Are Drug Companies Evil When They Lose Money Too?

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I recently read an article about the health costs of wealth inequality, and I have to admit I am stumped. I think I am in the minority that assumes it is expensive to increase life expectancey. Arguments about health care always seem to include several assumptions that never get questioned. For instance:

  • That people are not responsible for their own health.
  • That health care should be provided based on need, or on desire, but not on ability to pay.
  • That people shouldn't have to cut back in other areas of their lives to afford health care.
  • That good health care is a basic right, regardless of how well (or poorly) a person has practiced healthy living.

For instance, how many people can't afford health care, but have cable tv, cell phones, multiple cars, etc.? Americans spend so much on health care because we our keep-up-with-the-Joneses lifestyle is so damn unhealthy to begin with. I'm not criticizing people's life choices. If smoking makes you happy, I say this is America, land of the free, so go ahead and light up, but don't complain when you have to buy expensive drugs to fight your lung cancer in 30 years. All I am saying is yes, your health care is expensive, but what did you expect?

It is that time of year again when I have to watch dumb political ads on tv. So far, none of the local races have addressed any issues, but have tried to scare me by telling me who supports "big oil" or "big drug companies" over the little guy. It got me thinking about the pharmaceutical industry, an industry that I studied in depth during my b-school days.

The general theory accepted by Joe American is that drug companies take a pill that costs them a few cents to make, sell it for several dollars a pill, make huge profits, and rip off Joe, who is just trying to add a few years to the end of his life. The idea is that because a company is profitable, they are bad. But what about unprofitable drug companies?

As an example, I give you HollisEden. The company is working on several drugs, most notably a drug that will help you if you are ever exposed to intense radiation (from a nuclear bomb, for example). HollisEden has never made any profit. Read their financials. I did. Since 1995, investors have pumped over $100 million into the company without a return. Why would anyone do that?

Most of us would agree that a drug to help treat sickness from radiation exposure is a good thing. And we understand that it takes a long time for scientists to figure out how to make such a drug such that it is effective but still relatively free from dangerous side effects. When HollisEden finally gets a drug to market, they will have $100 million in R&D costs to recoup, so I assume they will charge a very high price compared to the actual production costs of the drug. I'm ok with that. If they don't provide investors some decent return on their investment, their is little incentive (other than altruism) to give a company $100 million and wait patiently.

One could argue that the government should fund this development, and at the pure research level, they probably should do some of that. But the market approach insures that money flows to the drugs that will make the most money, which (in most cases) are probably those that will have the greatest health impact. Sure, the system promotes some unhealthy behavior, but overall it is a decent system.

The point is this. HollisEden is doing important but risky work. The company may never make a profit and make go out of business. Or the company may create something that has huge potential value to society. Why do some people believe that such a risk shouldn't be rewarded, and that something so valuable to society should be cheap? Do these people consider unprofitable HollisEden an evil drug company?

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Comments

  1. laurence haughton's Gravatar Comment by laurence haughton on October 4th, 2006 at 12:48 pm

    Hey, just a minute Sri, how is this post naive? And how is it irresponsible? You have an obligation to present your evidence not just call names.

  2. John's Gravatar Comment by John on October 4th, 2006 at 4:57 pm

    Rob,
    So should doctors not make much money? Should they spend years in medical school, accumulating mountains of debt only to make as much money as your average secretary? I like your idealism, but have you really spent any time trying to figure out how you new business model would really work?

  3. mal's Gravatar Comment by mal on October 4th, 2006 at 6:09 pm

    Is Osama bin laden less evil when he builds an orphanage?

    Same question, same answer.

    The medical industrial complex conspires to keep prices high and this bozo says it’s our responsibility to pay whatever they want or suffer and die.

    I tell you what let’s let the free market decide. Let’s allow anybody to practice medicine any way they want. Let’s get rid of the FDA so that anybody can perscribe anything to anybody and sell it at any price and see what happens.

    You game?

  4. nobody's Gravatar Comment by nobody on October 4th, 2006 at 7:03 pm

    I am sorry but your example isn’t a very good one. A medicine against radiation sickness is one of those holy grails that always find finance. Sometimes this will be government one and some points in time it will be private or VC money. The people working that field have most of the time good paying jobs and are able to move between jobs or move along to a new company when the current goes bust for whatever reason. Other holy grail fields can be anti-aging,

    You try to make a point with a bad example, but worse is your initial assumption that the world think that companies are evil per sé. It all is about the jurisprudence of Salomon v. Salomon & Co. (1896), [1897] A.C. 22 (H.L.) or in layman’s terms “How can I as effective as possible avoid any juridical accountability for what the firm I invested in did wrong”. That decision made the world rumble on it’s foundation and it is still rumbling.

    Anyway I am not going to lecture here about how evil or not the world is, people have eyes and ears for them selfs and the mass can move any direction.

  5. Rob's Gravatar Comment by Rob on October 4th, 2006 at 7:28 pm

    Mal,
    Acutally, anyone can practice some kinds of medicine. Faith healers, holistic doctors, etc. are all around, and many people use them instead of using *regular* doctors.

    By the way, do you have any evidence that the medical industrial complex conspires to keep prices high? I’m sure there are some bad apples, but I know too many people in the industry to think they are all evil.

    You see, when my regular readers disagree with me, they have this tendency to leave reasonably intelligent comments, and point to educational links, even when the comments are negative towards my post. So forgive me if I’m not good at responding to ad hominems. But I’ll try to think up a witty comeback to “bozo.”

  6. mal's Gravatar Comment by mal on October 4th, 2006 at 9:04 pm

    Hey bozo. All businesses conspire to keep prices high. That’s capitalism. I notices that you didn’t really address my point. Let’s get rid of licensing for doctors, let’s get rid of the FDA, let’s allow everybody to practice medicine and sell whatever they want as medicine and see what happens. That’s the free market. You up for it?

    As long as the govt keeps tight controls on who can and can’t call themselves doctors and what is and is not medicine the free market does not exist. If the free market does not exist then all we are fighting about is who gets regulated how and where. I understand that you are pro business but there are a lot of people who are pro human. Neither of you is arguing for a free market solution. You each want to tilt govt regulation in your favor.

  7. T's Gravatar Comment by T on October 4th, 2006 at 9:06 pm

    Whatever you meant with the post doesn’t matter. I came here from reddit, and the comments there have deteriorated into something much worse than what people have left here. All people want is a flame war.

  8. Rob's Gravatar Comment by Rob on October 4th, 2006 at 9:22 pm

    mal,
    All business conspire to keep prices high? You should read about a company called “WalMart.”

    I didn’t address your point because it was irrelevant to the post. You obviously don’t understand what the post was about, or you may have noticed that. My argument that market funding works reasonably well as a mechanism for absorbing the risk associated with drug devleopment is no way implies that doctors should be unlicensed or that the FDA should be shut down.

    To answer your irrelevant question though, no. The FDA should not be shut down. One proper role of government is to correct for externatlities not reflected in the market price of goods that can be complex to evalute. The best way the government can do this is to provide information to all parties involved in the transaction, instead of legislating their actions. The FDA provides important information to consumers. If the FDA did not exist, I am sure a service would pop up to rate the safety of drugs, much like companies do for bonds, credit scores, etc. and much like a Consumer Reports. It would be a good thing though, if the FDA would allow people with severe cases of fatal diseases to elect to try more early stage, unproven drugs. Provided of course that they understand the risk involved.

    If you would like to ask other random questions unrelated to the post, please do so through email.

  9. narconon vista bay's Gravatar Comment by narconon vista bay on June 27th, 2007 at 11:19 am

    It looks like we are dealing with an interesting debate here. I am afraid whiteout arguments we won’t reach any result. So far i saw only contradictory data.

  10. Isabella's Gravatar Comment by Isabella on December 2nd, 2009 at 5:54 pm

    Hey I am writing a paper about how we need to regulate drug companies closer. Is there anyone opposed to regulating drug companies closer? And if so why do you oppose regulating drug companies closer?

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