WOBBLY ON PHARMA

“I recognize the political problem of Abbott’s raising the price of its inhibitor drug, and the poor timing. But are either ignoring production economics or you have gone wobbly on your own argument. The Sullivan Pharmaceutical Development Incentive Thesis (as I understand it): If we want the pharmaceutical industry to invest in more new drugs, we must support pricing necessary to attract the capital required. This applies to pricing adjustments as well. The amount that Abbott had invested in this drug did not change just because the dosage changed. the only thing that changed were the dosage and (therefore) the required production quantity. So Abbott had to amortize their fixed investment over a smaller production opportunity. Therefore the price goes up.
The dosage dropped by a factor of ten and the price only rose by a factor of four. Suppose the profit margin on the product before the change was 20%. Then the pricing change is a break-even proposition for Abbott if the fixed costs were somewhere between 30% and 35% of total revenue. If the fixed costs were more than that range, then profits drop. Less and profits rise.
If you have evidence that Abbott’s fixed costs before the price change were under 30% of projected lifetime revenues, then your charge of gouging has substance. Otherwise, your critique works only as a commentary on the bad public relations dynamics of the change.” – more feedback on the Letters Page.