The pharmaceutical industry in the United States has grown significantly in the last 30 years. It has been marked by a pronounced shift in patient treatment away from surgery and other treatment forms to a strong reliance on drugs. Revenues have skyrocketed and profit margins -- profits divided by total revenue -- have strengthened. Profits are calculated by deducting all costs -- raw materials, overhead expenses and income taxes -- from total sales. Therefore, profit margins indicate how much of each sales dollar a company retains as profit.
Pharma Industry Profit Margins
According to Yahoo! Finance’s industry summary, the average profit margin for generic drug companies as of April 2013 is 5.4 percent. The largest average profit margin is for major drug manufacturers at 18.4 percent. This group includes Pfizer, AstraZeneca and Bristol-Myers Squibb. For the "other drug manufacturers" category, which includes Teva Pharmaceutical Industries and Allergan, the average margin drops to 12.2 percent. These segments of the pharmaceutical industry have high barriers to entry due to high research and development costs tied to U.S. Food and Drug Administration compliance; these costs can exceed hundreds of millions of dollars.
More Profit Margins
The average profit margin for publicly traded drug wholesalers, including Cardinal Health and McKesson Corporation, is the lowest in the pharmaceutical industry at 1.30 percent. The profit margin for drug-related product producers, which includes Herbalife and USANA Health Sciences, is 11.7 percent. The latter category is sometimes referred to as nutraceuticals. More small businesses operate in these segments.
Pharma Industry Overview
The bulk of the revenue in the U.S. pharmaceutical industry is primarily driven by large multinationals. Biotech, once the purview of small startups, is now a driving force and a major revenue contributor. According to a study by Research and Markets, a provider of market research reports, the FDA approved more than 300 new drugs and vaccines between 1995 and 2005. The sheer size and growth characteristics of the pharmaceutical industry present opportunities for small businesses that can provide product and services to meet the industry's myriad needs.
Profit Margins
Comparing a pharmaceutical company's profit margin to industry peers allows it to assess its relative performance. If the company exceeds the industry average, the company is more efficient or has more market pricing power. If the company's profit margin is below the average, its management can delve further into the financial statements of competitor public companies for insights into how to improve its operations. The annual report or 10-K filing of public companies discusses competitive issues, financing, legislative concerns and other strategic and operational points that small-business owners can use to their advantage.
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