Risk and return

The example is from the Economist

The failure of torcetrapib is also a reminder that drug development is an extremely high cost, high-risk activity, and that the most promising new drugs can go wrong even at a late stage. In 2004 Pfizer pledged to spend $800m getting torcetrapib to market, an investment that may now be worthless. And such failures are hardly unusual. In the heart disease area, recent disappointing examples include AstraZeneca’s blood-thinner, Exanta, and Bristol-Myers Squibb’s blood-pressure-reducing drug, Vanlev. Merck is caught up in a costly legal battle following the withdrawal of its pain-killer, Vioxx, in 2004. Side-effects were discovered after Vioxx had gone to market. That failure cost Merck’s then-boss, Raymond Gilmartin, his job

This high failure rate explains why drug firms need to earn huge profits, for a while, on those drugs that do reach the market successfully. It explains why anyone who wants the drugs industry to be as innovative as possible―which is all of us, surely?―should oppose moves to impose limits on the pricing of new drugs, an idea now being actively considered in Washington, DC, by politicians who seem more desperate to cut the cost of health care than to improve its quality.