Pharmaceutical companies spent about 21 percent of their sales in 2000 on developing and testing new drugs, more than any other industry and twice as much as the computer software industry. Nevertheless, Microsoft reported a 39 percent profit last year, while BMG Software reported 28 percent. Pharmaceutical companies are so profitable because they charge high prices. While total spending on pharmaceuticals has been growing rapidly averaging a 13.7 percent annual increase between 1995 and 1999 most of that spending is due to an increase in new products and volume of sales, not higher prices. For example, while prescription drug sales grew by 18.8 percent in 1999, 14.6 percentage points of that growth was due to increased volume and new products, while only 4.2 percentage points of the increase was due to higher prices.
Drug companies make so much money because their products are patented.
There are many industries in which copywrited, patented or trademarked products compete strongly, advertise heavily , keep their prices low and still make high profits. But nobody cares because they aren t prescription drugs. The drug industry is very competitive. No drug company has more than 7.2 percent of the U.S. market. However, the prescription drug industry could be even more competitive than it already is which would have a price-lowering effect but only when the industry faces fewer regulations and consumers begin demanding not just the best drug, but the best value for their dollars.