More MS news articles for July 2002

Links Between Drug Company Profitability and Investments in Research: A Fact Sheet

July 2, 2002
By Joe Moser

Pharmaceutical companies must make a profit to stay in business. Some charge that drug companies make significantly more profits than companies in other industries. In fact, the profitability of drug companies is in line with other major industries. The research-based pharmaceutical industry also pays more taxes than other industries and reinvests more of its profits in research and development than other industries.

Prescription drugs are priced to reflect not only the costs of production, but also the significant costs of research and development. Recent research by the Tufts Center for the Study of Drug Development shows that the costs of developing a new drug exceed $800 million, with an average of 11 years from creation to market.

The profitability of drug companies is in line with other major industries.

And the pharmaceutical companies pay more taxes than most other companies. The research-based pharmaceutical industry spends a significant percentage of its sales revenues on research and development. There is a direct link between gross profitability and pharmaceutical R&D spending. As pharmaceutical companies make more money, they spend more on research. While it is true that some major drug companies have grown through mergers and acquisitions, no one company monopolizes the market. This is still a highly diversified industry where companies must compete. Continual investment in pharmaceutical research is important. Research shows new medicines are more effective at keeping people healthy, often avoiding other costly medical procedures and treatments. Generic drugs sometimes cost less, but they also may be less effective. Recent proposals, including one by Senators John McCain and Charles Schumer, would accelerate the use of generics and erode patent protections in an attempt to keep drug prices down. The weakening of drug patent laws would stifle innovation and hurt research. Generic manufacturers don't have the research and development cost of brand name companies. Brand name pharmaceutical companies spent more than $30 billion last year on research for which they must recoup the cost to keep the new drug pipeline flowing. The current drug patent system, modernized by the Hatch-Waxman Act in 1984, provides companies with confidence that if they develop a successful and effective new medicine that they can recoup their investment and have the resources to develop new medicines.

The drug industry is just like any other industry. It is trying to turn a profit in an environment that is risky, constantly changing, and over-regulated.

For more information, please contact:
Joe Moser

1 The 2002 Fortune 500 Industry Rankings. "How the Fortune 1000 Stack Up In Their Industries." Fortune. April 15, 2002.
2 "Examining the Relationship Between Pharmaceutical Pricing and Innovation." Published by Arthur D. Little, Inc. on May 10, 2002. Available online at
3"Taxing the Pharmaceutical Industry" PhRMA Backgrounder. July 17, 2000. Available online at
4"The Myth of 'Rising Drug Prices' Exposed." PhRMA Backgrounder. March 6, 2002. Available online at
5 F.M. Scherer. "The Link Between Gross Profitability and Pharmaceutical R&D Spending." Health Affairs. 2001 Sep/Oct; 20(5):216-220.
6 Joseph A. DiMasi. "Winners and Losers in New Drug Innovation." Medical Marketing &Media. 2001 Sep; 36(9):99-110.
7 Frank R. Lichtenberg. "Are the Benefits of Newer Drugs Worth Their Cost? Evidence From the 1996 MEPS." Health Affairs. 2001 Sep/Oct; 20(5):241-251.
8 David M. Cutler and Mark McClellan. "Is Technological Change In Medicine Worth It?" Health Affairs. Sep/Oct; 20(5):11-29.
9 Doug Bandow. "Threatening Pharmaceutical Innovation." The Washington Times. May 17, 2002.

© Galen Institute 2002