On the Edge Drug Company Monopolists and Profits Drug companies in the United St

Question

On the Edge
Drug Company Monopolists
and Profits
Drug companies in the United States are granted a patent on any new pharmaceutical drug they develop, which gives them a monopoly on that drug for 20 years. Not surprisingly, high monopoly profits (i.e., profits well beyond the average rate of profits in other industries) are characteristic of the pharma- ceutical industry. During the 1970s and 1980s, drug compa- nies listed in the Fortune 500 had average profit rates (as a percentage of revenues) that were double the average for all other industries in the Fortune 500.19 During the 1990s, drug company profit rates averaged four times the average profit rates of all other industries, and during the first decade of the twenty-first century, drug company profit rates were about three times the average rates of all other manufacturing indus- tries. Today their rate of profit remains higher than any other industry in the Fortune 500.20 Drug companies say they need these profits to ccover the costs of research for new drugs. However, drug companies spend only a small portion of their revenues—14 percent—on research. They hand out a larger portion of their revenues—17 percent—to shareholders as dividends, and they spend much, much more—31 percent— on advertising and administration. A study of drug manufac- turing costs found that prescription drugs have markups of 5,000 percent, 30,000 percent, and 500,000 percent over the cost of their ingredients. The ingredients in 100 tablets of Norvasec, which sold for $188, cost 14 cents; of Prozac, which sold for $247, 11 cents; of Tenormin, which sold for $104, 13 cents; of Xanax, which sold for $136, 3 cents, and so on.

Is the drug industry a good illustration of the market theories described in this chapter? Explain your answer.

What changes, if any, do you think we should make to U.S. drug patent laws? Explain.

How should the relation between drugs and human life/health affect your views on drug industry monopoly profits? Explain.

Explanation / Answer

1. The market theory discussed in this chapter is that of the monopoly markets. The chief characteristics of monopoly market are:

The product development in the drug and pharma industry is based on a calculated combination of chemicals and ingredients to fight a disease. This calculated combination is patented by the company so that no other company can use their formula. As the formulas remain unique, the companies have full control over the market and so, drug industry can be considered as a great example to illustrate monopoly.

2. The major changes which needs to be done in the US Drug patent laws are:

All these changes can be done with the objective to lower the cost of the medicines and drugs available in the market, to make them more affordable for the consumers.

3. Drugs are essential for human life. There are many deaths of human life, which happen because appropriate medicines and drugs were not given to the patient, as they were unaffordable. Drugs are manufactured with an intent to be life-saver, but the high pricing of the same, is making it a life-taker. Hence, the drug industry monopoly profit must be monitored and controlled by government laws to facilitate life of a common man.

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