For things like drugs and treatments, which often are covered by patents, you shouldn’t necessarily get to charge whatever the market will bear. But even then, looking to costs is a bad idea. If saying “you should be entitled to a 10% return above your costs” actually worked, why not do it for everything? Why not pass a law that says that smart phones can only be sold for 10% above cost? If that would work for drug development, it would work for smart phones too. From the supply side, the two are very similar: top talent + massive capital investment + high-tech manufacturing = product. We’d have $300 iPhones every bit as good as what we have now, right?
For drugs, a “fair price” is best determined by looking to return on investment. If the investors in Novartis are earning 10x what they could have earned by investing in a web tech start up, maybe that is unreasonable. Such high returns are unnecessary to keep capital from fleeing to alternative industries.
But that’s not what is happening. Novartis’s return on invested capital last quarter was 9.5%. Alphabet’s was 37%. Novartis is not making outsized profits. It’s making healthy profits consistent with investing in a high-risk, high-tech industry.
A contrary moral rule creates perverse incentives. It tells people that if you want to save lives, you need to invest billions of dollars while getting a minimal return. But if you just want to peddle advertising, you’re free to make as much money as you want. If you consider some things “too important” for the profit motive, what you’re doing is incentivizing people to invest money, time, and their careers in things that aren’t important.