If it costs $500m to develop and bring to market a new prescription drug with all the clinical trials and so on, and the chemical ingredients cost $1 per pill once we start making it, then how many pills do we need to sell in a 10 year period at $6 per pill to break even? Ignore the interest expense of that sunk cost or the time value of money complexities.
If patients take 1 pill per day, then how many patients do there need to be for us to get our money back in 10 years? Assume 365 days per year even though there are some leap years in there.
Suppose there are only 10,000 people with the indicated condition for this new medication, and that only half of them will be prescribed this medicine. What price needs to be charged per pill for us to break even in 10 years?
This scenario has assumed a 10 year patent protection period in which the drug is supplied by the monopolist inventor company. Without the patent protection, some other company could copy and make the same drug without paying that sunk cost of $500m, and undercut the price charged by the original inventor. In a price war between the original inventor and the copycat drug company, what would be the minimum price they both would charge per pill, and why would that be a bad thing?