Drug Trials

After reading several articles on Bloomberg, I came across an article that intrigued me; The CEO who Saved a Life and Lost his Job. As I was reading this article, a statement by Kevin Donovan stood out. He said "The company's obligation is the greatest good for the greatest number." This statement got me thinking. How is this statement relevant? The company has spent millions of dollars getting the drug ready for the market, however, these costs are sunk costs. Why would the company, financially speaking, need to refuse to allow the family the use of the drug? 

The article explains that Josh Hardy's medical condition didn't meet the criteria set for all previous trials. The company had a number of assumed risk to consider: first, Josh's treatment didn't meet the criteria, second, the possible delays that could occur if the drug didn't work, or three, if the FDA pulled it all together.  These risk could have had drastic financial consequence because the results on Josh's condition were unknown. 

After Chimerix completed a new analysis, I am sure the Net Present Value would now be lower than expected from shareholders. This could potentially prevent investors from continuing to invest in the drug. The company currently was not earning any revenue and was relying strictly on money from investors. This insight helped me understand Kevin's statement as I related to Chemerix point of view versus taking an emotional position.

1 comment:

Dr. Tufte said...

John: 100/100.

There's a lot of tough issues involved in cases like this, and I'm not always sure there's much economic insight.

I think part of the issue here is that there are two sorts of costs here: the development cost of the drug (paid out of investor financing), and the costs to repay that financing. Only the former is sunk at this juncture. So when John says "these costs are sunk costs" I think he's right about the ones that he's counted, but not about all their costs. So it's not strictly a decision based on sunk costs for the firm.

Morally, I'm not sure this whole thing isn't turned upside down. It seems to me the investors have actually taken a step forward to make this drug possible. The social media advocates working on behalf of the patient had not. How do we as a society justify giving them the moral high ground? That's a tough position to take, but let's be clear: the investors would not be getting beat up in the media on this one if they had blown their money on something frivolous.


There's an interesting classroom game that I play with students sometimes to illustrate the problem that innovators (like pharmaceutical companies) face. In the game, I choose 2 students, and tell them they have to bid to win $1. The trick is that both of them have to pay. This mimics R&D in real life, where more than one firm may make the investment, but only one gets the patent. If you think about how this game will work, it will make sense for each player to outbid the other. What makes it really interesting is that it continues to make sense for them to do this even when the bidding goes over $1. The implication for the real world is that the relevant opportunity costs that need to be counted for assessing profitability are all the R&D costs within an industry, not just those of the firm that gets the patent.