[mlyle]

For the private parts of development, the costs are absolutely priced in. A large drug company needs to amortize the cost of all development attempts, not just the successful ones. Private investments into smaller firms price in a very large chance of failure, so the cost of capital is quite high.

[pfdietz]

That's not quite right. A drug company with a new product will charge whatever the market will bear. What the costs do is control the scope of the industry: if profits are high, the industry expands to try more kinds of drugs, stopping when the attempts on the margin are just profitable enough (on average). If profits are not expected to be adequate, the industry contracts.

[mlyle]

That's close to what I tried to say.

Perhaps you prefer: A company must think it's likely that they'll have a good return on all development costs, not just the costs of drugs that happen to be successful, to continue to invest.

> if profits are high, the industry expands to try more kinds of drugs, stopping when the attempts on the margin are just profitable enough (on average).

Of course, something like pharmaceutical products, with exclusive sales of specific products, few sellers, strategic conduct relative to other industries (insurers), and heavy regulatory influence is not guaranteed to converge to normal profit.