1. Which cost definition from Exhibit 2.5 is being used by the consumer groups?

The
pharma-ceutical companies? What is included in the cost figures cited by consumer
groups? What are the pharmaceutical companies including in their discussion of
product cost? Which costs do you think should be included when comparing the cost
of a drug with its price?

2. Suppose that you are the accountant for the pharmaceutical company who is
charged with the responsibility for compiling costs associated with your newest
drug. The cost figures will be used in pricing and to determine profitability of
the drug. What costs do you think you would include? Does the IMA Statement of
Ethical Professional Practice have any bearing on your choice? Discuss.

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.

Revenue generated from drug production in the United States has more than doubled
in the past 10 years. In 2016 alone, the U.S. brought in more than $328.6 billion
in prescription drugs sold in retail outlets.1 The major key to this high revenue
is repetitive price increases.

Drug companies have an unusual ability to function relatively unregulated and to

raise drug prices beyond inflation rates. This allows the drug companies to
increase their revenues continually, even if the demand for one or more drugs is
not high. The result has been a huge outpacing of demand in the United States. For
example, from 2010 to 2015, the growth of prescription drug revenue for 30 top-
selling drugs averaged 61%, which was three times higher than the increase in
prescriptions for those drugs.2 By 2024, worldwide sales of prescription drugs are
predicted to reach $1.18 trillion.

KEY TAKEAWAYS
In the United States, the price of prescription drugs is relatively unregulated,
enabling pharmaceutical companies to increase their drug prices beyond inflation
rates and regardless of demand.
The majority of a pharmaceutical company’s revenue comes from steadily increasing
prices of drugs that have been on the market for some time.
When pricing their drugs, pharmaceutical companies consider a drug's uniqueness,
competition from other companies, and a drug's effectiveness.
Companies also consider the huge research and development (R&D) costs incurred to
bring a drug to market, a consideration that often leads to high prices for new
drugs.
Exorbitant Drug Costs
The news media in the U.S. has put a great deal of focus on pharmaceutical
companies that have released new drugs with sky-high prices. There has also been
increased focus on previously released drugs under new ownership that have
undergone abruptly increased prices. Drug companies do this, of course, to generate
revenue.

However, the majority of a company’s revenue comes from a pattern of steadily

increasing prices of drugs that have been on the market for some time. The number
of drugs that drug companies have in their pipelines will also affect each drug’s
price.

How Drugs Are Priced

Because of drug companies' pricing power and their ability to increase prices
without regulation, the worry about sluggish demand is far down on the list of
concerns in relation to pricing. Pharmaceutical companies concern themselves with a
variety of factors when pricing drugs.

Drug Uniqueness
The uniqueness of the drug must be considered. That is, how many other drugs are
already available that treat the same condition. If the market is heavily saturated
with drugs to treat a certain condition, new drugs for the same condition will
likely be priced lower.

Competition
Competition is another factor that affects pricing. Drug companies must consider
the popularity and success of the drug’s competition, and they must determine if
new drugs have added benefits over competing drugs. Additional benefits lead to
higher prices.

Drug Effectiveness
Drug companies must consider whether new drugs
through clinical trials) to change the current
the conditions the drugs target. The companies
drugs can prevent the need for certain medical
surgeries or other procedures.
have the potential (or have proven
practice of medicine used to treat
must also consider whether their
treatments or the necessity for

Drugs that can cut down on expensive surgeries, hospital trips, and doctor visits
are often priced higher because of the savings they offer customers on the back
end. Drug companies also issue higher prices to drugs that can extend or even save
lives.

Ultimately, the main objective of pharmaceutical companies when pricing drugs is to

generate the most revenue. This often means facing competition, which serves to
drive prices lower. However, drug companies have balanced pricing drugs too low
with the ability to enact price increases at steady intervals.

Issue of Pricing
Pricing a drug incorrectly is one of the biggest mistakes a drug company can make.
Pricing a drug too low or too high has a great impact on its potential for success.
If, for example, a drug is priced too high, payers may be unwilling to reimburse
for it or physicians may be disinclined to prescribe it. They may believe the drug
is not worth the high cost if it is likely that it will offer too little benefit to
warrant the cost. On the other hand, if a drug is priced too low, physicians may
conclude that it offers a discounted form of therapy, less effective than a more
expensive drug that already exists.

The research and development (R&D) surrounding each drug is another monumentally
important issue in regard to pricing. The amount of time, effort, and money that a
pharmaceutical company invests in the R&D for each drug must be weighed when the
drug is priced. This often leads to higher prices to ensure that the revenue
generated will exceed the expenditures behind the drug's development.