Question

CASE 12.2 The Price of Life In a surprising announcement, the world's second largest pharmaceutical company, GlaxoSmithKline (GSK), announced that it would slash prices on the pharmaceuticals it sold in the world's poorest countries. The company challenged other pharmaceutical firms to do the same. Specifically, GSK declared that it would cut prices for all drugs in the 50 least developed countries to a level no higher than 25 percent of the price charged in the United States. The company also pledged to re-direct 20 percent of its profits from poor countries to hospitals, clinics and medical staff in those countries. In addition to slashing prices in the very poor markets, GSK also noted that it was determined to make drug prices more affordable irn what it termed to be middle-income countries such as Brazil and Mexico This was not the first time a global pharmaceutical company had taken such action. Eight years earlier, Merck declared that it would cut prices by 40 to 55 percent in African markets on two of its recent AIDS-fighting drugs. Merck's powerful three-drug cocktail would be available in Africa for $1,330 a year, compared to approximately $11,000 in the United States. The company noted that it would be realizing no profits at this new price. Merck also pledged to extend these discounts to poor countries elsewhere in the world. Bristol-Myers followed suit, promising to slice the price of its AIDS drug Zerit to only $54 a year in Africa. At this price, Bristol-Myers claimed to be selling below costs. The company called on donor governments in Europe, Japan and the United States to join in a vigorous international 26 million people were estimated to be infected with response to the AIDS crisis in Africa, where over the HIV virus that eventually causes AIDS Shortly before, however, 39 major pharmaceutical companies had pharmaceutical firms from selling generic versions of their patented drugs, including AIDS dr begun litigation to stop Indian th African market. India had long refused to recognize pharmaceutical patents in order ast poor population with recent pharmaceutical products at much cheaper become adept at reverse-engineering drugs and had become efficient producers and quality generics. When two Indian generic drug firms, Cipla and Hetero, ent prices on some key AIDS drugs fell precipitously India had joined the WTO, agreed to bring its pharmaceutical protection laws more in line not immediate. Patent protection cases were slowly working their way through the Ind and some global pharmaceutical companies doubted that the Indian patent protection prices. Indian firms had exporters of high- a, and the country consequently with world norms. However, change was ered a price war in Afric government was truly supportive of DESIGNING GLOBAL MARKETING PRGAS n the meantime, the fight to keep the prices of AIDS drugs high in Africa eventually failed, resulting in an embarrassing public relations misstep for many global pharmaceutical companies Consumer boycotts ha patents on AIDs pharmaceuticals lowered their prices to below that of the Indian generics. In d even been threatened in developed markets. Many companies that held cases, donor organizations such as the United Nations helped supplement the low prices, bolstering the global pharmaceuti- the margins the pharmaceutical companies made off the sales. But primanily cal companies simply agreed to lower their prices In the years that followed, access to life-saving AIDS treatments increased significantly in Africa, and the growth of Indian generics was somewhat abated charge different prices in different Nonetheless, the fact that pharmaceutical companies continued to countries for the same drug fueled controversy For example, as markets matured in developed countries, counting on substantial growth among the middle classes in the developing world, especially in middle-income countries such as Mexico. However, they faced pressure to keep prices low in these countries as well. When Abbott Laboratories was told by the Thai government to lower its price on its latest version of the AIDS drug Kaletra, the company had threatened to remove it from the Thai market. A consumer boycott of the company ensued, and Abbott agreed to lower the price to $1,000 a year, In another lower middle-income country, Guatemala, the drug sold for $2,200. The average sal- ary in Guatemala was $2,400. Similarly, Bristol-Myers Squibb charged four times as much for two of its AIDS drugs in Mexico as it did in sub-Saharan Africa. An AIDS treatment in middle-income Mexico could cost $6,000 in a country where the PCI was only about $7,300. An AIDS organization launched an ad campaign in the United States, specifically in Los Angeles, against Bristol-Myers demanding that the company lower its prices in Mexico. Of course consumers in developing countries rarely pay the full price of a drug. since governments often purchase and dispense critical drugs. As major buyers, governments too were concerned with costs However, Indian generic giant, Aurobindo, sued the South African government when it chose a local producers bid over Aurobindo's to supply an AIDS drug. Aurobindo claimed that their bid was priced about 30 percent lower than the winner's bid. However, the South African government produced a study showing that the local producer's tax contribution, linkages with local suppliers and job creation supported the government decision to procure locally. In fact, emerging markets enforced some of the world's highest tariffs on pharmaceuticals. Iran had tariffs of 50 percent, India of 36 percent and Brazil and Mexico of over 35 percent. Controversy was not limited to emerging markets. Even in developed countries, pharmaceutical prices could differ substantially. For example, drug prices were higher in the United States than in Europe, where governments paid for most prescription drugs. Consequently. European governments negotiated prices with pharmaceutical firms. For example, the antipsychotic drug Clozanil could cost $51.94 in Spain, $89.55 in Germany. $271.08 in Canada and $317.03 in the United States Ironically, over-the-counter drugs and generic versions of prescription drugs whose patents had expired could be cheaper in the United States than in Europe because of greater competition in the U.S. market PRICING FOR INTERNATIONAL &GLOBAL MARKET S Discussion Questions 1. Wh at factors might contribute to GlaxoSmithkline's announcement to discount prices in emerging markets? Do you think these reasons are altruistic or self-serving? 2. Should U.S. consumers pay higher prices for pharmaceuticals than Africans? Why or why not? 3. Should Mexican consumers pay higher prices for pharmaceuticals than Africans? Why or why not? 4. Should U.S. consumers pay higher prices than Europeans for pharmaceuticals? Why or why not? 5. Should national governments pay more for locally produced pharmaceuticals? 6. What challenges might pharmaceutical companies face from widely disparate prices? Sources: "The Price of Life," in Kate Gillespie and H. David Hennessey, Global Marketing (Mason, OH: Cengage, 2011), pp. 366-367; Josh Ruxin, "AIDS Drugs-for Profit or Not?" Forbes, November 11, 2010, Gardiner Harris, "India's Efforts to Aid Poor Worry Drug Makers," New York Times, December 29, 2013; and "The New Drug Wars," The Economist, January 4, 2014.

Answer 1

1)

• In emerging markets, affordability is increasing but it is still low compared to developed economies.
• If GSK maintains its price high, its sales volume will be drastically affected.
• Health care is a volume business in such countries.
• In countries like India there are well established local competitors who can offer generics ate lower prices.
• Discounting prices also helps to increase spread among the masses.
• This is not a altruistic move bit rather a profit oriented strategic move.
• Without such decisions GSK will not be able to make profits or survive in such markets
  

2)

US pharmaceutical pay higher prices for pharmaceuticals than Africans. Not just pharmaceuticals, but everything related to health care is costly in US health care industry . . In US everything is a costly affair due to increased production costs, marketing costs etc. so it is the economic structure and system that makes the drugs costlier in US.

Africa is poor country. It becomes necessary to sleep drugs at lower prices and lower margins, so that we make sure healthcare is accessible and affordable to all `

3)

1. Africa is poor country. It becomes necessary to sleep drugs at lower prices and lower margins, so that we make sure healthcare is accessible and affordable to all `Mexicans are a developing economy.
2. Also the costs related to infrastructure, production and marketing are higher in Mexico.

So consumers have to pay more for drugs in Mexico

4)

In Europe the healthcare is predominantly government funded. The government has great control over insurance and companies, as a result. Then government policies are closely intertwined with healthcare administrationBut in US healthcare is primarily private funded. There is limited competition among players. Also there is direct-to-consumer advertising costs which is highly limited in other economies

5)

The government's role in strengthening local production capacity

Although governments often engage in pharmaceutical production in order to develop a local industry, local production is obviously quite distinct from public production. As many countries have moved away from import substitution policies the arguments for local production have been weakened. The WTO may also make the case for local industry less strong. Yet there are still reasons why local production may be desirable, particularly in terms of developing local capacity, creating jobs and achieving some independence from international suppliers.

Policy-makers should be aware of the range of possible production options. Distinctions are commonly made between:

• primary production (manufacture of the raw materials used in pharmaceutical production);

• secondary production (processing of finished dosage forms from raw materials or intermediate products);

• tertiary production (packaging and labelling of finished products from primary and secondary sources).

Governments need to evaluate the impact of local production policies, ... The Pharmaceutical Fund and Supply Agency procures medicines on .... of imports which did not cover all costs to the national government store. .... Overall, patients were paying 193% more for imported products in the private sector.