Based on my experience with over 40 different specialty chemical products. The price increases with patent protection and number of process steps required to make. Raw materials usually account for 50 to 80% of the assigned cost. Depreciation (amorticized equipment cost) makes up the majority of the rest. Overhead (local staff salaries) is usually 10 to 15%. A 50% gross margin is pretty big in the specialty chemical business for established products but common for new ones. a 10 TO 20% margin is more typical. Some established products operate at slight losses to provide a complete product line for key customers. The gross margin is then reduced by corporate overhead such as research (typically about 3-5% of sales for most chemical companies).

Based on limited exposure to the pharmeceutical industry through my dad working in marketing at Upjohn, a summer job there in their testing facilities, several job interviews, and being in an appendage of a primarily pharmeceutical company for many years before being spun off I think the drug industries costs are far higher than for most chemical industries. Far more money is spent on advertising because new products are always coming out. Research as a percent of sales is only slightly higher (5-7) but far higher on a per pound basis, primarily because the failure rate is much higher which is then reflected in the cost per pound. They also tend to involve more complicated synthesis processes. Regulation adds far more cost to bringing a product to market and limits the amount of continuous process improvement like I typically do to reduce cost.

In short the prices seem way high to me, but there are reasons for it. I think part of the problem is demand for marginal improvements in health care at a very high cost. If the industry were focused on reducing costs rather than making new drugs prices might actually start to drop.

What is more important to you - Better care or lower cost?

Regards,
Mark