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Originally posted by Tyrone_Slothrop
I keep trying to figure out what you are saying, and obviously I just can't get it.
If Big Pharma Inc. makes profits of $100 million, it can either pay this money as dividends or invest it in R&D. It can't do both. I understand that you think that the latter benefits shareholders by creating equity in the corporation, but profits need not be re-invested, and the company can borrow to invest in R&D.
Pharma can borrow money to invest, if the return is there. If the expected return is there, it will do this even if it isn't earning profits at the time.
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Allow me be more clear.
R&D is an expense which, along with other expenses, is subtracted from revenues to give you net income (i.e., profit). So to say that the $100 million in profits is "invested" in R&D is not technically correct.
The $100 million can be distributed to shareholders in the form of a dividend and this obviously benefits them as money in their pockets. The $100 million can also be kept in the company as retained earnings (i.e., shareholders equity), and this benefits the shareholders by increasing the enterprise value of their shares. "Investment" by the company in R&D theoretically benefits the shareholders in that it provides a platform for future profits.
Yes, the company can borrow for R&D, but whether it is efficient to do so is directly related to how profitable the company is, because the "cost" of borrowing is based, in nearly all cases, on the company's EBIT (earnings before interest/taxes) or EBITDA (EBIT plus depreciation/amortization). Thus, the more profitable the company, the cheaper the borrowing and vice versa. The company could also tap the equity markets for R&D, but the efficiency calculation in that case is also dependent on profitability.
And that is the magic link between profits and R&D*
*for one so quick to criticize my economics knowledge, your knowledge of finance and accounting leaves a whole lot to be desired.
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Originally posted by Tyrone_Slothrop In your (a), it's not acting rationally. So let's put that aside. Just call it monopoly pricing. Again, we're talking Econ 101 here. Your (b) is irrelevant, since other pharma products are not necessarily substitute products. Your (c) is undercut by Burger's observation that pharma earns its profits on the period before generics can compete. Since generics are substitutes, it suggests that there are not other substitutes.
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You obviously were not reading our conversation closely, but I'll just point out that you ignore in (b) and (c) my contention that it is not just generics that big pharma competes with, but other big pharma with patents for similiar uses, as well as alternative treatments.
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Originally posted by Tyrone_Slothrop You have a lot of faith in markets for someone who obviously hasn't taken any economics. In a competitive market, social utility is maximized by letting competition set prices. This is why government generally should not engage in price regulation. Monopolies are an exception to this rule. It is long since settled that monopolists will set prices too high, maximizing returns to them but producing a societally suboptimal distribution of resources. This is why local phone service rates are government regulated. I do not believe that the government is better than private actors at setting prices, as a general rule. But there are situations in which markets do not produce the best results, and this is one of them.
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I agree with this entirely in concept if we are in a true monopoly setting or an oligopoly with collusion. My (and I think Hank's) contention all along is that we are not convinced that is the case and that is why we have continued to explore the issue.
[edited for spelling and other non substative shit]
