IRS Data Shows Increasing Pharma Income From Royalties

by Ben Krohmal

CPTECH has requested and received from the United States Internal Revenue Service tax return data for the years 1995 to 2003 for companies in the pharmaceutical and medicine manufacturing industry.

Among the more striking findings is a dramatic increase in the level and share of income received from royalties.

First, a few notes about the data.

Data cover the pharmaceutical and medicine manufacturing industry (NAICS code 325410), filing U.S. Corporation Income Tax Return Form 1120. Virtually all pharmaceutical corporations are required to file form 1120, with the exception of those meeting nine requirements including having gross receipts, total income, and total assets under $500,000.

Sales: we use line 1c on form 1120, for gross receipts or sales less returns and allowances. I believe this normally would include both US and foreign sales for US firms, but only income from US subsidiaries for foreign owned firms. There is also an exclusion of some income that qualifies under the form 8873 "Extraterritorial Income Exclusion." The sales reported on this form will also include some non-pharmaceutical sales, for companies with broader product lines. The number of firms filing form 1120 ranged from 1,150 to 1,801.

Royalties: we use line 7 on the form 1120, for "gross royalties." We assume that royalties are primarily from patents, but also include royalties from the use of know-how, copyrights and other royalty generating items. The number of firms reporting royalties is much smaller, ranging from 101 to 151 in years for which we have data.

Year	Sales	returns	Royalties	returns	%
1995	144,919,796	1,312	3,472,600	106	2.4
1996	165,914,444	1,418	4,200,321	147	2.5
1997	175,317,302	1,801	5,001,710	133	2.9
1998	189,613,246	1,493	7,309,528	144	3.9
1999	201,290,916	1,150	9,811,938	151	4.9
2000	203,210,319	1,231	11,356,862		5.6
2001	218,514,161	1,367	12,486,640		5.7
2002	249,096,548	1,278	13,415,678	101	5.4
2003	273,870,756		18,064,648		6.6
Total	1,821,747,488		85,119,925		4.7

A note on obtaining IRS SOI Data

Statistics of income data are a fruitful source of information on corporations’ costs and earnings. General SOI data, including data from the health care industry, are available online. More detailed breakdowns by industry, including the pharmaceutical and medicine manufacturing industry (NAICS code 325410), are available from the IRS for a negotiable fee.