Question

Review "Gilead Signs Hepatitis C Pact to Cut Drug Cost for Poor." In this article, the authors describe how a hepatitis C drug will be offered to developing countries at a fraction of its price in the United States. Describe your personal opinion of Gilead’s actions, and then describe your economic opinion of Gilead’s actions. How might you advise the CEO of Gilead?

Article: https://www.reuters.com/article/us-gilead-sciences-india/gilead-signs-hepatitis-c-pact-to-cut-drug-cost-for-poor-idUSKBN0HA0TT20140915

Answer 1

The article reports that Gilead, a US based Pharma company, has decided that it will allow 7 Indian companies to produce generic versions of its patented Hepatitis C drug Sovaldi. The generics would be sold in 91 developing countries at a fraction of the cost. The drug will cost $300 a month in these countries while it costs around $28000 a month in the US.

Personal Opinion- In my personal opinion, generics, especially those for life-threatening diseases, should be allowed to be produced for populations who do not have the capacity to buy branded drugs. There has been a long debate about whether this is a good idea. Pharma companies who produce branded drugs often argue that allowing generics reduces the incentive to invent new drugs in the first place as it eats into their profit margins and producing a new drug is a very expensive process. This is the reason of the patent regime for drugs in the US, where a new drug if patented for a set period of time and during that time no generics are allowed. Detractors of this argue that medicines, especially for life-threatening diseases, should not be seen from a profit-loss perspective and that generics would save many more lives than branded ones as they are cheaper.
While I do agree somewhat with the Pharma companies' argument that it is indeed an extremely expensive process to produce a drug (research costs, cost of highly qualified scientists, cost of trials and approvals etc.), that does not mean that no middle ground can be found. Even the price of branded drugs is different in US and Canada. That hints to us that there more here than simply recuperating costs. This shows that the customer bargaining power is too low in the US. Maybe a solution can be found where underprivileged section of society get the drug at a subsidized rate.
Coming back to developing countries, it makes even more sense for generics in developing countries as these populations would never be able to pay for the drug and hence allowing companies which can manufacture the generics much more cheaply and with proper licensing is a good move. Many companies wouldve produced slightly different drugs anyway, especially once the patent expires.

Economic opinion of Gilead’s actions- Looking at the long term horizon, Gilead's actions make economic sense.

The population in these developing countries do not have the purchasing power to buy the drug at the US prices. Given this fact, it makes sense for Gilead to sell the drugs to those countries as long as the cost covers the marginal costs. What Gilead is doing here is licensing the drug to be pruduced at other pharma companies which are even better at producing cheaper drugs (hence, even lower marginal costs). Gilead will recieve a royalty on each drug sold. This way, Gilead has passed on the costs compeltely to the generic manufacturers while still receiving some profits.

The second economic point is to build brand value in these countries. Once the patent expired, the companies wouldve created generics of their own brands. Now, Gilead will create brand equity for the drug in these countries, which might endure even after the patent expires and the buyers might keep buying it then too, even at a slightly higher cost.

The third economic point is the brand equity in general. The stance of Pharma companies has often been seen negatively by the general populace as its not good PR to be selling life saving drugs at a profit. This move will have a positive impact on Gilead's brand value.

Advise to the CEO of Gilead- As discussed in the first part, I would recommend that he also look into the possibilities of offering the generic of Sovaldi at reduced costs, to the underprivileged section of population, even in developed countries including US. It need not be as low as what the rate is in India etc., but lower than what the current rate is. It can import the same generics from India and sell as its cheaper to produce there. If the proliferation can be effectively controlled to that section of population only, it makes both economic and general sense to do that.