« Are conservatives out of ideas? | Main | Should first cousins marry? » A long time ago, in a galaxy far, far away . . .21 May 2008 12:32 pm Words to strike terror into an investor's heart: I’ve been in this business for almost 19 years now. That means that the drugs that were discovered during my first few years of work are now either on the market or expected to be there soon. That's from Derek Lowe, drug researcher. This is why pharma needs big margins on the things that finally hit. Comments (14)
And even at 100% a long delay, combined with an expensive investment, would require high returns to be worthwhile. You might reasonably argue that the percentage is a bigger factor, but that doesn't mean the delay is not an important factor. re: "Hell, Bezos founded Amazon in 1994 and the company did not turn a serious profit until 2003. That's eight years, and Amazon had a pretty straight rise to success." And what was Bezos' and his earliest investors rate or return on their initial investment? 
Still, at least one of the drugs on Derek's mind will be pulled from the market after causing serious liver damage. Stay tuned to find out whether Big Pharma, with all its profits and research, merely fails to detect the problem or actively covers it up.
Ignore him at least until his ERA goes below 5.00
And even at 100% a long delay, combined with an expensive investment, would require high returns to be worthwhile. The second part of this statement ("expensive investment") is stupid. We're talking rate of return, mkay? That means the percentage by which your original investment, large or small, is multiplied. The absolute dollar amount of investment required is meaningless, except insofar as large amounts dictate far fewer players dividing the available capital into fewer but larger chunks. As for the first part...up to a point, yes, waiting longer for your profit means you want more of it. That's just adding the real general interest rate to whatever you want your profits to be. However, IIRC long-term real interest rates are generally pretty close to zero. If not zero, they're never especially high. That's why real estate and the stock market wildly outperform T-bills. On the other hand, T-bills are safe, and real estate and stocks are most definitely not. The higher rate of return of the latter is because of the risk of losing it all. Which brings me back to my original point. The real reason drug research investment requires a high rate of return is because of the massive risk involved. And what was Bezos' and his earliest investors rate or return on their initial investment? Enormous. In 2008 Bezos was personally worth near $10 billion. Even assuming he personally invested as much as a million dollars in Amazon (which seems damn unlikely) he's multiplied his investment by 10,000 in a mere 14 years. It's hard to know similar figures for drugs, inasmuch as these are sensitive numbers people hide. But one of the biggest blockbusters in recent history is Lipitor, which hit $1 billion in sales shortly after it debuted in 1997, and is estimated to maybe top out at $10 billion per year by the time the patent expires in 2010, for total gross returns of about $65 billion over its lifetime as a serious profit-maker. The investment required to develop the drug is hard to pin down. Warner-Lambert spent maybe 10 years on it, but it was a derivative of statins developed earlier in the 80s, and research dates back another 30 years before that. $1-2 billion seems like a decent ballpark number, which means the gross return on investment (i.e. ignoring all sales and distribution and manufacturing costs) is at best about 65 to 1 over about 20 years. Bezos clearly chose the more profitable path.
Every time I read something like that I think of the absurdity of the drug war. Think about this for a moment. As it is we have drug prohibition and our degenerate drug addicts take their money and send it to criminals who use it to murder each other and undermine the governments of Latin America. If we would legalize drugs, we could let big pharm go into the recreational drug business. The fact is that there isn't much research needed for recreational drugs. They have long since been perfected. If we would legalize drugs and let the pharmaceutical industry sell them, all of those billions that are currently going to fund the FARC and gold chains and grills for inner city gang members could instead be spent on research for useful drugs.
"Most basic science doesn't pay off in a substantially shorter time." That's funny when Most revenue from patents is earned in the first 5 years.
Most revenue from patents is earned in the first 5 years. Says who? You and the little voices? On the face of it this is ludicrous. Who the heck has a really valuable (i.e. novel) idea that takes a mere five years to go from a conception worth protecting via a patent to a complete market-ready fully market-penetrated contraption? Sounds damn unlikely to me. And why would revenue decrease later in the patent life? Competition? Uh, no. That's what the patent's about. What's going to drive down prices? In the case of drugs, I know this nonsense. They earn almost all their money at the end of their patent life.
Who the heck has a really valuable (i.e. novel) idea that takes a mere five years to go from a conception worth protecting via a patent to a complete market-ready fully market-penetrated contraption? Umm, most any software engineer, and certainly every software company. Many electronics makers. Companies in solar power. There's lots of high-tech research that can be rapidly rolled out into the market, often after the patent is filed but before it's granted. (Pat. Pending)
why would revenue decrease later in the patent life? Any patents which earn money in the first 5 years but not after are almost certainly electronics or other high tech patents. They earn less later because the technology they cover becomes obsolete. Most drugs, on the other hand, won't be FDA approved in 5 years' time, even if everything else goes perfectly. But you should note, Carl, that competition is possible even on patented products; a substitute might not be covered by the patent.
Still, at least one of the drugs on Derek's mind will be pulled from the market after causing serious liver damage. Stay tuned to find out whether Big Pharma, with all its profits and research, merely fails to detect the problem or actively covers it up.Do you seriously believe this? If so, you are a simpleton. And either way, the FDA is once again proven to be a complete waste of money--forcing testing at $70 to $90 million per drug, and taking no blame when the testing they demanded and approved the results of fails to spot an issue.
IIRC, it has been reported that TOTAL R&D expenditure by pharmas is less than any one of: I.e., R&D costs, earnest assurances to the contrary notwithstanding, do not drive pricing.
Carl Pham - The second part of this statement ("expensive investment") is stupid. We're talking rate of return, mkay? That means the percentage by which your original investment, large or small, is multiplied. The absolute dollar amount of investment required is meaningless, except insofar as large amounts dictate far fewer players dividing the available capital into fewer but larger chunks. If your making a very large investment your going to want a very large return. Most of the criticism of drug companies tends to focus first on the price of drugs, than maybe on the overall profitability of the companies. "Expensive investment", is very relevant to both of those points. As for the first part...up to a point, yes, waiting longer for your profit means you want more of it. That's just adding the real general interest rate to whatever you want your profits to be. No, it isn't just adding the real general interest rate to your profits. You don't know how much you will get back, or if you ever will get anything back. The uncertainty over time would drive a higher interest rate. To keep money tied up in such a risky investment for many years you will get a demand for much better return than the t-bill rate or than merely meeting inflation. Also the companies normal cost of capital is higher than the t-bill rate, and certainly isn't typically zero, even as a real interest rate. On the other hand, T-bills are safe, and real estate and stocks are most definitely not. Exactly. The real reason drug research investment requires a high rate of return is because of the massive risk involved. The real main reason is because of the risks, but having the uncertainty of return over a longer period of time, pushes the need for a higher rate of return than having the same risk and uncertainty over a much shorter time frame. And what was Bezos' and his earliest investors rate or return on their initial investment? Enormous. Exactly. People and corporations can deal with risk and delay in return, but only if they expect to have a good chance of making a very high return.
In any case it doesn't matter much if profits, marketing, and even packaging and distribution are more than total R&D (and I doubt the last is). Because 1 - The cost to bring a new drug on to the market includes Testing, not just R&D. And actually it includes a fair amount of marketing as well. 2 - If the expected return on the R&D and testing isn't enough to justify the investment given the risks, than the investment won't be made. The other costs don't effect this point much whether they are .01 times as much as R&D+testing, or 10 times as much.
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No it's not. It's the fact that very few of the drugs that work in the test tube ever pan out in Phase III clinical trials.
If the success rate for candidate drugs was 100% instead of some number three or more orders of magnitude smaller, then even if it took 20 years from lab bench to market, you wouldn't need a big profit margin. Most basic science doesn't pay off in a substantially shorter time.
Hell, Bezos founded Amazon in 1994 and the company did not turn a serious profit until 2003. That's eight years, and Amazon had a pretty straight rise to success.
Posted by Carl Pham | May 21, 2008 3:30 PM