Some politicians are attacking the pharmaceutical industry for charging high prices for medicines and making high profits. Are these attacks fair? Since prescription medicines account for only 7.2 cents of the average health care dollar and since their costs haven't risen any faster than other health care costs, there seems to be no economic reason to single them out. There may be a political reason, however. Voters are more aware of drug costs because many health insurance programs, notably Medicare, cover few or none of them.

On the whole, the pharmaceutical industry warrants more praise than blame. For example, the industry spends more on research and development than other high-tech industries:

• While the average manufacturing company spent an amount equal to 3 percent of sales on research and development in 1990, the electronics industry averaged 5.5 percent and the computer industry 8 percent.

• The pharmaceutical industry, however, spent 16 percent.

In addition, the pharmaceutical industry was the only American high tech industry that did not experience some decline in international leadership during the 1980s.

• An analysis of 97 new drugs introduced in world markets between 1975 and 1989 showed that the United States was the source of 47 - almost half.

• An analysis of 196 new drugs sold worldwide in 1970-85 showed that U.S. phamaceutical companies produced 85, or 43 percent of the total.

While the pharmaceutical industry earns a higher-than-average rate of return, it also takes above-average risks. For example, although successful new drugs are often very profitable, the odds of producing a financial blockbuster are very low.

• A Duke University study of 100 drugs revealed that a majority did not even cover the company's investment in R&D.

• On the average, 5,000 different compounds must be tested to come up with one new drug approved by the Food and Drug Administration.

• It takes an average of 12 years to get from initial research through final review for approval of a new medicine.

Public perceptions also are distorted by faulty reporting of prescription drug prices by the Bureau of Labor Statistics (BLS). Studies of high blood pressure and anti-ulcer drugs show that more than half of the price increases were due to improvements in quality. But the BLS does not take quality improvements into account in reporting drug prices. By contrast, when the BLS reports on automobile prices, it deducts costs related to new safety and antipollution equipment.

Source: Murray Weidenbaum, "Restraining Medicine Prices: Controls vs. Competition," Policy Study No. 116, April 1993, Center for the Study of American Business, Washington University, One Brookings Drive, St. Louis, MO 63130-4899, (314) 935-5630.