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3 - Profit- Maximizing Drug Firms: Models and Myths

Published online by Cambridge University Press:  19 January 2018

Philip A. Rea
Affiliation:
University of Pennsylvania
Mark V. Pauly
Affiliation:
University of Pennsylvania
Lawton R. Burns
Affiliation:
University of Pennsylvania
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Summary

DETERMINATION OF THE FLOW OF NEW PRODUCTS: INVESTMENT IN DISCOVERY

How do drug firms, and investors in drug firms, decide on which promising ideas they want to fund? Failure to understand or accept the usual economic models of investor and investment behavior can lead to mistakes and myths, both about what happened in biomedical sciences discovery in the past, and what would be expected, or desirable, going forward. So in this chapter we will perform the grueling task of laying out the basic conceptual model of investing first. We hope the reader will persist because the model has some surprising and important implications. Having made the effort to understand this economic model, we will then analyze critically some claims made by industry critics and advocates alike that are inconsistent with it. We will conclude by summarizing the evidence that allows us to adjudicate between this model and alternatives to it.

In reality, every investment decision has its own specific issues and personality. However, there is a general model of profitable investment in any novel idea in any industry, which surely holds for biomedical companies as well as for other companies investing in research about new products with long-term and uncertain payoffs. At some point in the process by which an idea turns into a new product offered on the market, investors (we assume) will be needed to provide capital. Investors could invest in many things and, although the investment community is not immune to emotion, enthusiasm, and even concern for the public good, ultimately an investment is made with the expectation of a reasonable chance that the funds sacrificed in the short run will return their cost plus a profit over time. There can be other sources of capital – government or philanthropy – but we will assume what seems obvious: given the current draw the biomedical sciences make on the capital market and given that the capitalist system looks like it is here to stay, sooner or later investor motives and investor returns will make a crucial difference.

So an investor thinking of committing a given amount to some biomedical sciences research project will, we

imagine, consider two aspects of the potential payoff from that project.

Type
Chapter
Information
Managing Discovery in the Life Sciences
Harnessing Creativity to Drive Biomedical Innovation
, pp. 43 - 72
Publisher: Cambridge University Press
Print publication year: 2018

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