Posted on 09/05/2009 3:29:10 AM PDT by Scanian
An email has been making the rounds for some time regarding the obscene profits enjoyed by drug companies. While it may be old news, innumerable credulous souls, like my sister, keep forwarding it as a revelation of The Truth, so it is useful to go over the economics raised in the email one more time.
The email casts the authors as intrepid investigators in the mold of Mike Wallace:
Did you ever wonder how much it costs a drug company for the active ingredient in prescription medications? Some people think it must cost a lot, since many drugs sell for more than $2.00 per tablet ... In our independent investigation of how much profit drug companies really make, we obtained the actual price of active ingredients used in some of the most popular drugs sold in America. There follows a list of 16 drugs. For example, we are told that 100 tabs of Prozac retail for $247.47, while the cost of the raw ingredients is only 11 cents, a markup of 224,973%! Gasp! Where's my pitchfork, Ma?
I responded to my dear sibling as follows: Let's assume that the numbers in the email are correct (I have no idea if they are). If you paid 11 cents for the precursors of your Prozac, could you make the drug? I couldn't either. If you scooped up some sand on the beach, could you fabricate the CPU in your computer? Intel did-and charged you a couple hundred dollars for it. How can they get away with that?
When there's little value-add to raw ingredients-say, turning Bessie Moocow into a Happy Meal-the markup is relatively low. But in high-tech industries the intellectual property is far more important than the cost of the precursors. Heck, even in an established industry there's a healthy markup. The spot price for iron ore is about $90 per ton. What? Infiniti charges $35,000 for a G37 when the main ingredient is worth $150? That's over 23,000% markup, man! Ripoff!
If you had a ton and a half of ore dumped in your driveway, could you transform it into your Infiniti? You're not buying raw materials, you're buying the know-how that turned them into something that will haul your butt over the pavement at 70 mph in air conditioned comfort and with a high degree of safety.
But do I want cheaper drugs? Of course. Bring your pitchfork and we'll march on Merck and GlaxoSmithKline.
Oh, and afterwards we can march on Ben & Jerry's and demand an ice cream cone for a dime. And a liter of bottled water for a couple of cents.
Infantile economics from the infantile left.
IMHO
Not to mention the scarcity and non-competition created by litigating so pharma products out of existence -
There is a fallacy in the author’s reasoning. I believe the assertion was not that the raw materials to produce a pill cost 11 cents but that the cost of producing each pill was 11 cents. So if it only cost $150 to produce a finished Infinity G37 and it sold for $35,000 that would be a more accurate analogy.
The meaning of the article is clear.
It may only cost a few cents each to mass produce a DVD of a feature motion picture but the investment in the creative work being reproduced is often in the tens of millions of dollars.
The difference is where hard working individual entreprenuers spend endless hours, money and sacrifice to build a company from the ground up, progressive liberal skunks demonize this virtue and want the same benefits with little effort on thier part. “I want what you have but I don’t want to work for it”
It takes years of R&D and millions of dollars to get a drug into production. And not very many drugs that are researched actually make the cut. You’re paying for all the R&D for “your” pill plus several others that didn’t get to market.
That analogy is wrong on so many points, its hard to know where to start. I'll make another analogy:
Let's say you discovered a strange plant in your back yard that cured cancer. You had an abundant supply, but for some reason, it grew no where else. You could grind up the leaves, put them in capsules, and one pill would cure all forms of the dreaded disease. Your production costs are near zero, lets say a penny apiece.
How much would you charge for them? Two cents apiece, a 100% markup?
There's one minor point: It costs a billion dollars in FDA trials for approval to sell them. Your production costs are still a penny apiece. Would you be able to charge two cents?
Oh, another point: Once you get FDA approval, you can only sell them exclusively for 17 years. In order to get the approval, you have to disclose how you make them. Others would surely find additional plants. Now how much do you charge? Still two cents? Any more than that, and you are one of those evil drug companies! I guess you should spend the billion in development costs out of the goodness of your heart.
(Juvenile leftist juvenile health care economics debunked)
The best and most lucrative scam ever invented.
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