This falls prey to a common misconception: drug companies do not price drugs in order to recoup the cost of r&d. R&d is a sunk cost, the pricing of the drug is determined by what the market will bear. Ability to cover r&d is important before beginning the development project- the company needs to believe that bn it will be able to price a drug in a way that is NPV positive, but when the drug is approved, pricing is based purely off of the laws of supply and demand.
That is correct. I did not make this sufficiently clear, but this model is supposed to reflect the perspective of an investor / startup deciding whether to invest in a drug development project. The model calculates price required for breakeven NPV using a discount rate of 20%, which is roughly in line with cost of capital for startups. Since most FDA approved drugs these days are developed by small companies, i thought it appropriate to use a small company's cost of capital
I see, then I guess more accurately the page doesnt fall prey to the misconception as much as accidentally perpetuates it. Maybe it would be a good idea to clarify using the tenses of the verbs and the wording that this is about the co considerations for the future pricing of the drug for a decision made before investment, and that the actual price of the drug will be dictated by supply/demand curves? If the model is presented as an investment go/no go calculator rather than price calculator, then that could make a lot of sense, and from that perspective it's a really cool model, I love how comprehensive it is! One nitpick, breakeven price and the word "breakeven" often refers to accounting profit, it might help to clarify that this is the price where you hit NPV>0, and maybe include the details of what the post patent cliff market size assumptions were (although that probably contributes very little given a 20% discount rate). It really is quite thorough!
Thanks, that is helpful feedback. I changed the first sentence to make it more clear that this reflects an investor's go / no-go model.