The Pharmaceutical Industry...
The Godfathers

A Thumbnail Sketch

Marlon Brando as the Godfather: 1972

A quick overview of the pharmaceutical industry is necessary to help keep things in perspective.  In 2011 the industry was expected to grow between 5%-7% and hit $880 billion in market size.  As of this writing in 2014, the market is very likely over $1 trillion.  The U.S. remains the largest pharmaceutical market in the world accounting for around $400 million of sales.

When we speak of the global pharmaceutical market, we are talking about 17 countries.  As far as how many separate companies there are in the industry is anyone's guess but if we include the smallest with 10 or less employees to the largest, it would easily top 30,000.  

The industry is in a period of consolidation with merger and acquisition activity going strong.  The big news as of this writing in April 2014 is Pfizer's attempt to buy Astra-Zeneca.

Growth drivers include the rise and spread of disease worldwide driven by mobility of the world population and a growing affluence in much of the world.  The industry is taking a big interest in the emerging markets and third world countries to keep stoking the growth. 

There are a couple of situations that could put the brakes on growth in some sectors.  For example there is a growing opposition to using drugs on large scale concentrated animal feeding operations for other than strictly therapeutic reasons.  Currently more drugs are dispensed to farm animals than humans.

Another issue is more FDA regulation in the face of side effects, interactions, growing antibiotic resistant organisms and a consumer drift toward natural cures and integrated medicine.  The huge cost involved in getting a new drug through the FDA approval process and bringing it to market will be a major concern.

Time to Narrow the Scope

Since there are so many firms in the somewhat fragmented pharmaceutical industry, focusing on the the top ten major drug manufacturers will suffice as being representative of the entire industry. 

Generic drug companies are excluded from this comparison.  The top ten shown below account for about 60% of total market share. 

The table below lists the top ten worldwide drug companies for 2013 by sales and shows the net profit margin for each. The industry average profit margin was 18.40% and the top ten are right in there with a 17.02% average margin.  In 2008 the list included Wyeth which was bought out by Pfizer in 2009, thus putting Bristol-Myers Squibb in tenth place for 2013. 

Company Total Revenue ($bil. USD)Net Profit Margin (2013)
Johnson & Johnson
71.9
20.9
Pfizer
51.6
22.1
Roche
53.1
24.3
Novartis
58.9
15.8
AstraZeneca
25.7
10.0
Sanofi-Aventis
46.2
9.6
GlaxoSmithKline
44.5
21.2
Merck
44.0
10.3
Eli Lilly
23.1
20.3
Bristol Myers
16.4
15.7

How do manufacturers in the drug industry make so much money filling our medicine cabinets while other industries are struggling to keep 7 to 10 cents on each dollar of sales?  Well in the ensuing pages, it will become clear why the top ten are the Godfathers of the pharmaceutical industry. 

But first, it could be enlightening to see how the industry views itself and the best way to do that is to go to the pharmaceutical industry association website.

PhRMA, the Pharmaceutical Research and Manufacturers of America, represents the country’s leading biopharmaceutical researchers and biotechnology companies. To see what a positive spin looks like, go there are check it out.

We will answer that question but for now we will go with an intuitive answer that excessive prices yield excessive profit margins.  In the following page, we will test that hypothesis.

To go on to the next page, click on Pharmaceutical Marketing.

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