[rayiner]

This article does a pretty good job of grappling with the fact that you can't have your cake and eat it too. On one hand the article acknowledges that treatments for orphan diseases have been successful, and many more have come out since the Orphan Drug Act was passed, as compared to before when these diseases were largely ignored. At the same time, it notes that clearly this is a lot of money to spend on one patient.

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.

[frgtpsswrdlame]

>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.

...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.

[tuna-piano]

In a world where investors invest in photo sharing apps and social media websites because of the potential billion dollar payouts - why would you limit the potential drug payouts without limiting the social media app payouts?

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.

[frgtpsswrdlame]

Actually, horror of horrors, if I could I'd take a giant antitrust bat to about half the technology sector (which would hurt profits).

I urge urge urge you to reevaluate your understanding of economics as well. I recently made a book recommendation on here, I'd like to make it again.

23 Things They Don't Tell You About Capitalism by Ha-Joon Chang

Economism by James Kwak

And no it's not at all hard to argue against the invisible hand theory although I'd really like to not do that here. But just consider how far physics has advanced since the 18th century, why don't you think economics has done the same? Just think about what you're actually proposing for a second. There are no scenarios where the invisible hand works against laypeople? I think that's incredibly naive.

[kevinnk]

I've recommended to plenty of people that they read "Principles of Macroeconomics" by Greg Mankiw, but weirdly enough no one has. Maybe I just didn't urge urge urge them enough?

Actually, if you believe economics hasn't changed since the 18th century you really should read it. Who knows, maybe you'll even reevaluate your understanding of economics.

[frgtpsswrdlame]

Principles is the exact wrong thing for someone casually interested in economics to read. It's the proliferation of the belief that Econ 101 is "real econ" when it's anything but. You can get an undergrad degree in Econ and still have no real understanding of how the economy works. Sure you'll have a simple model but that model will fail over and over again because it's far too simplified. That's why I recommend Economism. It's inoculation to Econ 101.

[kevinnk]

I don't really care if people understand "real econ" (whatever that means) but most people haven't even progressed past a folk understanding of economics. Having at least a cursory understanding of why, e.g., price controls lead to scarcity is really a requirement to create an informed criticism of any part of Econ 101. To get to that point, reading through an intro level textbook is exactly what is needed.

[cgmg]

Please enlighten us as to how your non-mainstream model is superior. The burden of proof is on you.

Also, your claim that economics hasn't advanced since the 18th century is absurd and betrays an ignorance of the subject.

[barrkel]

Mankiw is a bit of a right wing nutjob, though orthodox in the Chicago school. I wouldn't recommend his books, despite their prevalence in academia.

[stupidhn]

>if I could I'd take a giant antitrust bat to about half the technology sector (which would hurt profits).

That'd be nice on an island. Otherwise, have fun competing against technology behemoths from other nations, some receiving subsidization from the government.

[rokhayakebe]

You know you are correct. When a photo sharing app sells for billions everyone interviews the founders and praises them. When you save 10 lives and charge billions you are a criminal. I am not sure which one is right or wrong, but it certainly isn't fair to the drug makers.

[tuna-piano]

You summarize my feelings exactly, in a very clear way that demonstrates the absurdity of the situation.

[dasil003]

In a vacuum it appears absurd, but to understand why people feel this way, you have to look at the big picture of health care costs spiraling out of control and people literally having to choose between food or meds. Middle class people without health insurance and good retirement savings can end up in poverty because of an unexpected illness. Any attempt at health insurance reform gets twisted and maimed into baseless political showboating—I know several people who voted for Trump because they actually believe he can lower their health insurance bills, the fools.

When people think of a photo sharing app they are thinking of breezy fun social media times. When people think of rare disease treatments the sentiment is much darker a priori. I'm not saying drug companies are to blame for the current situation (hate the game not the player), but emotionally it's obvious why there is judgement about profiting from that situation.

[rayiner]

The problem with the typical person's view of this issue is that it confuses two very different things: price and affordability. Drugs should be priced at a level such that pricing them higher doesn't create enough additional benefit from new drugs to outweigh the extra cost, and pricing them lower causes loss in the benefit from new drugs to outweigh the savings from lower price. That should be decided at a society-wide level.

Affordability is then about transferring money from rich people to poor people so they can buy the appropriately-priced drug.

[thwarted]

When a photo sharing app sells for billions everyone interviews the founders and praises them.

In most of these cases, they've sold something for billions to a single entity that has the money and doesn't strictly need it (for example, if Youtube had not sold to Google it would have been an existential crisis for Youtube, not for Google).

When you save 10 lives and charge billions you are a criminal.

In these ten sales, you've made billions by charging each of the individuals 1/10th of the billions, individuals who don't have the money and do strictly need it.

There's a difference between "sells for billions" and "charges billions": in the former in the case of photo sharing apps, it's a buyer's market, and in the later it's a seller's market.

The founders, the sellers, might get praised in the event of a billion dollar photo sharing app sale, but few have sympathy for the purchasing party in that transaction, no matter what they paid, because it's a buyer's market.

I'm not sure fair, to the drug makers or otherwise, enters into it. These are not really that comparable, and only appear to be due to the scale of the sales both being "billions".

[tuna-piano]

I think where we probably agree is that the patent system (which is of course what grants the monopoly pricing power) needs reformation.

I think where we disagree is that I don't think I (or anyone else) knows how much resources society should spend on drug treatments. I strongly believe that the best way to determine how much money society should spend on drug treatments is just to let all the individuals decide how much they should spend on drug treatments (or insurance which covers drug treatments). (This is not saying, however, that you can't have transfer programs which transfer wealth from rich->poor)

In the end, the failures of central planned economies are the same as the failures of central planned sectors, including healthcare.

[emodendroket]

If your choices are to take a drug or die obviously you will do whatever you can to pay, but that hardly means the price is reasonable.

[foota]

I think here's the issue, an individual can only decide to spend on a life saving drug treatment if it exists.

[lacker]

It's not that 20% isn't good. It's that, this drug costs $389,000 a year and they are only making 20% margins. So, even if they were a nonprofit they would still have to be charging $311,000 a year to break even. You can argue they shouldn't be profitable, and OK even if that is granted, that still wouldn't make these rare drugs cheap.

[mjevans]

When money shouldn't be an object in the equation it should be removed from the equation.

This is work that should be done for public benefit by public benefit organizations.

In other words, universities should be where this kind of treatment is developed and tested, AND the regulations that make normal drugs so expensive should apply differently (and relate heavily to a LOT MORE public disclosure and real peer review).

[replicatorblog]

That's a good hypothesis. How about someone suggests that Harvard, with its $36B endowment, tests it out? Pick a rare disease, ask Harvard, or any similar institution, to tackle it with their world class medical school and research capabilities. Offer them gov't matching funds. Or threaten their tax-exempt status if they don't do it. And let's see how they do.

Maybe a socialized or non-profit R&D program would do better than big biotech companies, but before we legislate this idea, how about we test it? My concern is that a non-profit/gov't drug development program will work as well as the ACA's $2B website.

I get hives whenever someone suggests pharma companies are "too" profitable. My daughter is alive today because these "greedy" pharma companies have developed chemotherapies that beat leukemia 90+% of the time. A 20% margin for these companies that regularly produce miracle drugs seems totally fair. Pharma is the closest thing we have to magic in the modern world.

I'm open to the idea there are better possible systems, but the burden of proof is on your side, not the side that regularly cranks out life-saving medicines like the goose that lays the golden eggs.

[malandrew]

I take an orphan drug myself to treat cataplexy/narcolepsy. I think the costs are around $60k to $80k per year and I'm of the exact same opinion as you. I have treatment today because we allow them to make a profit, and I'm only willing to try an alternative system when we prove through experimentation that this alternative system will actually produce as many treatments for orphan diseases at a cheaper price that makes the treatment available to more people.

Without the US healthcare system, my treatment simply would not exist. My treatment exists in no other country in the world.

Eventually, those that don't have insurance as good as mine will benefit from these drugs once the patent expires. It sucks that many people won't benefit until that happens, but under the alternative system SJWs are so keen to promote my treatment would never have been developed and I couldn't get this treatment at any price and no one in the future would get it either because their wouldn't be a treatment for a patent to expire on.

At the end of the day, the US is practicing "socialist" healthcare. It's socialist in the sense that it pays for a lot of the R&D that the rest of the world benefits from. 40% of the entire output of medical research globally comes from the US alone.

[brownbat]

> When money shouldn't be an object in the equation it should be removed from the equation.

We all believe it's important to save lives.

If it costs $300k to save one life, but in other disciplines or other areas of medicine you can save a life for $5k, then you have a problem that is not solved by simply ignoring money.

[rayiner]

> When money shouldn't be an object in the equation it should be removed from the equation.

Money is just a proxy for goods and services; in this case a proxy for having a bunch of highly skilled scientists and doctors work for years to treat a disease only a small group of people have. Having a public benefit corporation rather than a private company doesn't fundamentally change that dynamic.

As to regulations: at bottom, all they really require you to prove is safety and efficacy. If there was a cheap way to prove safety and efficacy, drug companies would just do that on the front end, and send only working drugs through the clinical process. But most drugs don't actually work; most actually fail clinical testing, many after they've made it pretty far along. If you get rid of that testing, and the safety and efficacy data that comes from it, what exactly do you disclose to the public?

[TeMPOraL]

Money is the common unit we use to deal with resource scarcity. As long as there's more demand for care than care to go around, money will continue to be a part of the equation.

[arcbyte]

It doesnt matter where you move the money, its always in the equation.

[frgtpsswrdlame]

Gah those numbers don't work like that!! Alexion is a monopoly because of patent law, they are maximizing profit but they maximize profit in $ terms, not % margin terms. Alexion currently spends tons and tons of money on sales. Those sales expenditures only have to yield the slightest profit for them to partake because they don't give a rats ass about relative margins, only absolute profit. These lower profit activities bring the % margin down but overall profit up so the company engages in them. You can look at basically any drug and see that margin on it as a standalone is going to be incredible, they're super cheap to manufacture and you can charge as much as you want while it's under patent. If we limited the cost to $311,000 expenditures would be cut very slightly, the operating margin might move a bit but it would stabilize and they'd continue to make fantastic profits.

[johnnyhillbilly]

Sounds like they spend a lot of money on questionable "marketing". Also, one never knows where the true profits are recorded in the days of ubiquitous tax avoidance.

[epmaybe]

I'm not certain that marketing plays that huge of a role. They make the only drug on the market to treat hemolytic uremic syndrome, every medical student has to learn about it. Must be some other costs, or hiding of true profit as you suggest.

[eganist]

Sunk costs on failed treatments, generally. I don't remember the stat well enough, but it's something like a double-digit quantity of candidates fail for each single one that receives FDA approval.

Here's hoping someone else can investigate and share the exact number. I'm at a stoplight.

[tuna-piano]

While the math isn't exactly right - even if Alexion returned all profits to its patients at the end of the year, the cost of the drug would still be only 20% less than the current price. So instead of $500k, it would be $400k. Would that really change the dynamics of the discussion?

[refurb]

Great point to call out. Also, Alexion uses about 21% of their revenue for R&D. So of the $500K they sell the product for, $100K is profit, $100K goes back into R&D and the rest is paying for expenses.

[dnautics]

it's even crazier than that. Let's say that we institute some feel-good regulation that caps profits at 10% of cost. Presuming some sort of single payer system so that we don't have to feel guilty about screwing patients. What do I do as a pharmaceutical manufacturer? I'd overprovision FTEs on the production capability, encouraging them to spend "10%" time on other projects, ideation, but subtly encourage that 10% to be more. I'd create a QC system that is artificially stringent (make chromatography resins fail QC after single use) and recycle the QC-fail materials for pilot studies, etc...

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".

[vkou]

I think the problem with pharma is not the profit margins, as much as the stupid amount of money that gets poured into marketing.

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.

[refurb]

There is no indication that direct-to-consumer advertising of drugs improves health outcomes.

Do you have an citations to back that up? Because I do. And it's from the FDA.[1] I'll spare copying it all down and just leave these takeaways:

- FDA research, of patients who visited their doctors because of an ad they saw, and who asked about that prescription drug by brand name, 87 percent actually had the condition the drug treats. And in 6 percent of those DTC-generated visits, a previously undiagnosed condition was discovered.

- Only 7 percent of doctors said they felt "very pressured to prescribe" a particular advertised drug.

- According to the FDA study, a majority of doctors feel that DTC advertising increases patient awareness and involvement, improves compliance, and enhances the overall doctor-patient relationship.

[1]https://www.fda.gov/drugs/resourcesforyou/consumers/ucm14356...

[mjevans]

All that this tells me is that the current system for diagnosing patients is REALLY broken. Where's something like IBM Watson's doctor module to shortlist treatments for humans to undertake and evaluate?

[epmaybe]

It seems weird then, that the American medical association lobbies against DTC advertising.

[upvotinglurker]

The subset of doctors who expend probably significant time/effort getting on the governing board (or whatever it may be called) of the AMA, maybe have different opinions than doctors in general? (I've found this sometimes to be true of professional organizations/unions)

[epmaybe]

True, this is indeed possible. However, note that the FDA survey cited only asked 500 physicians. The survey was also done in 2004, which I believe is prior to the cracking down on gift giving and pharmaceutical companies giving kickbacks to physicians. If I remember correctly, DTC advertising spiked after this happened.

Here's some more recent data (also not super scientific, but probably a decent representation of most physician attitudes today): http://www.mmm-online.com/campaigns/what-doctors-have-to-say...

[Brakenshire]

Yes, I agree, I'm a big supporter of the pharmaceutical industry, it seems from random conversations that a significant proportion of people just think they are crooks, but clearly developing and testing drugs is expensive, that has to be paid for somehow, and private companies are completely indispensable to the process of drug development.

But, marketing is where my support starts to peter out. It seems crazy that marketing takes up such a large percentage of expenditure, it's not only wasteful but also introduces perverse incentives. I really think it would be great if trade deals could establish not just concessions like mandated strong intellectual property laws or restricted bulk negotiation, but also serious limitations on the other side of the coin, on something like pharma marketing.

If deep trade deals are justified by shaping the market to be at its most productive, I don't mind if that increases profits most of the time, but occasionally there will be measures that will improve the market but also reduce short term profit for some existing major players.

In practice, under the current situation the market is structured so that a profitable pharma company has to be good at generating demand, just as much as meeting a need. A company that can do the latter but not the former will go bust.

I think a world with more emphasis on judgements made by clinical research organizations (private or public) like NICE or the Cochrane Foundation rather than TV adverts, wine-ing and dining, and the nag factor on patients and overworked individual practitioners, would end up with a drastically more effective market for actually finding cures.

[refurb]

It seems crazy that marketing takes up such a large percentage of expenditure, it's not only wasteful but also introduces perverse incentives.

How much do drug companies spend on marketing? I've only ever seen article mention SG&A which is an accounting catch all for more than just marketing.

[rayiner]

I have my concerns about drug advertising, but pharma company SG&A isn't out of line with say tech company SG&A: For 2014-2015, the ratio between R&D spending and SG&A spending is 0.59 at Pfizer, 0.75 at Google, 0.56 at AstraZeneca, 0.43 at Apple, and 0.58 at Microsoft.

[Fomite]

Though in fairness, Apple isn't trying to get you to ask a licensed professional who has years of education about the new Apple Watch.

[barrkel]

How about prizes as a way of funding R&D? It's a different kind of profit motive, and it doesn't rely on monopolies and rent extraction to make things profitable. Once a drug is developed, it can be reproduced at close to cost.

https://en.wikipedia.org/wiki/Prizes_as_an_alternative_to_pa...

[JamesBarney]

The majority of advertising my pharmaceutical companies isn't direct to to consumer but to doctor's. And you're right it probably doesn't improve health outcomes, but I imagine most advertising doesn't improve consumer outcomes much.

[harryh]

That is an interesting point but doesn't really have any thing to do with rare disease drugs. There is no marketing for these drugs.

[maxerickson]

The sales rep calling up the doctor seems an awful lot like marketing.

Now a sales rep was on the other end of Owens’s phone from Alexion Pharmaceuticals Inc., the New Haven-based maker of Soliris—one of the world’s most expensive drugs, typically priced from $500,000 to $700,000 a year.

The rep was calling to argue with the treatment plan. She pressured Owens to continue Soliris treatments, ticking off detailed information about the mother’s organs that the doctor hadn’t shared with the drugmaker. “How did you know that?” Owens remembers thinking. She was monitoring the patient’s condition with seven hematologists and wasn’t swayed by the Alexion rep. “I was really taken aback by how bold and brash she was,” Owens says. “I’ve never had an experience like that—before or since.”

There was recently a discussion here about a new drug for ALS and when reading about it I took note of the line in the FAQ that mentions that anyone with a prescription can call the pharma company up and get a case manager to help explore their coverage and setup copay reimbursement ("Searchlight Support").

http://web.alsa.org/site/PageNavigator/alsa_radicava_faq.htm...

That's not exactly marketing, but it isn't really terrific that manufacturers are setting prices so high that they can spend significant resources helping people use their insurance.

[dmoy]

Idk how to break out their financial statement, but in 2016 it looks like they spent a billion dollars on "sales, general, and administration" (distinct from cost of sales (250m) and R&D (750m).

I would imagine something in that billion dollars is marketing...

[barrkel]

When the product is really important, we should change how we reward development, because if it's expensive, and we grant a monopoly, then the benefits of the product will be concentrated with the wealthy, rather than the many. And yes, that's not a good thing.

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.

[kharms]

> There is a tendency to believe that the normal dynamics of markets should be suspended when the product is "really important."

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.

[skybrian]

Perhaps a temporary monopoly isn't the best way to reward these companies? Prize money might work better. Once the prize is awarded, there can be competition.

[ubernostrum]

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.

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.

[finolex1]

It's highly debatable over whether lower profits will significantly reduce the incentive to invest, especially considering profits are already high (about 20%). A small drop won't make a significant difference for the lucrativeness of the industry. Perhaps the best way to go about doing this is by reducing patent lengths, rather than some other policy that is easy to circumvent/bend like taxes or price ceilings.

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.

[refurb]

A few thoughts since I worked for a biotech company.

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?

[WalterBright]

If the risks of investing in X or Y are the same, but the rewards of X > Y, then investors will invest in X. Capping returns will result in investment dollars going elsewhere.

[arjie]

Not going to argue about the drug issue but 20% profit margin is fantastic. That _is_ unusually lucrative.