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High drug costs are often in the news. Consumer groups contend that the pricing for some drugs is “too high” considering that the costs to manufacture each dose in so low. They talk of price gouging and excessive profits. Pharmaceutical companies defend the price charged on the basis of nonmanufacturing costs such as research and development and others. The following is a generic value chain for a pharmaceutical firm: R and D Design Production Marketing Distribution
Expert Answer
1.Consumer groups use traditional production cost to explain their concerns that the cost of production is very low, but the price of the drug is very high.
Pharmaceutical companies use value chain product costs to explain that there are costs associated with the R&D activities, design, production, other overhead costs as well as the marketing cost associated with these drugs. It causes the price of the drug to be higher to recover all these cost.
2.
Value chain cost and more specifically cost associated with the R&D should be considered when the pricing decision takes place. No any consumer group focuses when a research & development initiative fails and the company incurs huge losses. But, these costs should be considered when a price is fixed. It will give the correct picture when a cost is compared with the price.
3.
As a defence,
A. I will come up with the sunk cost associated with each step of the value chain and the data of cost incurred before producing a single unit of drug.
B. The detailed breakup of the recovery of cost w.r.t. the period of time and volume of production, so that the cost will be distributed for the whole production of the particular drug.
C. Plan of reducing the prices of the drug once the past investments is recovered and the breakeven in case of the particular drug is achieved.
4.
The cost of the drug should be distributed over a period of time. Though, it can happen that in the initial years, there can be a higher recovery of investments. It will push to the increased sales and profitability part will increase. Further, there should be different prices in different market and it should be on the basis of local economic, political and social conditions.
For example, a new medicine for the cancer is invented, then the company puts different prices to the medicine in US market, European nations, Asian countries and Africa. Here, the price is fixed on the basis of value chain cost method, but economic conditions and purchasing power of the population is also considered before fixing a price in the particular market.
