Are Drug Companies Evil When They Lose Money Too?


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?