Differential Pricing of Pharmaceuticals — The HIV/AIDS CrisisThe HIV/AIDS crisis has been called the worst pandemic since the fourteenth-century’s Black Plague.  The first incident of HIV/AIDS was discovered by the U.S. Centers for Disease Control in 1981.Over the next three decades, 60 million people have become infected and 25 million have died. Most HIV/AIDS cases are reported in the developing world, where 95 percent of those with HIV live today. Beyond social welfare and humanitarian concerns, as a result of globalization and the fastest growing international business opportunities in China and India, AIDS is now everybody’s business. Because the pharmaceutical industry especially relies upon governmental authority to approve formularies for reimbursement, to protect its monopoly patent rights, and to prevent importation of unauthorized, unlicensed imitation medicines, the question of how to price AIDS drugs is a public issue.Although no one has yet developed a cure for HIV, a number of companies have patented drugs that inhibit either the virus’s ability to replicate or its ability to enter host cells. Without further drug discovery, however, the best that can be done at present once a person contracts HIV is to partially and temporarily suppress the virus, thus delaying progression of the infection. The drugs that suppress HIV are called antiretrovirals, and the first, known as Retrovir, was introduced in 1987 by Burroughs Well come and was the only approved therapy available to treat HIV until1991. Since then, several new antiretrovirals have been developed by large pharmaceutical companies such as Abbott Labs, Bristol-Myers Squibb, Merck, Roche, and smaller biotech companies such as Agouron, Gilead Sciences, Triangle Pharmaceuticals, and Trimeris. Largely as a result of these drugs, the rate of increase of AIDS-related diseases dramatically slowed in the United States from1992–1995 and actually decreased in 1996 for the first time.Yet, even in the early days of antiretroviral drug development, HIV/AIDS drug pricing was a serious and contentious issue. The core problem is the fact that most HIV/AIDS cases are outside what the United Nations classifies as “rich countries” such as the United States. North America registered about 1.4 million cases of individuals living with HIV/AIDS and fewer than 25,000 deaths due to AIDS in 2008, but the comparative numbers for sub-Saharan Africa were 22 million cases and more than1.9 million deaths. Similarly, the U.S. adult infection rate was estimated at slightly less than one half of a percent in 2008 versus over 5 percent in sub-Saharan Africa, where GDPs per capita often are less than $1,000 versus $30,000 in the United States. Compounding the problem is the fact that many new AIDS drugs, especially those designed to attack the growth in drug-resistant HIV, grow ever more expensive. Trimeris and Roche introduced Fuzeon in early 2003, for example, at a whole sale price of €20,245 per annum, at least three times the price of any existing HIV/AIDS drug.The pricing decision reflects the fiscal realities of their expensive R&D-intensive business model against enlarged, global, corporate social responsibilities. A nation state-specific pricing policy across global markets has resulted in a tenfold differential between the highest priced market, the United States, and the price charged in the poorest countries. Glaxo and Roche management teams face many serious business ethics issues in this highly charged environment. Is such a tenfold price differential sustainable? How does one manage the resulting problem of parallel importing—that is, the unauthorized reimportation of export drugs bought at lower price points else wherein the world? Will abrogation of the intellectual property rights of the drug companies in the developing world threaten intellectual property protection at home? Will a public affairs backlash in high-priced markets force drug price discounts? If so, how can the massive R&D investment required for ongoing drug discovery and development be recovered? Are these companies facing such a public relations disaster that their corporate brand equity could be radically affected? What are big pharmaceutical companies’ corporate responsibilities in a public health crisis? Should Glaxo (or Roche) go it alone, or instead pursue collaborative strategies with other big pharmaceutical rivals?Is the monopoly on patented pharmaceuticals warranted? What barrier to entry prevents the re-importation into the United States of pharmaceuticals sold at lower prices abroad (say, in Canada)?The contribution margin percentage on pharmaceuticals exceeds the 55 percent to 70 percent margins on ready-to-eat cereals. Identify three reasons why pharmaceutical margins are higher.Suggest an approach to the big pharmaceutical company problem of differential pricing in the United States, Western Europe, and Japan versus the less-developed world.

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Asked Jul 3, 2019
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Differential Pricing of Pharmaceuticals — The HIV/AIDS Crisis

The HIV/AIDS crisis has been called the worst pandemic since the fourteenth-century’s Black Plague.  The first incident of HIV/AIDS was discovered by the U.S. Centers for Disease Control in 1981.Over the next three decades, 60 million people have become infected and 25 million have died. Most HIV/AIDS cases are reported in the developing world, where 95 percent of those with HIV live today. Beyond social welfare and humanitarian concerns, as a result of globalization and the fastest growing international business opportunities in China and India, AIDS is now everybody’s business. Because the pharmaceutical industry especially relies upon governmental authority to approve formularies for reimbursement, to protect its monopoly patent rights, and to prevent importation of unauthorized, unlicensed imitation medicines, the question of how to price AIDS drugs is a public issue.

Although no one has yet developed a cure for HIV, a number of companies have patented drugs that inhibit either the virus’s ability to replicate or its ability to enter host cells. Without further drug discovery, however, the best that can be done at present once a person contracts HIV is to partially and temporarily suppress the virus, thus delaying progression of the infection. The drugs that suppress HIV are called antiretrovirals, and the first, known as Retrovir, was introduced in 1987 by Burroughs Well come and was the only approved therapy available to treat HIV until1991. Since then, several new antiretrovirals have been developed by large pharmaceutical companies such as Abbott Labs, Bristol-Myers Squibb, Merck, Roche, and smaller biotech companies such as Agouron, Gilead Sciences, Triangle Pharmaceuticals, and Trimeris. Largely as a result of these drugs, the rate of increase of AIDS-related diseases dramatically slowed in the United States from1992–1995 and actually decreased in 1996 for the first time.

Yet, even in the early days of antiretroviral drug development, HIV/AIDS drug pricing was a serious and contentious issue. The core problem is the fact that most HIV/AIDS cases are outside what the United Nations classifies as “rich countries” such as the United States. North America registered about 1.4 million cases of individuals living with HIV/AIDS and fewer than 25,000 deaths due to AIDS in 2008, but the comparative numbers for sub-Saharan Africa were 22 million cases and more than1.9 million deaths. Similarly, the U.S. adult infection rate was estimated at slightly less than one half of a percent in 2008 versus over 5 percent in sub-Saharan Africa, where GDPs per capita often are less than $1,000 versus $30,000 in the United States. Compounding the problem is the fact that many new AIDS drugs, especially those designed to attack the growth in drug-resistant HIV, grow ever more expensive. Trimeris and Roche introduced Fuzeon in early 2003, for example, at a whole sale price of €20,245 per annum, at least three times the price of any existing HIV/AIDS drug.

The pricing decision reflects the fiscal realities of their expensive R&D-intensive business model against enlarged, global, corporate social responsibilities. A nation state-specific pricing policy across global markets has resulted in a tenfold differential between the highest priced market, the United States, and the price charged in the poorest countries. Glaxo and Roche management teams face many serious business ethics issues in this highly charged environment. Is such a tenfold price differential sustainable? How does one manage the resulting problem of parallel importing—that is, the unauthorized reimportation of export drugs bought at lower price points else wherein the world? Will abrogation of the intellectual property rights of the drug companies in the developing world threaten intellectual property protection at home? Will a public affairs backlash in high-priced markets force drug price discounts? If so, how can the massive R&D investment required for ongoing drug discovery and development be recovered? Are these companies facing such a public relations disaster that their corporate brand equity could be radically affected? What are big pharmaceutical companies’ corporate responsibilities in a public health crisis? Should Glaxo (or Roche) go it alone, or instead pursue collaborative strategies with other big pharmaceutical rivals?

  1. Is the monopoly on patented pharmaceuticals warranted? What barrier to entry prevents the re-importation into the United States of pharmaceuticals sold at lower prices abroad (say, in Canada)?
  2. The contribution margin percentage on pharmaceuticals exceeds the 55 percent to 70 percent margins on ready-to-eat cereals. Identify three reasons why pharmaceutical margins are higher.
  3. Suggest an approach to the big pharmaceutical company problem of differential pricing in the United States, Western Europe, and Japan versus the less-developed world.
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Expert Answer

Step 1

Answer 1:

The monopoly over a patented pharmaceutical can be categorized as an improper term because it represents only a limited amount (level) of patents justifiable as patents suffers from the following barriers – limited time, limited geography, lack of price control (mostly government agencies determine drugs prices), manufacturers have a lack of knowledge regarding price determination, etc. Further, these barriers to entry prevent the re-importation into the United States of pharmaceuticals sold at a lower price abroad (say, in Canada) as the combinations of the above factors will put pressure to expand and earn a higher profit to cover their R&D cost within the time period in which they are patent protected. In order to do that, they will accept in some countries prices that are far from ideal prices they would never accept in a true monopoly situation so, that they open the gates for grey trade re-importation and parallel imports. The barrier to grey trade is formed by the combination of several factors:

  1. Price difference
  2. Trade Tariffs (where applicable)
  3. Cost of transport
  4. Regulatory considerations
  5. Reimbursement procedures
Step 2

Answer 2:

The three main reasons why pharmaceuticals margins are higher and could exceed 55% to 70% margins on ready to-eat-cereals are as follows:  

 

  1. The higher margins depict the proportion of oblique vs. direct costs. Like in the case of software program, the development method is lengthy and high priced. The enormous majority of R&D tasks fail to finalize in a product being located on the market. The few products that skip all of the stages of the development system efficaciously, want to provide enough margin to cowl for the excessive R&D expenses, and enough coins to finance destiny R&D initiatives. The direct value of the products sold is insignificant.
  2. The better margin refl...

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