledley et al1 compare the profitability of pharmaceutical companies with that of other large companies. The authors used data from 2000 to 2018 on public companies for which information on sales and input costs could be obtained. The sample included companies in the S&P 500 Index, a group of the largest US companies, and comprised 35 pharmaceutical companies, 357 non–health care companies, and 52 nonpharmaceutical health care companies. Three measures of profits were examined: gross profits (revenue minus the costs of goods sold); earnings before income, taxes, depreciation, and amortization; and net income, also referred to as earnings. Net income is typically what is used to measure corporate profitability and makes the most compelling conclusion, although the results did not differ greatly across the measures. Ledley et al1 showed that from 2000 to 2018, the median net income margin in the pharmaceutical industry was 13.8% annually, compared with 7.7% in the S&P 500 sample. This difference was statistically significant, even with controls, although earnings seemed to be declining over time."