An email has been making the rounds for some time regarding the obscene profits enjoyed by drug companies. While it may be old news, innumerable credulous souls, like my sister, keep forwarding it as a revelation of The Truth, so it is useful to go over the economics raised in the email one more time.
The email casts the authors as intrepid investigators in the mold of Mike Wallace:
Did you ever wonder how much it costs a drug company for the active ingredient in prescription medications? Some people think it must cost a lot, since many drugs sell for more than $2.00 per tablet ... In our independent investigation of how much profit drug companies really make, we obtained the actual price of active ingredients used in some of the most popular drugs sold in America.
There follows a list of 16 drugs. For example, we are told that 100 tabs of Prozac retail for $247.47, while the cost of the raw ingredients is only 11 cents, a markup of 224,973%! Gasp! Where's my pitchfork, Ma?
I responded to my dear sibling as follows: Let's assume that the numbers in the email are correct (I have no idea if they are). If you paid 11 cents for the precursors of your Prozac, could you make the drug? I couldn't either. If you scooped up some sand on the beach, could you fabricate the CPU in your computer? Intel did-and charged you a couple hundred dollars for it. How can they get away with that?
When there's little value-add to raw ingredients-say, turning Bessie Moocow into a Happy Meal-the markup is relatively low. But in high-tech industries the intellectual property is far more important than the cost of the precursors. Heck, even in an established industry there's a healthy markup. The spot price for iron ore is about $90 per ton. What? Infiniti charges $35,000 for a G37 when the main ingredient is worth $150? That's over 23,000% markup, man! Ripoff!
If you had a ton and a half of ore dumped in your driveway, could you transform it into your Infiniti? You're not buying raw materials, you're buying the know-how that turned them into something that will haul your butt over the pavement at 70 mph in air conditioned comfort and with a high degree of safety.
But do I want cheaper drugs? Of course. Bring your pitchfork and we'll march on Merck and GlaxoSmithKline.
Oh, and afterwards we can march on Ben & Jerry's and demand an ice cream cone for a dime. And a liter of bottled water for a couple of cents.