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Pharmaceutical Industry examples
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27/08/2008 17:51:08
 
 
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Forum:
Politics
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Other
Title:
Pharmaceutical Industry examples
Miscellaneous
Thread ID:
01342382
Message ID:
01342382
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Here are few examples illustrating certain practices of pharmaceutical companies that get negative reaction on the left side of this board. Please, note that these examples are strictly educational; they don't have a purpose to start or invigorate any discussion. It means that I could gladly explain some terms, but I see no reason to discuss ideological differences.
I truly understand that VFP programmers are not required to be experts in non-related areas, so I tried to simplify the examples as much as possible.

Example #1: Profitability.
Let say, company ABC located in USA has developed drug 'xyz'. It took them about 10 years to develop the drug, and total development expense stands at $200M. Now they start production. Company expects to sell about 1M cases in USA only and it wants to recover initial investment during first 5 years (year 1-5) of production. Company expects that it will not meet generic competition during first 10 years of production (if someone does not know what 'generic' means here, I will explain it later). Also, I accept one of this board characters claiming patent protection length at 17 years (frankly, I don't want to search for the number myself). However, one should remember that company applied for the patent during development phase, i.e. time is already ticking and significant part of the protection period is already over.
Company operating expense to produce 1 case of the drug is $10, so company plans to set $50 case price. It would give them annual operating profit (50-10)*1M=$40M.
Question #1: Will company 'ABC' be profitable during first 5 years of production?
Answer #1: This question is not complete, i.e. company will be profitable in narrow ('operating') sense only, but it will not be profitable in general ('investment') sense until initial $200M investment recovered, i.e.until year #6 of production.
Question #2: Can company 'ABC' reduce drug price to $30/case?
Answer #2: Company could do whatever it wishes but this move would make it unprofitable in investment sense during first 10 years of operations; and after 10 years generic competition will squeeze operating profits down.

Example #2: Globalization. Scenario #1.
Company got an idea to sell drug 'xyz' on foreign markets. It estimates that total foreign sales could reach 500K cases/year. The only issue is that foreign governments want price reduced to $30/case.
Question #1: Should company pursue this deal?
Answer #1: Sure, why not. Selling overseas will make $10M/year in additional operating profits, so company will be able to recover initial investment in 4 years instead of 5.
Question #2: Will company 'ABC' be profitable during first 4 years of production?
Answer #2: This question is not complete, i.e. company will be profitable in narrow ('operating') sense only, but it will not be profitable in general ('investment') sense until initial $200M investment recovered, i.e.until year #5 of production.
Question #3: Are any problems with selling overseas?
Answer #3: If drugs sold for $30 overseas and they will be re-imported back to USA then company will be effectively forced to sell any case for $30, and this would a profitability problem (see Question #2 in the Example #1).

Example #3: Globalization. Scenario #2.
Company got an idea to sell drug 'xyz' on foreign markets. It estimates that total foreign sales could reach 500K cases/year. The only issue is that foreign governments want to subsidize drug price by $20/case, i.e. company will collect $50/case and government will reimburse own citizens by picking up $20/case, so final consumer price would be $30/case.
Question #1: Should company pursue this deal?
Answer #1: Sure, why not. Selling overseas will make $20M/year in additional operating profits, so company will be able to recover initial investment in 3.3 years instead of 5.
Question #2: Will company 'ABC' be profitable during first 3.3 years of production?
Answer #2: This question is not complete, i.e. company will be profitable in narrow ('operating') sense only, but it will not be profitable in general ('investment') sense until initial $200M investment recovered, i.e.until year #4 of production.
Question #3: Are any problems with selling overseas?
Answer #3: If drugs sold to customers for $30 overseas and they will be re-imported back to USA then company will be effectively forced to sell US-distributed cases for $30, and this would a profitability problem (see Question #2 in the Example #1). Besides that, foreign government will not be happy to subsidize $20/case for drugs effectively sold to US-based customers.
Edward Pikman
Independent Consultant
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