Health (1 of 3)

Pharma, biotech and medtech

About 10 minutes to read in full, or 1 minute for the short version belowFacts checked 30 September 2026

In one minute

Companies that invent, test, make and sell medicines and medical devices, from pills and vaccines to heart stents and scanners.

The big idea: A new medicine takes a decade or more and many failures to reach patients, and a patent then gives its maker a limited number of years to earn that cost back before cheap copies arrive. So the whole industry runs on four numbers: how many patients can be treated, the net price payers accept, the years of protection left, and the chance the science works. (This brief explains the business; it is not medical advice.)

One unit, in numbers: One patient treated for one year: EUR 12,000 comes in, and EUR 4,000 (33%) is left after its own costs.What is left is the unit's contribution, before the costs of the whole company. See the worked example
Typical margin: About 30 percent operating margin for large pharma; about 15 percent for medtech; many biotechs lose moneyRoughly how much of every 100 of sales (or income) is left as profit after the running costs. More on margin
Capital intensity: MediumA fair amount of money is tied up, in things like stores, stock or equipment. More on capital intensity
The number to watch: R&D as a share of salesHow much of each unit of revenue goes back into research for future medicines.

Ask this first in a case

Which business model are we in: branded, generic, biotech licensing, contract services or devices?

Words used above (1)

Generic:: A copy of a chemical (small molecule) drug sold after its protection ends.

The industry's other words are explained in Words to know (11).

On this page (17 sections)

How money is made

Branded medicines: patients treated times net price per year, for the years left before loss of exclusivity.
Generics and biosimilars: high volumes of low-price copies, often won in public or hospital tenders once protection ends.
Licensing: a biotech sells the rights to its drug for an upfront payment, milestone payments at steps such as approval, and royalties on sales.
Contract services: CROs earn fees per trial and CDMOs earn fees per batch they make for other companies.
Medical devices: equipment sales plus consumables used in every procedure and service contracts on the installed base (the machines already in hospitals).
Over-the-counter and consumer health: medicines sold without a prescription, earning like consumer goods through brand and distribution.

Worked example: one unit

Unit economics means the money in and out for one unit of the business. Start from the revenue, take away the unit's own costs, and what is left is its contribution. More on unit economics

The unit: One patient treated for one year with a patented medicine in Europe (fictional drug, rounded figures). Illustrative, rounded figures.
Line	Amount	ShareShare of revenue
Net price per patient per year, after discounts and rebates	EUR 12,000	100%
Minus Making the medicine (ingredient, finished dose, packaging, cold chain)	EUR 1,800	15%
Minus Sales, marketing and medical teams	EUR 2,700	23%
Minus Research and development to fund the next drugs	EUR 2,500	21%
Minus General and administrative costs	EUR 1,000	8.3%
What is left (contribution)	EUR 4,000	33%

Check: EUR 12,000 minus EUR 8,000 of costs leaves EUR 4,000.

So what: Making the medicine is only 15 percent of the net price, so every extra patient reached adds most of the price to profit; the lever is patients treated times net price, for the years of exclusivity left. When copies arrive the same patient earns almost nothing, because generic prices can fall more than 95 percent below the brand price.

Key measures(9)

Key measures (also called KPIs, key performance indicators) are the numbers people in this industry track. Ask for the first one or two early in a case.

R&D as a share of sales
How much of each unit of revenue goes back into research for future medicines.
Typical: About 21 percent for US-listed pharma, about 43 percent for listed biotechs, about 7 percent for medtech[1]
Probability of success by phase
The chance that a drug in a given trial phase moves to the next step; multiplied together they give the chance of approval.
Typical: Phase I to II about 52 percent, Phase II to III about 29 percent, Phase III to filing about 58 percent, filing to approval about 91 percent; about 8 percent from Phase I to approval (2011 to 2020)[2]
Cost to develop one approved drug
All research spending per approved drug, including the failures and the cost of money tied up for years.
Typical: About USD 2.6 billion in 2013 dollars in one widely cited study; other studies give lower figures, so treat it as an order of magnitude[3]
Peak sales
The highest yearly sales a drug is expected to reach, usually several years after launch; a "blockbuster" is a drug selling USD 1 billion or more a year.
Loss of exclusivity (LOE) date and the patent cliff
When patents and data protection end and copies can enter; a patent cliff is several big products losing protection close together. Glossary: Loss of exclusivity (LOE) date and the patent cliff
Typical: Estimates disagree because they measure different things: IQVIA expects more than USD 90 billion of US sales (at net prices) to lose exclusivity from 2025 to 2029, while Evaluate counts more than USD 300 billion of prescription drug revenue losing exclusivity from 2025 to 2030 on a wider measure[6]
Generic price erosion
How far prices fall once copies enter, which depends on how many competitors there are.
Typical: About 39 percent below the old brand price with one generic maker, about 79 percent with four, more than 95 percent with six or more (US)[4]
Gross-to-net
The gap between the list price and the net price the company keeps after discounts and rebates; always work with net price in a case. Glossary: Gross-to-net
Market access
The share of eligible patients whose payer covers the drug.
Installed base and consumables per procedure (medtech)
How many machines are in use at customers, and the single-use items sold each time one is used; together they make recurring revenue.

First questions to ask

When a case lands in this industry, these questions get you to the numbers that matter.

Which business model are we in: branded, generic, biotech licensing, contract services or devices?
How many patients can be treated: prevalence, diagnosed, treated and eligible for this product?
What net price will payers accept, and who pays in this country?
How many years of exclusivity are left, and what happens at loss of exclusivity?
For anything still in development, what is the probability of success from its current phase?

Value chain: where the margin sits

The value chain is the steps a product or service passes through, from the first supplier to the customer. Each step below shows how much of the value it keeps. More on value chains

Step 1: Discovery and early research
Margin varies
Biotech start-ups, university labs and the research arms of large pharma companies
Most early-stage biotechs earn nothing yet; they live on investor money or licensing deals.
Step 2: Clinical trials in people (Phase I, II and III)
Medium margin
The drug owner (the sponsor), often using contract research organizations (CROs) such as IQVIA, ICON or WuXi AppTec
CROs earn fees per trial. For the sponsor this step is pure cost and risk: only about 8 in 100 drugs entering Phase I are approved.
Step 3: Approval, pricing and reimbursement (market access)
Margin varies
The sponsor, with regulators (FDA, EMA, CDSCO, SFDA, HSA) and payers or health technology assessment bodies (NICE in England, the benefit assessment in Germany)
A gate, not a business: approval says the drug is safe and works; a separate decision sets whether anyone pays and at what price.
Step 4: Branded medicine sales during exclusivity
Fat margin
Research-based pharma and successful biotechs (for example Lilly, Novo Nordisk, Roche, AstraZeneca)
US-listed pharma companies average an operating margin of about 30 percent.
Step 5: Active ingredient and contract manufacturing
Medium margin
Ingredient makers (many in India and China) and contract development and manufacturing organizations (CDMOs) such as Lonza, Samsung Biologics and WuXi Biologics
Profit depends on how full the plants are and on a clean inspection record.
Step 6: Generics and biosimilars after protection ends
Thin margin
Generic makers such as Sun Pharma, Cipla, Teva and Sandoz; biosimilar makers such as Celltrion
With six or more competitors, generic prices can be more than 95 percent below the old brand price.
Step 7: Wholesale distribution
Thin margin
Wholesalers such as McKesson, Cencora and Cardinal Health (US), and national wholesalers elsewhere
Huge volumes on a very small margin: US-listed healthcare support services companies, the group that includes these wholesalers, average an operating margin of about 3 percent.
Step 8: Pharmacies, hospitals and the patient
Thin margin
Retail and hospital pharmacies, doctors who prescribe, and patients who take the medicine
Adherence (taking the medicine as prescribed) decides how much of the treated population turns into repeat sales.

Profit pool: who keeps the money

Where in the value chain the profit ends up, which is often not where most of the sales are. More on profit pools

Most of the profit sits with the owners of patented medicines during their years of exclusivity, because the price reflects the medical benefit and the research, not the cost of making the pill. Generics, wholesalers and pharmacies move far more volume on thin margins, and contract research and manufacturing earn steady fees in between. After loss of exclusivity the profit pool for that molecule largely disappears.

Cost structure(4)

The main costs, each as a share of revenue (the money from sales).

Cost of goods sold (making the product): About 28 percent of sales for pharma; about 46 percent for medtech[1]
Research and development: About 21 percent of sales for pharma; about 43 percent for listed biotechs; about 7 percent for medtech[1]
Selling, general and administrative: About 22 percent of sales for pharma; about 30 percent for medtech[1]
Discounts and rebates to payers (the gross-to-net gap, taken before net revenue): Varies widely by drug and country. One example of how big the gap can be: Medicare's negotiated 2026 prices for its first 10 drugs in the US were 38 to 79 percent below their 2023 list prices[9]

Benchmarks(6)

Typical figures for the industry, to check a client's numbers against.

Operating margin, US-listed pharma: About 30 percent[1]
Operating margin, US-listed biotech: About 9 percent on average, with an average net margin of about minus 5 percent[1]Many biotechs have no product on sale yet, which pulls the average down.
Operating margin, US-listed medtech and healthcare products: About 15 percent[1]
Operating margin, healthcare distribution and support services: About 3 percent[1]
Generics in the US: About 90 percent of prescriptions filled but about 12 percent of drug spending (2024)[5]
India in world generics: About 20 percent of the world's generic medicines, according to India's government[7]

Typical cases(8)

Case prompts you might hear in this industry.

Should we launch this new drug in Germany, and at what price?
Our biggest drug loses its patent next year. How do we protect revenue?
Should we buy this biotech with one drug in Phase II?
A generic maker's margins are falling. Why, and what should it do?
Should a device maker enter India or Saudi Arabia?
Should our biotech license its drug to a large partner or develop it alone?
How can we recruit patients into our clinical trials faster?
How big is the market for a new diabetes treatment in the Gulf?

Common traps(6)

Mistakes candidates make in this industry, and what to do instead.

Treating the doctor as the only customer. The patient uses it, the doctor chooses it and a payer pays for it; win all three.
Using list price instead of net price. Ask for the price after discounts and rebates.
Forgetting that most drugs in development fail. Multiply any value by the probability of success from the current phase.
Mixing up approval with reimbursement. Approval says the drug may be sold; a separate decision says whether anyone pays.
Applying US prices to other countries. Prices elsewhere are usually much lower, so size each market with its own net price.
Reaching for a generic framework instead of the real driver of this industry. Instead, value the pipeline as peak sales times the probability of success at each phase, and check net price and the loss of exclusivity date.

What changed, 2024 to 2026(6)

Recent changes a case could turn on.

Obesity and diabetes medicines became the biggest growth story: Lilly reported 2025 revenue of USD 65.2 billion, up 45 percent, led by its tirzepatide medicines (sold as Mounjaro and Zepbound). Supply, price cuts and new rivals are the open questions.[8]
US drug pricing changed: Medicare's first negotiated prices for 10 drugs took effect on 1 January 2026, at 38 to 79 percent below list price. A launch or pricing case in the US now has to ask whether the drug could be picked for negotiation.[9]
China became a major source of new drugs: Chinese companies signed a record of about USD 136 billion of out-licensing deals (selling the rights to their drugs to foreign companies, with most of the money paid only if later milestones are reached) in 2025, up from about USD 52 billion in 2024. At the same time the US BIOSECURE Act, law since December 2025, limits federal agencies and their contractors from buying from certain Chinese biotech suppliers.[11]
A large patent cliff is coming: Merck states that the main US compound patent on Keytruda, its biggest cancer drug, expires in December 2028, and many other big drugs lose protection before 2030 (see the patent cliff measure above for the size estimates, which disagree).[15]
Europe is rewriting its rules: EU institutions reached a provisional deal in December 2025 to reform pharmaceutical law, including how long trial data is protected, and the deadline to move devices to the stricter Medical Device Regulation was extended to 2027 or 2028 depending on risk class.[16]
Tariffs and "most favored nation" deals: on 30 September 2025 Pfizer became the first drugmaker to agree a pricing deal with the US government, linking some US prices to the lowest prices in other rich countries in return for a three-year grace period from threatened tariffs. Pfizer also pledged an extra USD 70 billion for US research, development and factories.[10]

Players by region(7)

Well-known companies in each region. You do not need to learn them by heart; they help you picture the market.

Global: Pfizer, Merck & Co., Johnson & Johnson, AbbVie, Lilly (US)
Roche, Novartis (Switzerland)
AstraZeneca, GSK (UK); Sanofi (France); Novo Nordisk (Denmark)
Medtronic, Abbott, Stryker (medical devices)
Europe: Siemens Healthineers, Philips (medical devices and imaging)
Lonza (Switzerland, contract manufacturing)
Sandoz (Switzerland, generics and biosimilars)
United States: McKesson, Cencora, Cardinal Health (wholesale distribution)
IQVIA (clinical research and data)
Many venture-backed biotechs, often around Boston and San Francisco
India: Sun Pharma, Dr. Reddy's Laboratories, Cipla, Lupin (generics and specialty medicines)
Serum Institute of India (vaccines)
Middle East: Hikma (listed in London, with roots in Jordan)
SPIMACO (Saudi Arabia)
Julphar (UAE)
China: Jiangsu Hengrui (medicines)
WuXi AppTec and WuXi Biologics (contract research and manufacturing)
Mindray (medical devices)
Southeast Asia: Kalbe Farma (Indonesia, medicines and consumer health)
Pharmaniaga (Malaysia)
Zuellig Pharma and DKSH (distribution of medicines across the region)

Words to know(11)

Linked words have a fuller entry in the glossary.

Pipeline: The drugs a company is developing, listed by trial phase.
Phase I, II, III: The three stages of trials in people: safety and dose, then whether it works, then large trials against current treatment.
Loss of exclusivity (LOE) (glossary entry): The moment patents and data protection end and copies may enter.
Generic: A copy of a chemical (small molecule) drug sold after its protection ends.
Biologic and biosimilar: A biologic is a large-molecule medicine made in living cells; a biosimilar is a close copy of one.
Gross-to-net (glossary entry): The gap between list price and the net price a company keeps after discounts and rebates.
Health technology assessment (HTA): A review of whether a medicine is worth its price, used by payers to decide coverage.
CRO and CDMO: Contract research organizations run trials for others; contract development and manufacturing organizations make medicines for others.
Blockbuster: A drug with sales of USD 1 billion or more a year.
Installed base (glossary entry): The devices already in use at customers, which drive sales of consumables and service.
Formulary: The list of medicines a hospital or payer has approved for use or coverage.

Business model patterns

The ways of making money this industry follows. Spot the pattern in a new industry and you already know the first questions to ask.

Moves common in this industry

Sources(16)

Facts checked on 30 September 2026. Worked examples are illustrative, shaped by these sources rather than one company's figures.

Go deeper and practise

Go deeper

The full lessons behind this brief, with sources and worked cases.

Practise it

Same pattern elsewhere

Industries that make money in a similar way. What you learned here carries over.

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