[finolex1]

It's highly debatable over whether lower profits will significantly reduce the incentive to invest, especially considering profits are already high (about 20%). A small drop won't make a significant difference for the lucrativeness of the industry. Perhaps the best way to go about doing this is by reducing patent lengths, rather than some other policy that is easy to circumvent/bend like taxes or price ceilings.

It's also worth noting that a large proportion of the basic research that goes into making these drugs is funded by the federal government or other research foundations, which receive little, if any of the benefits when commercialized. For instance, Alexion's drug is based to some extent on research conducted at Yale by its former CEO, not to mention the whole host of foundational research that preceded it.

[refurb]

A few thoughts since I worked for a biotech company.

R&D management sure as hell looks at the potential returns generated. I've been on projects where the company said "we're going to spend out $500M in R&D funds on this disease because we might actually make our money back. The other disease is off the table since we can't even break-even."

Yes, a lot of basic research is funded by the gov't, but that's minuscule compared to the funding the companies themselves put in. I sat in a meeting when a decision was made to move a promising compound forward. The investment? $400M for all activities post-phase 3. The NIH grants that supported the discovery? Maybe a few million?

[WalterBright]

If the risks of investing in X or Y are the same, but the rewards of X > Y, then investors will invest in X. Capping returns will result in investment dollars going elsewhere.