Last week, the local propagator of economic illiteracy, the Denver Post, ran an op-ed by a professor over at the University of Colorado Health Sciences center, who specializes in bioethics and the humanitites. It included the usual bromides about obscene profit margins and too much marketing vs. too little R&D. It concluded with a call for the citizenry to demand more R&D spending by drug companies. Or presumably, we'll be taking away those profits to make sure there's no more R&D. (Ironically, a week earlier I had had this debate with a friend of mine who's a doctor there, so maybe it's something in the water. Or a virus.)
In the meantime, Russ Roberts has an extensive podcast with Mr. Law-and-Economics himself, RIchard Epstein, an actual economist, of the Hoover Institution and the University of Chicago. Epstein makes the following points.
- That studies show that drug companies keep somewhere between 15% and 25% of the economic profit from their discoveries. Which means that you and I get to keep about 80% of the benefit from someone else's work.
- That the excessively long FDA approval time robs the compnies from many of the benefits of the patent system
- That taxing away the profits is only going to force the drug companies to focus on the higher-margin projects, which will then lead the same whiners to complain about the even more obscene profit margins
- That there will always be competition, since it's the molecule not the health benefit that gets patented; this means that your slightly different drug with a slightly different mechanism can compete even while the original is under patent protection
I'd add one other point. Mark Yarborough complains about the ratio of marketing budgets to R&D budgets. But this is always true. I just finished visiting a company, Brush Engineered Materials, which refuses to get pantents on much of its research out of the belief that they'd rather not have their competition reverse engineer their processes. Their competitive advantage and their real asset is their institutional know-how and craftsmanship in the art of making metal alloys. This is a company that knows it needs to be ahead of the curve, always developing new alloys and new uses for those alloys.
They spend less than 1% of gross revenues on R&D.
I never would have know about Epstein's book if not for a series of blog links.
Thus do institutional biases restrict the debate. At least on their pages.