The Link Between Gross Profitability And Pharmaceutical R&D Spending
Combined with evidence that profit rates of return on pharmaceutical industry R&D investments tend to exceed risk-adjusted capital costs by only modest amounts, the pattern suggests that pharmaceutical industry R&D is best described by a virtuous rent seeking model. That is, as profit opportunities expand, firms compete to exploit them by increasing R&D investments, and perhaps also promotional costs, until the increases in costs dissipate most, if not all, supranormal profit returns. If this is a correct interpretation of the industry’s behavior, it has self-evident implications for policy interventions aimed at reducing industry prices and profits.
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