Using numbers
I recently posted on drug prices and Jack wrote back and presented an interesting number that I think nicelybillustrates why details are important and why I so rarely trust “facts” Jack likes to present.
The number presented by Jack was that drug companies spend $1 in 5 on research and development. Which had some sort of a reference on the site Jack linked to, but the site itself looked a little suspect. But let’s presume for the sake of argument the number is accurate. It probably is in some sense and I don’t have a problem with the number.
But here is the problem. The number doesn’t mean anything by itself, plus it is a matter of how you frame the number. Anyway let’s give some thought tothis number Jack has presented. I will need to make a few assumptions to illustrate the point and I freely admit all of thefollowing numbers are chosen for convenience sake and not because I looked them up. They are nice an round and thus easy to work with.
So, Jack has published the following two data points
1) Drug companies spend about 20% of “money” on new drug research.
2) They make about 18% profit relative to revenue.
Jack can correct either of those if I have misread but let’s break down the numbers a bit and see what they reveal.
For the sake of argument, let’s assume the generic drug company is generating a revenue of 1 million dollars. Obviously this is low, but it is a nice managable sum and easy to work with.
So if they have 1 million in revenue and 18% of that is profit what does that 1 dollar in 5 mean?
If it means 20% of revenue then they are spending 200 thousand dollars of every dollar they take in on R&D. Now don’t forget everybody gets paid and the lights get turned on out of that 1 million as well. So that is actually a huge amount.
Perhaps what they meant w as that the spend 20% of the profits on R&D, which would mean 20% of the $180,000 is reinvested in new drug research, which would be $36,000 in R&D or 3.6% of revenue goes into R&D. Which is a lot less.
Unfortunately Jack’s number doesn’t specify although my guess is that if it was the second they would cite that instead as they are attacking drug companies.
Also the number is still problematic as there is no frame of reference. Is 20% a lot or a little of revenue to spend on R&D? What does Microsoft or Intel spend on developing new products? Or even Hasbro ? These are companies that make their money from developing new products as well. What do they spend on R&D? I used to work for Canon and I doubt they spend 20% of revenue on R&D. I currently work for a small medical start up and we would spend more Han 20% on R&D but the whole company is focused on that and I doubt it would get to 75% of our budget.
Now I put it to Jack that he might have a good argument but his data a presented doesn’t show that.
Now Jack may retort that I am only critical of data I disagree with but this is false. There is a wonderful organisation that I regularly support financially called Pink Cross and I sent them an email taking exception with the way they presented the stats on their homepage. Now in truth I offered suggestions that I suspect would make their case much stronger, but in fairness, the numbers here could make Jack’s case much stronger as well.
I really am equal opportunity when it comes to questioning statistics.