Wednesday, April 13, 2005

Horrors ! I Smell Profits

There is another one of those emails making the rounds that purports to show the obscene profits being made by the drug companies -- for example:

Claritin 10 mgConsumer Price (100 tablets): $215.17Cost of general active ingredients: $0.71Percent markup: 30,306%

Keflex 250 mgConsumer Price (100 tablets): $157.39Cost of general active ingredients: $1.88Percent markup: 8,372%

Lipitor 20 mgConsumer Price (100 tablets): $272.37Cost of general active ingredients: $5.80Percent markup: 4,696%

The alleged author of this email is:

Sharon L. Davis
Budget AnalystU.S. Department of Commerce
Room 6839
Office Ph: 202-482-4458
Office Fax: 202-482-5480
E-mail Address:

Now Ms Davis may or may not be a real person, but the objective here clearly is to indict the drug companies as greedy capitalist pigs. It is worth noting that the comparison is strictly between the ingredients and the shelf price with the conclusion being that the difference represents the profit margin of the manufacturing drug company. This conclusion can only lead one to conclude that Ms Davis is either totally devoid of any underestanding of economics, manufacturing, distribution, and capitalism, or she has a hidden agenda, which is to show how evil capitalism is.

Several years ago I did value chain research on a wide variety of products ranging from potato chips to automobiles and what I found was very interesting indeed. It is quite common for the raw ingredients to cost pennies while the product cost dollars. One of the products my team and I looked at was canned English Peas. The cost of the peas in the can was miniscule with the cost of the can itself costing more than the product inside. Virtually the total cost of this can of peas was in the packaging and distribution -- items that this mininon of the Department of Commerce glossed over in her rush to demonstrate the greed of the drug companies. In her example the drug ingredients cost pennies but the end cost is many times that, what is missing in the analysis is the rationale for the mark-up. The implication is that the drug companies and pharmacies are greedy big companies gouging everyone in the name of profit. This is a typical view held by most liberals because for the most part they rarely think and substitute what they "feel" for analysis and feelings are more important to liberals than facts. First off consider that the R&D cost for these drugs are huge plus the successful ones must pay for the R&D of the drugs that never make it. Then there are processing costs and anyone who has ever been in a process manufacturing facility knows how expensive they are and these manufacturing costs(taxes, wages, maintenance, etc.) must be absorbed by the product and consumer. Certainly, there are G&A costs as well and the marketing part of these costs are always suspect but even if these were eliminated entirely the end cost would not be greatly affected and my value chain research demonstrated this. Once the product is made -- i.e. the pill, then they must be packaged and shipped and then distributed. All of these steps add overhead and cost.

So the complaint is that the pharmacies are gouging their customers (and taxpayers via medicare) so they can build a Walgreen's on every corner. Obviously the author of the complaint feels this is wrong but where the consumer should get their prescriptions filled is ignored. This looks very much like the Neo-Marxist attitudes that pervade the universities. The consumer be damned -- we -- the government -- know what is best for you because you ignoramuses are too stupid to make decisions for yourself. Apparently Ms Davis would have the government set up their own pharmacies or better still set the price for the product. The fact that price controls have failed from the time of the Roman Empire until now is generally ignored just as the failure of Marxism is ignored.

This entire complaint is poorly thought out, alarmist, and certainly doesn't bear any marks of competent research. I suspect it is simply another example of some lightly educated liberal who is convinced that profit is bad, business is evil, and all of those engaged in these are simply instruments of the devil. I did notice that the author is not engaged in any of these nefarious activities but works for the Government where they spend our money on things that they think are good for us even if we don't want them.


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