Mylan isn't alone: 11 drugmakers with off-the-charts pricing power
Mylan (MYL) is drawing fire for passing off massive price hikes for its EpiPen allergy treatment. But it’s far from being the drug company with the most pricing power.
Gilead (GILD), Biogen (BIIB) and Amgen (AMGN), along with eight other drug giants in the Standard & Poor's 500, enjoyed off-the-charts pricing power on their products relative to costs — far beyond Mylan's, according to a USA TODAY analysis of data from S&P Global Market Intelligence.
Each of these drug companies' operating profit margins, a measure of how much a company's revenue turns to profit, hit 25% or more over the past 12 months excluding interest and taxes. That means these companies kept 25 cents of every dollar in revenue after paying operating costs. That blows away the 15.8% profit margin of companies in the Standard & Poor's 500 index and the 20% profit margin at Mylan.
Drug pricing has become a political lightning rod as government officials take note. Martin Shkreli, as CEO of Turing Pharmaceuticals, orchestrated a 5,000% price hike of a medication called Daraprim, used to treat toxoplasmosis, a parasitic disease that affects AIDS patients, pregnant women and others who have weakened immune systems. The decision sparked fury from from patients, medical professionals and politicians.
After all the negative attention, it's gotten in recent days Mylan, on Thursday, announced a plan that would offer discounts to some patients..
EpiPen maker to offer discounts after price hike firestorm
Presidential hopeful Hillary Clinton has on multiple occasions expressed her concern with the prices being charged by drug companies, including at Mylan. It's easy to see why: Biotechnology companies have the third highest operating margins of any industry after only tobacco companies and diversified financials.
Such fat profit margins attract attention, especially in an election year. Fears of a political backlash are starting to infect the stocks, too. Shares of the 19 pharmaceuticals and biotech stocks are down an average of 11% this year, missing out of the broader market rally.
But Mylan is just one of many drug companies enjoying lucrative profit margins. Gilead rules. The biotech is developing and selling a variety of drugs, including treatments for human immunodeficiency virus inflections, hepatitis C and liver disease. Over the past 12 months, the company has kept 63 cents of every dollar of revenue before interest and taxes. That's a higher margin than any other drug company in the S&P 500. It's largely the result of the company's rapid success of a hepatitis treatments.
"Margins are so high because when you launch a drug that rapidly goes (up to) $20 billion in global sales because you are curing a viral disease that may otherwise lead to end stage liver failure, it is impossible to ramp up spending so quickly to maintain normal margins," says Joshua Schimmer, analyst at Piper Jaffray.
Martin Shkreli defends EpiPen price increase
Gilead is no stranger for controversy of the pricing of its products. Several Democratic lawmakers questioned the company over the $84,000 price of treatment for sofosbuvir, a hepatitis C treatment years ago.
Biotechs are certainly the sources of the richest profit margins. Five of the top five drugmakers with the highest operating margins are biotechs, such as Biogen at 49% and Amgen at 42%. But even outside of biotech there can be some huge winning products. Mylan, which is mostly a generic drug company, reports a 20% overall operating profit margin. But on EpiPen, the allergy treatment that has drawn the attention of regulators, the company reported an operating margin of 55%, says Michael Waterhouse, analyst at Morningstar. "It’s a high margin product, but not unheard of for branded products with little competition," he says.
EpiPen's steady price increases masked until deductibles rose
Some think the fears about government attention on high drug profit margins are overblown. "We believe that this effort (efforts against Mylan's price hikes) likely will follow the same playbook that lawmakers used to shame Gilead, Valeant (VRX), and others," according to Spencer Perlman, analyst at Height Securities. "Congressional hearings and a press onslaught, but no substantive legislative action."
