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Ethical pricing of a healthcare company

In 1986, Burroughs-Wellcome Company introduced the first major breakthrough against acquired immune deficiency syndrome (AIDS). It was the life-prolonging drug AZT. The product has turned out to be very successful for the company and, largely because of AZT's success, Burroughs-Wellcome's profits have doubled in the three years ending in 1988. The Food and Drug Administration (FDA) plans to expand the authorization for the drug's usage to those who are infected with HIV, but not yet showing signs of serious illness. The estimate of the size of this market is hundreds of thousands rather than the tens of thousands who are currently sick with AIDS.
The controversy over the drug centers on its price. AZT costs about $8,700 for a year's supply for each patient (lowered from $10,000 in 1987). Critics in the gay, medical, and legal communities contend that Wellcome executives are "corporate extortionists." Some believe that the company has already made too much money at the expense of the sick. The price is so far out of reach for indigent and moderate-income people that the federal government had to step in with subsidies of millions of dollars.
Burroughs-Wellcome defends its pricing practices by stating that its profit margins (in the 50-70 percent range) are in line with those of other drug companies that introduce new drugs. They contend these high returns are necessary to finance research and development and recoup the millions of dollars invested in developing the drug. The company initially gave the drug free-of-charge to as many as 5,000 AIDS patients and spent $80 million on a new plant.
Additional criticism revolves around the actual development of the drug. The Wall Street Journal stated, "But Wellcome's moral position is undercut by its relatively minor role in the creation of AZT." Researchers at the Michigan Cancer Foundation, researchers from West Germany, and researchers at the National Cancer Institute are credited with the major discoveries that led to AZT. Nevertheless, Wellcome performed toxicology, pharmacology, and animal studies before AZT was given to the first human volunteer. It also financed the big clinical trial and bankrolled the give-away to the patients in the initial experiment.
Burroughs-Wellcome is under pressure to cut its price. The government is attempting to institute a "reasonable price" clause where an unduly high price could trigger a government order for a company to open its books. Any company found in violation could be sued for breach of contract. Congress is also studying AZT and one congressman wrote the company contending that the original price rationale (achieving a decent return on investment during a short product life) no longer exists as the drug has been on the market for three years and the market is growing for the product.

1. Condensed from Marilyn Chase, "Burroughs Wellcome Reaps Profits, Outrage from Its AIDS Drug," The Wall Street Journal (September 15, 1989).

Please answer the following:
1. How fair is this price of AZT?
2. On what marketing basis do you make your assertion?
3. Is the pricing ethical?
4. How might you tie your comments to our previous discussions on Pricing Strategies and the module resources content?
5. What should Burroughs-Welcome management do about the pricing in 1987, given the details provided in the case study?

Solution Preview

Step 1
The price of AZT is fair. Burroughs-Wellcome's pricing policy of charging 50-70 percent is similar to that of other companies that introduce new drugs. These returns are necessary to finance research and development as well as to recoup the expenses incurred during research and development of the drug. Even though Burroughs-Wellcome did not make major discoveries that led to the development of AZT, it performed toxicology, pharmacology, and animal studies before AZT was given to human beings. The company did what is necessary to bring a great drug to the market. The pricing is fair.

Step 2
The marketing basis on which I make the assertion is that the product AZT is excellent. It is a major breakthrough against acquired immune deficiency syndrome. It is a successful life-prolonging drug. The high usefulness of AZT is reflected in the high demand for the drug. From the marketing perspective, the price of $8,700 conveys the usefulness of the drug to ...

Solution Summary

This posting gives you a step-by-step explanation of morality in pricing of healthcare. The response also contains the sources used.