In 1982, the Center for Disease Control and Prevention (CDCP) labeled the acquired immune deficiency syndrome (AIDS) and began to warn the public of the disease. In 1983 and 1984, the virus that causes AIDS was isolated and in 1988 it was named the human immunodeficiency virus (HIV).
Burroughs Wellcome Company is a subsidiary of Wellcome PLC. Wellcome PLC is a pharmaceutical firm that employs 20,000 people in 18 countries. Wellcome PLC produces both ethical and over the counter medication. Zovirax, which treats herpes infections, accounted for $492 million in sales in 1989 (Kerin & Peterson, 2013). Retrovir, an AIDS treatment, was the second largest seller with $225 million in sales (Kerin & Peterson, 2013). Wellcome PLC also produces over-the-counter Actifed and Sudafed with $253 million in sales in 1989 (Kerin & Peterson, 2013). In 1981, there were 305 reported cases of AIDS, and by 1989 there were 35,198 reported cases of AIDS with numbers expected to continue to rise, although at a much slower rate (Kerin & Peterson, 2013). The majority of victims, almost 90%, were gay men or intravenous drug users, and almost one half of reported cases were in major metropolitan areas, such as San Francisco, Los Angeles, Houston, and New York. Not enough was known about the disease in the early 80’s to create a reliable way to predict its’ rate of growth.
Economically, treating AIDS patients was proving to be very expensive, averaging between $70,000 and $141,000 per patient according to a 1987 study by the RAND Corporation (Kerin & Peterson, 2013). Treating some forms of cancer averaged less than half of that cost. Since the income level of many AIDS patients was low, Medicaid covered treatment costs for approximately 40% of the patients, resulting in an
Burroughs Wellcome Company, estimated annual cost to the Medicaid system of between $700 and $750 million in 1988 (Kerin & Peterson, 2013). Several pharmaceutical companies, including Burroughs Wellcome, were in the race to produce an effective drug to combat HIV and AIDS. Burroughs Wellcome began research in 1984, developed Retrovir and began clinical trials on humans in 1985 (Kerin & Peterson, 2013). The FDA cleared Burroughs to market Retrovir in 1987, as the first and only authorized treatment for AIDS. Bristol Myers developed a drug called DDI, which appeared to slow the progress of the AIDS virus and lessen the damage it causes (Kerin & Peterson, 2013). Hoffman-LaRoche developed a similar drug called DDC that began clinical trials in 1989 (Kerin & Peterson, 2013).
As soon as Burroughs Wellcome was given the authority to market Retrovir in March of 1987, public protests began regarding the perceived high price of the drug. Wholesale price for Retrovir was set at $188 for one hundred 100-mg capsules. The recommended dosage was twelve 100-milligram capsules per day. The average annual treatment for an AIDS patients on Retrovir averaged approximately $8,528-$9,745 (Kerin & Peterson, 2013). The public, media, and advocacy groups compared the price of Retrovir to the cancer drug Interferon. The annual cost to a patient taking Interferon was only $5,000. In December of 1987, due to increased pressure, Burroughs Wellcome, reduced the price of Retrovir by 20%, and again by 20% in September of 1989 (Kerin & Peterson, 2013). The first price reduction was due to a cost savings in the production of synthetically manufactured thymidine while the second was due to an increase in potential patients. By 1989 sales had increased from $24.8 million in 1987 to $225.1 million (Kerin & Peterson, 2013).
As postulated by industry analysts, the direct cost of research and development (R&D) for Retrovir was estimated at $50 million. Burroughs Wellcome spent an additional $30-50 million in indirect costs to establish a new plant and equipment to produce Retrovir (Kerin & Peterson, 2013). They also donated $10 million worth of Retrovir to 4,500 AIDS patients. Pharmaceutical R&D of a new drug in the US averages around $125 million, so with direct and indirect cost to develop Retrovir was on the low side. Prior to Retrovir, Burroughs Wellcome had spent a reported $726 million for R&D in the previous five years without producing a single commercial winner (Kerin & Peterson, 2013).
Retrovir was designated as an “orphan drug” in 1985 under the Orphan Drug Act of 1983. This enabled Burroughs Wellcome to gain marketing exclusivity for a sevenyear period after its initial introduction. When Burroughs Wellcome was faced with the task of pricing Retrovir they had to account for many factors. They had to consider the demand for Retrovir. Since they were developing a drug for a fairly new disease, with relatively few patients, they had no way to predict what the demand would be in the next five years. They had to recoup their cost with the known numbers of AIDS in 1987, which were still fairly low. Burroughs Wellcome had to take into account both the direct and indirect cost spent on the R&D of Retrovir that totaled approximately $100 million. With an unknown market and $100 million to recoup they had to price Retrovir fairly high at the beginning. Looming competition was another important aspect for Burroughs Wellcome. They knew other pharmaceutical companies were researching drugs to treat AIDS and analysts believed there would be one or more of these drugs on the market by 1991 (Kerin & Peterson, 2013).
Burroughs Wellcome still had an ethical obligation to maintain fair pricing while trying to recoup their cost, as well as having an existing obligation to its employees, shareholders, and stakeholders. Most importantly however, is their responsibility to patients that rely on Burroughs Wellcome’s products for their health and well-being With an increasing number of AIDS cases, Burroughs Wellcome had a social and financial responsibility to make the drug Retrovir accessible to those who needed it, while remaining financially viable. It would be socially irresponsible to exploit people with an illness for mass profit gains. Like most other industries, the health care industry is competitive and no business is immune to failure. Because of this, Burroughs Wellcome must remain profitable in order to protect its employees and shareholders as well as to ensure that the company can continue its research while providing the medical community with effective medicine.
As previously mentioned, Burroughs had dropped the price of Retrovir twice: first on December 15, 1987 when a price drop of 20% was justified by synthetically produced thymidine and a second 20% cut due to a further expansion of HIV from 600,000 to one million estimated potential patients, at which point Burroughs’ gross profit margin (70.6%) and return on sales (20%) were comparable to other competitors in the industry (Kerin & Peterson, 2013). When pressured by outside entities about further reducing the price, Sir Alfred Shepard of the Board of Directors said, ” There is no plan for another price cut” (Kerin & Peterson, 2013). As a result of this balance between sustainability, profitability, and social responsibility, it was important that Burroughs Wellcome maintained its margins and success, but continued to remain sensitive to price concerns. Furthermore, it would benefit both Burroughs and patients in need of the drug, if insurance companies provided adequate coverage on the drug Retrovir, as private insurance companies only covered $250 million annually compared to the $750 million covered by Medicaid (Kerin & Peterson, 2013).
In January of 1990, congressional lobbyists began campaigning to reduce excessive profits in the drug industry. This set off a new round of pressure from the U.S. Congress, the media, and AIDS advocacy groups to again reduce the price of Retrovir. In 1987 sales of Retrovir were $24.8 million and net profit before tax was $8 million. Considering the $100 million dollar investment for the development, as well as new plant and equipment, the Return on Investment (ROI) was only 8%; meaning they only recovered about 8% of their initial investment for Retrovir. By fiscal year 1988 the ROI for Retrovir had increased to 52% but the initial investment had still not been recovered. In the five years prior to the sale of Retrovir, Burroughs Wellcome as a whole spent $726 million in R&D with no significant new drug. The ROI for Retrovir was still less than the company as a whole when considering the investment in R&D. See figure 1 Figure 1
According to Industry analysts it was estimated that the cost of Retrovir was between 30 and 50 cents per capsule (Kerin & Peterson, 2013). Using 40 cents for estimates, it can be determined that in 1987 when the drug first became available for sale the return on sales (ROS) was 28%. Realistically, the cost was probably more towards the 50 cent per capsule higher end, as producing the AZT required a biological chemical harvested from herring sperm and took months and over 20 chemical reactions to produce (Kerin & Peterson, 2013). Using the high-end estimate the ROS in 1989 was only 23.3%. This is very close to the 23.5% ROS industry average. By 1989 the price of Retrovir had been reduced by 20% twice. Burroughs Wellcome stated the first price reduction in December of 1987 was due to a synthetically manufactured Thymidine becoming available.
At this time, ROS was 23.0% using the 40 cent COGS estimate. Due to public pressure for an affordable AIDS treatment Burroughs Wellcome reduced its price again by 20% in September of 1989. At the 40 cent estimated cost this reduced the ROS to16.4%. Even using the low 30 cent estimate the ROA was only 24% which was is still very comparable to the 23.5% industry average. Burroughs Wellcome overall company ROS in 1989, while they were selling Retrovir at the $1.20 price per 100mg, was only 20%, which is over 3% lower than the industry average. Continued pressure to reduce the price again is not warranted. The figures show that to reduce the price another 20% would show at best a low 18% ROS and a possible negative ROS.
Comparing Burroughs Wellcome to 1989 industry average shows all their current ratios are well within what is normal for the industry. They are not the highest or the lowest of Return on Sales, Return on Assets, or Return on Equity.
Burroughs Wellcome has two choices at this point. Do not reduce the price or reduce the price. The advantage of not reducing the price is the ability to maintain their current ratios that will allow them to continue their R&D for new drugs. The disadvantage of not reducing price is dealing with the public, media, Congress, and advocacy groups that may continue to increase pressure on Burroughs Wellcome and create further negative publicity. The advantages of reducing the price would be the reduced pressure from the groups mentioned before and the claim of being ethically responsible. The disadvantage of reducing the price would be losing the current ratios. They take the chance to lose profit margin therefore lose some ability to develop new drugs.
Although there is public unrest in regards to the price of Retrovir we do not recommend Burroughs Wellcome reduce the price further. Reducing the price of Retrovir without another new drug would further reduce their current ratios, which are all within industry averages. Drug companies need profits as incentive to continue their research. Especially when there is the very real possibility of going several years without the discovery and approval of a new drug. Although, on the surface, it seems very unfair for a patient to have to spend close to $10,000 per year for treatment, it would be far worse if they didn’t have the treatment as an option at all.
Drug companies such as Burroughs Wellcome would avoid trying to develop “orphan drugs” if they had no chance of recovering cost. This is why government offers subsidies, tax benefits, and grants extending patents for drugs that qualify. In 1989 there were only 35,189 reported cases of AIDS in America and due to prevention awareness and HIV treatments, AID’s numbers were leveling off. Drug companies are taking a huge risk investing millions of dollars in cures and treatments for rare diseases. In part, the cost for “orphan drugs” is so high because so few people are consumers of them.
While it would be socially conscious for Burroughs Wellcome to drop the price further, they have to remain a viable company. Profits will ensure the financial future of the company as well as all the shareholders and stakeholders of the company. Maintaining the ROI percentages will allow Burroughs to remain viable and competitive allowing them to continue to develop new drugs that may provide further benefit. If they were to drop their prices it would be benefit public relations as they put the needs of the consumers before profits, however in such a competitive environment this could prove to be to a liability in the pharmaceutical industry, therefore, it is advisable that they do not drop their price by another 20%.
Kerin, R.A & Peterson, R.A. (2003)
Strategic Marketing Problems: Cases and Comments
England: Pearson Education Limited