Producing the drug for the government

Reference no: EM133710440

Company Alpha is the industry leader in the HIV drug industry. They have invested $150 million in research to produce the drug. This investment is a fixed cost. There are a few other smaller companies in the market. The company market share is given in the Excel data sheet.

The U.S. government has put a price ceiling on retail price- $1.20 per capsule. Company Alpha sells the drug at a wholesale price at $0.90 per capsule. The variable cost per capsule is $0.73. HIV patients are required to take 5 capsules per day. It is estimated that only 75% of the patients take their medicine regularly. Companies use this usage rate to calculate their revenue and cost estimates.

About 70% of the HIV patients depend on the government to pay for their drugs through Medicare and other subsidy programs. In a way, the government (that means taxpayers) is literally funding the HIV drug industry.

Position 1: The private companies and the advocacy groups have different perspectives in marketing the drug. Company Alpha has been given a special license to sell the drug for 20 years. Their license has expired. They have been given a two-year grace period to continue. The Company is lobbying to renew the license for another 10 years. They are opposed to price ceiling and want to deregulate prices. Other companies in the industry are supporting Company Alpha, the industry leader.

Position 2: The advocacy groups argue that the taxpayers are literally guaranteeing a fixed income to the drug companies. They oppose the renewal of the license. They suggest that the government should buy the license from the drug companies. The government is willing to pay twice the fixed cost (e.g., $300 million to Company Alpha). The Government will enter a "contract manufacturing" with the pharmaceutical companies. Under such an arrangement, companies will be producing the drug for the government. It is estimated that this strategy will decrease the variable cost of each capsule which is a substantial savings for the government.

Reference no: EM133710440

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