Burroughs Welcome

(part-i)

Annual cost of Retrovir treatment to AIDS patients is as follows:

Price to wholesalers Price to customer Annual cost to customers

After 2nd price cut of 20% (in Sept. 1989) $120 per 100 capsules $150 per 100 capsules $6570

After 3rd price cut of 20% (expected) $96 per 100 capsules $120 per 100 capsules

(Assuming 25% markup by wholesalers as after 2nd price cut) $5256

Given: Daily consumption of Retrovir - 1200mg i.e. 12 capsules of 100mg per day

Considering the assumption that Interferon is a reasonable reference for Retrovir and has an annual treatment cost of $5000, any further price cut in the price of Retrovir is not warranted.

TEV = Cost of Alternative + Value of Performance Differential

BWC is the first and, as of 1990, the only drug to gain FDA approval for the treatment of AIDS. Retrovir's role to the patients is paramount; results show Retrovir extends patients life expectancy, increases their sense of wellness, boosts their immune system, and helps with weight gain. Clearly the benefits of Retrovir have a direct impact on the patients' quality of life; as a result patients' desire for the treatment is high. All these factors add up to increase the 'value of performance differential' and hence taking the 'first mover's advantage' BWC can afford to charge a premium for its drug.

part-ii)

However, taking Interferon as a reference product for Retrovir is not a reasonable assumption. Only significant similarity between Interferon and Retrovir is that they both treat life-threatening diseases. Otherwise, they are not comparable in their market position, their development costs or their substitutes available.

A reference product is a product that is the best alternative available to a consumer, its closest competitor, or a product that satisfies a similar need. Interferon does not meet any of these criteria. Interferon is a cancer treatment drug and hence is not an alternative for Retrovir,