Riding High

The Truth About the Drug Companies: How They Deceive Us and What to Do About It
by Dr. Marcia Angell

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As their profits skyrocketed during the 1980s and 1990s, so did the political clout of drug companies. By 1990, the industry had assumed its present contours as a business with unprecedented control over its own fortunes. For example, if it didn't like something about the FDA, the federal agency that is supposed to regulate the industry, it could change it through direct pressure or through its friends in Congress. The top ten drug companies (which included European companies) had profits of nearly 25 percent of sales in 1990, and except for a dip at the time of President Bill Clinton's health care reform proposal, profits as a percentage of sales remained about the same for the next decade. (Of course, in absolute terms, as sales mounted, so did profits.)

In 2001, the ten American drug companies in the Fortune 500 list (not quite the same as the top ten worldwide, but their profit margins are much the same) ranked far above all other American industries in average net return, whether as a percentage of sales (18.5 percent), of assets (16.3 percent), or of shareholders' equity (33.2 percent). These are astonishing margins. For comparison, the median net return for all other industries in the Fortune 500 was only 3.3 percent of sales. Commercial banking, itself no slouch as an aggressive industry with many friends in high places, was a distant second, at 13.5 percent of sales.

In 2002, as the economic downturn continued, big pharma showed only a slight drop in profits-from 18.5 to 17.0 percent of sales. The most startling fact about 2002 is that the combined profits for the ten drug companies in the Fortune 500 ($35.9 billion) were more than the profits for all the other 490 businesses put together ($33.7 billion). In 2003, profits of the Fortune 500 drug companies dropped to 14.3 percent of sales, still well above the median for all industries of 4.6 percent for the year. When I say this is a profitable industry, I mean really profitable. It is difficult to conceive of how awash in money big pharma is.

Drug industry expenditures for research and development, while large, were consistently far less than profits. For the top ten companies, they amounted to only 11 percent of sales in 1990, rising slightly to 14 percent in 2000. The biggest single item in the budget is neither R & D nor even profits but something usually called "marketing and administration"-a name that varies slightly from company to company. In 1990, a staggering 36 percent of sales revenues went into this category, and that proportion remained about the same for over a decade. Note that this is two and a half times the expenditures for R & D.

These figures are drawn from the industry's own annual reports to the Securities and Exchange Commission (SEC) and to stockholders, but what actually goes into these categories is not at all clear, because drug companies hold that information very close to their chests. It is likely, for instance, that R & D includes many activities most people would consider marketing, but no one can know for sure. For its part, "marketing and administration" is a gigantic black box that probably includes what the industry calls "education," as well as advertising and promotion, legal costs, and executive salaries-which are whopping. According to a report by the nonprofit group Families USA, the former chairman and CEO of Bristol-Myers Squibb, Charles A. Heimbold, Jr., made $74,890,918 in 2001, not counting his $76,095,611 worth of unexercised stock options. The chairman of Wyeth made $40,521,011, exclusive of his $40,629,459 in stock options. And so on. This is an industry that amply rewards its own.

In recent years, the top ten companies have included five European giants-GlaxoSmithKline, AstraZeneca, Novartis, Roche, and Aventis. Their profit margins are similar to those of their American counterparts, and so are their expenditures for R & D and marketing and administration. Furthermore, they are members of the industry's trade association, the misleadingly named Pharmaceutical Research and Manufacturers of America (PhRMA). Recently I heard Daniel Vasella, the chairman and CEO of Novartis, speak at a conference.

He was clearly pleased with the American commercial and research climate. "Free pricing and fast approval secure rapid access to innovation without rationing," he said, sounding like the most red-blooded of Americans, despite his charming Swiss accent. His company is now moving its research operations to a site near the Massachusetts Institute of Technology (MIT), a hotbed of basic research surrounded by biotechnology companies. I suspect the move has nothing to do with "free pricing and fast approval" at all, and everything to do with the opportunity to profit from U.S. taxpayer-funded research under the terms of Bayh-Dole, and from the proximity of U.S. medical scientists who do the research.

About the Author

Former editor-in-chief of The New England Journal of Medicine and now a member of Harvard Medical School’s Department of Social Medicine, Marcia Angell is a nationally recognized authority in the field of health policy and medical ethics and an outspoken critic of the health care system. Time magazine named her one of the twenty-five most influential people in America. Dr. Angell is the author of Science on Trial: The Clash of Medical Evidence and the Law in the Breast Implant Case.