Economics, Ethics, and CSR

Parth Patel
Business 1.0
February 24th 2013


Blog #2: Economics, Ethics, and CSR

·      What are the basic economics of the industry? How do companies make money?  What are their costs?

The article that I read for this blog talks about the how pharmaceuticals are actually making their money.  The article also discusses about how the pharmaceutical companies are displaying information about drug costs and expenses in a way that makes it more beneficial to the company and displays the information in such a way as to disguise the real information.  This article is an interview with Marcia Angell who is a physician and the editor in chief of the New England Journal of Medicine.  Marcia talks about how the pharmaceutical companies display the cost of each drug to distribute by including the opportunity cost.  The company displays the cost of distributing a drug as around 800 million dollars, when really it is only around 400 million dollars.  The companies say that their numbers are more correct because they take into account the cost of the time that they didn’t spend producing another drug.  The opportunity cost ends up almost doubling the actual cost.  Angell also talks about how the drug companies mark up drug prices by “20 percent” from the manufacturing price.  This article may be from 2004 but still contains the important essentials for understanding how the pharmaceutical industry makes it money and the costs that they have.  Angell also talks about how the pharmaceutical industry has much more product than it needs.  She talks about how there are about 5 drugs for every purpose.  She feels that this does not need to be occurring because every drug does the same thing.

Pharmaceutical companies make their money from the production of drugs.  The profit is made from selling the drugs at a higher cost than what it took to produce.  As previously stated that could mean increasing the price by 20 percent to ensure a large profit.  To the consumer this just means high prices for drugs.  The pharmaceutical industry has an advantage.  People need their prescription medication.  For people on heart medication or cancer treatment they have no choice but to pay the high prices that the companies charge.  The pharmaceutical company has many costs.  Their costs include production, transportation, and marketing.  The article talks much about how the pharmaceutical companies attribute much of their costs to research and development.  Angell talks about how the companies attribute the high prices of the drugs to the fact that they need money for research and development.  The pharmaceutical companies put much of their profit back into research and development because research and development means different drugs.  The more types of drugs there are the more money companies can make.  The more money companies can make the more money they can put into research and development, and thus a cycle begins.

Reference: 

http://motherjones.com/politics/2004/09/truth-about-drug-companies