Profits: The Keys to the Cures

By January 30, 2008Health Care

Megan McArdle, a blogger at the Atlantic, has been writing about the pharmaceutical industry the last few days, that profits make R&D possible and increased government controls will work against pharmaceutical innovation. She does a fine job of refuting the usual arguments meant to undermine pharma: Government will replace the R&D, we should get Europe to pay more, the companies can just reduce advertising, etc.

Here’s a basic point that too often gets ignored by the statists, populists and well-meaning simplifists:

I don’t think of R&D as a budgeting problem; I think of it as an investment problem. After all, even if the pharmaceutical industry has no profits right now, they can borrow the money in the financial markets at fairly attractive rates.

The main obstacle to R&D, then, is not the current state of pharmaceutical industry profits; it is the potential return on the investment in R&D. After all, Merck doesn’t have to make drugs; it could generate a nice, safe return of 5% a year in government bonds. Or it could get into some other business, such as making soap. If you drive down the profits on new drugs too far, it stops making sense to invest in new drugs, even if there is a small profit to be made on current production.

Posts here, here, here and here.

(Hat tip: Glenn Reynolds)

Leave a Reply