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Comment by blackbear_ | Hacker News Reader

It is true that pharma companies take advantage of publicly funded research, but from there to brining a new drug on the market it takes further 10/15 years and 100s million dollars of R&D. A large portion of the cost comes from the fact that most of these projects prove infeasible and are abandoned during development or later during trials.

The vast majority of this effort remains unpublished, so I am not sure that the article you cite supports your argument. Most of the research mentioned in that article talks about possible associations between target and disease, which is just the earliest step of drug development.

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It's way more than hundreds of millions, it's now well over a billion and most of it by a large margin goes into failed programs. Though it does seem to be getting better (or getting worse more slowly?) recently.

https://media.nature.com/lw1024/magazine-assets/d41573-020-0...

https://en.m.wikipedia.org/wiki/Eroom%27s_law

There’s huge incentives to pad R&D spending numbers, so it’s important to consider the underlying reality here.

“In many cases, the estimated cost of capital can be substantial, representing almost half of total development costs in some recent estimates.” https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8855407/

Cost of capital makes sense in terms of ROI calculations, but it’s not going to show up as a line item on annual budgets. Similarly R&D at drug companies isn’t all drug development R&D.

I think the point of the article is that R&D is not the actual source of the cost for developing new products.

Forest for the trees. The main point of the main article still holds true:

Big Pharma (and Big Everything, really) consistently spends more on executive compensation and shareholders than R&D. And to the commenters' point, maybe if they put more of that in R&D, we'd have more promising and successful targets

Dividends are not spending. It’s just the shareholders taking money they own.

Money they own because the profits of the company far exceed the R&D costs.

There's a pretty nice article on this topic here. [1]

Shareholders do not own companies in any, way, shape or fashion, let alone owning the profits of a company. Shareholders own a right to vote on company matters and have certain privileges based around such, but increasingly often they don't even really own that in any meaningful way. Google, Facebook, and many other companies use tiered shares, where the executive owners of the company grant themselves shares with orders of magnitude greater voting power, generally enough for majority control. So the shares everybody else owns serve little purpose other than speculation.

In any case this is a [somewhat interesting] red herring. The issue is that big pharma profits are already very large (and in fact COVID sent a number of big pharma execs into the billionaires club) and so public funding serves little purpose other than to further increase their profit margins, which should not be the purpose of public funding - even though in practice it often is.

[1] - https://moneyweek.com/merryns-blog/shareholders-and-the-myth...

The thing is, pharma industry is clearly hugely profitable, so why doesn't the government invest in a wide shotgun approach to fund half (or more) of the entire industry and in return take half (or more) of the profits to either keep as revenue or reinvest in pharma or in other healthcare?

(Obviously theoretically ideal economically would be if the government could just have a socialised department discovering and developing all new drugs needed with no profit margins, but then you lose out on benefits of competition, profit motives etc. so a split model makes sense, where they're still private companies but the gov invests hugely in them - but in return for the fair share of profits, rather than so many current grants where the gov pays funding and it doesn't even get them a good discount on buying the overpriced final drug.

You could say that about any industry.

"The thing is, the S&P 500 is clearly hugely profitable, so why doesn't the government invest in a wide shotgun approach to fund half (or more) of the entire S&P 500 and in return take half (or more) of the profits to either keep as revenue or reinvest in the S&P 500 or in other stock indexes?"

Gov't investment in any industry just because it's profitable is a bad idea for obvious reasons.

Sure, except that investing in the S&P is just artificially inflating the economy as a whole, whereas my suggestion isn't intended to be "this is my advice for the most profitable use of a government $", it's a suggestion for boosting a small part of the economy to speed up the development / progress of new drugs as a societal benefit.

People who defend the huge profit amounts of pharma companies (which ultimately come from consumers needing healthcare, paying either directly or through insurance) say it's fair because of the huge amount they invest to create the drugs, if the government does most of the investing then they can take most of the profits to subsidise free pills for their population. Seems to me like a more direct benefit (in addition to potential economic benefits of boosting investment levels in a high-exporting industry too) than just the government buying S&P500 index funds.

define 'hugely profitable' - PFE is one of the biggest, their stock is at about the same price it was 25 years ago, so inflation already made you lose 50% of your money - with dividends maybe you broke even for a 25 year investment. I would not call that hugely profitable.

Why don't we go after the actual 'hugely profitable' companies if that is the goal.

Look what happens to University tuition when the government gets involved with funding. Not saying it would be the same model but I have doubts this could completely take over R&D funding.

I see Pharma more like energy utilities in that they provide an essential service that citizens cannot live without. Therefore maybe they should be regulated like utilities (which are private, or can be private, but their margins are capped and set by the government).

And yet the human race managed to survive for millennia with no pharmaceutical industry at all. The industry as we know it has only existed for about 100 years. While it has been helpful in extending lifespans and improving quality of life, it is nowhere as important as utilities like electricity and water.

The human race also survived without electricity for just as long…

Not ... sure that's the best reductio, since many governments do make broad-based equity investments, via Sovereign Wealth Funds, and it does bolster their long-term financial outlook.

To bring it back to the specifics of the original argument, and refine it a bit, the relevant point is, "If these are such easy profits from doing nothing, why doesn't the government get in on it?" Alternatively, why don't the universities themselves develop drugs to the point of FDA approval and mass marketing?

The unfortunate answer is: it's not actually easy profits. It's highly speculative and difficult work to turn a drug from "supported by university research" to "ready to market to the public". Sometimes universities do try to cover some of that ground though.

The same government that can't come up with sensible policies to regulate big pharma and gets played by all kinds of lobbyists suddenly is going to figure out how to develop drugs more efficiently than the industry does?

I'm suggesting the government take the role of investor, replacing (or rather, overshadowing) the financial firms & private owners who are the current investors, not taking over the way the companies work.

Could either give a body like the NIH a huge new budget to use for investing in pharma companies, or could pass a law that says any company that successfully raises X money with Y criteria (either in VC, or by IPO, or however) must automatically allow the government to buy x% at the same price (or a slight discount) as other buyers?

And sure, lobbyists, money in politics and quality of current US politicians are a problem to face with pretty much any aspect of improving the country, but I don't think that's a reason to never discuss ideas about how to do so. (Then again I'm not American so I don't have horse in this race, but I feel similarly about my UK.)

Pumping dumb money into a sector isn't likely to translate into profits. It will translate to a bubble and a lot of opportunists taking the money.

It isn't that it is impossible, but it would take a slow start, and sustained experimentation and organizational learning over many years, before the amount of money that could make a dent in the problem could reliably perform well.

All while VCs would be lobbying to end the incursion, and the easier money - therefore lower returns, it would inflict on their territory.

Hugely profitable is perhaps misleading. It’s hugely profitable in the sense that the aggregate profits are high, simply due to both the sheer number of products sold and their high prices. But in terms of profit to expense ratios the Pharma industry is actually at the low end of the spectrum. Most other industries, including tech, are far more profitable in this regard.

I wouldn't call it the low end of the spectrum [1]:

> Pharmaceutical companies had significantly higher annual profit margins than S&P 500 companies for the 3 primary outcome measures of gross profit, EBITDA, and net income (P < .001) (Table 1).

> For pharmaceutical companies, the median gross profit margin was 76.5% (95% CI, 70.3%-82.7%), the median EBITDA margin was 29.4% (95% CI, 26.3%-32.5%), and the median net income margin was 13.8% (95% CI, 10.2%-17.4%). For S&P 500 companies, the median gross profit margin was 37.4% (95% CI, 35.2%-39.6%), the median EBITDA margin was 19% (95% CI, 17.8%-20.3%), and the median net income margin was 7.7% (95% CI, 7.2%-8.2%) (Table 2).

[1] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7054843/

Now show me the Sharpe ratio. High risk, high reward

> 100s million dollars of R&D

It is worth noting that a significant portion of the D in R&D is money spent on direct to consumer advertising. This only happens in the USA, as I believe that it is not legal elsewhere.

edit: I am now not 100% sure about this, please see comments down-thread.

are you sure? usually this is counted as marketing costs.

Thanks for checking me on this. It was just what I recalled from memory, but I believe that the following links confirm this.

> The pharmaceutical industry devoted $83 billion to R&D expenditures in 2019. Those expenditures covered a variety of activities, including discovering and testing new drugs, developing incremental innovations such as product extensions, and clinical testing for safety-monitoring or marketing purposes [0]

> $6.56 billion spent on direct to consumer pharma advertising in 2019 [1], with nearly $8.1 billion spent in 2022. [2]

[0] https://www.cbo.gov/publication/57126#_idTextAnchor003

[1] https://www.statista.com/statistics/686906/pharma-ad-spend-u...

[2] https://www.fiercepharma.com/special-reports/top-10-pharma-d...

In "clinical testing for safety-monitoring or marketing purposes", "marketing purposes" doesn't mean spending money on ads and stuff like that, it means doing clinical trials to see if a drug works for a certain disease or population, or to compare their drug against a competing drug, or whatever. This is the insanely expensive research that pharma companies do to see if drugs actually work, that everyone likes to ignore when talking about greedy pharma companies.

Results of clinical trials (if successful) can then be used in ads, but that would not be R&D expenditure.

Hmm, thanks. Now that I search more, I am not as sure of my original point.

However, could we agree that DTC pharma advertising has very controversial benefits for patient outcomes, at best?

I will agree with that, if we can also agree that pharma companies spend tons of money on clinical trials, and it's difficult to imagine where that money would come from if they didn't exist :)

Does it? What would those be?

In fact anything that pharma companies say about a drug must be information from a clinical trial. One of those little surprising but obvious in retrospect facts. Clinical trials must be designed not just to 1) find out whether the drug works, 2) find out whether it’s safe, 3) ideally avoid information that it’s not safe, but also 4) generate the numbers they can put on brochures to compare it against alternatives. Then all of those are balanced against the immense cost (to pharma) and complexity (to pharma, CROs, trial sites, and trial participants).

It’s a ludicrously complex business process.

A huge part of the expense of Pharma is compliance. A simple example of a PC connected some lab equipment. The PC and the equipment have to be validated which means that every step used to install the PC, equipment and software has be in an approved procedure that used to deploy them. Any deviation from that procedure will require a exception reports that will have their own approval process. Once in use every action is performed has a procedure. Any deviation from that procedure will result in an investigation that can be reportable to the FDA etc. Every task done on the system will have a log that has to be manually filled out by an analyst or an admin. There are regular system and user access reviews that are reviewed and approved. Once the system is no longer in use a formal decommissioning has to occur. Date may have to be kept for 25, 40 or even 100 years. Now picture a lab with 100s of systems.

And yet even with that, executive pays and dividends (meaning profits over development) are higher than R&D cost. plus the cost of compliance is still less than human cost in R&D.

Are there any public numbers available on how much of the drug companies expenses is compliance related? Is that bookkept with "cost-of-doing-business" or some other line item?

Current examples I have found:

[1] Eli Lilly, 2022 Annual Report: https://investor.lilly.com/static-files/2f9b7bb1-f955-448d-b...

Significant mentions of "compliance" (most are legal issues). However, a decent number of warning statements about how government compliance will require significant effort. No actual numbers I could find. Main Finanacial is pg 57.

[2] Merck, 2022 Annual Report: https://www.emdgroup.com/en/annualreport/2022/_assets/downlo...

200+ mentions of "compliance" (most are legal issues, it's a lot to check) Pg 148 has "number of self reported compliance violations. Most are fraud or "against company values". 79 reported with 28 confirmed. Main financials start pg 230. There was some about "compliance with audits", yet nothing I could find that was a line item for "government process compliance" or something similar.

[3] Johnson & Johnson, 2022 Annual Report: https://www.investor.jnj.com/files/doc_financials/2022/ar/20...

Significant mentions of "compliance" (most are legal issues, J&J has a "bunch" of lawsuits in Canada vs generics). Could not find a direct reference to cost of government compliance, although I did read a part that implied it seemed to be rolled into R&D somewhere. Financial Statement is at pg 54, although the $ numbers start quite a bit earlier.

[4] Bristol Myers Squibb, 2022 Annual Report: https://annual-report.bms.com/assets/bms-ar/documents/2022-b...

Notably, has a neat list of the main compounds currently under investigation with various groups, and "products in pipeline developments" (basically drug status updates). Only 2 mentions of compliance, both are officers. Financials are pg 40 in the pdf. Also, there is something wrong with their PDF format, because search is very obviously broken (at least on Firefox). So there might be something hiding in there that's just not being searched correctly.

Anyway, best effort for a half hour of avoiding working on anything, and did not find a number source.

Great work, I'll try and take a look at some of the reports over the weekend, you've piqued my interest to dig further

Yeah still though, if we're going to be funding basic research (a necessary though not sufficient step in drug development) then drugs should be affordable, and the government should be able to negotiate on prices.

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