Are Drug Company Profits Really That Fat?
Posted by Clark Venable on 10/9/2004
Drug companies are widely perceived by the public to make huge amounts of money for their investors. Is that true? Well, it depends....
New England Journal of Medicine, August 26, 2004, 'The Pharmaceutical Industry--Prices and Progress':
" "Year after year, the pharmaceutical industry has ranked at or near the top of Fortune magazine’s annual list of the most profitable American industries, which are rated in terms of accounting returns as a percentage of either stockholders’ equity or total assets. But here, too, there is an element of fallacy. Under standard accounting practice, outlays for research and development are written off in the year they occur. But, in fact, such expenditures are an investment, yielding fruit many years after they are incurred. They ought, in principle, to be included in the company’s assets and then depreciated over an appropriate time period. When they are not, the capital base to which profits are related in standard measures tends to be undervalued, and percentage returns on that capital base are overstated. A government study found that, when appropriate corrections were made, the true returns on investment by the pharmaceutical industry during the 1980s were only 2 to 3 percent higher, on average, than “normal” competitive rates of return, which were estimated to average roughly 10 percent (excluding the effects of inflation). 19,20 This differential of 2 to 3 percent might have been attributable, at least in part, to technological risks not readily avoided through the portfolio strategies available to financial market investors. 21 Whether the differential has remained within that range in recent years has not been tested by broadly accepted analyses."
--F.M. Scherer, Ph.D., Kennedy School of Government "
Given that the pharmaceutical industry does its R&D from private funds, is the most research intensive of all industries, and has improved our quality of life like few industries have or ever will.....'the first thing we do, let's kill all the lawyers'.
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