FDA generally considers drugs approved  either as new molecular entities or new therapeutic biologics to be  “novel” drugs—products that are often innovative and serve previously  unmet medical needs or otherwise significantly help to advance  patient care and public health. Drug Industry Profit Margins and Merger and Acquisition Deal Values Increased, and the Industry Underwent Structural Changes

Among the worldwide drug companies included in the data we reviewed,  reported pharmaceutical and biotechnology revenues and profit margins  for most companies grew from 2006 through 2015. Company-Reported Revenues and Profit Margins Grew from 2006 through 2015

According to the data we reviewed, between 2006 and 2015 estimated  aggregate worldwide pharmaceutical and biotechnology sales revenue for  drug companies grew from $534 billion to $775 billion in real 2015 dollars  (about 45 percent), with most of the growth occurring between 2006 and  2011. As  a broader comparison, the average profit margin among the largest 500  companies was consistently lower than the average among the largest 25  drug companies and software companies. The largest 10 companies (by 2014 pharmaceutical  revenue) had 48.9 percent of the drug industry’s sales revenue in 2007;  by 2014, their share of the industry sales revenue declined to 38.2  percent. Industry Experts Noted Market Pressures Have Driven Structural Changes in the Industry, Such as in the Types of Acquisitions and Increased Specialization in Therapeutic Areas

Experts we interviewed noted that market pressures such as rising R&D  costs, fewer drugs in the R&D pipeline, and the growth in sales of generic  drugs have driven various structural changes in the drug industry, such as  in the types of acquisitions being sought. Industry spending focused on drug development rather than  earlier-stage research, whereas direct federal spending, such as through  NIH grants, funded a greater amount of basic research. Biologics and  orphan drugs accounted for an increasing share of new drug approvals  from 2005 through 2016. Pharmaceutical Company- Reported Research and Development Spending Increased Slightly, While Federally Funded Spending Decreased Slightly, from 2008 through 2014

Our analysis of industry survey data from NSF indicate that worldwide  R&D spending by U.S.-owned pharmaceutical companies and U.S.-based  R&D by foreign companies increased slightly (8 percent) in real dollars  from $82 billion in 2008 to $89 billion in 2014, the years for which  comparable data were available (see fig. Estimates of this spending are much smaller than  those for industry and federal agencies. Federal Tax Provisions Encourage Drug R&D, with Claims for the Orphan Drug Credit Increasing Sharply

Similar to the R&D spending trend identified above from the NSF data,  various IRS tax data consistently indicate that drug R&D activities did not  change significantly—with the exception of the orphan drug credit, which  over time increased sharply. Novel Drugs Consistently Accounted for About Thirteen Percent of New Drugs Approved in the United States from 2005 through 2016, and Biologics and Orphan Drugs Each Grew as a Share of Approvals

The number of approvals for drugs FDA considered novel drugs  increased from 20 in 2005 to 45 in 2015 but declined to 22 approvals in  2016, according to FDA data and reports (see fig. Novel drugs  accounted for between 8 and 18 percent of all drug approvals each year  and averaged 13 percent over the period. Certain empirical economic studies suggest that  mergers among brand-name drug companies can negatively impact  companies’ innovation post-merger. However, empirical  studies we reviewed suggest that less competition—that is, a more highly  concentrated market—is associated with higher drug prices, particularly  for generic drugs. We also identified several merger retrospective studies. Agency Comments

We provided a draft of this report to the Department of Health and Human  Services, FTC, IRS, and NSF for review. These agencies provided  technical comments, which we incorporated as appropriate. Appendix I: Scope and Methodology

This appendix provides further details on our scope and methodology in  addressing each of our three reporting objectives, which are to describe:  (1) how the financial performance and structure of the drug industry have  changed over time; and (2) how reported research and development  spending and new drug approvals have changed; and (3) what is known  about the potential effects of consolidation on drug prices and new drug  development. To provide a comparison, we followed the  same procedure to obtain data for software companies over the same  period. We also examined publicly available industry reports and generic drug approvals  data for discussion of concentration across different therapeutic areas. Interviews

To inform our understanding of the drug industry for all three objectives  including structural changes that have taken place, reasons for  consolidation trends, drivers of drug company R&D investment trends,  and any impacts of consolidation on drug price or innovation, we  interviewed drug industry experts including three drug trade associations,  four advocacy organizations, two financial ratings agencies, and officials  from the FDA, IRS, NSF, Federal Trade Commission (FTC), and NIH. “Generic Competition and Drug Prices.” 2015.
Why GAO Did This Study

Retail prescription drug expenditures were estimated to account for about 12 percent of total personal health care service spending in the United States in 2015, up from about 7 percent through the 1990s. Much of this growth was driven by use of expensive brand-name drugs, but price increases have been reported for some generic drugs as well. Prior GAO reports have identified multiple reasons for drug price increases, including limited competition. Experts have questioned whether consolidation among drug companies could reduce competition and R&D investment in new drugs.
GAO was asked to examine changes in the drug industry. This report describes: (1) how the financial performance and structure of the industry have changed over time, (2) how reported R&D spending and new drug approvals have changed, and (3) what is known about the potential effects of consolidation on drug prices and new drug development. GAO analyzed Bloomberg drug industry financial data for 2006 through 2015, and examined select publicly available estimates of company market shares for 2014 and market shares for certain therapeutic classes for 2016. GAO also analyzed estimates of company self-reported R&D spending and federal funding for biomedical R&D data, aggregate tax credit claims data, and drug approval data for the same approximate time period. All data were the most current available. In addition, GAO also reviewed published research and interviewed federal agency officials, economists, and representatives from industry and advocacy groups.

What GAO Found

GAO's analysis of revenue, profit margin, and merger and acquisition deals within the worldwide drug industry from 2006 through 2015 identified key trends:
Estimated pharmaceutical and biotechnology sales revenue increased from $534 billion to $775 billion in 2015 dollars.
About 67 percent of all drug companies saw an increase in their annual average profit margins from 2006 to 2015. Among the largest 25 companies, annual average profit margin fluctuated between 15 and 20 percent. For comparison, the annual average profit margin across non-drug companies among the largest 500 globally fluctuated between 4 and 9 percent.
The number of reported mergers and acquisitions generally held steady during this period, but the median disclosed deal value increased.
The largest 10 companies had about 38 percent of the drug industry's sales revenue in 2014. However, concentration was higher for narrower markets, such as for certain drugs in the same therapeutic class. In addition, experts noted that market pressures such as rising research and development (R&D) costs, fewer drugs in development, and competition from generic drugs, have driven structural changes in the industry such as increased use of acquisition by large drug companies to obtain access to new research.
From 2008 through 2014, worldwide company-reported R&D spending, most of which went to drug development (rather than research), increased slightly from $82 billion to $89 billion in 2015 dollars. During the same period, federal spending, which funded a greater amount of basic research relative to industry, remained stable at around $28 billion. In addition to grants, several federal tax provisions provided incentives for industry R&D spending, including the orphan drug credit, available for companies developing drugs intended to treat rare diseases, which increased more than five-fold from 2005 through 2014. Pertaining to drug approvals, the total number of new drugs approved for marketing in the United States fluctuated between 2005 and 2016, ranging from 179 to 263 drug approvals annually. Novel drugs—innovative products that serve previously unmet medical need or help advance patient care—accounted for about 13 percent of all approvals each year. Biologics—drugs derived from living rather than chemical sources—and orphan drugs accounted for growing shares of drug approvals, reflecting market and policy incentives to invest in these areas, according to experts GAO interviewed.
Research GAO reviewed indicates that fewer competitors in the drug industry are associated with higher prices, particularly for generic drugs. Research also suggests that drug company mergers can have varied impacts on innovation as measured by R&D spending, patent approvals, and drug approvals. Certain merger retrospective studies have found a negative impact on innovation.
The Department of Health and Human Services, Federal Trade Commission, Internal Revenue Service, and National Science Foundation provided technical comments on a draft of this report, which we incorporated as appropriate.