Pfizer’s Galactic Operating Profit Markup

Posted by Ednaldo Silva

The company-level operating profit markup can be estimated as a power function or a linear function between Net Sales (SALE) and Total Cost = XOPR = COGS + XSGA. The difference between Net Sales and Total Cost (measured by XOPR) is OIBDP (operating income [profit] before depreciation and amortization, or EBITDA). Some analysts include DP (depreciation and amortization) in total cost; however, DP is subject to substantial accounting discretion (such as including acquisition related impairment charges), which can prejudice cross-section comparisons.

A linear operating profit markup equation is posited:

     SALE = α + β XOPR

where the slope coefficient β > 1 is the OIBDP (or EBITDA) markup.

We take the U.S. pharmaceutical giant Pfizer (GVKEY 8530) as an example, and obtain:

     SALE = 1.7051 XOPR – 842.2

where the Count (sample size) = 71 (1950-2020) years of data and the Newey-West corrected standard errors of the slope coefficient (OIBDP or EBITDA markup) = 74.03, and of the intercept = −3.2511. The R2 = 0.9954. The intercept is significant, and the residual plot appears random.

This Pfizer example (showing the remarkable annual stability of the EBITDA markup = 70.5%) is prima facie indication of oligopoly behavior, or strong barriers to entry allowed by ineffective antitrust regulations. In price competition, Pfizer’s galactic EBITDA markup would dissipate or revert to a non-galactic across industry average.

The scatterplot below shows the historical stability (despite mergers, acquisitions, and divestitures) of Pfizer’s oligopoly-type operating profit markup. In fact, Pfizer’s EBITDA markup is higher than the reported magnitudes because research & development (R&D), advertising, sales promotion, and detailing are expensed to reduce taxable profits, and not capitalized on the balance sheet.

In RoyaltyStat’s nomenclature, XOPR = Total Cost (Stricto) (see x-axis of scatterplot below).

Pfizer EBITDA Markup scatter_plot


Published on Feb 17, 2022 3:58:00 PM

Ednaldo Silva (Ph.D.) is founder and managing director of RoyaltyStat. He helped draft the US transfer pricing regulations and developed the comparable profits method called TNNM by the OECD. He can be contacted at:

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Topics: Net Profit Indicator, OECD Profit Indicators