What Do Drug Companies Make?

It sounds like a trick question, doesn't it? And at one level, it is.

Andrew Ross Sorkin, in a DealBook column in today's New York Times, asks the question a little differently: Do drug companies make drugs, or money?

He begins with a passionate-sounding quote from the CEO of Valeant Pharmaceuticals:

I just want to emphasize that this is an industry where it is composed of really great people, working to do good things for patients, for doctors and actually for society, and when I look at our employees, there is sort of a noble purpose to working in the pharmaceutical industry.

Wow - I can almost hear the banners snapping in the breeze and a brass band playing something triumphal, can't you?

Alas, it's mostly an auditory illusion.

The reality, as Sorkin lays out, is that Valeant is "among the least innovative" of the drug companies. That's not to say it hasn't been profitable. Its CEO has achieved success "by sharply cutting research and development budgets, arbitraging tax domiciles — Valeant left the United States for Canada’s lower tax rates in 2010 by merging with Biovail — and buying rivals so he can cut their costs, too, while they take advantage of his lower tax rate."

Now Valeant has set its sight on Allergan, whose stock "is up 290 percent in the last five years."

Now what I hear is lip-smacking, because "Valeant, desperate for ways to increase its revenue, needs a cash cow to milk until it can find the next one."

Allergan invests five times as much of its revenue in research and development as does Valeant, and Valeant has already been quoted as planning to cut 20 percent of the combined companies' workforce.

There's no question that pharmaceutical companies have a right -- and an obligation -- to be profitable, just like any other company. The questions arise when profitability becomes an end in itself. How many "good things" are you still doing "for patients, for doctors and actually for society" at that point?