Home > Uncategorized > Pharmaceuticals: Beating the hell out of the average

Pharmaceuticals: Beating the hell out of the average

from Shimshon Bichler and Jonathan Nitzan

A lot has been written on the imminent decline of pharmaceuticals: their falling production, reduced R&D, declining innovation, the opioid crisis, patent cliffs, biting competition from generic drugs, growing opposition to IPR. The list goes on.

Top Guns

Judging by the yardsticks that matter the most, though – namely, the companies’ relative profit and relative capitalization – pharmaceuticals are doing just fine. In fact, based on these yardsticks, they remain the most powerful corporate sector of all.

In their 2020 study, ‘Profitability of Large Pharmaceutical Companies Compared With Other Large Public Companies‘ (JAMA 323, 9, March 3, pp. 834-843), Ledley et al. show that, during the period 2000-2018, the top 35 listed pharmaceutical firms outperformed every other corporate group in the S&P 500 (with the possible neck and neck exception of technology companies).

They had higher than average: (1) gross profit margins (76.5% vs 37.4% for the remaining S&P 500); (2) EBITDA margins (29.4% vs 19%) [2];  and (3) net profit margins (13.8% vs 7.7%). They also did better on all three margins than every other corporate subsector in the S&P 500, including non-pharmaceutical health-care firms.

Figure 1, taken from Ledley et al., visualizes this systematic out-performance.

nitzan june 8 fig 1[F

But is this top position sustainable? Can pharmaceuticals retain their top-gun status, or has their power peaked and is about to decline?

The Global View

The future, of course, is unknowable, but as far as the capitalists and their agents who own, sell, buy and price the shares of these firms are concerned, the outlook for pharmaceutical power is positive, not negative: in their opinion, it will continue rising.

This conclusion is implicit in Figure 2. The chart, which is taken from our work-in-progress on the subject, offers a global overview. It plots the distributive share of listed pharmaceutical firms in the net profit and market capitalization of all listed firms in the world.

nitzan june 8 fig 2

The chart indicates that, over the past half century:

  1. both shares have trended upward (i.e., on average, pharmaceutical net profit and market capitalization have grown faster than global net profit and market capitalization, respectively);
  2. the shorter-term movements of the two shares have been positively correlated; and
  3. generally, the pharmaceutical share of market capitalization has been greater than its share of net profit (the thin red line is almost always above the thicker blue line).

These findings – particularly the third – offer insight into what capitalists, taken as group, think about the future of pharmaceuticals.

The Capitalist Outlook

Market capitalization is a forward-looking ritual. It is determined by (1) capitalists’ expectations about future earnings, (2) their perceptions of future risk proxied by earnings volatility, and (3) the normal rate of return they use to discount expected, risk-adjusted future earnings to their present value. Equation 1 summarizes this ritual

Nitzan june 8 fig 3

According to the equation, capitalization is affected positively by expected future earnings and negatively by expected risk and the normal rate of return. Restated in everyday language, it means that if earnings expectations rise, so will capitalization, and that if risk and/or the normal rate of return increase, capitalization will fall.

The same ritual, with one minor modification, applies to relative magnitudes. Relative market capitalization – in this case, the market capitalization of pharmaceuticals divided by the market capitalization of all firms shown by the thin red line in Figure 2 – is determined by capitalist expectations about relative future earnings (pharmaceutical compared to all firms) and relative risk (pharmaceutical relative to all firms). Since the normal rate of return used to discount risk-adjusted earnings expectations is the same for all firms, it drops from the calculation and has no bearing on relative capitalization. Using the subscript R to denote relative magnitudes (in this case, pharmaceutical relative to all firms), we get: Nitzan june 8 fig 4

And here the relationship between the two series in the figure becomes important. The fact that the pharmaceutical share of global market capitalization (thin red series) is almost always larger than that the pharmaceutical share of net profit (thicker blue series) means that capitalists are willing to pay more for a current dollar of pharmaceutical net profit than for a current dollar earned by other firms. And this willingness to pay more for pharmaceutical net profit here and now means that capitalists expect (1) future pharmaceutical net profit to grow faster than global net profit, (2) future pharmaceutical risk to fall relative to global risk, or (3) some combination of the two. [3]

All in all, then, in the collective capitalist mind pharmaceutical companies are not about to decline, let alone fall into a protracted crisis. As far as capitalists are concerned, pharmaceutical profitability will continue to rise faster than the average, become less risky, or both.


[1] Shimshon Bichler and Jonathan Nitzan teach political economy at colleges and universities in Israel and Canada, respectively. All their publications are available for free on The Bichler & Nitzan Archives (http://bnarchives.net). Work on this note was partly supported by SSHRC.

[2] Earnings before interest, taxes, depreciation and amortization.

[3] Some observers argue that investors capitalize not the company’s expected net profit but its expected ‘free cash flow’, which, in the case of pharmaceuticals, they say, tends to be disproportionally higher due to the accounting classification of some R&D spending as cost. The data, though, do not support this claim. They show that the pharmaceutical share of global free cash flow, just like its share of global net profit, is lower than its share of global market capitalization. Furthermore, and importantly, they show that, unlike the pharmaceutical share of global net profit which trends upward, its share of global free cash flow trends downward.

  1. deshoebox
    June 9, 2021 at 4:54 pm

    When an industry shows both reduced risk and increasing profitability, you may suspect something like monopoly power in the market is occurring. Do we see anyhing like this going on now? Does the refusal of rich countries to waive patent protections so poor countries can manufacture vaccines to save the lives of their citizens suggest to you that pharmaceutical industries have undue power in those countries? If you are an investor do you care if you benefit from putting your money into corporations that profit by limiting access to life-saving medicines or by charging government health programs absurdly high prices for drugs? These are related questions should be discussed here, in my opinion.

  2. June 9, 2021 at 5:37 pm

    We avoid the notion of ‘monopoly power’. This concept is not only too narrow but also deeply misleading, being based on the idea that there is a separate ‘economy’ and a special science called ‘economics’ to analyze it, and that power is largely an *external* ‘distortion’ that hits this economy from the outside.

    In our view, the profit and capitalization of pharmaceutical companies — like the profit and capitalization of all companies — are based on power at large.

    In the case of pharmaceuticals, this power relies, among other things, on differential intellectual property rights; on shifting coalitions that collaborate/struggle in many different ways, including price setting; on conditioning the population to accept the private/state hierarchies of organized medicine; on tilting and often directing the nature of scientific research and funding in their favour; on selecting which compounds to develop and which not to; on creordering their own hierarchical/financial structure through mergers, acquisitions and buybacks; on dividing and conquering governments; on influencing legislation and policy, on striving and achieving favourable taxation; etc.

    It is the complex web of these power relations that creates differential profit and sets differential risk and therefore determines differential capitalization. And in our view, it is better to understand this web without invoking ‘economics’….

  3. Edward Ross
    June 10, 2021 at 12:31 am

    I agree with all of the above but would like to comment on the last line of Jonathan Nizan, What i would change is ‘it is better to understand this web without invoking ‘economics’ in my opinion it should read it is better to understand this web before invoking economics. Because i think change can only come about when all disciplines work together.Ted

  4. June 10, 2021 at 12:44 am

    Thank you Ted.

    I will have to disagree.

    The CasP approach shows that understanding capital as power undermines the key foundations of economics, thus making the ‘discipline’ of economics, both mainstream and Marxist, impossible.

    A brief explanation is offered in our 2021 RWER paper ‘Unbridgeable’ http://bnarchives.yorku.ca/681/

    The Full Monty is in our 2020 paper ‘The Capital as Power Approach’ http://bnarchives.yorku.ca/640/

    • June 10, 2021 at 10:48 am


      I think you are disagreeing with Ted because you haven’t understood what he’s saying, though perhaps he rather spoiled that with his “because”. I would have said “because one needs to understand that economics is mainly lies, or as G K Chesterton originally put it, “the endless and irrepressible repetition of half-truths”. And in GKC’s introduction to the Everyman edition of Dickens’ “The Old Curiosity Shop”: “Even among liars there are two classes, one immeasurably better than another. The honest liar is the one who tells the truth about his old lies … he keeps the truth in circulation: no one version of things stagnates in him and becomes an evil secret”. Sadly GKC notoriously didn’t understand money. But he did understand it was “power to” direct the economy, not your unqualified “power”, Jonathan.

      My opinion on what’s needed for change is again more specific than Ted’s. Most young people are too busy finding mates and providing for their children – learning what economics means today in practice – to have time to be interested in working with anyone outside their own specialism or firm. The onus is on those oldies with experience of what is wrong (rather than how to do things wrong) to redirect the practice by working together to care for and educate the unemployed: relentlessly exposing the truth about what money is and the folly of trying to accumulating it instead of preparing for a possibly calamitous future.

      I think we are all agreed that profiteering on pharmceuticals is as immoral as it gets.

  5. Ikonoclast
    June 11, 2021 at 6:41 am

    I think “monopoly” is a useful concept and a particular case of “power at large” in CasP, theory, which term (“power at large”) is a broader and deeper concept than mere monopoly and covers many more institutional and sociological factors. Monopoly also need not be looked upon as a pure economic concept and thus “impossible” in objective realism terms.

    Weber notes another (objectively real and non-economic in real terms) kind of monopoly:

    “A compulsory political organization with continuous operations will be called a ‘state’ [if and] insofar as its administrative staff successfully upholds a claim to the monopoly of the legitimate use of physical force (das Monopol legitimen physischen Zwanges) in the enforcement of its order.”

    That non-economic monopoly or monopoly claims is “the monopoly of the legitimate use of physical force”.

    By all means let us abolish economics and seek to reinstate “political economy” which might in itself need a new title or else the retention of the “economy” term will continue to evoke old thinking.

    It is (unintentionally) amusing that Jonathan Nitzan calls economics “impossible”. I mean no disrespect. I agree and I believe I know what he means. Yet, while the “discipline” of economics is impossible it exists in extant practice. It exists of course as a social practice; fictive, mystificatory and mythic but having weight because people believe its dogma, accept its prescriptions and enact its rituals. It is impossible that it be valid yet people believe it, follow it and make a form of life and society out of it. The real clearly must, can and does go on despite the fallacious justificatory superstructure of economics. People breed, produce, consume, cooperate, compete and transact (which includes more than just trade) while believing various sorts of irrelevant nonsense which are of no help and often impede and prevent better outcomes. That seems to be the size of it.

    The way I look at it, capitalism is about to be refuted by its own real collapse. Only that will convince the believers who still comprise most of the human race. Indeed, cornucopian capitalism is surely the most widespread irrational belief system ever created by humans..The sort of collapse coming is known as “the day prophecy fails”. There will be a lot of upset people, to put it mildly, and they will be looking for scapegoats.

    • June 11, 2021 at 10:14 am

      Ike, you had me reaching for my dictionary again with “cornucopian capitalism”, which is probably good, as it seems to make sense.

      Earlier, I wondered if you has missed “legitimate” being a euphemism for “legal” in Weber’s definition of the state, but I loved your own examples of “the real”.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.