8 ms·

You're looking at the wrong data. You need to look at return on capital. Right now the return on capital in pharma is below the cost of capital and it's trendi

by ikeboy 7y ago

You're looking at the wrong data. You need to look at return on capital. Right now the return on capital in pharma is below the cost of capital and it's trending towards zero. The inevitable result is significantly lower funding for research. https://endpts.com/pharmas-broken-business-model-an-industry-on-the-brink-of-terminal-decline/ https://endpts.com/pharmas-broken-business-model-an-industry...

amluto 7y ago
This suggests that something is very wrong with the market. The costs of development and production (even ignoring failures) are way below revenue, which means that return on capital should be very positive. Somehow most of the money is going into overhead. One might debate whether the overhead constitutes corruption, but it should be able to be reduced.
- toomuchtodo 7y ago
  I don’t demand my roads, libraries, or other public goods turn a profit. I wouldn’t demand the same of public pharma research (NIH, DARPA). Perhaps the market is not designed for this sort of endeavor (drug research). Let government stand in where the market has failed.
  - fjp 7y ago
    "Markets" are poorly designed for health care/research investment in general. Just like roads, education, general science research, etc... It just doesn't play well with being largely run with a profit motive. That's not to say there's on place for the private sector there, but there is massive friction between a profit motive in drug research and you know, building a more healthy society. See the "new Adderalls" like Vyvanse that offer no benefits over Adderall, but Adderall's patent is up so it can be made by generics and isn't as profitable anymore.
    - zip1234 7y ago
      Competition is what drives down costs in a market. If costs are going out of control, perhaps there is something in the current system that is preventing competition? Lack of price transparency?
      - fjp 7y ago
        Lack of price transparency is an issue. There's waaay too many misdirections and misaligned incentives between the price a consumer pays for a drug and the manufacturer's pricing. But again, market-based solutions are just not appropriate for essential health care. You would pay ANYTHING to not die - there's no price elasticity of demand. Every other developed country has figured out that this is simply immoral.
      - conanbatt 7y ago
        Competition drives down profits, not necessarily costs. If you passed a law that funds pharma startups to produce drugs, you would reduce profits and increase costs (through taxes). Cost goes down with increased productivity. Competition sometimes brings that, sometimes it doesn't. Economics can be complex!
  - learc83 7y ago
    As long as we have effective monopolies on new drugs, (either through patents or trade secrets) the market cannot function to drive down prices. I don't know why people like to pretend that it can. Life saving drugs are as close to perfectly price inelastic as you can get assuming no competition.
  - rayiner 7y ago
    Except the market has succeeded fantastically. In my lifetime alone, AIDS and HepC went from death sentences to chronic conditions. Many forms of leukemia went from fatal to highly treatable. Meanwhile, what has the government done? The trip from DC to New York on Amtrak is slower today than it was in 1960. In 1980, DC’s Metro had self driving trains. They had to shut that down in 2009 due to lack of maintenance and the unions. Spending on public education, adjusted for inflation, per student since 1960. But achievement hasn’t budged one inch. If the drug industry has failed, what words are in the English language for what the government has done?
    - mmhsieh 7y ago
      there is a distribution of talent in the government as there is in a private enterprise. the talent is distributed as much across functions as within them. where government "chooses" to be excellent, it is. such pockets of excellence are nurtured by funding, top cover and insulation from the inefficient and less competent parts of government. if policymakers wanted to create an enclave of excellence in public pharma, it could. if.
    - learc83 7y ago
      Of course you can find examples of where the private sector outperforms government. And I can provide counter examples. I just moved to a much smaller city (in the same region) with gigabit municipal internet. For the same price that I was paying comcast for 50 mbps internet, I now have 20 times the speed with no data caps. The market works great until it doesn't. The interstate system, and the military are 2 prime examples where the market is never going to provide a solution. Affordable medical care for everyone is another.
      - rayiner 7y ago
        I’m not just giving examples. Education and infrastructure are two of the big pillars of why we have government in the first place, and US government bodies have failed miserably on both fronts despite enormous funding. As to municipal internet—its great until it’s not. Maryland has municipal cable systems that were built a couple of decades ago, and they have struggled to keep up with the DOCSIS upgrade treadmill. Additionally, what problems exist with broadband in the US are largely government created. Comcast has no data caps almost everywhere in Maryland, because it’s in competition with Verizon. The only place that’s not true is Baltimore—where the city legally prevented Verizon from coming in and competing with Comcast. Verizon wanted to wire up Baltimore—the city wouldn’t allow it to do so. Speaking more generally, DC Metro was snazzy at first too, but was unable to maintain the system long term. It’s interesting you focus on the price point: is $50 sustainable? Charging too little is actually a big problem. A subway ticket in London can cost 2-3x as much as one in New York, despite the two systems being very similar in age and size. Unsurprisingly, the London subway is doing fine and the New York subway is falling apart.
- ikeboy 7y ago
  When it costs billions to develop a new drug due to onerous testing regulations, that's what happens. Ultimately returns in every industry tend towards zero. If we made it cheaper to develop new drugs it would extend the lifespan of the industry somewhat but not indefinitely. At some point diminishing returns take over and investment must go down.
  - toomuchtodo 7y ago
    How much is spent on marketing in comparison? Only in the US and New Zealand can you market drugs directly to the public. I sense an opportunity to destroy an unnecessary cost.
    - ikeboy 7y ago
      If you believe the market is choosing to waste money on ineffective marketing, sure. Do you have any particular reason to think that? Why would you expect return on capital to go up without marketing?
      - deleted 7y ago
        [deleted]
      - MiroF 7y ago
        Unnecessary from a benefit to society perspective - the marketing might be very effective for them but that is besides the point. If nobody is marketing, that definitely might increase return on capital.
      - jogjayr 7y ago
        You only need one participant in the market to start advertising and seeing profits, and then everyone else has to follow suit. Collectively the money may still be wasted because no one's relative market position changes very much.
        jessaustin 7y ago
        As much as the erection drug ads annoy me, this argument may prove too much... It may be that humans would be happier and the economy more efficient if all marketing were outlawed?
behringer 7y ago
I believe they like to call that "Hollywood accounting."
robbiemitchell 7y ago
This is some random person's calculation of industry returns. A person who says he works for a pharma company and doesn't link to any actual data. https://www.linkedin.com/in/kelvinstott/ https://www.linkedin.com/in/kelvinstott/
- ikeboy 7y ago
  He has sources for the data. You can look those up.
mumblemumble 7y ago
This analysis you link leaves plenty of room for either or both stories to be correct. Perhaps the marketing and R&D departments compete internally for budget. They certainly do at every other company I've worked at. And drug marketing is peculiar. One would expect demand to be largely inelastic, so it's odd to see marketing spend on par with that of soft drinks in the industry. Nor can we safely assume that whatever portion of demand is driven by marketing is beneficial from a public health perspective, given that overtreatment is known to be a serious problem in the USA, and that a significant motivator for overtreatment is patient pressure on health care providers.

by ikeboy 7y ago

amluto 7y ago

This suggests that something is very wrong with the market. The costs of development and production (even ignoring failures) are way below revenue, which means that return on capital should be very positive. Somehow most of the money is going into overhead. One might debate whether the overhead constitutes corruption, but it should be able to be reduced.

toomuchtodo 7y ago
I don’t demand my roads, libraries, or other public goods turn a profit. I wouldn’t demand the same of public pharma research (NIH, DARPA). Perhaps the market is not designed for this sort of endeavor (drug research). Let government stand in where the market has failed.
- fjp 7y ago
  "Markets" are poorly designed for health care/research investment in general. Just like roads, education, general science research, etc... It just doesn't play well with being largely run with a profit motive. That's not to say there's on place for the private sector there, but there is massive friction between a profit motive in drug research and you know, building a more healthy society. See the "new Adderalls" like Vyvanse that offer no benefits over Adderall, but Adderall's patent is up so it can be made by generics and isn't as profitable anymore.
  - zip1234 7y ago
    Competition is what drives down costs in a market. If costs are going out of control, perhaps there is something in the current system that is preventing competition? Lack of price transparency?
    - fjp 7y ago
      Lack of price transparency is an issue. There's waaay too many misdirections and misaligned incentives between the price a consumer pays for a drug and the manufacturer's pricing. But again, market-based solutions are just not appropriate for essential health care. You would pay ANYTHING to not die - there's no price elasticity of demand. Every other developed country has figured out that this is simply immoral.
    - conanbatt 7y ago
      Competition drives down profits, not necessarily costs. If you passed a law that funds pharma startups to produce drugs, you would reduce profits and increase costs (through taxes). Cost goes down with increased productivity. Competition sometimes brings that, sometimes it doesn't. Economics can be complex!
- learc83 7y ago
  As long as we have effective monopolies on new drugs, (either through patents or trade secrets) the market cannot function to drive down prices. I don't know why people like to pretend that it can. Life saving drugs are as close to perfectly price inelastic as you can get assuming no competition.
- rayiner 7y ago
  Except the market has succeeded fantastically. In my lifetime alone, AIDS and HepC went from death sentences to chronic conditions. Many forms of leukemia went from fatal to highly treatable. Meanwhile, what has the government done? The trip from DC to New York on Amtrak is slower today than it was in 1960. In 1980, DC’s Metro had self driving trains. They had to shut that down in 2009 due to lack of maintenance and the unions. Spending on public education, adjusted for inflation, per student since 1960. But achievement hasn’t budged one inch. If the drug industry has failed, what words are in the English language for what the government has done?
  - mmhsieh 7y ago
    there is a distribution of talent in the government as there is in a private enterprise. the talent is distributed as much across functions as within them. where government "chooses" to be excellent, it is. such pockets of excellence are nurtured by funding, top cover and insulation from the inefficient and less competent parts of government. if policymakers wanted to create an enclave of excellence in public pharma, it could. if.
  - learc83 7y ago
    Of course you can find examples of where the private sector outperforms government. And I can provide counter examples. I just moved to a much smaller city (in the same region) with gigabit municipal internet. For the same price that I was paying comcast for 50 mbps internet, I now have 20 times the speed with no data caps. The market works great until it doesn't. The interstate system, and the military are 2 prime examples where the market is never going to provide a solution. Affordable medical care for everyone is another.
    - rayiner 7y ago
      I’m not just giving examples. Education and infrastructure are two of the big pillars of why we have government in the first place, and US government bodies have failed miserably on both fronts despite enormous funding. As to municipal internet—its great until it’s not. Maryland has municipal cable systems that were built a couple of decades ago, and they have struggled to keep up with the DOCSIS upgrade treadmill. Additionally, what problems exist with broadband in the US are largely government created. Comcast has no data caps almost everywhere in Maryland, because it’s in competition with Verizon. The only place that’s not true is Baltimore—where the city legally prevented Verizon from coming in and competing with Comcast. Verizon wanted to wire up Baltimore—the city wouldn’t allow it to do so. Speaking more generally, DC Metro was snazzy at first too, but was unable to maintain the system long term. It’s interesting you focus on the price point: is $50 sustainable? Charging too little is actually a big problem. A subway ticket in London can cost 2-3x as much as one in New York, despite the two systems being very similar in age and size. Unsurprisingly, the London subway is doing fine and the New York subway is falling apart.
ikeboy 7y ago
When it costs billions to develop a new drug due to onerous testing regulations, that's what happens. Ultimately returns in every industry tend towards zero. If we made it cheaper to develop new drugs it would extend the lifespan of the industry somewhat but not indefinitely. At some point diminishing returns take over and investment must go down.
- toomuchtodo 7y ago
  How much is spent on marketing in comparison? Only in the US and New Zealand can you market drugs directly to the public. I sense an opportunity to destroy an unnecessary cost.
  - ikeboy 7y ago
    If you believe the market is choosing to waste money on ineffective marketing, sure. Do you have any particular reason to think that? Why would you expect return on capital to go up without marketing?
    - deleted 7y ago
      [deleted]
    - MiroF 7y ago
      Unnecessary from a benefit to society perspective - the marketing might be very effective for them but that is besides the point. If nobody is marketing, that definitely might increase return on capital.
    - jogjayr 7y ago
      You only need one participant in the market to start advertising and seeing profits, and then everyone else has to follow suit. Collectively the money may still be wasted because no one's relative market position changes very much.
      - jessaustin 7y ago
        As much as the erection drug ads annoy me, this argument may prove too much... It may be that humans would be happier and the economy more efficient if all marketing were outlawed?

behringer 7y ago

I believe they like to call that "Hollywood accounting."

robbiemitchell 7y ago

This is some random person's calculation of industry returns. A person who says he works for a pharma company and doesn't link to any actual data. https://www.linkedin.com/in/kelvinstott/ https://www.linkedin.com/in/kelvinstott/

ikeboy 7y ago
He has sources for the data. You can look those up.

mumblemumble 7y ago

This analysis you link leaves plenty of room for either or both stories to be correct. Perhaps the marketing and R&D departments compete internally for budget. They certainly do at every other company I've worked at. And drug marketing is peculiar. One would expect demand to be largely inelastic, so it's odd to see marketing spend on par with that of soft drinks in the industry. Nor can we safely assume that whatever portion of demand is driven by marketing is beneficial from a public health perspective, given that overtreatment is known to be a serious problem in the USA, and that a significant motivator for overtreatment is patient pressure on health care providers.