It's absolutely wrong to suggest the [biotechnology] industry evolved the way we thought it would. It's not surprising it was so successful, but the magnitude of its success, its importance to human medicine, it's really quite unbelievable." - George Rathmann, first CEO of Amgen Amgen is a biotechnology firm located outside Los Angeles. It was founded more than 35 years ago, one of the early firms to be built around the promise of biotechnology. Amgen went public in 1980. Its first major research effort was trying to clone the human EPO gene, which researchers believed would stimulate bone-marrow production of red blood cells and alleviate the anemia suffered by dialysis patients. This research effort turned out to be very successful. Human trials on the resulting product, Epogen, began in 1985 and were quickly followed by approval from the Food and Drug Administration. Kevin Sharer, who was either CEO or President of Amgen for nearly 20 years, describes Epogen and its significance: So there are many considerations here that go into the pricing decision, including what it cost to make the product, patient WTP, government insurance, and fairness. One approach, of course, when confronted with complicated decisions like this one, is to try to tackle the entire problem in its full-blown complexity right from the start. But that's hardly advisable. It's often more sensible to start simple and then see how each relevant factor might affect your decision. So let's look at a simpler version of the problem: we'll focus only on cost and WTP to start with. That is, we'll set aside the roles of insurance, fixed costs, and fairnessand return to those considerations very shortly. Notice, of course, that this simple set-upfirms choose prices while taking into account cost and WTPis one we're rather familiar with and have encountered earlier. So let's first see where one would price in this "simple" scenario. Cost The variable cost of production is relatively straightforward in principle. Say the cost to produce every 1000 units of the drugthe minimum doseis $8. (An important caveat: the numbers that we present here may not accurately reflect the Epogen case. Instead, you should think about these numbers as corresponding to a fictional product in a setting that is similar to, and is designed to capture some of the features of, that of Epogen. Indeed, what is more important in what follows is deriving some general principles of pricing from this setup, rather than trying to think of these as precisely corresponding to Epogen.) Every patient takes an average dosage of 2000 units per dialysis center visit, and visits a center three times per week (or, roughly, 150 times per year). Given this information, the annual variable cost of serving a patient might be around $2,400. That's the cost side. But what about demand? How would you try to figure out the WTP for a drug like Epogen