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2. Definitions
(a) Sales (SALES)—aggregate sales of a company’s
complete product offering.
(b) Cost of goods sold (COGS)—also referred to as
materials and production cost. Cost of goods sold is
an aggregate figure that includes all costs incurred in
producing the goods including write-offs from plant,
property and equipment, raw materials, inventory, etc.
(c) Research and development expense (R&D)—research
and development expenses that are separate from the
cost of goods sold.

3. Definitions
(d) Selling, general,and administrative expense (XSGA)—
these expenses provide for sales, marketing, as well as
general expenses incurred by the product pipeline.
XSGA provided by the WRDS database includes
salaries, rent, and research and development (R&D)
cost. In this study, R&D and general expense were
treated as separate categories.
(e) General expense = XSGA − R&D.
(f) Taxes—taxes paid by the company.

4. Definitions
(g) Depreciation—the steady loss in the value of capital
goods over a specified time period.
(h) Operating income (after depreciation and taxes)—
profits after depreciation and taxes; these are company
earnings from core operations after deducting the cost
of goods sold, and selling and general operating
expenses.
Operating income = Sales - COGS – XSGA -Depreciation -
Taxes

5. Methods
The data used in this work were extracted from the annual
reports of the pharmaceutical companies studied. The
selected companies, based on annual revenues for the year
2005Brand-name pharmaceutical companies are the
original developers of the drugs and have annual revenues
of at least $10 billion.
Generic pharmaceutical companies manufacture off-
patent drugs, with typical annual revenues of less than $5
billion.
Biotech pharmaceutical companies are the original devel-
opers of drugs made through biosynthetic processes.

6. Selected Companies

7. Key Observations
the average COGS as a percentage of
sales, is almost half the arithmetic average for COGS as a
percentage of sales for generics and roughly double that of
biotechs. The higher value of COGS as a percentage of
sales for generics is possibly a reflection of lower
expenditure on R&D and sales, and marketing for the
generic industry. However, it is also quite revealing to
realize that the COGS% is significantly lower for biotechs.

8. COGS %

9. R&D%

10. Operating Income

11. Key Observations
The trend for brand-name companies is
flat, The trend for generics shows more fluctuations
compared to the brand-name companies, The average
value of general expense for biotechs is slightly higher that
that of generic but lower than that of brand-name
companies. Biotech drugs are unique, have less
competition from similar (me- too) drugs in the market,
and treat specific unmet needs.
Therefore, the biotechs may not require as much
marketing and sales effort as do brand-name companies.

12. General Expenses

13. Relationship Between COGS, R&D, Operating Income, and General Expense
For brand names, COGS per unit sales showed a significant
decrease, while R&D per unit sales displayed a significant
increase during 1994 to 2005. Moreover, COGS% was
found to be negatively correlated with R&D% across time,
suggesting that the cost savings associated with a reduced
COGS may have been budgeted for increased expenditure
on research and development for the discovery of new
therapies. This work did not consider alternative
hypotheses for increased R&D expenditures during the
period studied.

14. Relationship Between COGS, R&D, Operating Income, and General Expense

15. Relationship Between COGS, R&D, Operating Income, and General Expense
For generics, COGS% showed a significant decrease,
while operating income showed a significant increase
over the years. COGS% was found to be strongly
negatively correlated to operating income. Generics are
not involved in the discovery of new therapies, so their
R&D expenditure is likely more geared toward devel-
oping formulations of already approved drugs whose
patents are about to expire. Thus, for generics, the
savings from COGS is probably not invested in
research and appears to result in increased profits.

16. Relationship Between COGS, R&D, Operating Income, and General Expense

17. Relationship Between COGS, R&D, Operating Income, and General Expense
For biotechs, most of the factors studied do not show a
significant change over the years except for depreciation.
Fluctuations were found in the data compared to brand
names andgenerics, but the datafailedtoshowany trend.
Interestingly, depreciation is significant for these compa-
nies, which might be an effect of the high capital
investment required to manufacture biotech products.

18. This Presentation Is Based On: Analysis of Manufacturing Costs in Pharmaceutical Companies
J Pharm Innov (2008) by: Prabir Basu & Girish Joglekar & Saket Rai & Pradeep Suresh & John Vernon
Reference: