Big Pharma is RICH

Drug companies are a huge hate-object for the Left. Because they appear to be big and rich and successful, that alone  provokes hatred in the enviers of the Left.  Add to that the high prices of some drugs and it is clear to the Left that the drug companies are "ripping off" the rest of us.

But are they?  Conservatives point to the huge costs of drug development and the consequent huge losses when the drug is not a success.  So the profitability of drug companies generally is not at all clear.  Big profits are accompanied by big losses.

Fortunately, we now have some real information on the subject.  An article has recently appeared in JAMA that sets out to answer the question objectively. It is "Profitability of Large Pharmaceutical Companies Compared With Other Large Public Companies" by Ledley et al.  An excerpt:

Question:  How do the profits of large pharmaceutical companies compare with those of other companies from the S&P 500 Index?

Findings:  In this cross-sectional study that compared the profits of 35 large pharmaceutical companies with those of 357 large, nonpharmaceutical companies from 2000 to 2018, the median net income (earnings) expressed as a fraction of revenue was significantly greater for pharmaceutical companies compared with nonpharmaceutical companies (13.8% vs 7.7%).

Meaning:  Large pharmaceutical companies were more profitable than other large companies, although the difference was smaller when controlling for differences in company size, research and development expense, and time trends.

So that's it.  Open and shut.  The left have some justification for their views.  But only superficially. The methodology of the study is very poor.  Why compare 35 companies with 357?  Many of that 357 would have been much smaller than the pharma companies.  So you are not comparing like with like. Large companies would normally have some degree of monopoly in their markets, which makes them more profitable than smaller companies.  A more defensible method would have been to pick 35 companies in each sector with comparable market capitalization and compare them in profitability.

But the problems do not end there. Drugs are a very risky business.  You can spend a billion dollars getting a drug approved only to find that a few deaths have been attributed to the drug.  The deaths will most likely to have been coincidences but publc pressure will cause the drug to be taken off the market -- leaving the company in a ditch.

And there is normally a return to risk.  People normally do risky things only if the reward is great.  So a valid comparison to a drug company would need to be with other risky businesses.  But that was not done in this case.  So it seems likely that the higher profits made by drug companies are simply payment for risk taking.  There is nothing unfair about their profits.  Their profits are what is needed to encourage innovation.  Remove that profit and you will see few if any new drugs.

1 comment:

  1. What to do, get no place fast or shlep along?July 7, 2020 at 1:53 PM

    No incentives and rewards promote the three darlings of the left; dawdle, dilly-dally and lollygagging.


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