Now, they let the markets take the risk of developing new drugs and they spend their money on sales, advertising and acquisitions. Smaller companies and startups that develop a promising compound go to Wall Street and raise money to investigate and develop the drugs from wall street investors. If and when one of these smaller companies hits on a new drug then one of the big biotech companies will just buy the company or the drug from the small company, often using their own stock to do it. So they take few risks and more or less only bet on sure things (though there have been a few high profile disasters, like CELG's last acquisition (which forced them to sell to another company themselves) and Bausch & Lomb (used to be VHC) which used debt to buy up a bunch of medium sized companies trying to make a very large biotech, a couple of hedge funds ran the stock way up... but it was a huge debt bomb and the company stock has crashed 90% from its peak.
Some of the major companies a few years ago came to some agreement to "trade divisions" with each other, I won't tell it exactly right right but for example say Proctor & Gamble decided it would focus on consumer goods, so they trade their drug division to Johnson and Johnson in return for obtaining JNJ's consumer products division. They decided to focus and monopolize rather than compete with each other.
Thank you for the detailed explanation of ways in which this works. However, I would really like your thoughts on what would happen if the IRS only allowed $1million to be deducted from the corporate taxes, meaning that the stockholders would be more conscious of the ridiculously high pay many in upper management are receiving. I own some GE stock, and when it was crashing from $50 to $5, and stayed low afterwards, I was outraged to see that the top 7 executives were still being paid between $11 and $22 million well after their pixx poor performance.
I chose the $1million figure because there is a lot of nostalgia for the late 50s and early 60s when top executives only earned about 40 times what the lowest level workers earned. In recent years it has ranged from 200 to 1,000 times the lowest pay levels. So I thought take the target political wage of $15/hr. Multiply it to a years pay and then times 40, and that was around $1million. If everybody things those were such great years, then let them live and pay on that scale.