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Small profits for big pharma?

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SCOTT JAGOW: The pharmaceutical industry doesn’t exactly have the finest reputation. Some common beliefs: Drug prices are too high. Drug companies spend too much money on marketing, not enough on Research and Development. The Congressional Budget Office just came out with a study of the industry. Our economics correspondent Chris Farrell has been pouring over it.

CHRIS FARRELL: Their bottom line is, there’s a reason why the industry charges high prices. Profitability is exaggerated. Profitability is not the measure of whether or not this industry is charging too much for drugs, too little, whether as a society we’re spending too much on drugs or too little.

JAGOW: OK, well what is the measure?

FARRELL: Well the report doesn’t say that. But Brad DeLong, economist, University of California Berkeley, made some nice comments and what he raised is what big pharma does in Washington D.C. The amounts of money that big pharma spends lobbying to get the rules in its favor — whether it’s an international trade agreement, whether it’s to prevent cheaper drugs from Canada being re-imported into the country — that’s where we should get upset. Limit the competition that are negotiated in Washington in return for campaign contributions and other forms of contribution. That is wrong, that we should be upset about. But when you look at profitability, R&D, prices and innovation, there’s some fascinating things going on with the industry and I think to a large extent, we should be applauding what’s going on.

JAGOW: OK so this report says that the industry’s not as profitable as everybody might think.

FARRELL: That’s right.

JAGOW: I gotta tell you, I’m not exactly buying this right off the bat. Because when I go to the pharmacy, they take an arm and a leg. So I want you to convince me the drug companies aren’t raking it in.

FARRELL: It’s still highly profitable. You can still say they’re taking an arm and a leg, maybe it’s just not an arm and two legs. But it’s still incredibly profitable. Part of it is also the structure of the industry. To develop a new innovative drug costs probably about, this is the estimate that’s out there: $800 million over 12 years. But, once you start manufacturing the thing, it costs you nothing to make it. I mean, it’s like software. It’s like a lot of industries where you have a lot of research and development and then you have very low manufacturing costs, you come up with obviously a big spread.

JAGOW: So you’re telling me they send my arm and leg off to Washington?

FARRELL: They send your arm and leg off to Washington. I think there’s a dual picture. You look at this report and you say OK I’ve learned a lot about profitability and R&D investment in the drug industry and as an investor I like this . Still doesn’t change the fact that what I’m going to get upset about is what’s happening in Washington and this report does not deal with it.

JAGOW: Chris Farrell is the Marketplace Economics Correspondent. In Los Angeles, I’m Scott Jagow. Thanks for listening and have a great day.

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