IN-DEPTH INTEGRATIVE CASE

In-Depth Integrative Case

In-Depth Integrative Case

Question 1:

Pharmaceutical companies have also begun to reduce the prices of their patented essential drugs, in order to make them available to more people in need. Bristol-Myers Squibb announced to reduce the prices of two widely used AIDS drugs, ddI and d4T, to about US$500 in Senegal. Mark Harrington of New York based Treatment Action Group analyzed this offer as follows,

Senegal has 79,900 people living with HIV. If one quarter of them need antiretroviral therapy this would mean that about 20,000 Senegalese would need anti-HIV therapy. The BMS discount, when added to one by Merck would bring the cost of one year's triple therapy to between US$950-1,850. The median income in Senegal is US$510 per year. (Wick and Zanni 2001)

Merck is providing a US$50 million donation, primarily in the form of a price reduction (matched by another US$50 million by the Gates Foundation) to Botswana. The money is primarily given to develop a comprehensive infrastructure for dealing with HIV/AIDS. An unspecified percentage of the Merck donation comes in form of drug subsidies (i.e. subsidies for Merck drugs). Harrington comments, “If Merck and Gates together are giving US$10 million per year, this means that 50,000 (of 290,000) could be treated per year if the cost of antiretroviral therapy was US$200 per year. There would be no money left over for prevention, testing and counseling, health care clinics, treatment and prevention of opportunistic infections, and palliative care.” (Wingfield 2000a) Other companies, such as Hoffmann-LaRoche, have promised steep discounts that are yet to transpire. Effectively, the companies are moving towards a solution that encompasses differential prices in developed and developing countries. Strange as it may sound to the uninitiated observer, many patented drugs are substantially higher priced in developing countries then they are in some developed countries. Much of this has to do with the fact that many developed countries (such as, for instance, Australia, Norway and others) put price caps on patented drugs. Manufacturers are not permitted to sell drugs at a higher price or else governments withdraw the approval for the drug to be sold in the particular market. (Tucker 1997)

The problem with the discount-based approach is, just as above, that such offers are fraught with conditions, time and quantity based limitations and a continuing dependence of developing country's health care planning on the good-will of commercial organizations. Moreover, this is a solution which corporations are quick to criticize in other circumstances: parallel pricing is the classic revenue profit maximization method for monopolists and oligopolists, yet it is always at risk to undermining by market entrants and through “arbitrage”. Arbitrage is the buying of a good G at price p in one market M, and selling it at price q (q>p) in another market N where good G is priced at price r (r>q), so as to capture part or all of the market N for good G. The arbitrageur does not produce good G, but “steals” from the producer of G a ...