High Entry Cost Market of Biotech and Pharmaceuticals - Assignment Example

As a means of better understanding joint ventures and the motivations behind them, the following discussion will be concentric upon defining and discussing the ways in which joint ventures within the biotech and pharmaceutical field can be explained as ultimately rational business choices that are determined based upon ability to engage with the market, success ratios, and potential future profitability.

As a guiding entity of the process, the legal departments of the requisite entities must be continually engaged and aware of the process.  This represents an added cost and necessity that each and every pharmaceutical firm engaged in research and development must necessarily incorporate a team of legal experts and lawyers to guide them through each and every process of clinical trials, reporting requirements, paperwork, and associated compliance issues.  Ultimately, economic theory dictates that price discrimination corresponds to the following three market conditions: the power of market sellers, the segmentation and overall price responsiveness of the market, and the direct and indirect potential that exists for arbitrage.  With respect to market power, this is a concept that can simply be understood as a function of the ability of the seller to raise its prices as compared to the other sellers that exist within the market.  Obviously, in the case of a brand name drug that has recently been cleared by clinical trials and is available to the marketplace, the ability of the seller to raise his/her prices above that of the competition is very high due to the fact that no perfect substitute exists and there is a near perfect monopoly engaged by the given pharmaceutical manufacturer; albeit for a limited amount of time (Gupta et al 2011).  As a way of understanding such a construct to a more full and complete level, the researcher and/or reader must consider the total cost that is necessitated in bringing a drug to market in the first place in order to gain a more full and complete appreciation and understanding for why such a miniature monopoly is created which allows for otherwise static economic factors to be temporarily suspended.  

One of the primal issues that are associated with the pharmaceutical market as it exists today is the high cost of current drugs within the system.  Many consider this high cost to be non-representative of the overall cost of production that the pharmaceutical manufacturers must expend to create such drugs; however, the fact of the matter is that the actual cost of production of the drugs themselves represents only a small portion of the overall cost of drug creation (Stiglitz & Jayadev 2010).  This is of course due to the fact that the process of approval for any new drug is exorbitantly expensive and with any one given drug, the probability of it passing through all three phases of testing and eventually being approved is a mere 8%.  As such, one can begin to understand why there remain such high prices passed along to the end consumer during the period in which the drug is available as a brand name only; i.e. with no generic alternatives.  It is during this brief period in time that the drug companies attempt to recoup the necessary expense that they have expended on carrying the drug through all of the clinical trials which have ultimately led to the drug being approved for the market. 

Although there is no clear representation of the total cost of bringing a drug to market due to the different levels of research and trials that need to be conducted with each and every drug, a rough estimate provided based on averages indicates that there is around a 126 million dollar investment that must be provided to bring a single drug to market.  As a direct function of this, joint ventures are invariably engaged to effect such an end.  Even with staggering cost figures, joint ventures can be a way of effectively sharing risks and allocating key resources from two or more firms that seek to engage in drug or biotech development (Malinowski & Gautreauxt 2012). 

As can be seen from the preceding analysis, the level to which cost constraints dictate the manner in which the economics of the pharmaceutical market is displayed, very little freedom exists for the manufacturer to reduce the price or redefine the way in which products are presented to the end consumer.  However, if the governmental entities that ultimately have purview over the pharmaceutical sector wish to intervene as a way to ameliorate the level of high prices that are represented to the end consumer, it is foreseeable and likely that a level of subsidization of the research and development process could still see the pharmaceutical firms maintain a high level of profitability while at the same time not passing on the direct cost of research and development to the end consumer.  Naturally, such an approach would mean that a level of taxation and dead-weight loss would be assumed; yet, this is an issue that must be engaged upon if it is the ultimate desire of the society to seek to present more fair and equitable access to the end product by the consumer.