The business case for cures

Procopius in comments yesterday raised a point I’ve seen around a couple of times that I want to address as the logic is internally inconsistent with a core underlying assumption of the statement.

I believe all the pharma companies have one thing in common. I believe they search for treatments that ameliorate, but do not cure…. The pharma companies have, since then, been able to recapture patent control of the treatments and are raking off monopoly rents…

The core underlying assumption is that Big Pharma Company Execs are profit maximizing, rent extracting sociopaths who are seeking to make as much money as possible for as little work as possible. And the secondary assumption is that it takes less work to produce treatments rather than cures.

I could see this argument actually working to some extent if there was both only a single Big Pharma Company and infinitely high barriers to entry from any other entity that wanted to be a Big Pharma Company.

But that is not the world that we live in.

Let’s run with two assumptions to look

  • Big Pharma Company execs are profit-maximizing, rent extracting bastards
  • There are multiple Big Pharma Companies with high but not insurmountable barriers to entry
  • What does that world look like?

    It looks like companies will try to undercut their competitors. It looks like a lot of me-too drugs of using slightly different molecular pathways to attack a set of problems. It looks a lot like this world.

    Let’s assume Company A has a decent but not great non-curative treatment for Itchy Elbowitis that it thinks it can sell for $20,000 per year for 50 years per patient. At a 5% discount rate that is a revenue stream worth $370,000. That looks pretty damn valuable to me.

    Now Company B is working on a technology that it thinks will cure Itchy Elbowitis. It thinks it can price the treatment for $300,000 for a single afternoon that will produce lifetime benefits. Company B’s stock price will go up, Company’s B’s executives will get better hookers and more blow and they’re happy to undercut Company A.

    Company A should be able to figure out what Company B is doing through public filings, clinical trials and Company B’s merger and acquisition sprees that serve as a component of Company B’s research and development budget, Company A may also be looking at cures so that they don’t lose the entire Itchy Elbowitis revenue stream to Company B.

    As long as we assume that there are large profits to be made in pharmacy development and that the barriers to bring a drug to market are not insurmountable, someone will be working on a cure. The big challenge is that the science is tough, the clinical trials are tough, the pricing is tough. And yeah, Pharma does not help itself when it engages in pay for delay, patent evergreening and other rent collection strategies, but those strategies confirm the first assumption that the senior leadership is profit maximizing rent seekers. Being able to find a cure when there is another company with a fat, lazy monopoly is a profit maximizing behavior.

    I think that the assumption that Pharma wants to develop only life long treatments for a continual revenue stream instead of cures runs hard into the internal contradiction of assuming that Pharma is run by evil profit maximizing bastards. The big caveat is this assumes there is no industry wide, universal price fixing scheme in play. That assumption is one I am not addressing in this post.






    28 replies
    1. 1
      Eric NNY says:

      “The big caveat is this assumes there is no industry wide, universal price fixing scheme in play. That assumption is one I am not addressing in this post.”

      You should address this next.

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    2. 2
      Just Chuck says:

      It looks like companies will try to undercut their competitors

      The big caveat is this assumes there is no industry wide, universal price fixing scheme in play. That assumption is one I am not addressing in this post

      Given that we know for a fact that there are industry-wide price-fixing schemes currently in play for some drugs, how do we rule out other collusions or outright conspiracies?

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    3. 3
      Obvious Russian Troll says:

      So they’re evil, but not that evil. Makes sense.

      I do agree with Eric NNY; how can we be sure that there is no universal price fixing scheme?

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    4. 4
      Another Scott says:

      The big caveat is this assumes there is no industry wide, universal price fixing scheme in play. That assumption is one I am not addressing in this post.

      You’re no fun. ;-)

      Thought experiments can be instructive, but life is complicated.

      How would your thought experiment go if there was a 3rd player, say Company C in Pakistan, that was willing to make cheap copies of Company B’s $300,000 cure and sell it for $500? As you say, once someone figures out how to do it, smart close followers can quickly replicate the results. In such a world, the pressure in the US would seem to be toward the continue-to-treat end of the spectrum and fight like hell to keep the $500 cure out of the US market. Why? Because it’s much, much cheaper for a company to keep a customer – even at a discount – than to find new customers.

      Anyway, I think you’re right that drug companies will go after a cure if they think they can make money with it. It’s just that the drug market is so very complicated because of extraneous things beyond whether the drug actually works better than a long term treatment. And many of those complications are joyously created by the drug companies themselves to increase the chances of collecting monopoly rents.

      Cheers,
      Scott.

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    5. 5
      justawriter says:

      Then there is the scenario where there are 1 million current Itchy Elbowitis sufferers with 100K new IE cases a year. ALL NEW WONDERCILLIN will cure IE and can eliminate it in the affected population over a course of five years. It turns out IE is mildly contagious and after the bulk of the existing cases are cured, new infections drop to a few hundred sporadic cases a year. Wouldn’t the incentive be to extract as much loot from the current batch of patients because the revenue stream dries up when the disease is no longer endemic?

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    6. 6
      Dog Mom says:

      What if IE could be prevented all together by some lifestyle changes?

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    7. 7
      daveNYC says:

      Doesn’t Scenario B run into the issue of insurance companies not wanting to spend big bucks on cures that won’t necessarily result in lower costs for them in the long run due to the patients switching providers?

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    8. 8
      Silver Wolf says:

      I agree that this conspiracy is frustrating and often hard to break. It is one of the left wing counterparts to the climate change hoax argument. The idea that countless people would be willing to go along with this obvious evil and no one pipes up with a statement like “my employer is sitting on the cure for cancer” is nuts.

      Also, if I was a large pharma company exec, I would be desperately looking for a cure for any ailment who’s treatment medicine is under patent with another company. Especially if the other company just recently developed the treatment and has not yet recouped their costs. Cutting off your opponent at the knees after he has extended himself is a great way to increase your own market share.

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    9. 9

      Thanks David, stuff like that drives me nuts too.

      Speaking of pharma companies being bastards: Opioid Maker Charged With Fraud In Marketing Drug As Less Prone To Abuse

      At the heart of the 28-count indictment is Indivior’s effort, beginning in 2007, to popularize a new method of delivering its Suboxone medication, which is used to treat patients suffering from opioid dependency. With a cheaper generic tablet form of the drug expected to go on sale, the company developed a dissolvable film that could be placed under the tongue, describing the new delivery system as “less abusable” with a “lower risk.”

      Prosecutors now say the company knew the dissolvable film version of Suboxone was potentially more dangerous, more susceptible to abuse, and included a higher risk that children might be exposed to the drug. The firm also developed a program that allegedly connected opioid-dependent patients with doctors who prescribed Suboxone “in high doses and in suspect circumstances.”

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    10. 10
      PAM Dirac says:

      I think the other unstated assumption that is needed to make this conspiracy work is that the greedy people running the show don’t get the disease in question. Plenty of pharma execs die of cancer. They are pathologically greedy, but they are willing to give up their own lives for what? Keeping the conspiracy alive for some else?

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    11. 11

      I think the big problem is that people have seen what we can do to infectious diseases with vaccination and antibiotics, and they assume drug companies can be just as effective at dealing with diseases that result from organic problems with the body, like heart disease and arthritis. Basically, big pharma has been extremely effective at harvesting the low hanging fruit, and people are upset that the rest of the fruit is much higher on the tree.

      @Dog Mom:

      What if IE could be prevented all together by some lifestyle changes?

      Doctors counsel their patients to make lifestyle changes all the time. For example, most doctors will push their patients to lose weight, exercise more, etc. as approaches to deal with heart disease before they start prescribing anything. But it should be obvious that making lifestyle changes is hard, and most of us don’t think medicines should be restricted to patients who are still sick after making lifestyle changes.

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    12. 12
      p.a. says:

      The big caveat is this assumes there is no industry wide, universal price fixing scheme in play. That assumption is one I am not addressing in this post.

      Any lack of evidence for cartelization is evidence of successful cartelization.

      ; – O

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    13. 13
      John Harrold says:

      I actually work in pharma R & D. Human physiology is simply so complicated that generally speaking finding a treatment for a disease is much faster and easier than finding a cure. Not easy, just easier.

      Human disease affects us all. My father has heart disease, COPD, and pancreatic cancer. If we could cure diseases we would be incentivized to do so simply to help ourselves.

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    14. 14
      William Krueger says:

      Wouldn’t the ability to patent a drug combined with the long and involved FDA approval process change the narrative by giving essentially exclusive control to a major source of treatment?

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    15. 15
      Doug says:

      “Pharma does not help itself when it engages in pay for delay, patent evergreening and other rent collection strategies”

      This also presumes that pharma companies are black boxes that uniformly execute the will of their CEOs. Whereas like any human organization, they are messy congolomerates: Compliance is apopleptic that the guys in Small European Market were bribing the local medical association (again); IP sees a way to squeeze a couple more years of exclusivity out of DuraTreat, while Government Relations is worried that will encourage the regulators in Big European Market to look at the reimbursement scheme for not only DuraTreat but also SugarHelp, which has been a profit-driver since its release three years ago. Development has BigCures 1, 2 and 3 headed into clinical trials, but they’re fighting for budget against DuraTreat III and IV.

      In short, it’s something of a wonder that anything close to a coherent strategery emerges from an organization that large.

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    16. 16
      rp says:

      That’s just not how research works.

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    17. 17
      PAM Dirac says:

      @John Harrold:

      Human physiology is simply so complicated that generally speaking finding a treatment for a disease is much faster and easier than finding a cure.

      I’m not sure people know that the vast majority of clinical trials fail (without controversy). One accounting (discussed here) estimates only about 13% succeed, and only about 3% in cancer.

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    18. 18
      Brachiator says:

      I believe all the pharma companies have one thing in common. I believe they search for treatments that ameliorate, but do not cure….

      Oddly enough, this is the business model of the Big Supplement and alternative medicine industry.

      And this crap rarely even ameliorates.

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    19. 19
      dnfree says:

      Speaking of making money by keeping people dependent on drugs (and doing very little research in how to wean themselves), this was a fascinating article in the New Yorker this week.

      https://www.newyorker.com/magazine/2019/04/08/the-challenge-of-going-off-psychiatric-drugs

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    20. 20
      joel hanes says:

      Reasoning from ideological prior assumptions rather than observing the real world of outcomes is exactly how the Republicans saddled themselves with supply-side “voodoo” economics.

      Compare the research dollars going into searching for ameliorative drugs for high blood pressure or high cholesterol with the research dollars going into the search for desperately-needed new antibiotics.
      Or look at where the advertising dollars go.

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    21. 21
      Villago Delenda Est says:

      CEOs of big pharma companies are parasites.

      Wipe them out. All of them.

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    22. 22
      joel hanes says:

      The pricing history of insulin.
      The pricing history of epi-pens.

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    23. 23
      Chris Johnson says:

      It looks like companies will try to undercut their competitors

      No.

      Price fixing has been everywhere from Silicon Valley salaries to supermarkets. This industry has ‘customers’ literally threatened by death. It is stark madness to think that they will uniformly follow principles of effective capitalism when all they have to do is tacitly or overtly settle on across-the-board inflated prices.

      You are saying that among a bunch of guys who are raking in huge sums of cash, they will be moderated because one of the guys is going to intentionally take LESS CASH IN ORDER TO HURT THE OTHERS competitively.

      They’re a class. They hang together. There is no reason for any of them to turn class traitor and seek to pressure the others. That’s rare, and when you get that you call it Jeff Bezos. It’s not a healthy thriving businessperson who does that, it’s a broken individual who’s insatiable and driven… even for a CEO.

      You are wrong in some of these assumptions about how business works. The talk of ‘oh, competitive pressure, ain’t it great and optimal’ is wink-and-a-nod stuff. Ignore it and EVERYBODY makes out like bandits, which accurately describes health and health insurance in the USA.

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    24. 24
      grubert says:

      A corporation does not need a sociopath in charge in order for the corporation to behave in a sociopathic manner. This applies to any sufficiently large organizations of human beings.

      ReplyReply
    25. 25
      Matt McIrvin says:

      Now suppose there’s a cheap vaccine from Company C that prevents Itchy Elbowitis forever. Wouldn’t it be tempting for Companies A and B to spread rumors about how it will make your children autistic?

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    26. 26
      Fred Fnord says:

      Note BTW that price-fixing schemes need not be formally communicated. The same people sit on all the boards of directors of all these companies. They all want to maximize the profits of ALL the companies. An ‘understood’ agreement, just ‘the way we do things in this industry’, is perfectly fine.

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    27. 27
      Brachiator says:

      @Matt McIrvin:

      Now suppose there’s a cheap vaccine from Company C that prevents Itchy Elbowitis forever. Wouldn’t it be tempting for Companies A and B to spread rumors about how it will make your children autistic?

      No.

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    28. 28

      “The big caveat is this assumes there is no industry wide, universal price fixing scheme in play.”

      If there is not, how do you explain the rises in the price of insulin, and just about every inexpensive-to-produce generic drug?

      ReplyReply

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