Hollywood and BioPharma: Differentiated by Unique Economic Models

Originally published 2/21/2017

In my previous post, I detailed numerous similarities between the pharmaceutical and film industries. Now it’s time to point out the substantial differences between these two businesses that illustrate their different economic consumption and pricing models.

Production Costs - Big Barriers to Entry in Pharma, but Not Film

Nobody’s producing drugs in their basement that are going to earn them a ton of money. Okay, let me rephrase that. Nobody’s producing legal pharmaceuticals in their basement that are going to earn them big bucks. Creating prescription drugs is a very expensive enterprise. The cost of bringing a new drug to market has been estimated by the Tufts Center for the Study of Drug Development to be about $2.6 billion. That’s a huge hurdle to making money. There’s no getting around extensive research, filing multiple patents, complicated manufacturing steps, expensive clinical trials, and detailed regulatory and FDA filing requirements. How long might it take just to recoup those costs? Let’s return to my previously cited example of a very poor selling drug. Seattle’s CTI BioPharma sold only $3.47 M of their non-Hodgkin disease/B-cell lymphoma drug Pixuvri worldwide in 2015 (all sales were in Europe). If it cost the company the current industry “average” of $2.6 billion to develop it (which it didn’t), it would take about 749 years just to recoup that money, based on 2015 revenues. And that’s without showing a profit. It’s a pretty safe bet this drug will never recapture its development costs no matter what they were.

In contrast, films these days can be made for incredibly low budgets. One of the most widely cited examples of a cheaply made film was the independently produced The Blair Witch Project. The movie was filmed in eight days for about $35,000, and went on to gross $248 million worldwide. Tangerine, a hit movie shown at the 2015 Sundance film festival, was filmed almost entirely on an iPhone 5S. With recent technological advances, it’s still possible to produce a film in Hollywood for a budget of less than $100,000.

Profitability - Pharma Enjoys Repeat Business and Monopoly Pricing

This category is the one where the film and pharmaceutical industries take entirely different paths. Movies that you’ll see at your local multiplex theater or art cinema house will charge you about the same price for each and every film. The same $10 bill will buy you a ticket to see Fences, Hidden Figures, and La La Land, or (if you were foolish enough to skip the reviews), Collateral Beauty or Warcraft. IMAX and 3D movies are marginally more expensive for their customers, but again, no matter the quality of the film, the cost to attend any of them is about the same.

In contrast, the prices for prescription drugs range from as little as a few cents per pill for a generic blood pressure medication to over $1000 per pill for the latest hepatitis C wonder drugs. And many medications are taken daily over a lifetime, whereas the vast majority of people will see any particular movie only once in the theaters. Total cost to see the latest “hot” movie in the theater (or to rent the DVD) can be less than $10. In contrast, the total cost for your next prescription could run you (and/or possibly your health insurance provider) tens of thousands of dollars, or possibly more. And you may be taking that pill or injection, whether its expensive or not, for as long as you live. Films live on in our hearts and memories, but we don’t need to consume the same ones every day. In fact, it’s the wide variety of films available that make them so attractive to many of us.

Who Needs the Product? Drugs Are Lifesaving, Films Life Enhancing

Here’s another big difference between these two industries. No one needs to see a movie. You may want to, or feel compelled to, but if you don’t, it won’t kill you. And if you don’t see it this week at your local cinema, in a few months you can rent it on DVD or stream it for a nominal fee. In contrast, if you don’t get a certain medication that you need, you may very well die. With many drugs being terribly expensive, and with many Americans still without health insurance, affordable access to medicines is indeed a life or death issue. The film industry, unlike pharmaceuticals, is not a life or death business, even if those who work in that industry think it is (there goes my invite to next years Oscars).

Distribution Channels: Varied and Complicated

You can watch a movie at your local theater, on Pay-For-View, on DVD, while flying at 35,000 feet, or while streaming it over the Internet on your TV, phone, or computer. The only legal places to get prescription drugs are at your doctor’s office or from a licensed pharmacy. Both film and pharma have well-honed distribution channels. The prescription drug business is much more tightly regulated than the film industry, where the biggest hurdle (aside from getting financing) is submitting films to the Motion Picture Association of America (MPAA) for rating prior to their release. A movie studio may not like the rating they receive, but they will still be able to release their film, no matter what the rating.

Distribution and logistics networks in place for the shipping, tracking, and receiving of a wide spectrum of medicines are extremely complex. Some drugs require a cold chain for shipping, must be protected from light, or are dangerous to handle. If a film is labeled as radioactive, it means that no one in Hollywood wants to be associated with it (remember Ishtar or Howard the Duck?). In the drug business, if a medicine is labeled as radioactive, it means it actually is radioactive. Getting these drugs out to patients who need them is a challenging logistical process.

Regulatory Requirements

Hollywood used to be a place that strained under the yoke of regulation, even though it was self-imposed. In response to what some considered to be lewd and lascivious films being produced in the 1920s and early 1930s (along with scandals associated with a number of movie stars), industry leaders were pressured into adopting the Motion Picture Production Code, otherwise known as the Hays code. This effectively censored films for a period of over 30 years by spelling out behaviors and images that filmmakers were to avoid. This included profanity, nudity, scenes of actual childbirth, miscegenation, drug trafficking, and white slavery. The code was eventually replaced by the MPAA film rating system in 1968. These days, aside from requirements that films be rated before their release to the public, filmmakers can pretty much show whatever they think their audiences will find entertaining.

Drug companies, like the movie studios, also had free reign in their early years to produce and distribute whatever they saw fit.  This process has tightened up considerably over the past century, usually in response to some drug-induced tragedy and the resulting public outcry. The Pure Food and Drug Act of 1906 was put in place to help regulate the addition of alcohol and narcotics to many patent medicines. The Federal Food, Drug, and Cosmetic Act was introduced in 1938 following the elixir sulfanilamide disaster, when more than 100 children were poisoned as a result of the addition of diethylene glycol (a chemical related to anti-freeze) to the medicine to improve its palatability. Drug laws were further tightened up in 1962 with the Kefauver Harris Amendment, this time as a partial response to the thalidomide scandal, which was avoided (for the most part) in the U.S. due to the careful diligence of FDA reviewer Dr. Frances Kelsey. The Kefauver Harris amendment added a significant requirement of drug makers: they needed to show that their drugs were not just safe, but that they were also efficacious. Numerous other pieces of legislation affecting the industry have been put in place over the years, and it remains one of the most tightly regulated of all businesses in the U.S. These regulations, contrary to what has been sold to the public, have actually benefited the industry greatly, as it gave both doctors and their patients’ confidence in the quality of the nostrums that they peddle. It also instituted a high cost-of-entry barrier for potential new competitors.

Final Thoughts

While the film and pharmaceutical businesses share a number of characteristics, their underlying business models are fundamentally different. Each industry produces a few big winners each year, along with a larger collection of marginally successful and money losing projects. Many of the development efforts that get green-lighted in either industry are never completed for a variety of reasons. Walt Disney once said, “We don’t make movies to make money, we make money to make more movies.” Many companies in biopharma would talk a similar line by telling you that, “We don’t make drugs to make money, we make money to make more drugs.” An exception might be those drug companies whose business model is to simply buy existing medicines and jack up their prices astronomically. These include companies such as Mylan, Valeant, and Marathon. Price-gouging pharma poster boy Martin Shkreli, the former CEO of Turing Pharmaceuticals, once stated the advantage of this approach “It's a great business decision that also benefits all of our stakeholders.” His description sounded to me like what Humphrey Bogart (as private eye Sam Spade) once said of the Maltese Falcon: it's “the stuff that dreams are made of.”