A set of circumstances meant that major pharmaceutical companies over the last twenty years have become basically marketing concerns.
First, the early stages of research are very risky, but not that capital-intensive: several approaches to a problem are tested to see which works best. Management research has shown that due to their massive bureaucracy, the majors do a terrible jobs in evaluating which attempts are really promising and which need to be quickly axed.
Second, the financial market distrusts integrated concerns as too many things happen at the same time, making it difficult to undestand earnings.
As a result, pure research companies (a.k.a. "biotech" companies) lead by entrepreneurial scientists who take significant gambles based on their deep scientific knowledge are increasing the source of early research. The biotechs often derive from the spin-off of the major's research labs or sometimes by the initiative of young university researchers. They are lean organisations, with minimal overheads and quick decision-making. High-risk, high-reward specialised investors (venture capital, private equity partnerships, business angels and sometimes - more recently - hedge funds) finance the spin-offs or start-ups.
When a really promising molecule is found, the biotechs sell it to the majors. The majors are financed by the stock market, so they have the vast financial resources necessary to carry out the final, more capital-intensive stages of the research. These late trials on human-like apes and humans are very expensive but the focus is on the strict observation of established protocols in an uniform way with no space for creativity, a task where large organizations do very well as they can enjoy purchasing power and professional financial controls.
Actually, for financial reasons (i.e. accessing the loss made by the biotech to pay less tax) it is often more worthwhile for the majors to buy the whole biotech company and shut it down. Can you see that line on Pfizer accounts called "acquired research and development"? That is the part of the biotech acquisition price that can be amortised by the majors using complicated US-GAAP and SEC rules.
Other than financing advanced clinical trials, the crucial aspect of a major's job is marketing: lobbying to the regulatory authority (FDA) and to the doctors through their army of sales reps. Again, another task that requires financial muscle, discipline and established procedures.
In conclusion, the majors do use a lot of smoke and mirrors to justify the prices of medicines (in this I agree with sudogeek). They want to convince us that the prices are determined somehow scientifically taking into accounts the cost of innovation, when probably they do not know themselves how much they spent in research.
I repeat, majors outwitted the regulators in the United States. But in Europe and elsewhere, old-fashioned central purchasing and price-bargaining is working much better.
GBH - "The whole point is that the App Store acts as a firewall between busy soccer moms and goatse links"
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