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

1 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.

2 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

3 The following table summarizes the price changes for brand and generic drugs from 2000 to 2001 (IAEN).

Patents and Monopoly Power

4 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.

5 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.

6 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.