Oh God... please, please, please do not listen to this guy. This type of thinking, which is borderline unethical, is what causes bubbles and dot com disasters.
1. Current price is essentially irrelevant to the value of an option. The difference between the option price and the current price is the relevant measure.
2. Volatility is NOT good for stock options, or for stocks i n general--except in one, unethical scenario, i.e. when you absolutely no faith in your company and are waiting for the right moment to sell all your shares to suckers who don't know any better. When one exercises one's option, more often than not, given the AMT and other archaic tax rules, one will be paying TAX on the difference between the option price and the current stock price. If volatility is high, and the stock later drops (and volatility, of course, implies big movement in BOTH directions), you STILL foot the tax bill--resulting in the possibility of a huge LOSS on the option (say the company's stock price dips into the penny stock range), but ALSO an ONEROUS tax bill (say, at the time of exercise, you made a killing -- but a killing in stock assets that are now worthless).
Unless you plan to sell your stock IMMEDIATELY after exercise (and more often than not, there are rules that will prevent you from timing this sale at a price on any given day), then you don't want volatility -- you want nice, steady growth.
Why do these supposed 'experts' on 'Wall Street' always presume to know better than tenured faculty members at one of the best (if not the best) b-schools in the country? If anything, this fellow proves the Wharton profs' point -- people do NOT understand how options work....
I'm always shocked that even fine publications such as the NYTimes can publish stories with such specious economic analysis.
Some points...
1. It's very true that a few countries such as Brazil have managed to squeeze pharmaceuticals for a much better price on AIDS drugs; they may even be able to sustain this price advantage for a long period of time -- that is, unless other countries decide to mimic their hardline negotiating tactics.
What is in essence happening here is that the rich countries of the world are subsidizing the poorer ones (which, depending on your worldview, could be a good thing). If drug companies were forced to sell WORLDWIDE at current third-world prices, they would decide that it'd be better not to produce the drug at all (and more importantly, truncate current R&D on related drugs). Fixed costs (mostly R&D) DOMINATE drug production -- it usually costs around $500 mil to bring a drug onto the market -- what other industry can you name that spends that much money on ONE product, that may or may not be obselete by the time it hits the market?
Conclusion: it makes sense for a drug company to sell to limited packs of consumers at lower prices where they are forced to do so (the marginal cost of each pill, after all, is extremely low, and pharmaceuticals need to milk the few projects in their pipeline that actually come to fruition), but when the question of gov't coercion and price control is broadened to the entire potential market, the firm's (and industry's) decision-making changes drastically.
2. I find it quite amusing that someone could argue that "claim of patents being needed to finance new research is rebutted with the statistic that two-thirds of the drug companies costs are in marketing and administration." Let me get this straight -- 1/3 of a company's expenses are R&D, and thus they DON'T need patents to protect their innovation?!?!?
The fact of the matter is that one-third is an EXTREMELY large proportion of one's expenses to be spending on R&D -- cut 1/3 of the revenue out of almost ANY company's balance sheet and they're bankrupt 10 times over. Correlatively, ask someone to ignore 1/3 of their costs in producing a product (which is essentially what you do when you abolish patenting, since generic firms will enter IMMEDIATELY post-discovery and price identical generic drugs based purely on the post-R&D marginal cost -- which is an insignificant amount), and 99 times out of 100, they'll tell you that it's simply not worth producing.
Conclusion: abolishing the patent system WILL, in fact, eliminate any incentives for drug research and development -- and thus eliminate private research and development. A more reasonable arument can be made with regard to the length of patenting (This will depend on the extent to which one believes society should invest in health-care and drugs, because regardless of where you set the patent length, it will have a differential effect on investment), but wholesale abolition is surely bad policy.
3. I think the only real alternative to a patent system is government financing. The government (as we should know by now) is more than willing to finance projects that are less than profitable, and thus it could price at marginal cost (or subsidize companies to do the same) once a drug is discovered -- say, by researchers at the NIH or a private institution.
The problem with this solution, as with all central-planning solutions, is the problem of efficient allocation -- i.e. it nearly always ends up that investment and production is based more on personal relationships, bureaucratic greed, and other irrational allocative incentives. Who chooses which drugs to fund? And who pays the price when the wrong drugs are funded? In the private sector, executive teams make decisions, and they are PUNISHED (along with the entire firm and the shareholders) when they make the wrong choice. In a centrally-planned market, the government loses some money, but is anyone really going to take the fall in a system of 'flexible culpability'? Particularly in a market where a huge proportion of research eventually fails in any event?
This doesn't even take into account the problem of pricing -- should every drug be priced at marginal cost? What if some diseases have external costs to society, e.g HIV, which poses a threat to others in the community? My guess is that the current political pressures to force PRIVATE COMPANIES to lower their prices will prove irresistable in cases where the GOVERNMENT is setting prices. The result? Even successful drugs will be HUGE fiscal black holes -- we're talking billions of dollars a year -- sucking up money that may be more useful in other places (e.g. in shoring up Medicare or Social Security).
Conclusion: if you don't like patents, the only alternative (assuming you think drug research is good, haha) is government finance, and government finance has nearly insurmountable allocative and pricing problems.
As a final point I'd just like to emphasize that I do not think that the current system is necessarily the best, nor do I believe that drug companies are angels (patent review, in particular, is something we should be concerned about... as in the tech sector, too many drug companies get away with frivolous patents). Nonetheless -- contrary to the Slashdotian Widsom, I think most informed individuals realize that patents (and -- gasp! -- drug company profits) are a NECESSITY to any rational system of drug development. Without patents, the alternatives are severe underinvestment/underproduction, or discombobulated combinations of philanthropic/governmental finance.
Slashdot Mirror
Oh God... please, please, please do not listen to this guy. This type of thinking, which is borderline unethical, is what causes bubbles and dot com disasters.
1. Current price is essentially irrelevant to the value of an option. The difference between the option price and the current price is the relevant measure.
2. Volatility is NOT good for stock options, or for stocks i n general--except in one, unethical scenario, i.e. when you absolutely no faith in your company and are waiting for the right moment to sell all your shares to suckers who don't know any better. When one exercises one's option, more often than not, given the AMT and other archaic tax rules, one will be paying TAX on the difference between the option price and the current stock price. If volatility is high, and the stock later drops (and volatility, of course, implies big movement in BOTH directions), you STILL foot the tax bill--resulting in the possibility of a huge LOSS on the option (say the company's stock price dips into the penny stock range), but ALSO an ONEROUS tax bill (say, at the time of exercise, you made a killing -- but a killing in stock assets that are now worthless).
Unless you plan to sell your stock IMMEDIATELY after exercise (and more often than not, there are rules that will prevent you from timing this sale at a price on any given day), then you don't want volatility -- you want nice, steady growth.
Why do these supposed 'experts' on 'Wall Street' always presume to know better than tenured faculty members at one of the best (if not the best) b-schools in the country? If anything, this fellow proves the Wharton profs' point -- people do NOT understand how options work....
I'm always shocked that even fine publications such as the NYTimes can publish stories with such specious economic analysis. Some points... 1. It's very true that a few countries such as Brazil have managed to squeeze pharmaceuticals for a much better price on AIDS drugs; they may even be able to sustain this price advantage for a long period of time -- that is, unless other countries decide to mimic their hardline negotiating tactics. What is in essence happening here is that the rich countries of the world are subsidizing the poorer ones (which, depending on your worldview, could be a good thing). If drug companies were forced to sell WORLDWIDE at current third-world prices, they would decide that it'd be better not to produce the drug at all (and more importantly, truncate current R&D on related drugs). Fixed costs (mostly R&D) DOMINATE drug production -- it usually costs around $500 mil to bring a drug onto the market -- what other industry can you name that spends that much money on ONE product, that may or may not be obselete by the time it hits the market? Conclusion: it makes sense for a drug company to sell to limited packs of consumers at lower prices where they are forced to do so (the marginal cost of each pill, after all, is extremely low, and pharmaceuticals need to milk the few projects in their pipeline that actually come to fruition), but when the question of gov't coercion and price control is broadened to the entire potential market, the firm's (and industry's) decision-making changes drastically. 2. I find it quite amusing that someone could argue that "claim of patents being needed to finance new research is rebutted with the statistic that two-thirds of the drug companies costs are in marketing and administration." Let me get this straight -- 1/3 of a company's expenses are R&D, and thus they DON'T need patents to protect their innovation?!?!? The fact of the matter is that one-third is an EXTREMELY large proportion of one's expenses to be spending on R&D -- cut 1/3 of the revenue out of almost ANY company's balance sheet and they're bankrupt 10 times over. Correlatively, ask someone to ignore 1/3 of their costs in producing a product (which is essentially what you do when you abolish patenting, since generic firms will enter IMMEDIATELY post-discovery and price identical generic drugs based purely on the post-R&D marginal cost -- which is an insignificant amount), and 99 times out of 100, they'll tell you that it's simply not worth producing. Conclusion: abolishing the patent system WILL, in fact, eliminate any incentives for drug research and development -- and thus eliminate private research and development. A more reasonable arument can be made with regard to the length of patenting (This will depend on the extent to which one believes society should invest in health-care and drugs, because regardless of where you set the patent length, it will have a differential effect on investment), but wholesale abolition is surely bad policy. 3. I think the only real alternative to a patent system is government financing. The government (as we should know by now) is more than willing to finance projects that are less than profitable, and thus it could price at marginal cost (or subsidize companies to do the same) once a drug is discovered -- say, by researchers at the NIH or a private institution. The problem with this solution, as with all central-planning solutions, is the problem of efficient allocation -- i.e. it nearly always ends up that investment and production is based more on personal relationships, bureaucratic greed, and other irrational allocative incentives. Who chooses which drugs to fund? And who pays the price when the wrong drugs are funded? In the private sector, executive teams make decisions, and they are PUNISHED (along with the entire firm and the shareholders) when they make the wrong choice. In a centrally-planned market, the government loses some money, but is anyone really going to take the fall in a system of 'flexible culpability'? Particularly in a market where a huge proportion of research eventually fails in any event? This doesn't even take into account the problem of pricing -- should every drug be priced at marginal cost? What if some diseases have external costs to society, e.g HIV, which poses a threat to others in the community? My guess is that the current political pressures to force PRIVATE COMPANIES to lower their prices will prove irresistable in cases where the GOVERNMENT is setting prices. The result? Even successful drugs will be HUGE fiscal black holes -- we're talking billions of dollars a year -- sucking up money that may be more useful in other places (e.g. in shoring up Medicare or Social Security). Conclusion: if you don't like patents, the only alternative (assuming you think drug research is good, haha) is government finance, and government finance has nearly insurmountable allocative and pricing problems. As a final point I'd just like to emphasize that I do not think that the current system is necessarily the best, nor do I believe that drug companies are angels (patent review, in particular, is something we should be concerned about... as in the tech sector, too many drug companies get away with frivolous patents). Nonetheless -- contrary to the Slashdotian Widsom, I think most informed individuals realize that patents (and -- gasp! -- drug company profits) are a NECESSITY to any rational system of drug development. Without patents, the alternatives are severe underinvestment/underproduction, or discombobulated combinations of philanthropic/governmental finance.