Blister pack with dollars instead of pills From 2011-2019, large drug companies had areturn on investment capital of 17.3 percent, compared tothe average ROIC across all other industries of 11.5percent. (Photo: Shutterstock)

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Pharma has been countering the call for government-mandatedprice restrictions by arguing that lowerindustry revenues would stymie development of needed drugs.

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A group of researchers at the West Health Policy Center andJohns Hopkins Bloomberg School of Public Health say that's a lot ofhooey–claiming they have the data to back that up.

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"We find that large pharmaceutical manufacturers could enduresignificant revenue reductions, including the reductions consideredin recent legislative proposals, while maintaining current researchinvestments and still achieve the highest returns of any marketsector," the researchers write in their white paper, "How Much Can Pharma Lose?"

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Related: New details in Big Pharma price-fixing lawsuitsuggest lawyers wrote 'polite f-u letters'

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They compared the returns among 23 large pharmaceuticalmanufacturers with more than 2,000 companies in other industries,using the metric return on invested capital (ROIC): a company's netoperating profit after tax divided by its total invested capital.The researchers found that from 2011-2019, large drug companieswere the most profitable industry, with a combined ROIC of 17.3percent; the next most profitable industries ("accommodation andfood services" and "professional, scientific, and technicalservices") each had an ROIC of 15.3 percent and the average ROICacross industries (excluding large drug companies) was 11.5percent.

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The researchers then calculated what the impact of recentfederal legislative price reduction proposals could be on futureROIC. They found that from 2020-2029, large pharmaceuticalmanufacturers would be expected to earn $2.28 billion in profit on$9.94 billion in net sales revenue. Of that revenue, largepharmaceutical manufacturers could see $758.1 billion in revenuereduction and still maintain an industry-leading ROIC of 15.3percent.

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Indeed, these manufacturers could face an even greater $1.45billion reduction in revenue and still maintain an ROIC greaterthan 75 percent of other industries, while a revenue reduction ofnearly $2.24 billion would leave manufacturers with an averageROIC, the researchers found.

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"Recent legislative proposals to address drug spending have beenscored to reduce drug spending, and thus pharmaceuticalmanufacturer revenue, from $100 billion to $481 billion from 2020to 2029," they write. "While the pharmaceutical industry haslikened these losses to a 'nuclear winter,' we find that largepharmaceutical manufacturers would be able to weather these lossesand still maintain an attractive ROIC compared to otherindustries."

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The researchers conclude that manufacturers could still maintaina revenue level that is attractive to institutional investorswithout reducing current expenditures for research and development— rebutting the argument that recent legislative proposals would"drastically harm innovation."

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"Even with lower revenues, large pharmaceutical companies wouldstill present one of the best investment options for institutionalinvestors, undercutting the notion that capital would flee to otherindustries and that large pharmaceutical companies would be unableto significantly reward venture capital investments in early-stageresearch," they conclude.

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Katie Kuehner-Hebert

Katie Kuehner-Hebert is a freelance writer based in Running Springs, Calif. She has more than three decades of journalism experience, with particular expertise in employee benefits and other human resource topics.