Tuesday, August 12, 2014

How GOP politics trumps good sense and financial prudence

A Deal Too Good to Turn Down, Unless It’s Medicaid

Uwe E. Reinhardt, NYT
AUG. 12, 2014

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

Imagine being the shareholder of a publicly traded biotech company whose management and board were considering the economic merits of a truly awesome project involving a new drug.

Unlike most pharmaceutical and biotech products, which require billions of investment up front before revenues come rolling in, this peculiar product would require the firm only to put up monthly production costs of 10 cents for every dollar of revenue that will come in the same month. This is because the drug has already been developed by someone else, and this firm bought the patent on it some years ago.

The drug has been found to be so effective that its approval by the Food and Drug Administration is virtually a sure thing. Furthermore, there will be a solid market for the product as far as the eye can see.

Even if this product were on the market for only, say, 20 years, the metrics by which modern business firms evaluate such deals — the net present value and the internal rate of return — would be truly stunning. In fact, the internal rate of return on the deal would be infinitely large. Infinity, as our daughter explained to me when she was 7, is a number so large that only God knows it. Naturally, the longer the period during which the new drug would be on the market, the more awesome the return on it would be.

(More here.)

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