Prometheus 6

Nonsense? Don't be so sure, so quickly. Your first reason doesn't seem to follow. You're right, that money wasn't all spent on the day of approval. The point of looking at it that way is, as you doubtless know, to calculate the opportunity costs. The money could have been invested instead of spent - how much would would you have, by approval day, if it had been?

People do the same sort of calculations for mortgages and loan payments all the time - imputed interest rates and all that. Are those nonsense as well? If your answer is "yes", do you think you could convince an accountant?

As for your second reason, I can't see your point. I was speaking of the money that drug companies spend on drug development. None of it is federal money. It's ours - yep, our ill-gotten profits - and we risk it by paying people like me in the labs, paying for clinical trials, and so on. How do you figure that this is government money, again?

Derek:

The point of looking at it that way is, as you doubtless know, to calculate the opportunity costs. The money could have been invested instead of spent - how much would would you have, by approval day, if it had been?

You assume they had the money to invest on day one.

And why do you stop the calculation on approval day? That's kind of arbitrary. Why not do the calculation over the life of the product?

Because it would lead to an entirely different judgement.

I'm not saying it's evil, it's simply the way the game is played. For instance, if I (corporately) show $20,000 profit and one expects to make 2% on one's investment, then one values my corporation at $1,000,000 even if I only spent a couple of grand on computers to set it up. Not evil, simply the way the game is played…and has as much bearing on reality as opportunity costs. Exactly as much.

At any rate, I might be able to convince an accountant of the validity of doing opportunity cost calculations over the life of the product but it wouldn't be in the best interests of his client so I doubt being able to convince one to actually do it.

I'll yield your point about it being the pharmaceutical company's money under discussion if you'll yield the point that all drug that were initially developed with public funding should go generic immediately.

Now that you mention it, what percentage of drugs are created by research and development that is fully funded by pharmaceutical companies, no publicly funded research involved in a totally new drug?

The reason Alex (and I) stopped at the approval date was that we were discussing the costs involved to bring a compound to market - the point where you can start to make the money back. Some drugs earn it back, and some don't. The point of doing the calculations is to try to only work on the former ones. Drug development is a sunk cost.

You could certainly calculate on from there, but then you have to add cost of manufacturing and cost of sales instead of cost-of-development. And you use imputed interest rates on that money, too. It's a worthy thing to look at, and it's just the kind of thing that a company does when it's figuring out how much to spend on marketing and promotion.

As for your second question, there are a lot of people claiming that most new drugs are really straight from the NIH, or some such. This is not true. Even if you get an idea for a drug target right out of a paper in the Journal of Biological Chemistry, from an academic lab funded 100% by government grants. . .even then, you're still looking at, on average, that 800 million dollar figure to find a drug and develop it. The amount spent in grant money pales, imputed interest rate and all.

To pick a recent example, the University of Rochester did not develop a COX-2 inhibitor, although they discovered the COX-2 enzyme. Drug companies did - and a majority of companies that tried to make one failed, and all the money they spent to do it is gone.

Academic labs rarely, if ever, come up with a compound that is ready to go to clinical trials. They're doing academic research, as they should: broad fundamental studies that point the direction you should go in to spend your 800 million.

When a drug company does the fundamental research part as well, the costs are even higher.

The reason Alex (and I) stopped at the approval date was that we were discussing the costs involved to bring a compound to market - the point where you can start to make the money back.

I understand that. It is, in fact, the reason I think it's an important conversation. If you significantly overestimate the cost of bringing a drug to market, a potentially life (or lifestyle) saving drug may not be marketed.

And that you have overestimated the costs is obvious from simple inspection, even assuming opportunity costs to be an actual expense ratherthan a potential bookeeping entry.

Do you really think you would have doubled your money…if you had the money up front…had you made some investment other than the development of a new drug?

And Alex asked was it unreasonable to count all funds as though they were spent on day one, the answer is YES. If anyone disagrees I challenge them to pay me compound interest on $5000 over 5 years, and let me take five years to give him the money he's paying me interest on. I don't think you'll find an accountant to accept that, even in principle.

You could certainly calculate on from there, but then you have to add cost of manufacturing and cost of sales instead of cost-of-development. And you use imputed interest rates on that money, too.

Again, assuming opportunity costs to be a valid concept (which I don't, and wont as long as you can't put it on your tax returns), yes you'd add cost of manufacturing and cost of sale as well as cost of development…we're talking about doing the calculation across the life of the product.

But you still don't get pretend you spent all the money on day one. You want an estimate, take the dollar amount you agree you actually spend ($402 million, not $802 million). Say it takes an average of eight years to bring the drug from patent approval to market. Then you're talking roughly $50 million per year. Do your interest calculation on $50 mill the first year, $100 mill the second, etc. You still won't get me to accept the figure but at least I'll accept you're seriously presenting it.

Academic labs rarely, if ever, come up with a compound that is ready to go to clinical trials. They're doing academic research, as they should: broad fundamental studies that point the direction you should go in to spend your 800 million.

You mean the direction you should go in to spend your 402 million. Opportunity costs are not figured into the GNP.

At any rate, here we drift into personal philosophy. I feel anything paid for by taxes should belong to everyone who pays taxes. I have no problem with process patents, and you can actually be protected longer under trade secret law.

I'll try channeling a rational lefty here:

We need to make the price of medicines as low as possible without discouraging research in new drugs by private companies to a significant degree.

In order to find the lowest price possible, we need to have a correct understanding of the profitability of the drugs we want to pricecap, or better yet, we need to have a correct understanding of the manner in which the pharma people make research decisions.

Now, the question is not, should we consider opportunity costs in determining drug profitability, but rather, do the pharma people use them in making decisions what research to undertake or not.

And the answer is, they do. You may disagree with this, but all indoctrinated accountants working for the pharma people think like this:

"If the projected return on investment for certain research is lower than the return I would get for parking my money on a risk-free bank-account, I'm not gonna do that research."

In short, if you do not allow for opportunity costs, you will seriously misjudge the amount of new drug research that will not be undertaken by the pharma people.

Fine, fine, fine.

As long as you pretend "economic costs" come out of your pocket the same way accounting costs do, I'm calling bullshit.

Since we're trying metaphors, try this:

You own a mom and pop hardware store. You've bought $100k in merchandise, paid $25k in expenses and taken in $200k in sales. When you file your taxes do you claim $75k in profit or do you subtract the $5k you could have made on your $125k had you stuck it in the bank?

I know how accountants look at it. I know how corporations look at it. I'm saying opportunity costs are not paid to anyone and are an artifact of economic analysis. Not even accounting practices.

> When you file your taxes do you claim $75k in profit or do you subtract the $5k you could have made on your $125k had you stuck it in the bank?

No, the taxman isn't gonna appreciate that. Nor should he.
That's because I DID make 75K. However, I made 70K from operating a store, and 5K from investing my money.

It is easy to see that after running the store for one year, I am only 70K better off than I would have been if I had not run the store. When deciding to close the shop or not, I will look at the 70K number and compare it to the effort put into running the store.

No, the taxman isn't gonna appreciate that. Nor should he.
That's because I DID make 75K.

That's all I'm saying. I'm tempted to ask exactly what part of the $25k expense you call an investment. Perhaps it was $5,000 of the $100k merchandise purchase.

Yeah, I know we aren't being that picky. But if I lined up all the receipts such a business had on file you would not be able to go through them and add up $5000 in investments.

If you want me to fix my RSS feeds, you'll have to give me a hint about what is wrong with them. ;)

You aren't exhibiting an understanding of opportunity cost. I think so because you say things like this: "The money was NOT spent all on day the drug was approved"
"And that you have overestimated the costs is obvious from simple inspection, even assuming opportunity costs to be an actual expense rather than a potrntial bookeeping entry.

Do you really think you would have doubled your money�if you had the money up front�had you made some investment other than the development of a new drug?"

It isn't something that costs you money. It is a way of talking about who chooses to invest in what. If I invest in something I know is going to lose money, I am an idiot unless I'm running some sort of tax scheme. If I invest in something that will definitely make 3% a year (a CD perhaps) I'm much smarter. If I invest in something that will have an imprecise percentage chance of making money and an imprecise percentage chance of losing money it is a wise decision based on how much money I can make compared with what the chances are that I will make or lose money. If, on average, the best this imprecise investment will make is less than 3%, I'm still an idiot for investing in it because I had a safe 3% available to me with the CD. The gap between the average return of the safe investment and the risky investment is called the opportunity cost. If the risky generally underperforms the safe, no one would invest in the risky. In fact if the risky cannot dramatically outperform the safe (when the risky doesn't go bankrupt) very few people would invest in the risky.

Pharamaceutical research is risky.

"The money was NOT spent all on day the drug was approved"

You are right. The fact that it is spent BEFORE the approval is what makes sunk costs amenable to an opportunity cost analysis. In fact that is a pre-condition to talking about opportunity costs.

Your whole bank analysis is completely nonsensical once you realize that opportunity cost analysis is how one chooses between investments. It isn't expensable, but if the pharma profits drop anywhere near the safe investment level, everyone will pull out of pharma research because such research has a high chance of giving you NOTHING. If your return is 4% when positive with a 75% chance of getting nothing, you would be a fool to invest in such a thing when you could get 3% in a CD and the only risk you would take is the vanishingly small chance that the entire world economy implodes. Opportunity analysis is a selection mechanism.

"I'll yield your point about it being the pharmaceutical company's money under discussion if you'll yield the point that all drug that were initially developed with public funding should go generic immediately."

What percentage of public funding do you mean when you say 'with' public funding?
I always here lefties talk about how drugs come from public funding. But the RISKY/EXPENISVE part is done by the private corporations. What analysis has led you to believe that is otherwise?

You aren't exhibiting an understanding of opportunity cost…It isn't something that costs you money.

ahem

I believe that is the very point I've been making all along.

Your whole bank analysis is completely nonsensical once you realize that opportunity cost analysis is how one chooses between investments.

And that was never said.

What was said is, "this is what it costs to bring a drug to market." That is simply false.

Now, had it simply been said "these are the calculations we must do in order to judge whether or not to take this to market," you'd be having no dispute with anyone. But when you say "this is what it costs," when those who are up on it KNOW it "isn't something that costs you money," well, that fails the laugh test.

On the RSS feed, I guess my problem is I prefer RSS 2, your index.xml, over RDF/RSS 1.0, the index.rdf file. The RSS 2.0 template uses the MTEntryLink instead of the MTEntryPermalink tag (which includes a named anchor when appropriate). That's fine if your preferred archive type is daily, but if it's weekly like yours that makes every RSS link go to the top of the weekly page instead of straight to the post.

You can tell me to sod off and take the rdf file or you can use this in you RSS 2.0 template:

<?xml version="1.0" encoding="<$MTPublishCharset$>"?>
<rss version="2.0"
xmlns:dc="http://purl.org/dc/elements/1.1/"
xmlns:sy="http://purl.org/rss/1.0/modules/syndication/"
xmlns:admin="http://webns.net/mvcb/"
xmlns:rdf="http://www.w3.org/1999/02/22-rdf-syntax-ns#">

<channel>
<title><$MTBlogName remove_html="1" encode_xml="1"$></title>
<link><$MTBlogURL$></link>
<description><$MTBlogDescription remove_html="1" encode_xml="1"$></description>
<dc:language>en-us</dc:language>
<dc:creator><MTEntries lastn="1"><$MTEntryAuthorEmail$></MTEntries></dc:creator>
<dc:date><MTEntries lastn="1"><$MTEntryDate format="%Y-%m-%dT%H:%M:%S"$><$MTBlogTimezone$></MTEntries></dc:date>
<admin:generatorAgent rdf:resource="http://www.movabletype.org/?v=<$MTVersion$>" />
<sy:updatePeriod>hourly</sy:updatePeriod>
<sy:updateFrequency>1</sy:updateFrequency>
<sy:updateBase>2000-01-01T12:00+00:00</sy:updateBase>

<MTEntries lastn="15">
<item>
<title><$MTEntryTitle remove_html="1" encode_xml="1"$></title>
<link><$MTEntryPermalink encode_xml="1"$></link>
<description><$MTEntryExcerpt remove_html="1" encode_xml="1"$></description>
<guid isPermaLink="false"><$MTEntryID$>@<$MTBlogURL$></guid>
<dc:subject><$MTEntryCategory remove_html="1" encode_xml="1"$></dc:subject>
<dc:date><$MTEntryDate format="%Y-%m-%dT%H:%M:%S"$><$MTBlogTimezone$></dc:date>
</item>
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</channel>
</rss>

Oh, yeah.

If two stamps, an envelope and a postcard are given to a lab in support of pharmaceutical research, then compound should be in the public domain.

My reasoning is, the risk pharmaceutical companies undertake is in creating the processes whereby the drug is produced, packaged and distributed safely (I include testing in this). They are entitled to a process patent. But in most cases the company neither discovered the compound nor ascertained its primary effects.

tell me if my rss change worked. In the RSS challenged department, how do you get started actually using it, I've heard lots, but know little.

Your RSS 2.0 file is now perfect.

The basic purpose of RDF/RSS/Atom feeds is to give you the headlines and enough of each post to let you decide if you want ro read the whole post. There's a movement afoot to get people to include the whole article.

The easiest way to get started with RSS feeds as a consumer is to check out Bloglines. It's like Blogrolling.com for RSS feeds. In fact, they'll build a blogroll-type list you can embed in your page. Check it out, read their explanation of what they do for you. If you find it useful and want to consider a desktop client (I use one; it's just a personal preference) let me know.

I would add my 2 cents by remarking that the reason why the pharma accountants/ execs take into account opportunity costs is becuase every other industry in the world does as well.

Automobiles, Airplanes, Computers, Textiles, you name it.

The reason is because investors want to know how much better you are going to do with their money than a.) a realitively "risk-free" investment (i.e., treasury bonds) and b.) other investments with similar risk profiles.

The first comparison gives a baseline that the more risky investment must beat (or no money goes to that investment) and the second gives comparisons among similar investments (kind of like understanding the relationship between odds and payouts in Vegas).

At the end of the day every pharma CEO understands that the money being invested in either new research, me-too products or marketing isn't theirs, it belongs to the stockholders - who expect a certain return for their investment.

In the end, the drug industry behaves rationally, exactly like an industry. If they couldn't make money off of drug research they wouldn't do it. If they make an "obscene" amount of money, then more companies shift towards pharma research and more start-ups are formed.

A better line of inquiry is maybe directed towards the government, which has a very different set of problems to address. For the government, increasing the "health" of the population for a given % of the GDP is the driving force.

Why do we invest so much in pharmaceuticals and not preventative medicine (like getting people to stop smoking, exercise and eat right)? It is pretty well known that the sickest people account for the biggest spend. Do we/ how do we shift that around so the overall population gaines the most?

As for the 2 stamps question, if the compound is in the public domain who is going to spend the money to put it through all the clinical testing and manufacturing scale-up needed for FDA approval? Some compounds are in the public domain, generics. These are a lot cheaper to develop because all the clinical work/ risk has already been done - the ultimate me-toos.

JJ:

I would add my 2 cents by remarking that the reason why the pharma accountants/ execs take into account opportunity costs is becuase every other industry in the world does as well.

Taking opportunity costs into account in your planning is much, much different that claiming you've actually taken the opportunity costs out of your pocket and given it to someone. That is what is being done when one claims the ~$400 million out of pocket + $400 million opportunity cost = ~$800 million actual cost to bring a drug to market.

I'm not unreasonable. But I am wondering why everyone on the pharmaceutical side of the discussion wants to treat opportunity costs as though it were money actually paid.

At the end of the day every pharma CEO understands that the money being invested in either new research, me-too products or marketing isn't theirs, it belongs to the stockholders - who expect a certain return for their investment

It would be more honest to simply SAY that as you have. We all know this, of course, but this report is trying to give an air of mathematical inevitability to the prices being as high as they are. That is the reason I believe this opportunity costs thing is being clung to so tenaciously. But if:

• R = risk (0 = no risk, 1 = forget it forever)
• U = projected units produced
• B = break-even cost, taking into account
  • development cost
  • production and distribution costs
  • remaining lifetime of the patent

then (B + (B*R))/U seems a reasonable starting point for discussion of appropriate unit pricing. There will, of course, be reasons to drift one way or another from that reference point. Say we make annual price adjustments.

I know that ain't an economics theorem up there. It's just the most structured way I can present a still-forming thought. And I know it's not a free market solution, but the problems I would like to see solved are not free market problems.

Yes, I think medicine should be treated differently than your standard economic item…and it it ever is, a REAL economist will look at the patterns that develop under the new conditions and write a quantitative description of them…and thus shall be born a new economic law.

Meanwhile, too many of you are arguing as though the options are obscene profit or none. What about reasonable profit?

If they make an "obscene" amount of money, then more companies shift towards pharma research and more start-ups are formed.

That's just not true. The barriers to entry are
more obscene than the profits.

For the government, increasing the "health" of the population for a given % of the GDP is the driving force.

You know what I'd like to see?

I'd like to see an estimate of what it would cost to increase the "health" of the population, and then hear reasons to spend less. Followed by the reasons it actually costs more.

That's what I'd like to see.

Why do we invest so much in pharmaceuticals and not preventative medicine (like getting people to stop smoking, exercise and eat right)? It is pretty well known that the sickest people account for the biggest spend. Do we/ how do we shift that around so the overall population gaines the most?

One good question doesn't eliminate another good question.

As for the 2 stamps question, if the compound is in the public domain who is going to spend the money to put it through all the clinical testing and manufacturing scale-up needed for FDA approval?

Why, the company that wants the process patent of the methods of production and distribution, of course.

Some compounds are in the public domain, generics. These are a lot cheaper to develop because all the clinical work/ risk has already been done - the ultimate me-toos.

We were discussing NCEs. Generics, being medicines on which both the patent and every legal means of extending said patent have expired, are not under discussion in the original report or any of the responses to it.

> then (B + (B*R))/U seems a reasonable starting point for discussion of appropriate unit pricing.

people only undertake high-risk projects because they expect high profits. Any form of profitcapping will force people only to undertake low-risk projects.

As I see it, the underlying problem is not ethical but philosophical.

Let's take the following thought experiment: you are kidnapped by the evil pharma people and locked up in a room. there's a locked exit and a red button. through a one-way mirrot you can see a lab with 10 dogs. The evil pharma spokesman announces through a loudspeaker that the door will open in ten minutes so you can exit. however, if you have not pressed the red button before that time, a lethal gas will be let into the the adjacent lab and the dogs will die. Compounding the dilemma, if you DO press the button, another lab with dogs will be gassed, but it is not revealed how many are present there. What are you to do?

What are you to do?

Ignore specious tests.

> then (B + (B*R))/U seems a reasonable starting point for discussion of appropriate unit pricing.

people only undertake high-risk projects because they expect high profits. Any form of profitcapping will force people only to undertake low-risk projects.

That's why the R is in there.

A bit of a reminder: this all started with an attempt to fold opportunity costs into out of pocket costs as though opportunity costs were actual expenditures.

Have we agreed that's nonsense yet?

> Ignore specious tests.

You can't ignore the fact that if you start micromanaging the drug market, you risk discouraging new research.

>this all started with an attempt to fold opportunity costs into out of pocket costs as though opportunity costs were actual expenditures.
>Have we agreed that's nonsense yet?

I'm not sure that was the case, my impression was that opportunity costs were presented as a big part of the price of a drug.

You can't ignore the fact that if you start micromanaging the drug market, you risk discouraging new research.

Don't you believe in the power of the almighty market? You don't think the market will just clear at a different pricing point? What's wrong with that?

this all started with an attempt to fold opportunity costs into out of pocket costs as though opportunity costs were actual expenditures.Have we agreed that's nonsense yet?

I'm not sure that was the case, my impression was that opportunity costs were presented as a big part of the price of a drug.

It was so presented, but we have established in this very thread that's not the case. But let me try channelling a rational righty here:

"You aren't exhibiting an understanding of opportunity cost�It isn't something that costs you money."

"Your whole bank analysis is completely nonsensical once you realize that opportunity cost analysis is how one chooses between investments. It isn't expensable, …Opportunity analysis is a selection mechanism."

As well as a rational lefty.

ahem

I believe that is the very point I've been making all along.

You are fighting THIS battle ALL alone.

> Don't you believe in the power of the almighty market? You don't think the market will just clear at a different pricing point? What's wrong with that?

Well, you just don't get something for nothing. If you devalue patents, by pricecapping drugs, then investors will asume that this behaviour will extend to the future, and factor this in into their profitability calculations for new projects, and are likely refrain from undertaking some new research. So the real price for cheap drugs now might be the absence of new drugs in the future.

>It was so presented, but we have established in this very thread that's not the case

Well, count me out of that "we". After an investment that only starts generating revenue after 10 years, the investors are gonna want a lot of intrest, just as your credit card company would if you missed 10 years of payments.

Well, count me out of that "we". After an investment that only starts generating revenue after 10 years, the investors are gonna want a lot of intrest, just as your credit card company would if you missed 10 years of payments.

Let me keep this simple.

Do you really think an opportunity cost is an expense?

Aren't you just trying to justify the prices and profitability medicines produce under current economic conditions?

> Do you really think an opportunity cost is an expense?

There's two major branches of accounting: fiscal accounting and cost accounting. They deal with two different questions:

- how much do I owe the Taxman
- at what price are my products profitable.

We agreed higher up this thread that the taxman doesn't care about opportunity costs. That's because if I lend money to myself and pay it back to myself with intrest, the cost of paying intrest cancels out the gain of receiving intrest, so it all evens out in the end. The taxman only cares about my overall profit.

However, when I start to do cost-accounting for individual productlines, these intrests become a factor. A product that only starts generating revenue several years after initial investment must pay back a lot of intrest before it becomes profitable.

In other words, opportunity costs are not an expense. They are a means of deciding what to invest in.