Strategic Pricing Proposal to Counter Generic Sildenafil

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STRATEGIC PRICING PROPOSAL TO COUNTER GENERIC SILDENAFIL

We, the Viagra Senior Marketing Managers, are proposing the post-patent expiration Strategic Pricing Plan to the Pfizer Executive Leadership Team for presentation at the next quarterly meeting. Viagra has been very successful since its approval in March 1998 as a first in class erectile dysfunction (ED) medication. We achieved gross revenue of $1.9 billion last year despite competition from the two other branded drugs in our market, Cialis and Levitra. As we look to the future and our patent expiration in 2020, we need to plan to face our generic competition. The goal for the Viagra post-patent expiration Strategic Pricing Plan is to maximize profit as long as possible. This report will provide an overview of our past and current state, and arrive at our proposed pricing strategy plan in which we will achieve the best outcome.

ZOLOFT (ANTI-DEPRESSION DRUG) CASE EXAMPLE: PRICE ELASTICITY OF DEMAND

In our efforts to predict what will happen to Viagra once our patent expires, we reviewed another Pfizer’s drug, Zoloft, as a case example. Zoloft was the leading antidepressant drug that brought in $3.3 billion in sales before its patent expired on June 30, 2006. It faced branded competition from Effexor XR from Wyeth, Paxil and Welbutrin XL from GlaxoSmithKline, and Cymbalta from Eli Lilly & Co. The demand for Zoloft was inelastic before patent expiration which allowed Pfizer to set a high price for the drug. Demand then became elastic when generics entered the market post-patent expiration. The below graphs display this change in demand elasticity for Zoloft. We expect this will be the same for Viagra.

PAST AND CURRENT STATE OF VIAGRA

The current market for ED drugs includes three patented brand drugs: Viagra (Pfizer), Levitra (Bayer) and Cialis (Eli Lilly). Viagra was introduced in March 1998 and held a pure monopoly position for five years before Levitra and Cialis were introduced in August and November of 2003, respectively. The entrance of these two other differentiated ED drugs caused the ED market to become an oligopoly. All three ED drugs have some market power and have been pricing their product at about the same price of each other. Viagra, with its exclusive patent right to sildenafil and differentiated branding, has been able to raise its price to greater than 108% since the 1998 launch, as shown in the chart below: [1] Year| Price (in dollars) Per 100ct bottle| % Increase in Price| Sales (millions of dollars)| % Change in Sales| 2008| 1,252.63| 19| 1,934| 10 |

2007| 1,052.63| 10| 1,764| 6 |
2006| 954.77| 7| 1,657| 1 |
2005| 893.13| 5| 1,645| (2)|
2004| 850.60| 5| 1,678| (11)|
2003| 810.10| 6| 1,879| 8 |
2002| 767.13| 3| 1,735| 14 |
2001| 744.79| 3| 1,518| 13 |
2000| 721.70| 3| 1,344| 32 |
1999| 700.00| 0| 1,016| 0 |

As you may recall, we have pushed to raise the price in order to: (a) recoup the cost that went into research and development, testing, and the FDA approval process, (b) cover our current manufacturing and other miscellaneous costs, and (c) obtain maximum profit while Viagra has its patent.

We have been successful in choosing the price that maximizes the difference between total revenue and total cost. The basic markup rule can be expressed as (P − MC)/P = 1/PED. Markup rules indicate that the ratio between profit margin and the price is inversely proportional to the elasticity of demand [2]. This implies that the more elastic the demand for a product, the less pricing power the monopoly has (and vice versa). In this case, as in Zoloft’s case, the inelasticity of demand has given Viagra more pricing power.

Even with the frequent price increases, sales continued to grow and revenue steadily increased, with only a few expectations, as stated in our annual reports [3],...
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