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A Tidy Drug Induced Profit

The high cost of drugs is a flashpoint these days. Consumers claim the drug companies are gouging. The pharmaceutical companies blame the high costs on international price controls and the excessive expense and risk associated with bringing new drugs to market.

I don't profess to have done enough research to take a definitive position. My suspicion is the drug companies are taking advantage of consumers. That suspicion was bolstered by the latest earnings reports from some of the leading drug companies.

Novartis, Switzerland's leading pharmaceuticals group, reported its second quarter results yesterday and I clearly went into the wrong business. The company's profits increased 18% to $1.55 billion from the previous year. The company's sales registered a 12% gain to $6.97 billion from $6.2 billion in the second quarter of 2003.

Novartis said profit rose more than sales due to productivity gains, lower expenses for marketing, and the lower cost for research and development of new medicines.

Doing some simple math reveals a clue as to whether drugs are fairly priced. Dividing revenue by profits yields after tax margin. In the case of Novartis that number is 22%. I have news for you. That's a very high number. I don't know many businesses that yield a 22% after tax margin.

Merck & Company's earnings may have declined 5.3% but executives at that company won't be applying for food stamps. Net income was $1.77 billion on revenues of $6.02 billion. Drum roll pleae... that's an after tax margin of 29.4%

At Wyeth Pharmaceuticals earnings also declined. Maybe drugs are too cheap. The company reported $827.3 million in earnings on $4.22 billion in sales. That yields an after tax margin of 19.6% Seems a pattern is developing.

In contrast Dell Computer, one of the world's top technology companies is expecting earnings of about $780 million on revenue of $11.7 billion for the quarter ending July 30. That's an after tax margin of 6.7%

At MGM Mirage, one of the world's largest and most successful hotel and gaming companies, business is good but not as good as selling drugs. They reported a doubling of net income to $104.7 million on $1.07 billion in revenue. That's an after tax margin of 9.8%

One last industry: automotive. General Motors reported a 49% increase in profits for its most recent quarter. Not bad. Except that the increased profits didn't come from selling cars but financing them. Oh well, you take it where you can get it. The world's biggest automaker recorded second-quarter net income of $1.34 billion on sales of $49.1 billion. That's an after tax margin of 2.7%. Wow, the car business really sucks.

Can't say the same for the drug business legal or otherwise. Me thinks the pharmaceutical companies might be a tad greedy. Perhaps the government should turn its attention to combating the legal drug trade versus the illegal one. Or conversely, convince illegal drug dealers to go straight and work for the pharmaceutical companies. I bet the after tax margin is better.
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