Category — Big Pharma

Well, it is a waste of corn.

Belgian Brewer InBev is offering a big payday to shareholders of Anheuser-Busch Cos. (BUD) (BUD) Inc., but its bid to create the world’s largest beer company is already facing a major obstacle - U.S. election-year politics. [snip]
Republican Gov. Matt Blunt said Wednesday he opposes the deal, and directed the Missouri Department of Economic Development to see if there was a way to stop it.

“I am strongly opposed to the sale of Anheuser-Busch, and today’s offer to purchase the company is deeply troubling to me,” Blunt said in a statement.

Web sites have sprung up opposing the deal on patriotic grounds, arguing that such an iconic U.S. firm shouldn’t be handed over to foreign ownership. One of the sites, called SaveAB.com, was launched by Blunt’s former chief of staff, Ed Martin.

“Shareholders should resist choosing dollars over American jobs,” Martin said in a statement Wednesday night. “Selling out to the Belgians is not worth it - because this is about more than beer: it’s about our jobs and our nation.” [snip]

Really? Politicians, from local to federal, spent the dollar to dirt, making everything from the Flatiron Building to BUD cheap enough to buy with pocket change.

What about the obscene profits made by Big Beer?

Bud’s profit margin is 8.74%, slightly more than all of Big Oil. We need to tax these windfall profits, products of misery from the mortgage meltdown.

Even as their overall profits have soared, major oil companies are earning a relatively modest 8.7 percent profit margin — the portion of the sale of each barrel that hits the bottom line. Major banks and drug makers, for example, enjoy profits margins that are twice as big.

Besides, slimming down BUD will free up more corn for ethanol; that puts more pressure on Evil Oil.

They should worry, BUD will be the only alcohol available for the family buggy fuel tank, about for what BUD is fit, if that.

Prophets of profit

WARNING: This post contains economic thought. Not compatible with Marxist drivel.
For Vermont Sandernistas, reading this might cause IBS.

Megan McCardle making sense about profits, pricing, and policy.

[snip]
So the most probable outcome of introducing monopsony power here [in the U.S.] is that the market for drugs shrinks to the point where it will support few-to-no new drugs.
[snip]

People who think that there will be continuing R&D in the pharmaceutical industry are basically thinking of it as a budgeting problem. They think of the pharmaceutical industry’s gross income as a budget to be allocated between various functions, such as marketing and R&D. [snip]

I don’t think of R&D as a budgeting problem; I think of it as an investment problem. After all, even if the pharmaceutical industry has no profits right now, they can borrow the money in the financial markets at fairly attractive rates.

The main obstacle to R&D, then, is not the current state of pharmaceutical industry profits; it is the potential return on the investment in R&D. After all, Merck doesn’t have to make drugs; it could generate a nice, safe return of 5% a year in government bonds. Or it could get into some other business, such as making soap. If you drive down the profits on new drugs too far, it stops making sense to invest in new drugs, even if there is a small profit to be made on current production.

Developing new drugs is very, very risky. Depending on what you think constitutes a drug candidate, somewhere between one in one thousand, and one in ten thousand drug candidates makes it from a lab bench to clinical trials. Each of the failed drugs was very expensive, particularly if it got partway through clinicals, which run about $500 million per course.

The problem is, once you’ve developed a drug, it’s easy to copy. It’s also usually trivially cheap to produce. And your patent is rapidly running out. This gives a monopsony buyer a lot of leverage to force down your price–you’re almost always better off taking something. This is particularly true if the monopsony buyer has the power to break your patent and license its generic manufacturers to turn out cheap but near-perfect imitations of your product². This is, in fact, what Europe has done; they make pharmaceutical firms sell to them at cost plus. The lion’s share of the profits on any drug come from the United States; what they get in Europe and Canada and the rest of the world is (thin) gravy, a price that is just a little bit better than not selling any drugs there.

Now imagine that America drives drug prices down to that sort of “cost+10″ or “cost+20″ level. The pharmaceutical firms will keep making the drugs they already have, because there will still be a little profit there. But they would have to be psychotic to invest billions of dollars over a 20 year time horizon in exchange for a one in a thousand chance of making that small a profit. Would you put 20% of your income now into an investment that might yield a profit of 10% of your income–in thirty years?

But they have to invest in R&D, say my interlocutors; otherwise they won’t have any drugs to sell! This makes the odd assumption that they can’t do anything else. But history is full of companies that used to do something else entirely–and also, of companies that went out of business when their market collapsed.

Think: tulips, buggy whips, Polaroid, Kodak film and paper, Studebaker, Pan Am. How many more can you remember.