Drug Companies Are Like, Greedy And Stuff
Our Guv seems to not only have fired up yours truly with his nonsense about the prices that drug companies charge. In this morning's WSJ, Holman Jenkins chimes in with some basic business economics:
...OK, Ted Kennedy probably doesn't understand any of this (or care). His answer for the difference between U.S. and Canadian retail drug prices contains only one syllable: greed. So let's visit the greed argument, since it also possesses the minds of many journalists.
What can it possibly mean to call an industry "greedy"? Drug companies are said to be an unconscionable exception because their profits are comparatively high, 15.4%, when measured as a percentage of sales. But here's a question: Grocery stores have a measly return on sales of 1.4%, and liquor stores an even measlier 1%. So why does anybody invest in these businesses rather than the drug business? Last time we looked, the grocery industry and liquor stores still existed.
Such indictments of the drug industry overlook the fact that profits are a cost -- the cost of a company's capital. Nobody pays back their investors more than they are obligated to. By the same token, if your capital costs are 15.4% of your total costs, profits had better be 15.4% of your revenues or you won't be in business long. Measures of profitability, in short, tell you a lot more about an industry's need for capital than about its "greed."
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