There is a tendency to believe that the normal dynamics of markets should be suspended when the product is "really important." Of course, that's backward. When the product is really important, the worst thing you can do is turn it into a low-profit economic ghetto by reducing incentives to invest. At the same time, when the government takes over the role of the market by granting a temporary monopoly, there clearly has to be some backstop at work.
The interesting thing to note that the company in the article, Alexion, is not even an unusually lucrative company. In 2015 its operating income was $536 million on 2.6 billion of revenue, or about a 20% operating profit margin. For comparison, Alphabet's operating margin is over 25%. Google also does much better in terms of return on equity and revenue per employee metrics.
...what. 20% margin isn't good nowadays? And why on earth are we comparing this company to a tech giant, they're not in the same world when it comes to how they operate. Of course google's going to look better in a lot of these terms, it's google (and i'd argue a monopoly). I mean at what point do we say, actually these biotech companies are plenty profitable? There's so much handwringing about how if we hurt these companies in anyway then all these sick people will die. It's just not true. Why don't we take the S&P 500, a Biotech Index and ALXN and put them on a chart:
https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...
Well damn, looks like despite all their huge R&D costs, only 20% margins, so on and so on they are doing pretty damn well. Honestly, are we looking at the same chart? These companies are MILKING sick people and we're afraid to intervene. Markets don't work in life and death scenarios because people would pay anything. This is a case that begs for regulation and even with it these companies are going to be just fine.
Over time, would limiting the potential profits in life-saving drugs increase or decrease the number of life-saving drugs developed?
In an economy where people can choose to work in any field, and investors can choose to invest their money in any field - what better way is there to allocate the people and money resources than by letting people voice how valuable something is with their wallets? Do you want to force someone to buy a third car instead of buying a new drug treatment?
If you understand the invisible hand theory (actually understand it, not just the everyman's definition) I think it's difficult to (a) argue against in general and (b) argue against for certain life-saving industries especially.
There are always ways to sneakily increase costs. And I'm not going to lose sleep at night, since I am putting those funds back into "improving society".
There is no indication that direct-to-consumer advertising of drugs improves health outcomes. It does, however, greatly increase the cost of medication. Since the marginal cost of producing more drugs is low, advertising, even at a positive RoI, leads to increased prices.
Consider prizes instead of patents: https://en.wikipedia.org/wiki/Prizes_as_an_alternative_to_pa...
We don't need to have a government enforced monopoly to support high prices to fund drug development. There are other ways that don't turn it into an economic ghetto either.
I've not seen the argument that they should be suspended as much as that they are. "Really important" just means that demand is inelastic.
You contradict yourself here.
The normal dynamics of markets have been suspended in order to ensure that "really important" products make it to market. That occurs through government-granted monopolies on drugs along with subsidies and grants on research. And that is what props up the market and provides the "incentive to invest" you insist is needed.
So you can argue for "normal dynamics" -- which would be a more free market with no government-granted monopolies, subsidies or research grants -- or you can argue to preserve "incentive to invest". But you can't have your cake and eat it, too, and the fact that you don't seem to consider how much we already do to meddle with the market in order to make sure "important" products are available is slightly worrying.
It's also worth noting that a large proportion of the basic research that goes into making these drugs is funded by the federal government or other research foundations, which receive little, if any of the benefits when commercialized. For instance, Alexion's drug is based to some extent on research conducted at Yale by its former CEO, not to mention the whole host of foundational research that preceded it.
R&D management sure as hell looks at the potential returns generated. I've been on projects where the company said "we're going to spend out $500M in R&D funds on this disease because we might actually make our money back. The other disease is off the table since we can't even break-even."
Yes, a lot of basic research is funded by the gov't, but that's minuscule compared to the funding the companies themselves put in. I sat in a meeting when a decision was made to move a promising compound forward. The investment? $400M for all activities post-phase 3. The NIH grants that supported the discovery? Maybe a few million?
I intensely dislike the way pharma companies "buy" the opinions of prominent doctors and get them to sell their drugs for them. There are many similarly unethical things that the pharma companies do, but having made a drug that seems to help patients, and then charging as much as they can for the limited time that they can does not seem unreasonable.
This econtalk episode [2] on "price gouging" seems particularly relevant, it's really very entertaining (and educational)
[1] https://en.wikipedia.org/wiki/Generic_pharmaceutical_price_d...
[2] http://www.econtalk.org/archives/2007/01/munger_on_price_1.h...
That being said, other companies in countries that don't honor patents definitely do this very thing for chemotherapies and the like.
But here is what I think about these high priced drugs:
Joe was a successful lawyer, but as he got older he was increasingly hampered by incredible headaches. When his career and love life started to suffer, he sought medical help. After being referred from one specialist to another, he finally came across an old country doctor who solved the problem.
"The good news is I can cure your headaches... the bad news is that it will require castration." You have a very rare condition which causes your testicles to press up against the base of your spine and the pressure creates one hell of a headache. The only way to relieve the pressure is to remove the testicles."
Joe was shocked and depressed. He woundered if he had anything to live for. He couldn't concentrate long enough to answer, but decided he had no choice but to go under the knife. When he left the hospital he was without a headache for the first time in 20 years, but he felt like he was missing an important part of himself.
As he walked down the street, he realized that he felt like a different person. He could make a new beginning and live a new life. He saw a men's clothing store and thought, "that's what I need .. a new suit."
He entered the shop and told the salesman, "I'd like a new suit." The elderly tailor eyed him briefly and said, "Let's see... size 42 long." Joe laughed, "That's right, how did you know?" "Been in business 60 years!" Joe tried on the suit. It fit perfectly. As Joe admired himself in the mirror, the salesman asked, "how about a new shirt?" Joe thought for a moment and then said "sure..." The salesman eyed Joe and said "let's see...34 sleeves and...16 and a half neck." Joe was suprised, "that's right, how did you know?" "Been in the business 60 years" Joe tried one the shirt, and it fit perfectly. As Joe adjusted the collar in the mirror, the salesman asked "how about some new shoes?" Joe was on a roll and said "sure!"
The salesman eyed Joe's feet and said "Let's see... 10-1/2...E." Joe said astonished, "that's right, how did you know?" "Been in business 60 years!" Joe tried on the shoes and they fit perfectly. Joe walked comfortably around the shop and the salesman asked "how about some new underwear?" Joe thought for a second and said, "sure!" The salesman stepped back, eyed Joe's waist and said "Let's see... size 36."
Joe laughed, "Ah ha! I got you I've worn a size 34 since I was 18 years old." "The salesman shook his head, "you can't wear a size 34, it will press your testicles up against the base of your spine and give you one hell of a headache."
In a nutshell, people with CF misprocess fats, wind up excessively acid and wind up with serious malnutrition. I got very picky about the fats I consume, aggressively addressed the nutrient deficiencies until my body worked more normally, and I eat a diet that compensates for my body's tendency to become way too acid.
I also avoid chemicals that bother me, avoid exposure to germs, etc.
I look fairly ordinary these days. It isn't obvious to other people that my entire life revolves around this. It is sort of like being a kosher Jew who eats only approved foods and so forth.
The only thing I'm thinking of is the military, and they have loads of lobbying costs and operational costs due to spreading their supply chain across many districts.
