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Drug Companies Have Big R&D Expenses and Still Make Large Profits

Pharmaceutical companies have come under harsh criticism over how much they charge, whether hiking prices on long-existing drugs, trying executive pay to drug prices, or making critical medicines difficult to afford by those who depend on them.

Drugmakers historically have blamed higher prices on the costs of research and development. And it is true that R&D is expensive, with companies typically spending more than they ultimately make in profits, according to Axios.

But such figures can be misleading. Marketing costs have grown substantially, according to an article in the Journal of the American Medical Association. Between 1997 and 2016, industry spending on marketing grew from $17.7 billion to $29.9 billion, largely owing to direct-to-consumer ads and marketing to health professionals to promote medicines.

Also, industry publications like Pharmaceutical Executive and notes from tax experts stress the ability for companies to take advantage of federal and state R&D tax credits, which can significantly reduce tax liabilities.

As a result, even with major R&D spending, pharmaceutical companies remain highly profitable. They have the tenth highest average after-tax profit levels of more than 100 different industries. And according to figures from Axios, while drug companies bring in 23% of health care’s U.S. revenue, they make 63% of the total profits.