Two Billion Dollars Is a Lot of Money
Friday, February 27, 2015
I came across an open letter in the New York Times by Ezekiel J. Emanuel, an oncologist and a vice provost at the University of Pennsylvania.
He decries the lack of new antibiotics and describes his new plan to ensure that biotech companies refocus their efforts to develop more. His plan? Award $2,000,000,000 for every successful antibiotic brought to market.
While I applaud his attempts at out-of-the-box thinking, he'd benefit from a firmer grasp of economics.
I've long since learned that workarounds (although politically expedient) are often more expensive than attacking problems at the source. By his own admission, "animal feed accounts for 80% of the antibiotics used in the United States and contributes to antibiotic resistance." Wouldn't it be simpler (and cheaper) to prohibit the use of antibiotics in animals? Forcing farmers to internalize the true cost of raising a healthy animal is surely preferable to a world in which humans die from lack of functional antibiotics. In addition, according to Dr. Emanuel, fifty percent of antibiotics used by humans are prescribed "unnecessarily." Cracking down on the over-prescription of antibiotics would require minimal research and could be implemented with far less difficulty than creating a new class of antibiotics. A simple change of law would cut down on 90% of antibiotic use without public money and without a reduction in care given to human beings.
I also take issue with his statement that his plan is highly efficient. It's not. The doctor's plan states that only firms that create a new class of drugs would receive the prize money. Of course, many good-faith efforts will likely fail. As an economist outside of the medical field, I am woefully unqualified to estimate the likelihood of a successful research program. But, the risk of failure must be considered when calculating the true value of the prize money. If (for instance) an effort has a 20% chance of success, then the value of the prize is only one fifth of two billion dollars - still quite a bit of money, but far less than the stated amount.
Finally (and I do not say this lightly), his statements describing "the prestige, bragging rights and renewed sense of mission" that this prize will inspire amongst biotech firms is completely nonsensical. None of these rewards are particularly important to firms that even he describes as profit-hungry.
Oddly, the doctor's letter danced around a possible solution to the problem - and (lo and behold) it involved the pricing of antibiotics. He describes the fact that biotech firms don't want to invest in antiobiotics because their prices have been anchored at a low dollar amount. We could easily correct this problem with a simple renaming of future classes of drugs. How about calling them "anti-cellulars?" It sounds like a different product than anti-biotic, and if new classes of drugs are as needed as he claims, should be able to sell for larger dollar amounts.
Good try Dr. Emanuel, but I think you need to go back to the drawing board on this one. Don't make the same mistakes! Pick up a copy of my book on software pricing or contact me for a consultation. While I can't promise prestige, bragging rights and renewed sense of mission I can help you gain a better knowledge of pricing economics to apply toward your business goals.