Pharma & Biotech Industries Headed Toward an Era of Reduced Profit Margins

In the face of reduced profit margins for the pharmaceutical and biotechnology sectors, an effective financial management strategy is central to maintain sustainable growth.

New analysis from Frost & Sullivan’s (http://www.financialservices.frost.com) Financial Assessment of the Global Pharmaceutical & Biotechnology Industry research evaluates the financials of public companies in the global pharmaceutical and biotechnology industries, and ranks organizations based on their financial and risk management. This offers a comprehensive ratio analysis that includes profitability, activity (turnover), liquidity, and solvency. The research identifies key trends and challenges that can impact the performance of industry participants over the next 12 months.

The main reasons attributed to declining profitability in the pharmaceutical and biotechnology industries are expiring patents, delayed approvals, the advent of generic versions of drugs, measures to contain healthcare spending, and the increasing number of participants in the same profit pool. A restricted environment for new product entry, rising prices, and lower acceptance of products in newer therapeutic areas will further squeeze profit margins in the long-term.

“Companies with a diverse portfolio of drugs saw higher profitability in the pharmaceutical industry,” noted Frost & Sullivan Financial Analyst Dr. E. Saneesh. “The long timelines and accumulating expenditures incurred before a drug is commercialized is making the biotechnology industry less profitable in recent years, even resulting in negative margins for companies that are smaller in terms of revenue.”

The pharmaceutical industry has generally witnessed smaller margins due to increasing competition from generics, pricing pressures, and decreasing healthcare spending. In the biotechnology industry, companies within a low revenue range and with relatively new products witnessed negative margins because of the heavy investment in R&D, as well as selling, general, and administrative expenses (SG&A).

In both industries, companies with lower revenue had poor turnover ratios because of the huge investments made in assets and product development. In terms of cash reserve, smaller pharmaceutical companies, as well as large and small biotechnology companies, showed an increase in their cash reserve as a percentage of their assets.

Further, the pharmaceutical and biotechnology sectors did not witness a great variation in the R&D-to-sales ratio in recent years. Despite a general decline in overall sales in both industries, R&D expenses have not considerably reduced.

“All these trends highlight the difficult times the pharmaceutical and biotechnology industries are going through,” concluded Dr. Saneesh. “To create sustainable growth, companies must undertake systematic and effective financial management strategies.”

Financial Assessment of the Global Pharmaceutical and Biotechnology Industry is part of the Business and Financial Services Growth Partnership Service subscription. All research services included in subscriptions provide detailed market opportunities and industry trends evaluated following extensive interviews with market participants.

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Frost & Sullivan, the Growth Partnership Company, works in collaboration with clients to leverage visionary innovation that addresses the global challenges and related growth opportunities that will make or break today’s market participants. For more information on this research, please e-mail Britni Myers, Corporate Communications, at britni.myers@frost.com.