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Comment by cnewey | Hacker News Reader

Read the findings from [1] - it appears that in a very considerable number of cases, there's actually a disconnect between the cost to research, develop, and produce a drug - and the price that's charged to customers (or insurance). The conclusion is that the price is mostly determined by "what the market will bear", rather than much else. This suggests (to me, at least) that in cases of a particularly expensive drug like Humira, a large proportion of the profits are not reinvested into R&D.

[1]: https://jamanetwork.com/journals/jama/article-abstract/25456...

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I suggest reading a microeconomics textbook. In the absence of price controls price will be set such that supply equals demand. It does not surprise me in the slightest that a drug that people really, really need and that is still under patent protection is very, very expensive.

Prices are what makes supply equal demand.

Blockbuster successes, massive profit makers are what pays for all the many, many failures of drug development. There’s quite a bit of research on the economics of drug development but the thing that I find the most convincing is that the big drug companies aren’t exceptionally profitable. They’re pretty much in line with what you’d expect of multinationals of their size, 10% or so profit on revenue per year. Scientific publishers like the accursed Elsevier earn supernormal profits, 33%.

It appears that net profit (for AbbVie, at least) tends to sit quite comfortably between 20-30% most years - 24.27% last year, and hitting almost Elsevier-like levels (~32%) in 2009 [1]. That smells like profiteering to me.

Add to that their particularly hostile approach to patent applications (100+ on Humira alone), and to me it appears that AbbVie perhaps has a vested interest in stifling innovation and charging large amounts of money for their products "because they can".

[1]: http://financials.morningstar.com/ratios/r.html?t=ABBV

Call me when AbbVie is listed with Roche, Novartis, Pfizer or GlaxoSmithKline as one of the big pharmaceutical multinationals. A relatively small company having a blockbuster success and returning huge dividends to shareholders is why people are willing to invest in biotech/pharmaceutical startups at all. Every biotech startup formed around one drug that gets serious funding burns at minimum a decade of man years and at the beginning most of those man years are going to be researchers with doctorates. Absolutely nothing gets to market with that little investment and most of these companies fail.

The point about the pharmaceutical sector’s profit margins is about the sector more than it is individual companies. Minnows that make supernormal profits expand and as they expand their profit margins decline because they use up the most profitable opportunities and move on to less profitable ones until there’s nothing left. This last bit never actually happens because things change fast and general equilibrium is never reached but that’s the tendency. Large profit margins attract competitors and in the meantime allow those enjoying them to grow.

Re: “Profiteering”

According to the theory of neoclassical economics, anti-price gouging laws prevent allocative efficiency. Allocative efficiency refers to when prices function properly, markets tend to allocate resources to their most valued uses. In turn those who value the good the most (and not just the wealthiest) will be willing to pay a higher price than those who do not value the good as much.

https://en.m.wikipedia.org/wiki/Price_gouging

That’s about the same profit margin as Google and Facebook and Apple. Are they “profiteering?” Saying that the “reasonable profit” for drug companies should be lower than tech companies, say 15%, is economically equivalent to saying we should impose a 50% tax on drug company profits. Which would be nuts. You tax products you want less of (cigarettes, sugary drinks) not ones you want more of.

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