Drug prices and corporate profits

Recently at a reunion of college friends we fell into a discussion about drug prices. One of us voiced the common complaint that drug prices are too high, and unfair. I countered with the standard free market argument that the high prices are needed to cover development costs; that if pharmaceutical company profits are out of line, the market will respond.
What is the free market response to high profits? The pharmaceutical companies’ products are protected from competition by patent laws. Competitors can’t simply copy a product and produce it at a lower cost.
The proof of the argument might lie in the numbers. Are pharmaceutical companies more profitable than other US companies? The numbers tell you they are. I compared gross profit margins for the S&P 500 versus gross profit margins for the top ten US pharmaceutical companies, for the quarter ending June 30, 2015.

Taking S&P 500 financial results as a stand-in for an average US corporation, the gross profit margin of the top ten US pharmaceutical companies is 83% higher than the average. The following table lists the top ten US pharmaceutical companies with their gross profit margins for the quarter ending 6/30/15.

Bottom line
Do patent laws need to be loosened to allow more competition? Right now pharmaceutical products are protected, and producers have the freedom to charge high prices. The result is that industry profits are nearly double the norm.