Pharmaceutical R&D

In an over-the-top post Megan McArdle goes all Xena warrior princess on Ezra Klein and Jerry Avorn.  I especially liked this bit: Here's Avorn on why we need not worry that regulating drug prices will reduce innovation:

There are a couple reasons that this is a specious argument. One is that according to their filings with the SEC, the drug companies only spend about 15 cents of every dollar on research and development. That's compared to more than 30 cents in administration and marketing and more than 20 cents on shareholder equity. As an investment in R&D, I think any venture capitalist would say a company spending 15 percent on research is not a robust innovation engine.

and here is McArdle swinging the sword of truth:

This makes about as much sense as saying that Dr. Jerry Avorn cannot be that smart because his brain only weighs about three pounds. Presumably, you can't be really smart–really innovative–unless your brain is at least 30 percent of your body weight!

This is obviously ludicrous–so why would Dr. Avorn say it about an R&D department? Like your brain, the R&D department is part of a complex system that does a lot of important stuff. You can argue that the R&D department is the most important part of a company, not least because it couldn't survive long without it. I think the same thing about my brain–but I'd still be just as dead without my liver. You certainly can't prove anything about my effectiveness as a journalist by pointing out that [my brain] weighs less than my bones. So how big should a "brain" be? Hard to say. But let's look at some companies that are generally recognized as pretty innovative, and their R&D as a percentage of revenue:

Apple:  three cents out of every dollar

Google:  ten cents out of every dollar

Intel:  fifteen cents out of every dollar

Genzyme (innovative biotech startup!):  sixteen cents of every dollar

US Government:  three cents out of every dollar

I can assure Dr. Avorn that any venture capitalist would be happy to invest in these hidebound laggards who haven't had a new idea in centuries. The first few, anyway.

By the way, I liked Jerry Avorn's book Powerful Medicines (see also here) but I thought it was weak on economics, a fact which really shows in this interview (he does make a few good points about comparative effectiveness research). 


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