3 ms·

Over the long term... yes, they do try to recoup the costs of developing a drug and a reasonable profit. I was deliberating simplifying things. Over the short

by mbreese 13y ago

Over the long term... yes, they do try to recoup the costs of developing a drug and a reasonable profit. I was deliberating simplifying things. Over the short term, the costs of developing a drug are a sunk cost that has already been financed using the profits from the previous round of drugs. They try to get as much out of the market as they can with their current lineup of drugs so that they can pay for the pipeline that is developing the next round. Over the long term over many drugs on the market, they are hoping that they are able to make a reasonable profit. They have to recoup the costs of developing each drug (including the ones that failed before getting to market). And to satisfy shareholders, they try to make as much profit as they can. The amount that Pharma charges is based on a variety of factors, but you're right that it is largely what the market will bear in the presence competing drugs. For a cancer drug, the amount is whatever the insurance companies will pay. And that amount is always negotiated. The market will determine what is reasonable. However, they still have a giant research and development machine that must be financed. If they aren't making enough on their current drug lineup, a company either needs to charge higher prices or slim down their drug development pipeline.

cma 13y ago
Yes that's all I've been saying. So sure, the future pipeline gets slimmed because of lowered expected returns. There might even be further decreases to productivity of the research pipeline due to economies of scale (investigating one drug may make you stumble on a cure for something you weren't even looking for). Or there might be significant diminishing returns to more pharm industry research, because of the dependence on advances that only come through basic biology research. So it is hard to say which outcome is optimal. Nothing in economics says that the money generated through monopoly prices due to patents is an optimal amount for drug research and development. And why chose 20-year patent terms rather than 30? Or 10? It's just kind of a system we've thrown together haphazardly. Through NIH we fund more than half of drug research and basic biology research largely outside of the patent system. India funds research as well that we take advantage of, and India provides the early education for a very significant proportion of our graduate-student/pharm-industry-researcher population. In practice, any monopoly (which is what patents provide, though in reality upwards of 20% of pharm research is just wasted on researching patent workaround processes and drugs to break the monopolies of competitors, adding no new functionality) will try and price discriminate. E.g. low-income people can get coupons for prescription drugs in the US and pay way less than high-income people, though it will be less relevant once we have near universal insurance coverage. So, in the presence of patents and import/export restrictions/tariffs, the companies would end up charging much less on average per-pill in India and other low-wage countries than in the US in order to maximize profit. This means that though we give India a subsidy, it doesn't cost us much in lost revenue relative to the number of people in India who get a benefit.

by mbreese 13y ago

cma 13y ago

Yes that's all I've been saying. So sure, the future pipeline gets slimmed because of lowered expected returns. There might even be further decreases to productivity of the research pipeline due to economies of scale (investigating one drug may make you stumble on a cure for something you weren't even looking for). Or there might be significant diminishing returns to more pharm industry research, because of the dependence on advances that only come through basic biology research. So it is hard to say which outcome is optimal. Nothing in economics says that the money generated through monopoly prices due to patents is an optimal amount for drug research and development. And why chose 20-year patent terms rather than 30? Or 10? It's just kind of a system we've thrown together haphazardly. Through NIH we fund more than half of drug research and basic biology research largely outside of the patent system. India funds research as well that we take advantage of, and India provides the early education for a very significant proportion of our graduate-student/pharm-industry-researcher population. In practice, any monopoly (which is what patents provide, though in reality upwards of 20% of pharm research is just wasted on researching patent workaround processes and drugs to break the monopolies of competitors, adding no new functionality) will try and price discriminate. E.g. low-income people can get coupons for prescription drugs in the US and pay way less than high-income people, though it will be less relevant once we have near universal insurance coverage. So, in the presence of patents and import/export restrictions/tariffs, the companies would end up charging much less on average per-pill in India and other low-wage countries than in the US in order to maximize profit. This means that though we give India a subsidy, it doesn't cost us much in lost revenue relative to the number of people in India who get a benefit.