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The shifting profit pie: How earnings across the pharma sector are changing

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How is the pharmaceutical value chain faring financially? Who are the biggest winners and losers? Every two years, Kearney analyzes pharmaceutical profit pools to answer those questions. Our analysis follows a drug across the value chain, from concept to patient. We aim to understand the profitability of key players in the U.S. value chain and explore the shifts and underlying trends in the data.

Todd Huseby

Our 2022 analysis draws on public financial performance and industry-level data and evaluates revenues and profits (EBIT). Although the market continues to face uncertainty, revenue in the pharmaceutical sector has steadily increased, swelling to more than half a trillion dollars. Pharmacy now accounts for 14% of total health care spending in the U.S. But while revenue and profitability have grown overall, profit distribution has been lopsided. Branded manufacturers and product innovators have reaped the most significant rewards, while the middle of the value chain has felt a squeeze.

In this article, we’ll dig deeper into the underlying trends driving those pharmaceutical shifts and offer clues into what could be on the horizon for pharmacies, payors and pharmacy benefit managers.

A growing pie with uneven
profit slices

First, we found that the pie got bigger. Revenues across the industry grew at a CAGR (compound annual growth rate) of 5.1% from 2018 to 2022, which is understandable given the growth of pharmaceutical spending as a portion of overall health spending in the U.S. As expected, profits have swelled in tandem with revenues. Profits reached nearly $140 billion in 2022 (figure 1). 

But, as the pie gets bigger, it isn’t cut into equal pieces. Each value chain segment has a starkly different slice of the “profit pool” pie in terms of its share of EBIT. Vertical integration across the value chain, and increasingly payors integrating with providers, can blur where the core profit centers are in the pharmaceutical value chain.

The key winners across the value chain are branded manufacturers. They’re the biggest risk takers and innovators in the industry, and they’ve reaped rewards for those risks and investments. Branded manufacturers have continued to grow their slice of the pie; their profits expanded from 52% of value chain profits in 2018 to 64% in 2022.

And while branded manufacturers benefit, other segments, such as wholesalers and pharmacies, are holding steady or experiencing compression in their share of profits.

What’s causing the profit shift: three factors to explore

• Pharmaceutical companies are accelerating R&D and advanced therapeutics. — Pharmaceutical companies are looking ahead at the regulatory changes coming soon. Top branded drugs like Humira, Keytruda, Eylea and Stelara will likely lose market exclusivity before 2026. In anticipation of that threat to approximately $70 billion in drug sales, pharmaceutical companies have augmented their R&D pipelines.

Mike Piccarreta

Notably, companies have divested generic products and consumer health divisions. For example, Pfizer shed Viatris, Novartis spun off Sandoz, and GSK demerged from Haleon. Instead of focusing on generics and consumer health, these companies are acquiring earlier-stage branded products (e.g., Sanofi acquiring Tidal; GSK purchasing Sierra Oncology).

Gene and cell therapies have advanced rapidly, with rare diseases and clinical areas such as oncology and neurology leading the way.

With value chain-leading margins of about 22% in 2022, branded manufacturers will be able to continue to invest in replenishing their pipelines through R&D and acquisition.

• Government regulation is driving cost efficiency — Government intervention is a significant factor driving the changing landscape. Government-funded health care programs (Medicare Advantage plans and CMS) are incentivizing a shift to value-based care. In addition, the Inflation Reduction Act (IRA) creates ripple effects that will be felt for years, as the initial 10 drugs subject to this legislation will come under the program in 2026. While most of these 10 drugs are nearing the end of their patent life, everyone in the value chain should consider how to manage their portfolio to mitigate the risk of future drugs that could be subject to the IRA.

• Health care is being consumerized — New entrants and disruptors are shifting the market in more ways than many industry analysts initially forecasted. Consumer preferences will always be a strong driver that forces change. For example, Amazon made a big bet on consumers’ desire for subscription-based health care when it acquired One Medical in 2022. Amazon will continue to invest in health care as a driver for future growth.

In addition, consumer demand for weight loss drugs like Ozempic and Wegovy has seemingly reshaped the pharmaceutical market overnight: These drugs accounted for more than 65% of total prescriptions in 2022, a staggering statistic.

What the numbers mean for each part of the value chain

In addition to industry trends, unique factors affect profits for different parts of the value chain. Each segment has walked a starkly different path to profit over the past four years, characterized by unique headwinds or tailwinds (figure 2).

DJ McKerr

As mentioned, brand manufacturers’ hefty investment and betting on pricey R&D ventures have led to tremendous rewards, driven by increasing product innovation and the rise of specialty and advanced therapies. The brand manufacturing segment saw EBIT growth of $34 billion from 2018 to 2022, demonstrating the sheer magnitude of return on ­investment.

Generic manufacturers have experienced a general trending decline, with segment profits settling at $9.5 billion in 2022, or only 7% of the total profits in the pool. The steady decline in share for the segment has been driven by generic price deflation, resulting in lower EBIT margins that have forced players out of the space, leading to a rising number of drug shortages for generics.

Wholesalers continue to be squeezed due to the highly consolidated market; three key players own about 95% market share. Given the consolidation and commoditized nature of the industry, dynamics are very price sensitive. Despite pressures, wholesalers experienced mild profit growth of $3 billion from 2018 to 2022 and are largely stable in their share as the least profitable segment in the value chain.

For pharmacies, it’s no surprise that from 2018 to 2022, immense pressures led to a decrease in operating profits of 17% — the largest compression in EBIT across the value chain. This decline was primarily due to declining reimbursements from PBMs and the commoditized nature of dispensing. In addition, retail pharmacies face increasing cash pricing competition from mass merchants and grocers, which can strategically use larger shopping baskets to absorb lower profitability in retail ­pharmacies.

Payors and PBMs have seen total profits stabilize around $20 billion in 2022. But while other segments’ profit shares grew, PBMs and payors’ overall share of profits compressed from 2018 to 2022. These entities have remained relatively stable by acquiring other parts of the health care industry and from a continued focus on drug rebates.

How to respond to the shifting profit pie

Given this analysis of the current state of the value chain, how can pharmacies respond?

As pharmacies return to pre-pandemic operations and government-funded vaccination programs fade away, pharmacy profits are under pressure. Pharmacies should focus on consumers and convenience, build holistic offerings, and differentiate away from PBMs. Building on current efforts, pharmacies should continue to focus on consumer centricity and try to minimize location switching to increase each existing and future consumer’s lifetime value (LTV). Current consumers prioritize convenience and expect interacting with their pharmacy to be easy and painless, especially post-pandemic.

Furthermore, beyond a consumer-centric focus, pharmacies should also build out holistic offerings. As the industry shifts from traditional brand-name drugs to specialty drugs over the coming years, pharmacies must make it an operational imperative to ensure profitable operations across holistic offerings. This opportunity will also enable pharmacies to create differentiation from the competition and drive pricing power, if done ­correctly.

Finally, pharmacies have been at the continued mercy of PBMs, pre- and post-COVID. Pharmacies should incubate different ways to interact with the value chain to reduce the decline in profitability. For example, Blue Shield in California and Intermountain have announced unique ways that they will forgo or work around PBMs, creating differentiation while controlling costs, dispensing and pharmacy-related care. In addition, as cash and discount card customers grow, pharmacies should be prepared to establish a relationship directly with the ­consumer.

The pharmaceutical value chain can expect continued growth in both revenue and profits. As we look to 2026, will the same trends continue to drive inequality across the sector, or will the industry reach an equilibrium? The landscape of health care continues to shift — how are you navigating it?

The authors would like to thank Mary-Catherine Cochrane and Olugbenga Olatunji for their contributions to this article.

Todd Huseby is a partner in the health care and life sciences ­practice at Kearney, which is a global strategy and management consulting firm. He can be reached at todd.huseby @kearney.com. Mike Piccarreta is a partner in the health care and life sciences practice at Kearney. He can be reached at [email protected]. DJ McKerr is a ­principal in the health care and life sciences practice at Kearney. He can be reached at dj.mckerr@­kearney.com.


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