Why do drug companies charge outrageous prices in poorer countries?

Here is an article that mentions that Bayer was charging $5,500 for a one month dose of a particular cancer drug. Quote from the article:

"Economist and intellectual property expert James Love said, "The Bayer price of Rs 34,11,898 per year ($69,000) is more than 41 times the projected average per capita income for India in 2012, shattering any measure of affordability. Bayer tried to justify its high price by making claims of high R&D costs, but refused to provide any details of its actual outlays on the research for Sorafenib, a cancer drug that was partly subsidized by the US Orphan Drug tax credit, and jointly developed with Onyx Pharmaceuticals.”

How does pricing a drug way outside the affordability of the populace help the drug company?

I understand most of the cost is needed to recoup R&D expenditures, but if it is so expensive that no one buys it, nothing is gained. Let’s say the drug actually cost 25 cents per pill. Even if you sell it at $2 a pill in India, that is more profit than you make if no one buys an expensive pill.

Help me understand the economics of this.

Please keep in mind this is GQ, so try to keep it factual and calm.

I will respond to my own question now.

Are they afraid that if they make it too cheap in some countries (like India), then people from other countries will just fly to India and buy a whole bunch of it for cheap?

Statistics like these are worthless. Any idea how much that drug costs in wealthier places?

Not much is gained for the drug company if they sell it below cost either. In fact, selling below cost makes it that much harder to develop and sell OTHER drugs.

And do you have any idea what the actual manufacturing costs are, even without recouping their research and development costs?

Well, the article indicates that a drug company is making a generic and selling if for 3% of the cost of Bayer. That would seem to indicate that production costs are not the driver of the high price of the drug.

Plus, just because one billion people can’t afford it, does not mean there are not 10 million people who can, or whose insurance policy can afford it. If 99% cannot aford it, 1% of a market of 1.3 billion people is still a good market.

The trouble with drug prices and other medical procedure prices, is that the people who need it and the people who pay for it are usually different. That’s no different in the privatized USA or universal health care Europe or a-bit-of-both India. If you can afford a $5000/mo. medication, either you can afford it or more likely your insurance company can. Since they pass the cost back to the employer/insurer, high prices are no skin off their ass. Only public-funding health care will complain, but unless the government’s intent is to bypass the patent system, there is no recourse until the drug is generic - at which point it drops in price significantly.

I missed that. And it was in the very first paragraph! Sorry.

Still, I’m worried where the future medicines will come from if the designers can’t recoup their investments.

It may seem like I don’t care about people who are currently ill and need this medicine. I do care about them. But I also care about people in the future who won’t have any medicines, if the researchers can’t afford to keep researching.

Another thing to consider is that very few people actually pay the listed retail price of these kinds of medications. So the question isn’t what the official price of the drug is, but what do people actually end up paying.

Production costs are not the same thing as development costs. It’s obviously cheaper to mass-produce something once it’s already been invented. Production costs don’t factor in the years of R&D, regulatory approvals, trial experiments, and dead-ends required to bring a new drug to market.

The list price of a drug is also usually not what most people actually pay, as others have alluded to.

It will be interesting to see how Bayer reacts to this maneuver.

I don’t see how that applies. There is no reason not to sell it at $5,500 a month in the US or the UK or anywhere else. But there appears to be little benefit to the company to overprice it in a poor market.

Isn’t it better to sell it at a price that works than to not sell it at all?

Now, md2000’s case is that it may be better to sell it to 1,000 people for $1,000 ($1,000,000) than to sell it to 10,000 for $50 ($500,000). It seems to me that to cut the price by 5 times would open up more than 5 times the market population due to the way wealth is distributed, but I am not an expert.

I already acknowledged this in my OP.

I guess my point is not coming across. The R&D costs are sunk costs and don’t enter into the equation. Either they can compete with the generic and make some money or they can hold firm on keeping it 30 times more expensive and make absolutely no money. What option looks better to you as the company?

That is an interesting question. I know that is the case in the US, but I am not sure how much it does or does not apply in a place like India.

I believe this may very well be a big part of it. And it doesn’t require anyone actually flying to India: you just need a couple of people in India (or whatever country that has some discount on drugs), buy up the stuff and ship it to a more wealthy country of your choice. I assume that if the country is poor enough, you may even find some people that actually need that drug who are willing to sell their prescription drugs if the price is right. And of course for the pharma companies, that means they lose profit in their wealthier markets.

On a related issue, I have read somewhere that counterfeit drugs are a huge problem in Africa, with something like one third (or even two third, don’t remember exactly) of consumed drugs being ineffective or plain poisonous replacements, cooked up in some warehouse. I don’t know how the business of counterfeit drugs really works there, but I sure could imagine a lucrative business model if you can get your hand on some discounted drugs for the poor: Sell the real drugs to the first world for good money, hand out cheap counterfeit stuff in your country, keep the profit. If someone asks, you’ve dutifully handed out all the drugs to the poor. And if the poorer recipients of the drugs don’t have the means to find out whether the drugs are real (or fight back if they aren’t), you shouldn’t have a problem.

It’s impossible to restrict the trade of drugs on the black market so the drug industry is effectively globalized. Drug companies would love to figure out a way to do effective differential pricing.

I agree “leaks” are the reason. A train ride that costs $100 in the US cost $10 in India because the masses can’t afford $100, so better to sell at 10 than have esmpty seats. Transportation (apart from third world ferries in the most literal sense) are the most unleaky things imaginable because a train ride in India can’t be resold for $20 in the US. Pills can. Pharmaceuticals are one of the leakiest things imaginable since they’re small, relatively nonperishable, and valuable.

I’ll speculate that another reason is India’s thriving generic drug industry, and their not-all-that-great patent protection. Bayer wants to get the maximum possible from those who will pay the higher price for the “genuine Bayer” article, because they can’t beat the price of the local product.

Not everyone in India is poor, while the ratios may be different there is the full spectrum of wealth just like in the USA.

And in fact most older drugs are drastically cheaper outside the USA.

Drug companies and governments have a vested interest in preventing leakage of cheap third-world medications back to the first-world.

I take the antiviral drug Viread for HepatitisB, but it is also used to treat HIV. From a Canadian pharmacy it costs $1,675.00 per 4 months for original Gilead product (Blue Diamond-shaped pills). The NHS here in the UK probably pays less due to volume, I don’t pay anything at all. There is also a cheaper generic version of the drug at about 1/3 the cost of the original.

Because this drug is so vital to the treatment of HIV (and in the future, the prevention of HIV spread), Gilead have licensed the production of Viread in the third world. These pills are white, and only cost $120 for 4 months. The governments that distribute these pills have to take all efforts to prevent these white pills from being sold in the west, because if they don’t, Gilead will withdraw the license for production. Pharmacies in the west also cannot sell these white pills, at risk of their license. Also, without the security of properly branded, marked product, the risks of counterfeit product goes up markedly. I certainly would not take the risk.

These measures cannot stop all leakage, but it can stop much of it.

As for third world patients selling their drugs for cash, an illustration of how desperate people are to survive - a poor south african woman with HIV was told that the antiviral drugs worked better when taken with food, which she could not always afford. So she ate cowdung to fill her stomach before taking the antivirals. If you would rather eat cowshit than miss the benefits of the drugs you need to live, you are not going to sell them for any price.

Si

Right now the US is trying to extend international patent protection for drugs beyond 5 years. I don’t agree with that but I do understand.

A scientist friend of mine has been working on finding a drug to treat arthritis. In that time he has worked for two giant pharmaceutics companies. For 25 years. That’s 25 years of salary, 25 years of intensive research, 25 years of managing laboratories, grants, staff, and budgets.

The result? Nadda. Zero. Yes there are promising indications, strong possibilities…but after 25 years there is still no answer. And all the time he knows other competing researchers might make the crucial break-through rendering his life’s work pointless.

Scientists accept this philosophically but the reality is wonder drugs are rare and cost an extraordinary amount of patience and money to discover.

Publicly funded health systems generally use their market position to negotiate lower prices, like the NHS Pharmaceutical Price Regulation Scheme.

Western companies sometimes give drugs, normally out of date or for some other reason unsaleable, to third world countries because that can get tax breaks for their “charitable” activities.