This JAMA "study" will fuel screaming headlines about the cost of drugs, but it mainly addresses the tiniest tip of the iceberg. Modern Discontent brings up R & D, one of the biggest contributors to drug cost, that is ignored when considering only cost of physical production, as well as the fact that U.S. consumers and tax payers have subsidized the cost of drugs "sold" to other countries for decades.
Ideally profits from current drugs would drive R & D for new drugs.
Even huger economic elephants are the funding of the FDA regulation and its revolving door relationship with Pharma. This is probably the majority of the cost of doing pharma business. These companies are effectively and collectively running their bloated subsidiary called the FDA.
Lastly, inundating the U.S. population with drug advertising has to be adding another 20% or more to the cost of pharma business.
I’ve worked for years in pharma . Gross margins are high, for sure. On a small molecule, high volume pill, 90-odd pct is not uncommon. Even complex biologics can have gross margins in the 80-90 range. Old style vaccines with low prices for sale globally, mid 50s (average…US will pay more, Ghana a lot less).
But then up to 20pct for R&D (most of which wasted on projects that go nowhere), and SG&A can be a big number depending on how many sales reps you need (more in primary care, a lot less in speciality). Your operating margin is going to be in the range of mid 20s for a global company with a a fragmented primary care portfolio, up to mid 40s for a US focused specialty care company with a few big blockbuster drugs. It could well be higher but optics demand you keep it below a certain level and so you start to see fancy HQs, giant salaries, massive boondoggles etc.
It’s a rip off, especially for Americans. On top of that, a lot of drugs don’t work very well.
I do not see here a mention of "value-based pricing" (search for it if not familiar with the term). So now value-based is bad, and cost-plus is good, or so some people say.
What I find interesting is that the value of the product has been influenced in the minds of customers to be perceived as far greater than it really is. (I wonder what _that_ cost.) A particularly rational and informed individual might even conclude that the product has negative value, but that's not to whom these things are marketed.
But no, let's pin the responsibility on the pharmaceutical companies. They're the cause of our problems. Let's not consider real causes that might implicate us and our behavior. Or the possibility of collective individual behavior that would make it impossible for companies to get away with such things.
I’m not doubting there is likely higher prices than “reasonable”. As you point out the costs are manufacturing - cost of goods sold, not true costs which would include non-recurring costs like r&d, which is a huge number. Also it is worth pointing out that while ‘cost’ can be used in various colloquial meanings, there is a difference between cost (to the seller) and price (paid by the buyer). In a true market economy, price has nothing to do with cost: if a company’s cost vs the price the market can bear will result in loss or insufficient profit then that company wouldn’t make the product. However if the product is not a commodity and there is not competition due to patents or lack of alternative offerings, then prices can rise from restrictive supply in the face of demand. I’m no economist but that’s what it seems to me.
I would not take it even for $5 per month
This JAMA "study" will fuel screaming headlines about the cost of drugs, but it mainly addresses the tiniest tip of the iceberg. Modern Discontent brings up R & D, one of the biggest contributors to drug cost, that is ignored when considering only cost of physical production, as well as the fact that U.S. consumers and tax payers have subsidized the cost of drugs "sold" to other countries for decades.
Ideally profits from current drugs would drive R & D for new drugs.
Even huger economic elephants are the funding of the FDA regulation and its revolving door relationship with Pharma. This is probably the majority of the cost of doing pharma business. These companies are effectively and collectively running their bloated subsidiary called the FDA.
Lastly, inundating the U.S. population with drug advertising has to be adding another 20% or more to the cost of pharma business.
I’ve worked for years in pharma . Gross margins are high, for sure. On a small molecule, high volume pill, 90-odd pct is not uncommon. Even complex biologics can have gross margins in the 80-90 range. Old style vaccines with low prices for sale globally, mid 50s (average…US will pay more, Ghana a lot less).
But then up to 20pct for R&D (most of which wasted on projects that go nowhere), and SG&A can be a big number depending on how many sales reps you need (more in primary care, a lot less in speciality). Your operating margin is going to be in the range of mid 20s for a global company with a a fragmented primary care portfolio, up to mid 40s for a US focused specialty care company with a few big blockbuster drugs. It could well be higher but optics demand you keep it below a certain level and so you start to see fancy HQs, giant salaries, massive boondoggles etc.
It’s a rip off, especially for Americans. On top of that, a lot of drugs don’t work very well.
I hope you see this https://www.businessinsider.com/what-is-ozempic-glp1-drugs-developed-by-gila-monster-2023-3
I do not see here a mention of "value-based pricing" (search for it if not familiar with the term). So now value-based is bad, and cost-plus is good, or so some people say.
What I find interesting is that the value of the product has been influenced in the minds of customers to be perceived as far greater than it really is. (I wonder what _that_ cost.) A particularly rational and informed individual might even conclude that the product has negative value, but that's not to whom these things are marketed.
But no, let's pin the responsibility on the pharmaceutical companies. They're the cause of our problems. Let's not consider real causes that might implicate us and our behavior. Or the possibility of collective individual behavior that would make it impossible for companies to get away with such things.
I’m not doubting there is likely higher prices than “reasonable”. As you point out the costs are manufacturing - cost of goods sold, not true costs which would include non-recurring costs like r&d, which is a huge number. Also it is worth pointing out that while ‘cost’ can be used in various colloquial meanings, there is a difference between cost (to the seller) and price (paid by the buyer). In a true market economy, price has nothing to do with cost: if a company’s cost vs the price the market can bear will result in loss or insufficient profit then that company wouldn’t make the product. However if the product is not a commodity and there is not competition due to patents or lack of alternative offerings, then prices can rise from restrictive supply in the face of demand. I’m no economist but that’s what it seems to me.