Why do Prescriptions Cost so Much: An Evaluation of Development Costs in Big Pharma

No matter who one is, there is a chance that theymoney have gone into the drug store to get a prescription drug and been amazed by the price. Within 2012, the average price for prescription was $268.1 Some might even argue that the prices are too high and are only present due to the ability to monopolize the market through patents. Such a discussion is for another day, instead of focusing on this issue, instead this post will attempt to bring to light some of the reasons why the prices are such as they are.
In every market, companies desire to maximize their profit. This means that within any market a company is try to have their revenues exceed the costs that are put into producing a given product. These costs are usually divided into two parts, fixed costs and variable costs. As suggested by the names, fixed costs deal with costs that have to do with long term aspects of the company (such as rent for the land, machinery for production), while variable costs are associated with the actual production. The pharmaceutical market is unusual in its costs distribution, the vast majority of costs for the drug are within the fixed costs. This is largely due to the developmental costs that go into producing a new drug, even if you’re a well-established company.
For pharmaceutical companies, there are a number of factors which go into this fixed cost. The first of which, and perhaps the most sizable portion is research and development of the new drug. This is a large area of the costs since it covers not just the intellectual and concept aspects of the drug development, but also includes the costs associated with the testing of the drug itself. In a ten year span, two of the biggest pharmaceutical companies, Bayer and Pfizer, spent $33,118 and $77,786 million respectively simply within R&D. These values equate to $6,624 and $7,779 million per new drug resulting solely from the R&D of the drugs.2 This puts a massive amount of costs, which the company must recoup if it expects to stay in business for any length of time.

Dev Cost of Drugs
This result of the fixed costs to producing the new drugs has gotten to a breaking point recently. Partially this is due to the fact that 95% of experimental medicines studied end up being either ineffective or not safe.3 This has led to companies having to load off even more expenses onto the consumer. After taking into account responsibilities towards investors, it is still likely that when a drug makes it through the process and is successful that the company will end up taking a net loss. Studies done on the costs for drug production have indicated that the total costs for bringing a drug from inception to market has an estimated cost of $1.104 billion (in 2013 dollars). This doesn’t include the costs associated with the time spent developing the drug itself, which can push the cost of designing a drug to around $2.600 billion.4 This value has risen dramatically in the past 20 years and shows few signs of being slowed down.

Due to the costs of development and research into new drugs prior to them coming to market, don’t expect the price of prescriptions to come down anytime soon. Despite this, there is reasonable hope for the future as with new computer models and synthetic techniques for the drugs, there are expectations to limit both the number of failures of the drugs tested and reduce the costs associated once the drug has been put into production. Potentially these can reduce dramatically the costs put onto the drug companies, and by extension the consumer as well.

Works Cited

  1. Spending on Prescriptions in 2011. (2012).
  2. The Cost Of Creating A New Drug Now $5 Billion, Pushing Big Pharma To Change. Forbes at <http://www.forbes.com/sites/matthewherper/2013/08/11/how-the-staggering-cost-of-inventing-new-drugs-is-shaping-the-future-of-medicine/print/&gt;
  3. How Much Does Pharmaceutical Innovation Cost? A Look At 100 Companies. Forbes at <http://www.forbes.com/sites/matthewherper/2013/08/11/the-cost-of-inventing-a-new-drug-98-companies-ranked/&gt;
  4. Cost to Develop New Pharmaceutical Drug Now Exceeds $2.5B. at <http://www.scientificamerican.com/article/cost-to-develop-new-pharmaceutical-drug-now-exceeds-2-5b/&gt;

Luke, Just Stop and Think Economically

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Source: http://tinyurl.com/movk6lz

Movie remakes and sequels often bear less success than the original films or the first in the series. There are instances, however, when a sequel or remake produces equal or even greater success than its predecessors. With this in mind, I want to make an economic prediction: the upcoming Star Wars film “The Force Awakens” will be an inevitable success. Many are skeptical, but I have absolutely no doubts, and here’s why.

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Source: http://www.the-numbers.com/movies/franchise/Star-Wars

First, Star Wars is the second highest grossing film series of all time (“Community Post: The Highest Grossing Movie Franchises.”). The franchise lies just bellow James Bond, and to be fair, there are many more films of the latter than there are of Star Wars. Star Wars, as of 2013, has grossed a total of $9,147,802,760 billion worldwide, while the James Bond series has produced a total of $14,626,911,942 billion (“Community Post: The Highest Grossing Movie Franchises.”). When you really sit down and think about it, those are absolutely absurd numbers for what ultimately is just light from a television screen or projector. That unjustly simplifies cinema, but you see what I mean. The undeniable fact stands that well known films are capable of continuing production and maintaining/increasing their success and popularity. This remains evident even when films fall short. Take the Bond film “Quantum of Solace” as an example: I’m not a movie critic, but I’d bet money that if you ask an avid bond-fan their favorite film in the series, Quantum of Solace wont be their answer. Casino Royale was such a big hit that consumers came back for more, but the numbers say that they weren’t as pleased with Daniel Craig’s second performance. “Quantum of Solace” made 40.1 percent of its total domestic gross from its opening revenue (“‘Casino Royale’ Vs. ‘Quantum of Solace’ Vs. ‘Skyfall'”). Furthermore, its second weekend drop domestically was 60.1 percent, the highest of Craig’s three bond films (“‘Casino Royale’ Vs. ‘Quantum of Solace’ Vs. ‘Skyfall'”). Of Craig’s three performances, “Quantum of Solace” had the lowest worldwide gross, lowest foreign gross, and was in release domestically for only 11 weeks (“‘Casino Royale’ Vs. ‘Quantum of Solace’ Vs. ‘Skyfall'”). While It’s clear that the film may not have met “Bond standards”, it still brought in a lot of revenue.

Screen Shot 2015-05-04 at 9.33.03 PM

Source: http://www.buzzfeed.com/jakel11/the-highest-grossing-movie-franchises

Another significant piece of evidence further supports my prediction that the new Star Wars film will be successful. Some may argue that the very revival of the franchise is due to the success of the contemporary director J.J. Abrams. Abrams received great success with his recent bring-back of the beloved Star Trek series. “Star Trek” brought in a worldwide gross of $385,680,446 million (“‘Star Wars’ Vs. ‘Star Trek'”). Abrams produced not one, but two successful modern Star Trek films. “Star Trek Into Darkness” exceeded Abrams previous film and brought in a worldwide gross of $467,381,584 million (“‘Star Wars’ Vs. ‘Star Trek'”). The very fact that consumers trust and admire Abrams suggests that it’s likely they will return for his project on Star Wars.

Consumers are faithful to beloved series in cinema in the same way that customers are faithful to name brand products. When Oreo comes out with a new cookie, people are curious. Some might not even like Oreos anymore, but they’ll still buy the new product due to the satisfaction they indulged in during their original experience. I am one of those consumers. I will still go see the new Star Wars film even if it turns out to be terrible simply because of my love for the original films.

Works Cited
“‘Casino Royale’ Vs. ‘Quantum of Solace’ Vs. ‘Skyfall'” ‘Casino Royale’ Vs. ‘Quantum of Solace’ Vs. ‘Skyfall’ N.p., n.d. Web. 03 May 2015.
“Community Post: The Highest Grossing Movie Franchises.” BuzzFeed Community. N.p., n.d. Web. 03 May 2015.
“‘Star Wars’ Vs. ‘Star Trek'” ‘Star Wars’ Vs. ‘Star Trek’ N.p., n.d. Web. 03 May 2015.

The Broken Patent System

The patent system has been in discussion throughout this year, and just last week the Senate announced a bipartisan proposal to reform the patent system ( Downes).  This new proposal is aimed at making life more difficult for abusive lawsuits by so-called patent trolls.  Many companies are now being referred to as “patent trolls” — companies that stockpile patents, then use them to get money out of other companies rather than actually make things with them (Peterson). These trolls are not just causing problems to big companies like Samsung, but are also filing lawsuits against innovators with small capital.  Many of the patents that are being questioned at the moment are so called Design patents unlike the Utility patent which describes the actual uses of a product, unlike the Design patent which describes the ornamental features (Downes). This is part of the problem that too many Design patents are being issued, these patent trolls sometimes collect patents for years and wait until a company creates a product to then step in and claim patent infringement. Many innovators hope that this new innovation act will pass because it will not only place restrictions on patent approvals, but also “reduce the drag on the U.S. economy, which the Consumer Electronics Association, pegs at $1.5 billion a week” (Downes).

Featured image

Current Samsung Logo

However, its not just the patent trolls who are taking advantage at the broken system, major companies like Samsung and Apple have also filed for patent infringement against one another. With Apple claiming they have Design patents for things such as “obvious features as the rectangular shape, rounded corners, translucent screen, and colorful icons of Apple’s devices” ( Downes). What seems more ridiculous is the amounts that Apple is demanding from the infringement, such as the entire profit Samsung made by selling some of the smart phones and tablets with such designs.

Featured image

Current Apple Logo

A preeminent patent scholar, rejects Apple’s approach and in a brief signed by Stanford law professor Mark Lemly, and nearly 30 other scholars, the authors note that as many as 250,000 active patents cover various aspects of today’s complex devices. Attributing all of their value to their rectangular shape, the brief argues, follows neither the law nor common sense.  “People don’t buy iPhones simply because they look cool; they buy them because they function” (Downes).

This section of the article was the section that many people could agree on, especially the Senate who need to change the way the system works. Just like Lemley claims, people do not buy products just based off looks, but how the product functions which can be said for all products. The problem with many cases that Design patents cause is an issue of Asymmetric information, but sometimes innovators who are actually creating this working product, don’t know that someone else has a patent on the idea they have decided to actually produce. The problem is not necessarily that Design patents exist it’s that the people who are buying these patents are using them against other companies to make a profit, instead of actually going through the process to establish a functioning product.

Works Cited

“Apple”. Web.archive.org. August 27, 1999. Archived from the original on August 27, 1999. Retrieved January 1, 2014.Web. 04 May 2015.

Downes, Larry. “Everyone Hates Patent Trolls, but Here’s the Root Problem with Our Broken System.” Washington Post. The Washington Post, 4 May 2015. Web. 04 May 2015

Peterson, Andrea. “Is 2015 the Year Congress Finally Takes on Patent Trolls?”Washington Post. The Washington Post, 29 Apr. 2015. Web. 04 May 2015. <http://www.washingtonpost.com/blogs/the-switch/wp/2015/04/29/is-2015-the-year-congress-finally-takes-on-patent-trolls/&gt;.

“Samsung 1993”. Corporatebrandmatrix.com (2007-05-19). Retrieved on 2013-03-19. Web. 04 May 2015.

The Study of Middle-Man Kingship

A question arises as to what we are here to consider the beneficial result of the winning party. One thinks that it could well be explained in full details, but that is still questionable. I think that majority would like to discuss such an issue on the grounds that it fulfils their wishes.

Now, let’s get back to our main discussion of what could happen if we let the majority take its full initiative and decide on its own what would happen to it and the consequences thereof. One thing that should be mentioned is that the the way this people analyse and work through every individual and cohesive part is wholly grounded on the idea that whatever happens to them would in effect and fact benefit them with et cetera. This is true and would prove them beneficial if anything.

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The study under would demonstrate the consequences and the relying ability of those involved in the democratic choice of the majority. Let’s examine this then. This includes people voting at each interval the idea and the choice behind their willingness that eschews any possible hinderance to their well-being and happiness; such is the main idea of their making any kind of decision.

Now, out of all these consequences, one sees the pattern that exemplifies the existence of the middle-man kingship of a concept that we studied so far in our book. That is that the one choosing the points between 70-80 would far less likely fall within the line of the one choosing 70 or 50. This is what we discussed so far, will prove to be useful in the further development.

Are Same-Gender Liberal Arts Colleges Becoming Obsolete?

This week, institutions of higher education and prospective students across the nation were shocked by the announcement that Sweet Briar, a longstanding all-women’s liberal arts college in Virginia, would be closing its doors after this semester. Despite its $85 million dollar endowment, the institution’s president cited “insurmountable financial challenges” as the primary reason for the closure.

Although there are still significant barriers inhibiting the entry of women, particularly women of color, into higher education, female enrollment in coed colleges has still improved dramatically in recent years, while yield rates for women’s colleges have stagnated or declined. Many college women feel that coed institutions with large endowments and a variety of programs are better equipped to prepare them for careers in the public sphere. Although some same-gender liberal arts colleges are moving towards creating programs that women have been historically denied access to, many still do not have the facilities or the infrastructure to create entirely new departments in areas of STEM (science, technology, engineering, math), economics, or even political science, all of which have been targeted by high schools and national campaigns as areas of much-needed improvement in terms of gender diversity. Additionally, national conversations surrounding the legality of denying certain populations access to semi-publically funded institutions, even those created in response to historical marginalization, have contributed to the politicization and complexity of fundraising for, operating, and hiring at women’s colleges. When all these motivations and factors are taken into account, it becomes unsurprising that same-gender institutions are facing closure more than ever.
On a broader level, analysts have noted that Sweet Briar’s closure is just one more situation in a growing national trend that places online or community colleges above expensive liberal arts colleges, particularly same-gender or rural institutions. Online and community colleges usually offer more directly tangible programs, something that younger generations have prioritized in recent years due to a weaker job market. Bloomburg Businessweek noted that small, private U.S. colleges are in a “death spiral” stemming directly from lower enrollment rates, and must compensate with strategic moves to add more programs, increase their endowments, and engage in more intense communications campaigns in order to stay relevant and competitive with other institutions of higher education. Other analysts agree, but note that small liberal arts colleges must go even further and “get serious about savings on costs”. Judith Shapiro, former Barnard president and current president of the Teagle Foundation, works with liberal arts colleges and other entities to implement financial and economic education programs for faculty, staff, and administration at colleges. These programs include information on topics such as market competition for students, people’s tendency to link quality and price, how tuition discount rates work, and the effects of a recurring expense, like salary raises, versus one-time capital improvements.

Forward-thinking, progressive same-gender liberal arts institutions such as Hollins College and Mary Baldwin College have integrated these financial education programs into training and curriculum, with much success. Female economists such as Catherine Bond Hill, current president of Vassar College, emphasize the importance of prioritizing private same-gender education, and have also begun working with women’s colleges to balance budgets and experiment with innovative economic policies in order to keep these institutions’ doors open. Hill notes that “we need to be educating more students in America at the college level, not fewer. The economics are challenging…I wish they had experimented and innovated to address the challenges, demonstrating to others how to make education available at lower cost.” While the closure of Sweet Briar is unfortunate, it may well set a precedent that encourages same-gender liberal arts colleges to be proactive about adjusting their finances and balancing their budgets to remain competitive among other institutions of higher education in the United States, before it’s too late.

Works Cited

http://www.businessinsider.com/rival-of-imploding-womens-college-tells-its-students-not-to-panic-2015-3

http://www.businessinsider.com/sweet-briar-college-closing-2015-3

http://www.bloomberg.com/news/articles/2014-04-14/small-u-s-colleges-battle-death-spiral-as-enrollment-drops

https://www.insidehighered.com/news/2015/03/04/sweet-briar-college-will-shut-down

https://www.insidehighered.com/news/2015/02/10/institute-aims-give-faculty-primer-higher-ed-economics

http://www.forbes.com/sites/ccap/2012/02/16/the-male-female-ratio-in-college/

http://www.esa.doc.gov/sites/default/files/womeninstemagaptoinnovation8311.pdf

http://www.scu.edu/ethics/publications/iie/v5n2/affirmative.html

Patenting the Genome

In 2013, Association for Molecular Pathology v. Myriad Genetics, Inc. went to the Supreme Court to determine the legitimacy of patenting DNA. Ultimately, it was unanimously voted that human genes cannot be patented, although patenting synthetic genes is still legal.

Myriad Genetics had isolated two human genes that were indicators of a predisposition for breast cancer. For many “inventions,” the United States government offers a legal monopoly, or patent, to the inventor in order to protect their right to develop and make money off their product. However, “’Myriad did not create anything,’ Justice Clarence Thomas wrote for the court. ‘To be sure, it found an important and useful gene, but separating that gene from its surrounding genetic material is not an act of invention.’”

Its legal monopoly allowed Myriad Genetics to charge “4,000 dollars for comprehensive testing on just two genes” and “$700 for extra information that national guidelines say should be provided to patients.” Genetic sequencing of a whole genome, 20,000 genes instead of two, really costs around $1,000. Myriad Genetics was a patent troll—“a firm that owns a patent, but does not manufacture products or supply services based on it.” “It owned the genes, and didn’t want anyone trespassing on its property.” Myriad’s methods of testing for the two genes were not innovative or new and women were often at a loss to find a second opinion from another source because Myriad’s patent precluded other firms from testing for it. Its legal monopoly essentially allowed Myriad to price life, only women who could afford Myriad’s expensive prices could determine if they were at high risk for breast cancer.

“Not surprisingly, [Myriad] made labored arguments that its patents, which allowed monopolistic prices and exclusionary practices, were essential to incentivize future research.” This is the reasoning behind patenting, but, on the other hand, “In obtaining the patent, Myriad, like most corporations, seemed more motivated by maximizing profit than by saving lives—if it really cared about the latter, it could and would have done better at providing better, more accurate and cheaper tests.” In many cases, making inventions open source stimulates creativity and invention, where people invent for the sake of learning and improving, instead of stagnating in order to up profits.

Sources:

http://opinionator.blogs.nytimes.com/2013/07/14/how-intellectual-property-reinforces-inequality/?_r=1

http://www.nytimes.com/2013/06/14/us/supreme-court-rules-human-genes-may-not-be-patented.html

http://www.economist.com/news/business-and-finance/21645604?zid=317&ah=8a47fc455a44945580198768fad0fa41

http://www.scotusblog.com/case-files/cases/association-for-molecular-pathology-v-myriad-genetics-inc/

The Economics and  Infrastructure in Nepal: an Earthquake Case Study

In looking at the 7.8 magnitude earthquake that struck Nepal on Saturday, April 25th, I was struck by the high death tolls. As of Wednesday, the 29th, the death toll is above 5,000 people, a number that is expected to climb (Fuller and Barry). The 7.8 magnitude earthquake is estimated to leave up to $10 billion in damages, which is about 20% of the nation’s GDP (Mullen). This high number is largely due to the lack of infrastructure. Nepal, a country located between two colliding Continental Plates, is especially prone to earthquakes (Shimer). A majority  of the death toll is due not to the earthquake itself, but rather from collapsed buildings and falling debris. This is proof that it necessary for countries building on fault lines to strictly enforce earthquake resistant buildings, to minimize human structural damage. Unfortunately, for a variety of reasons including a weak economy ($694 per capita GDP) and poor political leadership, there were no enforced building codes in Nepal. This caused a huge amount of collapse of both centuries old, historic buildings as well as newer homes and businesses. This poor infrastructure left hundreds of individuals trapped underneath, burying them and blocking roads and communication lines, preventing a speedy rescue effort (Mullen).

Roads are blocked due to falling debris. Source: http://a.abcnews.com/images/International/AbigailHunter_NepalQuake2_150425_4x3_992.jpg

Another important aspect of infrastructure that could mitigate damage is a decent road system, which  Nepal lacked prior to the earthquake. Most of the rural villages, accounting for approximately 80% of the population, are virtually inaccessible (Rural Population). Part of this is due to the massive landslides triggered by the earthquake and its aftershocks, blocking the few existing roads to these villages, making recovery and rescue difficult, at times only accessible by helicopter. But a large part of the problem is due to the lack of roads in the first place. This lack of roads decreases the ability for rescue teams, as well as individuals fleeing from the steep mountain slopes that are more at risk for landslides, to get in or out of the valleys (Khadka).

Landslides wiped out villages and blocked roads. Source: http://blogs.agu.org/landslideblog/files/2014/08/14_08-Sunkoshi-3.jpg

The final impact the lack of infrastructure in Nepal was its lack of established communications systems. Within Nepal, only 13% of the population has regular access to the Internet, and cell phone service is intermittent (Purnell). This severely curbs the availability to communicate the needs of various communities to each other. Sending out calls for help is significantly difficult.This hinders immediate relief from agencies such as the American Red Cross which  was not as effective as it could have been because of the lack of information as to where what kind of help was needed and when.

The Nepal earthquake was unavoidable with modern technology. However, the death toll and estimated $10 billion in damage could have been greatly mitigated if there had been stronger infrastructure, which would have increased the availability of information and access to rural communities in need of immediate assistance (Mullen).

The high death toll and cost of damages are due in part to the lack of infrastructure; a solution would be to improve infrastructure in Nepal during the rebuilding process. However, such a solution comes with a high cost; time, resources, and political effort are required, as are large government expenditures to cover the cost of building improved roads and enforcing building codes. It is important to keep in mind the benefits of improving infrastructure. Improved roads and increased access to the internet and phones would improve communication and commerce, thus increasing most people’s quality of life. Arguably more important, however, is that there are people’s lives on the line; spending thousands or even millions of dollars on enforcing earthquake resistant buildings and improving the overall country’s infrastructure could save hundreds to thousands of lives in the next earthquake. It is hard to put a value on a human life, but it may be worth the government expenditure to save future lives.

NOTE: If you are interested in donating to help the relief efforts, consider donating to one of these organizations: http://www.bbb.org/council/news-events/news-releases/2015/04/nepal-earthquake-donation-tips/. Or stop by Whitman’s Reid Campus Center during lunch this Friday and all next week (May 4-8th) between 12-2pm, as well as this weekend (May 2-3) on Ankeny field from 12-2pm; all proceeds from the button sale will go to the American Red Cross relief effort.


Works Cited

Fuller, Thomas and Ellen Barry. “Villages Near Nepal Earthquake’s Epicenter Are Desperate as Death Toll Tops 4,000.” The New York Times 27 April 2015. http://www.nytimes.com/2015/04/28/world/asia/nepal-earthquake.html

Khadka, Navin Singh. “Landslide Fears After Nepal Quakes.” The BBC 28 April 2015. http://www.bbc.com/news/science-environment-32501206

Mullen, Jethro. “Nepal Can’t Rebuild Without the World’s Help .” CNNMoney 27 April, 2015. http://money.cnn.com/2015/04/27/news/economy/nepal-earthquake-everest-tourism/

Purnell, Newley. “Tech GIants Help Track Nepal Earthquake Survivors as Communications Are Hit.” The Wall-Street Journal 27 April 2015. http://www.wsj.com/articles/tech-giants-help-track-nepal-quake-survivors-as-communications-hit-1430119745

“Rural Population (% of total population) in Nepal.” 2015. Trading Economics. http://www.tradingeconomics.com/nepal/rural-population-percent-of-total-population-wb-data.html

Shimer, Grant. Personal Interview. 28 April 2015.