DIFFERENTIAL PRICING OF PHARMACEUTICALS: THE HIV/AIDS CRISIS10 The HIV/AIDS crisis has been called the worst pandemic since the fourteenthcentury'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 (also known by its generic name zidovudine or AZT), was introduced in 1987 by Burroughs Wellcome (now GlaxoSmithKline) and was the only approved therapy available to treat HIV until 1991. 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 (e.g., opportunistic infections) dramatically slowed in the United States from 1992-1995 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 than 1.9 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 wholesale 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 nationstate-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 elsewhere in 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?

Questions

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.