The Pharmaceutical Industry and the AIDS Crisis in Developing Countries ·
Describe the nature of supplying drugs to emerging markets at an affordable price without undermining their profits ·
Research and analyse in depth the effectiveness of one proposed policy response to this issue. Introduction
2001 saw a flurry of events, as highlighted in the excepts of the case study, which caused an awareness by the international community of the inequality between rich and poor nations in the care and treatment of people living with HIV/AIDS.
Epitomized by the lawsuit against the South African government, the drug companies "want desperately to be seen helping fight the global AIDS crisis
but the companies also remain unwavering in their defense of patents, even if it means suing poor nations that want to make or buy bootleg generics because they can't afford brand-name drugs." The episode not only represents a "moral scandal", but also a major economic, political and social challenge. Can the needs of the poor be met through increased access to the drugs, without necessarily hurting the profits of the drug companies?
Past Trends and New Developments
The following table summarizes the price changes for brand and generic drugs from 2000 to 2001 (IAEN).
Patents and Monopoly Power
Prices charged by pharmaceutical companies for patented drugs are commonly several orders of magnitude higher than their marginal cost (the cost of producing an additional unit of the drug). For innovative products like antiretrovirals, private firms legitimately need to recover their high overhead costs for research and development and for fulfilling the regulatory prerequisites of market approval in high-income countries. This attributes a "temporary monopoly power" to the patent owner and creates socially useful long-term incentives for continued R&D.
However, actual production costs are low. The low marginal costs explain why generic drug producers, as soon as they do not have to pay royalties to patent holders, are able to offer substitutes to branded products at comparatively low prices. This was the case in Brazil where its national industry produced cheaper generic drugs and was delivered free to HIV-infected patients. In a perfectly competitive market, in which consumers will automatically buy a substitute good if its price is lower, international drug prices would spontaneously tend to be based on such marginal cost. The demand for the brand drug will be reduced (and become more elastic) with the introduction of substitutes.
However, the international market of branded antiretroviral products is characterized by imperfect competition i.e. a limited number of firms supplies a limited number of products. This is an oligopolistic market, where private firms are in a position to impose prices and rates of return that may capture an "excessive rent". As such, patent rights are often associated with compulsory licensing obligations in order to guarantee an efficient public disclosure of innovative knowledge. Under the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS), any country may allow a third party to use a patent without the owner's consent "in cases of national emergency" or "other circumstances of extreme urgency".
Demand & Supply
More than 33 million people are infected with HIV worldwide, over 95% of whom live in developing countries. (Kremer) Although the absolute demand of HIV-infected patients is less, the willingness-to-pay by these affluent patients is much higher based on the perceived value of the drugs. While the drug is critical (suggesting low elasticity of demand), drug companies could not charge an unlimited price, because they could not force people with AIDS to buy the drugs. It is therefore not surprising pre-2001 for the drug companies to target the segment of market demand from high-income countries.
In the pre-2001 context, drug companies could exercise its...
References: 1) KENNEDY, R. E. The Pharmaceutical Industry and the AIDS Crisis in Developing Countries, Harvard Business School, August 2001. [Case Study]
2) AGENCE NATIONAL DE RECHERCHES SUR LA SIDA (ANRS): Economics of AIDS and Access to HIV/ AIDS Care in Developing Countries, Issues and Challenges – Part One: Patents, Generic Drugs and the Market for Antiretrovirals, June 2003. [Available from http://www.iaen.org/papers/anrs.php, accessed in Jul 2006]
3) INTERNATIONAL AIDS-ECONOMICS NETWORK (IAEN): State of the Art: AIDS and Economics, July 2002. [Available from http://pdf.dec.org/pdf_docs/PNACP969.pdf, accessed in Jul 2006]
4) KREMER, M. Creating Markets for New Vaccines Part 1: Rationale, April 2001. [Available from http://papers.nber.org/papers/W7716.pdf, accessed in Jul 2006]
5) PNG, Ivan. Managerial Economics, 2nd ed., Blackwell Publishing, 2002.
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