Revenue models, cost structure, unit economics and operations
How branded pharma, generics, biotech, contract manufacturers and medtech make money, what their costs look like, and the key metrics, with a launch and a licensing deal worked through.
Industry brief, with a one-minute summary: Pharma, biotech and medtechFirm processes and online tests change from year to year and differ by office. Use this to prepare, and confirm the exact current steps on the firm's own careers page.
Key takeaways
- A branded medicine earns patients times net price times years of protection; generics earn thin margins on huge volumes; device makers earn on their installed base and the consumables that go with it.
- Active ingredients. A few countries make a large share of the world's active pharmaceutical ingredients (APIs) and generics.
- Quality. Factories must follow Good Manufacturing Practice (GMP) and pass inspections by regulators such as the FDA.
- Cold chain. Many biologics and vaccines must be kept cold, often between 2 and 8 degrees Celsius, all the way from the factory to the patient.
Key idea
A branded medicine earns patients times net price times years of protection; generics earn thin margins on huge volumes; device makers earn on their installed base and the consumables that go with it.
| Model | Who earns this way | How revenue is made | What drives profit |
|---|---|---|---|
| Branded (patented) medicines | Large research-based pharma, successful biotechs | Patients treated x net price per year, for the years of exclusivity | Benefit over current treatment, payer coverage, years left before LOE |
| Generics | Generic makers (many in India, also in Europe, Israel and the US) | High volumes at low prices, often won in public or hospital tenders | Cost of making, speed to launch when protection ends, number of competitors |
| Biosimilars | Specialist biologic makers | Discounted copies of biologics | Manufacturing scale and quality, willingness of doctors and payers to switch |
| Licensing and partnering | Biotechs licensing to larger companies | An upfront payment, milestone payments when the drug reaches steps such as approval, then royalties on sales | Quality of the science, deal terms |
| Contract research and manufacturing (CRO, CDMO) | Service companies that run trials or make drugs for others | Fees per project or per batch | Capacity utilization, quality record, scale |
| Medical devices | Device makers | Equipment sales, consumables used in each procedure, service contracts | Installed base, procedure volumes, product upgrades |
| Over-the-counter (OTC) and consumer health | Brands sold without a prescription | Retail sales, much like consumer goods | Brand, distribution, marketing |
So-what
Ask first which model the client uses. A generic maker and a branded maker face opposite problems.
Gross-to-net. The list price of a medicine is rarely what the company receives. Payers negotiate discounts and rebates, and governments set or cap prices. The gap between list price and the net price the company keeps is called gross-to-net. In the US the gap is large for many medicines. Always work with net price in a case.
| Line | Pharmaceutical companies (percent) | Healthcare products, mostly medtech (percent) |
|---|---|---|
| Cost of goods sold | 28.3 | 46 |
| Research and development | 20.9 | 7.2 |
| Selling, general and administrative | 21.9 | 29.8 |
| Operating margin before tax | 29.5 | 15.3 |
Source: Aswath Damodaran, NYU Stern, US data as of January 2026. Approximate; columns may not add to exactly 100 because of other items and rounding. Biotech averages are not shown because many biotechs have little or no revenue yet, which distorts the ratios.
So-what
In pharma, research (about 21 percent of sales) and selling (about 22 percent) together cost more than making the product (about 28 percent). In medtech, making the product and supporting it in hospitals cost more, and research less.
Worked case
Launch economics: a new lung treatment in Germany
The prompt
A fictional mid-sized pharma company plans to launch a new treatment for a chronic lung disease in Germany. About 50,000 patients are eligible, and it expects to treat 20 percent of them at peak. The net price (after discounts) is EUR 12,000 per patient per year. Making the drug costs 10 percent of net sales, and the medical and sales team costs EUR 30 million a year. What are peak sales and peak yearly contribution after the sales team?
The structure
- Peak contribution = patients x share x net price, minus cost of goods and the launch team
- Patients treated at peak
- Peak sales
- Minus cost of goods and the sales team
Working it through
1. Patients treated
20 percent of 50,000.
Patients treated at peak:50,000 × 0.2 = 10,0002. Peak sales
10,000 patients at EUR 12,000.
Peak sales (EUR millions):50,000 × 0.2 × 12,000 ÷ 1,000,000 = 1203. Cost of goods
10 percent of sales.
Cost of goods (EUR millions):120 × 0.1 = 124. Contribution after the sales team
Sales minus cost of goods minus EUR 30 million.
Peak contribution (EUR millions):120 - 12 - 30 = 78
The recommendation
The company should launch, because peak sales of EUR 120 million from 10,000 treated patients give about EUR 78 million a year of contribution after the EUR 30 million sales team. First, making the drug costs only EUR 12 million at peak, so most sales fall through to contribution. Second, the result rests on two drivers: a 20 percent share of eligible patients and the EUR 12,000 net price. The risk is the German benefit assessment: if it finds no added benefit, the negotiated price can be much lower. As a next step, test with doctors whether the drug beats current treatment by enough to win a 20 percent share.
Risks: Uptake is usually slow: peak sales often come several years after launch; If the benefit assessment finds no added benefit, the negotiated price can be much lower.
Worked case
Keep the drug or license it out?
The prompt
A fictional biotech in Boston owns a drug about to enter Phase II. A large pharma company offers USD 50 million upfront now, plus USD 200 million if the drug is approved. The biotech estimates a 15 percent chance of approval from here, in line with the BIO data for drugs entering Phase II. If it keeps the drug, it must spend USD 120 million on trials, and if the drug is approved it expects it to be worth USD 1,000 million. Ignoring the time value of money, which option has the higher expected value?
The structure
- Expected value = probability x payoff, minus costs that are certain
- License: upfront + probability x milestone
- Keep: probability x value if approved, minus trial cost
Working it through
1. License
USD 50 million for sure, plus a 15 percent chance of USD 200 million.
Expected value of licensing (USD millions):50 + 0.15 × 200 = 802. Keep
A 15 percent chance of USD 1,000 million, minus USD 120 million of trials.
Expected value of keeping (USD millions):0.15 × 1,000 - 120 = 303. Difference
License minus keep.
Advantage of licensing (USD millions):80 - 30 = 50
The recommendation
The biotech should license the drug, because licensing has an expected value of USD 80 million against USD 30 million for keeping it, an advantage of USD 50 million. First, the USD 50 million upfront is certain, while keeping depends on a 15 percent chance of approval. Second, licensing removes the risk of spending USD 120 million on trials for a drug that fails, which matters for a small company with limited cash. The risk is that the 15 percent estimate is too low for this drug. As a next step, test the decision with discounted cash flows and a range of approval odds.
Operations and supply chain
- Active ingredients. A few countries make a large share of the world's active pharmaceutical ingredients (APIs) and generics. India's government says the country supplies about 20 percent of the world's generic medicines. Since the shortages of 2020, buyers in the US and Europe have been adding other sources.
- Quality. Factories must follow Good Manufacturing Practice (GMP) and pass inspections by regulators such as the FDA. A failed inspection can stop supply from a plant for months.
- Cold chain. Many biologics and vaccines must be kept cold, often between 2 and 8 degrees Celsius, all the way from the factory to the patient.
- Contract manufacturing. Many companies use contract development and manufacturing organizations (CDMOs) instead of owning every plant. Examples include Samsung Biologics (South Korea), Lonza (Switzerland) and WuXi Biologics (China).
- Distribution. Wholesalers buy from manufacturers and supply pharmacies and hospitals. In many countries a few wholesalers handle most of the volume.
- Devices. Hospitals expect training, fast repairs and spare parts. Field service engineers and loaned instrument sets for surgeries are real costs that pharma companies do not have.
| Metric | Plain definition |
|---|---|
| Pipeline | The drugs a company is developing, listed by phase |
| Probability of success (PoS) | The chance that a drug in a given phase will be approved |
| Peak sales | The highest yearly sales a drug is expected to reach |
| Loss of exclusivity (LOE) date | When patents and data protection end and copies can enter |
| Gross-to-net | The gap between list price and the net price after discounts and rebates |
| R&D as a share of sales | Research and development spend divided by revenue |
| Market access | The share of patients whose payer covers the drug |
| Adherence | The share of patients who take the medicine as prescribed |
| Installed base (devices) | The number of machines or systems in use at customers |
| Consumables per procedure (devices) | The recurring revenue from single-use items each time a device is used |
| Capacity utilization (manufacturing) | Actual output divided by the maximum possible output |
So-what
Ask for the two or three metrics that fit the case: pipeline and PoS for a biotech deal, LOE and gross-to-net for a revenue decline, installed base for a device maker.
A brand-name drug sells USD 1,000 million a year in the US. After generics enter, the brand keeps 20 percent of its volume and cuts its price by 30 percent. What are its new yearly sales, in USD millions?
A surgical robot maker has 500 robots installed in European hospitals. Each robot is used for 300 procedures a year, and each procedure uses EUR 1,500 of instruments and accessories. What is its yearly consumables revenue, in EUR millions?
A drug has a list price of USD 1,000 a month. Rebates and discounts to payers average 45 percent. What net price does the company keep, in USD per month?
A biotech receives an upfront payment, then milestone payments, then royalties on sales. What is this model?
Why is cost of goods usually a small share of sales for patented medicines?
Which metric matters most for a device maker's recurring revenue?
Sources for this lesson (4)
- Aswath Damodaran, NYU Stern: operating and net margins by industry (US), data as of January 2026
- BIO, Informa Pharma Intelligence and QLS Advisors, Clinical Development Success Rates 2011 to 2020 (2021)
- Invest India (Government of India): pharmaceuticals sector overview
- Recognized public explanations of case-interview concepts and frameworks
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