Of Pills and Profits: In Defense of Big Pharma

Peter W. Huber in Commentary

Somehow or other, the average price of the pill has to end up high enough to pay off the up-front cost.

No law of economics decrees that you can always accomplish this. Competition ordinarily pushes price down to marginal cost, paying no heed at all to costs that were sunk years ago. The problem is especially acute with drugs, where so much cost lies in the original chemical design. The pioneer also shoulders the considerable financial burden of persuading the FDA that the drug is safe and effective, while me-too applicants can, in principle, just photocopy what the pioneer has already filed. It is not impossible for the pioneering company to end up as the only player that fails to profit from its discovery.

Patents address this problem by granting a monopoly for a fixed term, during which the manufacturer can keep prices high or, better still, calibrate them to each buyer’s willingness to pay.

(Mr. Huber spoke to our chapter on March 6, 1992.)