Why I love Big Pharma, and why you should too

[John_Hemming]

@dicarlo2

As with any investment class, the margin over the cost of capital tends to decline as the sector matures and thus risk declines

Has risk in pharma declined?

[RapAdmin]

This is interesting… if true. We’ll see how it develops… (DTC = Direct to Consumer).

[dicarlo2]

No idea, I don’t know much about pharma investments specifically. I find it hard to believe that pharma is a net negative investment class, if that were the case capital would be fleeing and it would need to become entirely publicly (government) funded.

[RapAdmin]

Looking at gross profit, it seems Pharma is doing fine…

From ChatGPT:

Query: What are the top 20 most profitable industries in the USA, by gross profit margin?

Response:

As of 2025, the U.S. industries with the highest average gross profit margins are predominantly in finance, pharmaceuticals, and technology. These sectors benefit from low cost of goods sold (COGS), strong pricing power, and scalable business models. Below is a ranked list of the top 20 industries by average gross profit margin, based on the most recent data:(Vena Solutions)

Top 20 U.S. Industries by Gross Profit Margin (2025)

1. Banks – Regional: 100.0%
2. Banks – Diversified (Money Center): 88.8%
3. Biotechnology: 86.4%
4. Credit Services: 82.7%
5. Asset Management: 81.5%
6. Capital Markets: 80.7%
7. Mortgage Finance: 78.4%
8. Drug Manufacturers – General: 72.9%
9. Internet Content & Information: 64.0%
10. Medical Devices: 63.5%
11. Medical Instruments & Supplies: 56.9%
12. Luxury Goods: 56.2%
13. Education & Training Services: 56.0%
14. Drug Manufacturers – Specialty & Generic: 55.5%
15. Apparel Manufacturing: 49.1%
16. Diagnostics & Research: 48.0%
17. Airlines: 48.8%
18. Broadcasting: 47.1%
19. Consulting Services: 44.3%
20. Communication Equipment: 42.2%(Stern School of Business, Kentley Insights, FullRatio)

These industries often feature minimal direct production costs or benefit from high-margin intellectual property, such as software, financial products, or patented pharmaceuticals. For instance, banks and asset managers typically incur low COGS, while biotech and pharmaceutical companies can command premium pricing due to innovation and regulatory protections.

If you’re interested in exploring net profit margins or specific companies within these sectors, feel free to ask!

[LaraPo]

@adssx

yet the impact on life expectancy would be massive:

Yes would be massive, but how do you explain that life expectancy is much better in Europe than in the States?

[CronosTempi]

The problem as always, is in determining what is a value added cost, and what is cost added with no value to the end consumer (in this case patient). If a step in the process adds no value, eliminating it is beneficial. The issue of course is that those who profit from this no value added cost are going to be highly resistant to such elimination. Are PBMs value added to the patients? Sounds like not. But they make so much money, good luck trying to cut them out. Reminds me of the tax filing industry who for decades have successfully lobbied congress to prevent every effort to simplify the process, because they benefit from the complexity and the resultant need for their services. Yet they benefit no one other than themselves - they waste time and money of the end consumers taxpayers as well as undermine tax compliance from the taxpayers thus lowering government revenue and increasing the cost of enforcement. Pure parasites, yet seemingly impossible to dislodge. I’m afraid PBMs may be the same kind of chronic condition.

[John_Hemming]

It’s not a question as to margins, but the return on capital spend. IP things have high margin.

[RapAdmin]

I would argue that gross margins are a good indication. In the USA Pharma spends a huge amount on marketing / advertising which really doesn’t benefit the consumer:

Chat GPT Query: What is the average percent of the public pharmaceutical company’s gross revenue is spent on marketing and R&D per year, during the past ten years?

On average, public pharmaceutical companies have historically spent a significant portion of their gross revenue on both marketing and research & development (R&D), but marketing typically exceeds R&D in many cases—especially among large pharmaceutical firms.

Estimated Averages Over the Past 10 Years (approx. 2013–2023):

Category	Average % of Gross Revenue
Marketing & Sales	20%–25%
Research & Development (R&D)	15%–20%

These averages are based on data from major public pharmaceutical companies (like Pfizer, Johnson & Johnson, Merck, Novartis, etc.) and industry analyses from sources such as:

• U.S. Securities and Exchange Commission (SEC) filings (10-K reports)
• Congressional Budget Office (CBO)
• Journal articles (e.g., JAMA, Health Affairs)
• Industry reports from Deloitte, IQVIA, Statista

Key Observations:

• Marketing often exceeds R&D: A 2019 study in JAMA found that, among the top 10 pharma companies, spending on marketing (including direct-to-consumer ads and sales reps) exceeded R&D.
• Variation by company: Biotech firms or companies focused on innovation (e.g., Moderna, Vertex) tend to spend more on R&D (often 30%+), while diversified pharma companies (e.g., Johnson & Johnson) may allocate more to marketing.
• Trends: Marketing spending has been relatively stable or growing slightly, while R&D spending has been increasing gradually due to rising development costs and increased focus on biologics and personalized medicine.

[John_Hemming]

The difficulty is linking historic R&D to current revenue. Obviously any current R&D relates to potential future revenue.

[John_Hemming]

Pharma R&D return on investment falls in post-pandemic market | Deloitte UK

Measuring the return from pharmaceutical innovation

After more than a decade of declining returns on pharmaceutical research and development (R&D), the tide is turning. Our 15th year analysing the forecast average internal rate of return (IRR) for the top 20 biopharma companies, reveals a second year of growth to 5.9 per cent in 2024.

[relaxedmeatball]

@adssx

mandate display on product

IMO, yes and no. A lot of people still smoke, even though rates are falling. All the package labels and photos of cancerous tongues still didn’t stop people smoking, and every school kid for the last 30+ years has been told that it gives you cancer etc etc. From what I understand, banning advertising has also been quite effective. But even then, plenty of people use illegal recreational drugs which have zero commercial advertising.

IMO, probably the biggest effect is going after the financial aspects at the consumer level, and regulating the producers and sellers of these products. I believe that if better choices were more economical (in money and time/convenience), then more people would go for them. There’s a huge cultural issue too. Japan, Korea, Taiwan etc have 24/7 McDonalds, there is fresh, delicious deep fried food in every 711, Family Mart and Lawson. They love drinking sugary crap, bubble teas, juices loaded with sugar. But obesity rates are very low despite wide availability of cheap and tasty junk food.

If I were in charge, I’d go full authoritarian to be honest. I’d make fast food places apply for licenses like those which sell alcohol. They’d have to pay a fortune for it. They’d have high taxes. They’d have minimum price caps, limits on calories per serving etc. They’d be limited on how many within a certain area. They wouldn’t be allowed to advertise. Make their life a nightmare basically. I would probably like to ban most drinks containing sugar entirely. I think there’s no reason why Coca Cola should even exist. Marketing “vitamin water” (owned by Coca Cola) as a health drink is criminal.

@CronosTempi

they waste time and money of the end consumers taxpayers as well as undermine tax compliance from the taxpayers thus lowering government revenue and increasing the cost of enforcement. Pure parasites, yet seemingly impossible to dislodge. I’m afraid PBMs may be the same kind of chronic condition.

It’s a great example. It seems to me that a government with an authoritarian streak that is willing to bully things through even if unpopular, or even a bit illegal, might have a chance. So perhaps this current government actually could fix it, if they were suitably motivated.

[John_Hemming]

An authoritarian government could mandate masks to reduce infection …

I think we need to be careful about mandating too much on scientific grounds

Going back 30 years an authoritarian government could have come down hard on “dangerous” fats and encouraged the consumption of carbs.

Even today people are taking risky off label drugs. An authoritarian government could make this illegal.

[adssx]

@relaxedmeatball

IMO, yes and no. A lot of people still smoke, even though rates are falling. All the package labels and photos of cancerous tongues still didn’t stop people smoking, and every school kid for the last 30+ years has been told that it gives you cancer etc etc. From what I understand, banning advertising has also been quite effective. But even then, plenty of people use illegal recreational drugs which have zero commercial advertising.

This is called freedom, and it is good

@relaxedmeatball

If I were in charge, I’d go full authoritarian to be honest.

I guess I wouldn’t live in your country But I’m sure you can create a community where you live where fast-food places are banned from operating.

[John_Hemming]

@adssx

I guess I wouldn’t live in your country

There is a good market orientated approach as to what people think are the best ways to run countries. That is to look at the countries people want to migrate out of and migrate in to.

[adssx]

Yes, people vote with their feet and tend to prefer more liberal places. No one ever crossed the Berlin wall to go East surprisingly!

[DeStrider]

Well, I left the USA for Hong Kong and I don’t regret the decision at all. Surprisingly, Hong Kong has more freedom of religion than the USA. Although the freedom of the press is gone. Freedom of speech is fine as long as you don’t publicly talk about the government in a bad way.

[John_Hemming]

@DeStrider

Surprisingly, Hong Kong has more freedom of religion than the USA.

How do you measure this?

[DeStrider]

Easter and Christmas as well as Buddha’s Birthday are all public holidays for all schools and government organizations as well as most workers.

The government sponsors religious schools and children can attend them for free.

There are displays of Christianity at government offices such as a life-size nativity scene at Christmas.

You would never find any of the above in the USA.

[John_Hemming]

I think the concept of religious freedom is no pressure from the state for people to follow a particular religion or not follow one. The question of state subsidy of religion is I think a separate question.

In the UK there are religious schools funded by the state and religious holidays. We also celebrate quite a few in Birmingham beyond formal holidays. (Holy Days)

[DeStrider]

Yes. Hong Kong supports Christianity, Buddhism, Confucianism and Daoism (public holidays). There are Islamic mosques here as well, but we don’t celebrate Islamic holidays. Everyone is free to worship as they choose.