COGS Effect on SG&A and R&D

The short video we saw called “The Other Drug War” and some general discussions we had in class, sparked my curiosity on how pharmaceutical companies can afford to use large percentages of annual revenue to fund SG&A (selling, general and administrative) and R&D (research and development). The answer is COGS (cost of goods sold) and fairly easy to see by comparing financial statements from major pharmaceutical companies with other major companies in industries that also have R&D expenses, like software, computers, and microprocessors.

COGS in pharmaceutical and software companies are 2-3 times less than companies that develop, market, and sell computers and microprocessors. COGS for pharmaceutical and software companies range from 19-33% of there annual revenue and COGS for computer and microprocessor companies range from 48-76% of their annual revenue.

Pharmaceutical and software companies are taking advantage of lower COGS to increase their SG&A and R&D budgets which in turn feeds the machine for continued growth and profitability. Based on this simple analysis, if you want to increase the SG&A and R&D budgets, reduce COGS.

Percentage of Annual Revenue - 2007

Computers and Microprocessors
HP
COGS 76%
SG&A 12%
R&D 4%

IBM
COGS 54%
SG&A 22%
R&D 6%

Apple
COGS 66%
SG&A 12%
R&D 3%

Ericsson
COGS 59%
SG&A 12%
R&D 15%

Intel
COGS 48%
SG&A 14%
R&D 15%

Motorola
COGS 73%
SG&A 14%
R&D 12%

Software
Microsoft
COGS 21%
SG&A 29%
R&D 14%

Oracle
COGS 19%
SG&A 26%
R&D 12%

SAP
COGS 33%
SG&A 26%
R&D 14%

Pharmacutical
Eli Lilly
COGS 19%
SG&A 33%
R&D 23%

Pfizer
COGS 23%
SG&A 32%
R&D 17%

Merck & Co
COGS 25%
SG&A 31%
R&D 20%

GlaxoSmithKline
COGS 22%
SG&A 31%
R&D 15%