I do this sort of thing because not everyone reads comments and I believe this to be an important discussion.
Derek Lowe at Corante's
In The Pipeline noticed the link in
yesterday's post and was good enough to visit. Derek disagreed with my two objections to the whole idea of opportunity costs being folded into the cost of producing a new drug:
- The money was NOT spent all on day the drug was approved
- Most of the money spent was Federal money
On the first point he says:
You're right, that money wasn't all spent on the day of approval. The point of looking at it that way is, as you doubtless know, to calculate the opportunity costs. The money could have been invested instead of spent - how much would would you have, by approval day, if it had been? People do the same sort of calculations for mortgages and loan payments all the time - imputed interest rates and all that. Are those nonsense as well? If your answer is "yes", do you think you could convince an accountant?
My response, lifted from comments:
You assume they had the money to invest on day one. And why do you stop the calculation on approval day? That's kind of arbitrary. Why not do the calculation over the life of the product? Because it would lead to an entirely different judgment. I'm not saying it's evil, it's simply the way the game is played. For instance, if I (corporately) show $20,000 profit and one expects to make 2% on one's investment, then one values my corporation at $1,000,000 even if I only spent a couple of grand on computers to set it up. Not evil, simply the way the game is played…and has as much bearing on reality as opportunity costs. Exactly as much. At any rate, I might be able to convince an accountant of the validity of doing opportunity cost calculations over the life of the product but it wouldn't be in the best interests of his client so I doubt being able to convince one to actually do it.
This morning I recognized another disagreement with reality in this argument: taxes. I'm not sure is pharmaceutical companies declare opportunity costs as actual expenses or losses, but if they do they don't declare the entire expense or loss incurred in developing a drug. They would if they could, but they don't know the figure so they can only declare what they can calculate. Taking that into account when calculating opportunity cost would lead to a less assailable figure.
