A new issue brief released by the Center for Medical Economics and Innovation at the nonpartisan Pacific Research Institute finds that innovative drug manufacturers earn some of the lowest risk-adjusted returns in the U.S. health care system, despite making the largest investments in research and development. The findings challenge the central claim used to justify government drug price controls.
The brief examines financial data from more than 1,200 publicly traded U.S.-based companies across five major health care sectors between 2022 and 2024, measuring profitability using economic value added (EVA), a metric that accounts for risk and cost of capital.
The analysis finds that biopharmaceutical manufacturers earned an average EVA of just 1.1 percent during the period studied, well below the overall U.S. industry average of 6.3 percent and far lower than other health care sectors. By comparison, health insurers, pharmacy benefit managers, and other health care support services earned an average EVA of 33.1 percent.
At the same time, innovative drug manufacturers invested 33.2 percent of their revenues into research and development, far more than any other health care sector and nearly ten times the average U.S. industry investment.
“These findings directly contradict the narrative that drug manufacturers are price gouging,” said Dr. Wayne Winegarden, director of PRI’s Center for Medical Economics and Innovation. “Once you properly account for risk and capital costs, innovative drug manufacturers are among the least profitable participants in the health care system, while taking on by far the greatest financial risk.”
Advocates of drug price controls often argue that government intervention is necessary to curb excessive profits. The brief concludes that this argument fails by its own logic, as risk-adjusted returns in the biopharmaceutical sector are not excessive compared to other health care industries.
“Drug affordability is a legitimate concern, but price controls are the wrong solution,” said Sally C. Pipes, president and CEO of the Pacific Research Institute. “Blunt government price setting threatens future medical innovation while leaving untouched the distorted pricing system that actually drives higher costs for patients.”
The brief warns that reducing the already modest risk-adjusted returns available to drug developers will discourage investment, lead to fewer new treatments, and ultimately harm patients. Instead of imposing price controls, the authors argue that reforms should focus on improving transparency and fixing the underlying incentives within the drug pricing system.
