Question

Firms in the patented pharmaceutical industry earned an average return on net worth of 22 percent in 2006, compared with an average return of 14 percent earned by over 1,400 firms followed by Value Line . Which theory or theories of profit do you think best explain(s) the performance of the drug industry

Answer 1

Answer and Explanation:

The following theories of profit best explain the profits of pharma companies:

1. Risk bearing - The theory says the higher the risk, the higher the rewards. The pharma companies take huge risks in inventing a new drug, having trials and the getting FDA approvals.

2. Monopoly - If a new drug is approved, the pharma company gets a patent over it, which means that it will have an effective monopoly on that segment of the market.

3. Innovation - it states that innovation is what keeps a company ahead. And pharma industry is built on innovation. Pharma companies have to continuously find new drugs because once patents run out on existing drugs, there are no profits to be made.