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If the alternative is no cure at all, what's the issue?

If it's a fair price based on all their costs, then there's no issue. But if it is exorbitant even after considering all the costs- well, many people take umbrage with healthcare profiteering.




Determining the “fair price” based on costs is not rational. What is the “fair price” for an iPhone? It’s certainly not based on costs. It’s based on what the alternatives cost.

For things like drugs and treatments, which often are covered by patents, you shouldn’t necessarily get to charge whatever the market will bear. But even then, looking to costs is a bad idea. If saying “you should be entitled to a 10% return above your costs” actually worked, why not do it for everything? Why not pass a law that says that smart phones can only be sold for 10% above cost? If that would work for drug development, it would work for smart phones too. From the supply side, the two are very similar: top talent + massive capital investment + high-tech manufacturing = product. We’d have $300 iPhones every bit as good as what we have now, right?

For drugs, a “fair price” is best determined by looking to return on investment. If the investors in Novartis are earning 10x what they could have earned by investing in a web tech start up, maybe that is unreasonable. Such high returns are unnecessary to keep capital from fleeing to alternative industries.

But that’s not what is happening. Novartis’s return on invested capital last quarter was 9.5%. Alphabet’s was 37%. Novartis is not making outsized profits. It’s making healthy profits consistent with investing in a high-risk, high-tech industry.

A contrary moral rule creates perverse incentives. It tells people that if you want to save lives, you need to invest billions of dollars while getting a minimal return. But if you just want to peddle advertising, you’re free to make as much money as you want. If you consider some things “too important” for the profit motive, what you’re doing is incentivizing people to invest money, time, and their careers in things that aren’t important.


Avexis spent ~$700M on developing this drug. But drug prices don't just cover costs for developing the drug. They also have to cover losses from other failed r&d projects, and also cover the cost of capital

money isn't free. If for profit companies didn't fund this research, no one would. Opportunity cost of money is a real cost and it is reflected in the price of any commercial good -- drugs are no exception

Is there profiteering in some cases? Yes. Is there in this case. Probably a bit. But it is not realistic or fair to think drug companies should price solely based on a cost-plus model, ignoring losses from failed research efforts and the cost of capital

However, cost of capital is a huge driver of costs and reducing it would be very valuable. The question is how to do that

If you're curious to see how these different things affect drug price, I made a tool where you can play around with different drivers of drug prices (incl cost of capital) to see how they affect price: https://www.baybridgebio.com/drug_pricing_calc.html


When I say cost, I mean everything. Including R&D, including those other failed projects, including rye cost of capital.


there is no such thing as a "fair price"


In a capitalist free market, sure, but people argue that that's not what healthcare should be.


It's also not what healthcare is, so long as we have patents.




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