I would suggest, though, that Cato's take on the matter is not the full story. After all, pharmaceutical companies are not non-profits - lower revenue in their cases simply means taking out of their profit margins (a few seconds of looking turns up a Wahington Post article from 2005 that Merck had a profit margin greater than 25% and that the pharmaceutical industry was the second most profitable industry). There are also the insane amount of advertising spending they do - given the costs of advertising, that must surely rival their research costs. And then you have skeptical takes on the whole thing like an article by Marcia Angell based on her book about the pharmaceutical industry. She points out there that no one knows how much it really costs to bring drugs to market, but that, more importantly, much of the brunt of research costs are actually borne by universities and such and often funded with NIH money. (How's THAT for market intervention?)

Which raises the inevitable question - should we NOT fund drug research? I for one would be inclined not to say so. What I would like is if drugs funded with public money (at least largely public money - I don't mind if they paid for some of their research equipment with past research or something) weren't being sold at a profit to cover the "costs" of research.