So what factors go into determining a drug’s price?
In the last chapter, you learned about the values that investors use to fund drug development. And remember
from Chapter 1? Investors fund an entire portfolio of potential therapies, knowing that only a few will become profitable blockbusters. If rewards for those few are high, the overall portfolio is worth funding — which is how society incentivizes innovators to invest in new drugs in the first place.Remember the investment equation from the last chapter? Here’s a refresher…
Check out the variables detailed under “what it’s worth if it works.” From a drug company’s perspective, when determining a price for a drug, it’s important to consider:
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market size
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production costs
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diagnosis and treatment rate
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presence of competitors
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patent life
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treatment duration, and
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projected adherence to the medication
You might think that once this information is nailed down, setting a price should be relatively straightforward. A drug company can just figure out what they need to spend to produce a drug, estimate how many people out there might take it, and then sell the drug at a reasonable margin to pharmacies which will distribute it to patients, just like any other commercial product — right?
Unfortunately, it’s way more complicated than that…