Healthcare Revenues

[caethan]

So there's been a lot of discussion about healthcare reform in the last several months. One of the major arguments is about healthcare innovation: opponents of a single-payer system argue that most healthcare innovation is driven by the profitable U.S. market, and that if the U.S. switches systems, the profitability of healthcare innovation could

Comments

[ferventsquirrel]

Thanks for looking this stuff up. I think it's a great service to everyone.

A question, regarding the innovation angle: Have you seen any information regarding how much revenue comes from products that are new (i.e., products where the patent is still in force) vs. revenue from continuing sales of old technologies? I think you need to remove generics/old technologies from the revenue calculation to properly evaluate the profitability of healthcare innovation.

[caethan]

I saw some breakdowns of newer and older drugs in a couple of the company's reports, but I didn't see subsections for U.S. and International markets. I'll go back through and check. But yeah, you're right, that'd be useful to have.

[caethan]

OK, I pulled out a breakdown for GlaxoSmithKline, as they have a particularly detailed financial report. I basically went through their drug list, looked for ones that were still on US patent, and summed the sales for just those drugs in separate markets. Results:

GSK Total Revenue: 45,112 mUSD, 40.02% in the US market
GSK Pharm Revenue: 37,756 mUSD, 43.64% in the US market
GSK 'new' Revenue: 19,272 mUSD, 53.39% in the US market

So there's a shift, but not a dramatic one when you restrict yourself to looking at on-patent drugs.

[a_napoleon]

I think what you really want to be looking at is free cash flow, because the revenues only represent money coming in and not necessarily where it goes from there. Free cash flow (=profit + depreciation/amortization - capital expenditures(aka purchase of property, plant, & equipment)) will be a much better proxy of what the company has to work with every year for new research etc. What would be really nice (but probably difficult to obtain) would be the percentage of each company's free cash flow (or maybe just profits) that comes from sales to the US market (in a similar vein to the statistic that I have heard, unverified, that 125% of MSFT's profits come from Office).

Specifically I would be interested in a correlation the 'innovation' of a company (be it total research budget, number of patents, etc.) each year to its percentage of profits from the US. If you could show that these were correlated across a wide range of companies then you would have a solid answer.

[caethan]

Hmm... that might be useful. So would you suggest breaking down depreciation & capital expenditures in the U.S. and Intl. markets too? And how exactly would one calculate the free cash flow? I'm not sure I understand the breakdown.

[caethan]

I've been trying to find profit breakdowns since you mentioned them, and I just can't find any publicly available information about them. I've gone through Pfizer information pretty thoroughly, including 2008 annual and quarterly reports, shareholder meeting presentations, and SEC filings, and the only breakdown for U.S. and Intl. markets is in revenues. Sorry. :(

[caethan]

Finally found something for Pfizer --- breakdowns of income from continuing operations before taxes and minority interests:

2008 -
Total 9,694 U.S. (1,760) Intl 11,454
2007 -
Total 9,278 U.S. 242 Intl 9,036
2006 -
Total 13,028 U.S. 3,266 Intl 9,762

So, percent of income from the U.S. market in the last three years is -18%, 3%, and 25%.

Now, they do mention some mitigating factors - 2008 is negative because of a 2.3 billion settlement with the USDoJ. Still, I'm pretty comfortable saying now that the argument that pharma is so dependent on U.S. profits that they'll lose all their profits if we change systems (I've seen assertions that >80% of pharma profits come from the U.S.) is, frankly, a load of horseshit.

[ferventsquirrel]

OK, here's a (probably wrong) calculation based on the numbers you've posted for sanofi-aventis at the bottom of the worksheet, which I take to be the numbers for drugs that still have patents. I'm making a lot of assumptions that probably aren't justified, but I'm seeing where it takes me

[petefred]

Awesome... thanks for putting this together! I've been wondering about the same issue, but didn't actually get around to looking up the data. I've added a couple more companies below, along with some world population proportions to give a sense of perspective

[petefred]

(D'oh, I just realized I didn't post the full set of numbers you needed for your spreadsheet last night... I'll check those for the companies I posted in a couple hours)

[petefred]

As a followup to Joe's comment... one of the other interesting things to know, from a health care policy standpoint, would be the magnitude of the various country specific drug approval expenses. I know from talking to friends and family in pharma that clinical trial expenses are a major barrier to what drugs a company will actually try to move forward with (since they set a minimum for the earnings needed for a drug to turn any kind of profit). While R&D expenses (and possibly manufacturing) don't really make sense to break down by country/region, approval and sales expenses do. Unfortunately I couldn't find such breakdowns in either of the reports that I was looking at

[petefred]

(I'd also like to clarify one thing from last night -- in point (a), I don't mean "reasonable" in the normative sense, but rather, at what point do we accept or reject the proposition that the US provides so much of the revenue that altering our health care system would stunt drug development. Unfortunately it doesn't sound like we're able to get enough information on regional breakdowns of regulatory, infrastructure, and sales expenses to give a good quantitative answer)