The Cost of Living

Several weeks ago, I stumbled across an issue of BusinessWeek left behind by a previous passenger on a plane. The issue was dated Jan. 30, 2006, and I came across an article about the high cost of medicine and copied down this section:

Dr. Leonard Saltz of Memorial Sloan-Kettering Cancer Center in New York says that 10 years ago the drugs used to treat colon cancer cost about $500. Today, the tab is $250,000. Over the same 10-year period, the average life expectancy for colon cancer patients increased from 11 months to a little more than two years.

Doctors say many breast cancer patients routinely refuse a new class of drugs known as aromatase inhibitors, which prevent the disease from recurring, because they can't afford them. Herceptin is also effective at preventing recurrence, but a Belgian study released last month calculated that Herceptin would cost European governments $42,000 per patient if used for that purpose.

H. Wayne Thornton of Albuquerque, a supervisor with the U.S. Forest Service, was shocked when he was diagnosed with breast cancer in 1996. The 59-year-old has gone through surgery and numerous rounds of chemo. He is now trying to survive on a combination of Herceptin, Avastin, and Abraxane, a new chemotherapy from American Pharmaceutical Partners Inc. -- at a cost of about $25,000 a month. Thrornton pays a premium of $388 per month to cover his wife, Betty, and himself. Still, his co-pays total hundreds of dollars each month for these three drugs.

It's that first paragraph that really caught my eye. 13 months of life = $249,500. That's a lot of money. Google says there are 9496.3 hours (395.68 days) in 13 months. That means the cost comes out to $26.27/hour ($630.56/day). This is so much money that even at 1/2 or 1/4 the cost, we're still in a position where most people would not be able to pay.

So is someone out there making obscene profit? It's not that hard to check. The Herceptin and Avastin mentioned in the article are both made by Genentech, a public company that goes by NYSE:DNA. Public means I can pull up their 10-K annual report and see what they made. From there we get:

• Revenue: $4.6 billion
• Expenses: $3.5 billion
  
  • R&D: $945 million
    
• Profit (before taxes): $1.2 billion
  

That's a lot of money they're making. But $250K a year is a big sum to chop down in order to be affordable. Let's say they halved all their prices. That would give us:

• Revenue: $2.3 billion
• Expenses: $3.5 billion
  
• Loss: $1.2 billion

Well, there can be some argument here over whether or not expenses would decline as prices decline, since you might not need as much sales and marketing if your product were cheaper. But even if you assume that this price is sustainable, we're still talking about $120K a year. That's still mad expensive. So let's chop it in half again:

• Revenue: $1.15 billion
• R&D Expenses: $945 million
• Cost of Goods Sold (e.g. manufacturing cost): $672 million
• Loss: $467 million
  

Whoops, although all we're doing now is manufacturing and research drugs, we're losing money. And it still costs $60K/year ($157.64/day).

But that leads to a more basic question. Why is the price set at $250K/year?