>This, of course, is a big charade. The cost of producing a drug is low relative to its sales price (gross margins are high, see the pharmaceutical companies’ 10-Ks!)
A drug is not a widget. You can't just make one. Almost all drug programs end in abject failure, usually far before even the clinical trial phase. Gross margins have to be high because you have to pay for 10 failed programs with the successful one.
And one reason that profits are low in the US because that's where there R&D happens.
Oh, that definitely explains the record profits. How silly of everyone. Everyone you can put the pitchforks down, it’s fine, we should just ignore that they run an excessively profitable business overcharging for basic life-saving drugs developed 10 years ago because they occasionally lose money on new drugs, even though it’s not nearly enough to cause a dip in profit. It’s fine, it’s all fine, move along.
Big Pharma profits low in the US? Please. Their R&D happens wherever talent is cheapest, their tax havens wherever laws are loosest, and their profits—record-breaking year after year—safely deposited wherever shareholders are happiest. If only their medicines were as creative as their accounting.
The real innovation is their business model: socialize the research costs, privatize the profits. Billions in taxpayer dollars fund the basic science, university labs, and early clinical trials that underpin 'breakthrough' drugs. Yet when these public investments strike gold, not a penny in dividends flows back to the public coffers that made it possible. Instead, we pay twice—first through our taxes to develop the drugs, then through world-leading prices to access them. That's not capitalism; that's a publicly-subsidized monopoly.
The expensive parts of drug R&D aren't the 'talent', it's the clinical trials. You can't simply offshore those, not if you want FDA approval.
Summit Therapeutics is the largest drug company by market cap without an approved product and has only 159 employees. Only a fraction of which are scientists. They are spending 2x as much on R&D every quarter as they are on total G&A expenses company-wide. It's basically all clinical trials. They're already in about $600m for R&D alone since they went public. If they don't get that back from patients/insurers, they're unsustainable.
Summit Therapeutics embodies the exact pharma model we've been critiquing - their business strategy isn't about bearing enormous R&D risks alone, but about strategically distributing those risks while maintaining private profit potential.
Their lead product, Ivonescimab, wasn't discovered or developed by Summit at all. They simply licensed it from Akeso for $500 million upfront.
They received up to $72.5 million from BARDA (taxpayer money) for Ridinilazole development and another $7.8 million from CARB-X (a public-private partnership) for SMT-738.
Their "innovation" model relies heavily on academic partnerships - Ridinilazole originated from publicly-funded university research, and they're leveraging MD Anderson's infrastructure rather than building their own.
Meanwhile, their executives received enormous compensation packages - in 2023, just two executives (Zanganeh and Soni) received compensation valued at $44.2 million, representing over 74% of their entire GAAP R&D budget that year.
Even their clinical trials for Ivonescimab combinations are being funded by Pfizer, not Summit.
This isn't a small company heroically bearing enormous R&D costs - it's a company that has masterfully distributed those costs across government grants, academic partnerships, and external collaborations while positioning itself to capture the profits if any of these products succeed.
How much of that budget goes to actual research versus 'seeding trials' designed to familiarize doctors with prescribing patterns?
When taxpayers fund the foundational research and patients pay premium prices, perhaps the real innovation isn't in the lab but in a business model where public investment yields private profit.
That's not risk-taking capitalism: that's having your cake, eating it too, and charging the baker.
The cost of trails and approvals is not something that needs to be covered because these costs are optional (and i guess the processes can be paused arbitrarily). Profits allow you to invest in new drugs but there are other ways of financing those, like investors or loans.
The general point is, that large drug companies can leverage many things while pretending R&D _requires_ high margins.
A drug is not a widget. You can't just make one. Almost all drug programs end in abject failure, usually far before even the clinical trial phase. Gross margins have to be high because you have to pay for 10 failed programs with the successful one.
And one reason that profits are low in the US because that's where there R&D happens.