Price discrimination (great read!)

[Tyler Durden]

I was in a rush to get to work when I posted the article, so I want to post some of my thoughts now.

1. It's kinda amazing how much our perception of something is affected merely by the 'value' tag attached to it, when the value has just been assigned by someone else. I remember looking at a voice recorder being sold for $7 and thought about getting a bunch to re-sell. I thought it was a pretty good bargain. Then I found another place that sold the same thing for $2. Instead of thinking "wow! I just found a better deal", I started wondering if there was anything wrong with the product, and then in the end decided not to get it because "there must be a catch, it must be damaged or something".

I wonder if it has to do with our reliance on information of others from ancient times. Kinda like a caveman offering another an apple, suggesting it tastes good. The receiver would believe him and eat it only because of that belief. So if someone (anyone) tells us that something is good because of it's value, then we are to automatically believe in it?

2. Mum: Eat it.
Me: Why? I don't like it.
Mum: It's expensive, so it's good for you.

That was when I was young, and to this day she still does it and I still don't understand it. "Why would I have to like something just because it's expensive?" I wondered. I often got more joy out of eating cheaper (and tastier) junk food.

3. It's funny how something as artificial as the price can act as such a material distinction between people. Take the lettuce example in the article. The rich people who bought the $6 would be thinking "I'm getting something so much better than that other cheap stuff", and the poor people who bought the $3 lettuce would be thinking "damn, maybe one day I can afford some nice lettuce like the $6 ones".

BUT IN REALITY THEY ARE THE SAME THING!!! So why do we feel so different about it??

 

[Julia]

Of course it does. The prices they charge for their drugs are a function of their total investment into R&D (+ all the other costs associated with the product), not just the investment into what makes it to market. It's not really any different to any other R&D dependent company does, the successes pay for the failures.

Do you have any first hand experience of the industry? Can you provide proof that the successes pay for the failure across the industry?

I think they are getting much stricter on this. However it is possible that drugs are not bioequivalent because the exact manufacturing procedure was not followed and you get different isomers etc.

Not defending big pharma. They do make a lot of money but in many cases this is proportional to the risk involved in drug discovery. To give you an example, in the last five years the big pharma have been developing quite a few drugs for Alzheimer's disease, a handful of which have made it to last stage clinical trails. So far non of them have passed the clinical trials and would have cost those companies up to a billion dollars maybe more. I forgot numbers but I think to get a drug to stage 3 clinical trial is something in the order of a 100-500 million. To market is over 1 billion.

In that manner it is quite different to Apple or Intel. The risk of failure are much much higher and the product development costs are much higher as well.

Exactly. Thank you, Flying Fox.

There seems to be a general perception that some businesses do not have an intrinsic right to be for profit, viz the banks and now pharmaceuticals. No doubt others that don't come to mind at present.

McLovin, let's just say the major players in the pharmaceutical industry were to withdraw on the basis that they couldn't satisfy their share holders. Who do you think would take over the research function?

 

[banco]

I don't think pharmaceuticals can be equated to ipads. Noone is going to die if they don't have access to ipads.

 

[McLovin]

Do you have any first hand experience of the industry? Can you provide proof that the successes pay for the failure across the industry?

There are lots of expenses here. A single clinical trial can cost $100 million at the high end, and the combined cost of manufacturing and clinical testing for some drugs has added up to $1 billion. But the main expense is failure.

...

Why include failure in the cost? Right now, fewer than 1 in 10 medicines that start being tested in human clinical trials succeed. Some biotechnology companies do manage to make it to market without having to spend money on failed medicines – but only because other startups went bust trying to test other ideas.

...

But if a drug company could promise to invent new medicines for $55 million a pop, its stock price would soar like Apple’s. It really does cost billions of dollars to invent new medicines for heart disease, cancer, or diabetes. The reality is that the pharmaceutical business is in the grip of rising failure rates and rising costs.

(bolding mine)

http://www.forbes.com/sites/matthew...uly-staggering-cost-of-inventing-new-drugs/2/

McLovin, let's just say the major players in the pharmaceutical industry were to withdraw on the basis that they couldn't satisfy their share holders. Who do you think would take over the research function?

The cost of capital would rise, there'd still be people willing to back new drugs. Unless I'm misunderstanding the question.

 

[Julia]

The cost of capital would rise, there'd still be people willing to back new drugs. Unless I'm misunderstanding the question.

I'm asking who is going to take the initiative to start the research into potential new medicines if there were no pharmaceutical companies prepared to do so?

 

[Julia]

On second thoughts, forget the question. It's fruitless trying to fight the bias against so called big pharma.
For whatever reason, the perception exists that they are all a bunch of unprincipled bastards, unconcerned about anything other than extreme profits.

 

[FlyingFox]

I agree that they cost their failure's into their products (not only the current product but all of them). They have to. However sometimes even that may not be enough to pay off the development cost in the time period of patent protection in which case they do rely on their brand value.

....
The cost of capital would rise, there'd still be people willing to back new drugs. Unless I'm misunderstanding the question.

Don't know about this. Pharma do ride on the back of a lot of government funding and research but they do serve a purpose in getting that research to drugs. There is a lot of research going into many rarer diseases but no successful treatments because it is not financially viable for pharma to put money into this.

 

[McLovin]

On second thoughts, forget the question. It's fruitless trying to fight the bias against so called big pharma.
For whatever reason, the perception exists that they are all a bunch of unprincipled bastards, unconcerned about anything other than extreme profits.

What bias???...I don't know what you're inferring from what I'm writing but I certainly wasn't implying I thought they were "unprincipled bastards, unconcerned about anything other than extreme profits".

I have no idea what you're talking about.

 

[Ves]

You guys and girls all seem to be talking about different things?

 

[banco]

On second thoughts, forget the question. It's fruitless trying to fight the bias against so called big pharma.
For whatever reason, the perception exists that they are all a bunch of unprincipled bastards, unconcerned about anything other than extreme profits.

Probably because their behavior over the years has generally borne that perception out.

 

[McLovin]

Don't know about this. Pharma do ride on the back of a lot of government funding and research but they do serve a purpose in getting that research to drugs. There is a lot of research going into many rarer diseases but no successful treatments because it is not financially viable for pharma to put money into this.

Which I already acknowledged when I pointed out the largest single R&D spender in the US is the government.

 

[Julia]

What bias???...I don't know what you're inferring from what I'm writing but I certainly wasn't implying I thought they were "unprincipled bastards, unconcerned about anything other than extreme profits".

Whether you were or not is immaterial. I'm talking about the generalised perception. See banco's ultra generalisation.
I've been involved in the enormous work of setting up trials etc, the enthusiasm of the medical researchers when they believe they have something that will make a genuine difference to some disease process, and then the disappointment when for whatever reason the hopes are not fulfilled.

It's not all about money.

You have still not offered any suggestion as to who would initiate the research if the pharmaceutical companies did not. Governments certainly don't provide sufficient funding.

I have no idea what you're talking about.

Fine. Don't worry about it.

 

[McLovin]

Whether you were or not is immaterial.

The question and the follow up were both in reply to my post. So I assumed they were directed at me.

I'm talking about the generalised perception. See banco's ultra generalisation.
I've been involved in the enormous work of setting up trials etc, the enthusiasm of the medical researchers when they believe they have something that will make a genuine difference to some disease process, and then the disappointment when for whatever reason the hopes are not fulfilled.

It's not all about money.

That's great for them, it truly is. They enjoy their work. Big pharma expense almost all of their R&D (the failures and successes) and are still wildly profitable enterprises. The fund manager on Wall St cares little about how great researchers feel about the work they are doing, they care about the bottom line, like any other business they are invested in. Fortunately, happy employees often go hand in hand with profit maximisation. It may not be all about money, but overwhelmingly it is.

You have still not offered any suggestion as to who would initiate the research if the pharmaceutical companies did not. Governments certainly don't provide sufficient funding.

I don't know who would pay for it, likely it would be the government. Not that I see why it's at all relevant to anything I've said.

 

[FlyingFox]

I agree with McLovin that you have to price your RD (and marketing) into your products. You can't function as a business otherwise.

Is it price discrimination when big pharma prices 1B R&D cost into product prices? It can be but probably isn't. Remember the generic came second.

Is it price discrimination that Nike charge 5*cost for a pair of golf clubs or shoes because they paid someone $250M to "market it"? A waste really.... They may not be any where near 5* better but that is the perception. They can just as easily charge 2* and not pay someone $250M but than you don't have brand value.

 

[McLovin]

I agree with McLovin that you have to price your RD (and marketing) into your products. You can't function as a business otherwise.

Of course. I'm not sure why it's even a point of discussion. Find me any business that survives long if it can't cover its costs. Pharma isn't a benevolent industry, it's a business. Just like any other business it's entitled to charge, and does, as much as it thinks it can.