NCPA - National Center for Policy Analysis

The "Pharmatech" Industry And Its Profits

June 26, 2000

Some analysts refer to that part of the pharmaceutical industry responsible for developing and marketing hundreds of new drugs as the "pharmatech" industry, because it is the new economy model of a high-technology industry. Last year, pharmatech companies spent $21 billion in an effort to develop new -- and often life-saving -- drugs.

Liberal advocacy groups decry what they see as the high level of that industry's profits. And they applaud moves to impose price controls on prescription drugs. But here are a few facts regarding the economics of research and development of new drugs they should take into account:

  • Critics cite drug company profits -- which Fortune magazine says averaged 18 percent of revenue in 1999 -- to justify their calls for price controls.
  • But such profit levels are not out of line compared to those in other sectors of the economy, particularly for a new economy industry -- with commercial banks' profits averaging 15 percent of revenues last year, real estate achieving 17 percent levels, and computer software 15 percent.
  • In the 1990s, pharmaceutical sales grew at an average annual rate of 8 percent to 15 percent -- with most of that growth the result of greater volume, not higher prices.

Price-control advocates might be described as knowing the price of everything and the value of nothing. They might be asked to estimate how long pharmaceutical manufacturers will be willing to plunge billions of dollars into the search for greater pain-relieving and life-saving drugs in a future full of price controls.

Source: Merrill Matthews Jr. (Institute for Policy Innovation and the American Conservative Network), "Want to Stifle Drug Innovation? Posture, Impose Price Controls," Investor's Business Daily, June 26, 2000.


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