they aren’t any more expensive than they used to be, they just get allocated a share of the profits from R&D ventures that’re highly profitable overall.
Did you mean “allocated a share of the costs”? If not, I am confused by that sentence.
I’m pretty uncertain how the arrangements actually work in practice, but one possible arrangement is: You have two organizations, one of which is a traditional pharmaceutical company with the patent for an untested drug, and one of which is a contract research organization. The pharma company pays the contract research organization to conduct a clinical trial, and reports the amount it paid as the cost of the trial. They have common knowledge of the chance of success, of the future probability distribution of future revenue for the drug, how much it costs to conduct the trial, and how much it costs to insure away the risks. So the amount the first company pays to the second is the costs of the trial, plus a share of the expected profit.
Pharma companies making above-market returns are subject to political attack from angry patients, but contract research organizations aren’t. So if you control both of these organizations, you would choose to allocate all of the profits to the second organization, so you can defend yourself from claims of gouging by pleading poverty.
Did you mean “allocated a share of the costs”? If not, I am confused by that sentence.
I’m pretty uncertain how the arrangements actually work in practice, but one possible arrangement is: You have two organizations, one of which is a traditional pharmaceutical company with the patent for an untested drug, and one of which is a contract research organization. The pharma company pays the contract research organization to conduct a clinical trial, and reports the amount it paid as the cost of the trial. They have common knowledge of the chance of success, of the future probability distribution of future revenue for the drug, how much it costs to conduct the trial, and how much it costs to insure away the risks. So the amount the first company pays to the second is the costs of the trial, plus a share of the expected profit.
Pharma companies making above-market returns are subject to political attack from angry patients, but contract research organizations aren’t. So if you control both of these organizations, you would choose to allocate all of the profits to the second organization, so you can defend yourself from claims of gouging by pleading poverty.
Ah, that makes sense. Thanks for explaining.