Pricing Strategy

Group Assignment 4
Cipla
Submitted to

Prof Sreelata Jonnalagedda

Indian Institute of Management Bangalore

Date: 6th February 2011

Submitted by:

Anand Raj Mani (0911078)

Kunal Deep Bhagat (0911247)

Maria Cheryl Fernandez (0911104)

Mohit Kumar (0911251)

Monisha Nakra (0911252)

The challenge facing Cipla
The adoption of the product patent regime in pharmaceutical in India, definitely changes the rules of the game
as far as Cipla is concerned. However, the TRIPS really doesn’t threaten their existence altogether and might just
be the impetus needed that spurs innovation. The business model will require a greater focus on the following:
1. Increased portfolio of off-patent drugs: Cipla, has a definite advantage over the west in terms of cost of
production. The presence of an established industry and the skilled man-power can be leveraged to take
advantage of this and gain a leadership in low-cost off-patent drugs
2. Produce patented drugs under cross licensing: Cipla’s strengths lie in production and drug delivery while
the MNC’s advantage is in R&D, Cipla can look to cross license drugs and sell them in select markets. It can
also collaborate with the MNCs in clinical trials, product development and marketing the patented drug
3. Increased spending in R&D: New drug discovery, which is a long and expensive process, is what gives
pharma companies the big money. This increased focus on R&D can also spur innovation. Owning patents
will enable Cipla to meet its humanitarian goal of making the drugs available to majority of the population
4. Continue lobbying with the Government: The TRIPS agreement can be voided if the MNC’s drugs are
unaffordable to the average citizen. Considering India’s low per-capita income, there is a high likelihood of
this. Thus lobbying with the government and proving to them the merits of this argument, can enable Cipla
to continue to reverse engineer and manufacture crucial and expensive drugs
5. Keep reverse engineering: There is merit in a patent exception rule which allows countries to manufacture
pharmaceuticals for export in order to supply countries that cannot manufacture themselves. Cipla should
ensure that is should be prepared to take up this market if the argument is upheld by the WTO.

Collaboration to alleviate the AIDS Crisis

Working through the AIDS crisis would require collaboration among all the stakeholders involved. No single
party can provide a lasting solution which would alleviate this crisis. A strict implementation of the present
monopoly patent regime is socially harmful as it causes a deadweight loss since every buyer has to pay the
extremely high monopoly price. The best way to tackle this crisis would be to treat the whole process of
discovering drugs to cure AIDS as a public good. In order to ensure that this strategy works, three basic
components need to be put in place:
 Ensuring free access : All intellectual results of successful research to develop AIDS related drugs should be
provided as a public good that Pharma companies across the world can use free of charge. This will ensure
that every company works efficiently to bring their costs down and then the general public has free access
to choose between products of different competitors. However, in order to prevent arbitrage, there
should be a global consensus to adopt this public good strategy instead of the current TRIPS regime.
 Incentivizing research: An open access to others efforts mandates the provision of alternative rewards
which would incentivize organizations across the world to continue spending on research to develop
newer forms of drugs. Individual governments can identify specific companies or universities and fund its
research activities in order to ensure that their efforts are adequately rewarded. On the other hand, there
could be a prize incorporated by bringing together funds from the government as well as from NGOs
across the world. This prize money would be awarded to whoever is first to provide a significant
breakthrough. However, it is important to ensure that the prize money is substantially larger than the
estimated costs of such research.
 Measuring impact: Once incorporated, the prize money should also be awarded to those efforts which
significantly reduce the overall burden of curing or eradicating the disease. Measuring the actual impact in
terms of number of people having access to the medicine and the number of lives saved would incentivize
 firms across the globe to ensure that their medicines reach the poor. This could also imply that the
inventor and the generic producers could work hand in hand to increase the affordability and availability
in different parts of the world.
An arrangement of this sort will be successful only if it is global in scope. If successfully implemented, such an
agreement will go a long way in lowering the prices of advanced medicines. This would not only benefit the poor
and the affluent alike but also help eradicate AIDS and prevent any such crisis in the future.

Analyzing The Big Pharma’s Approach

The operations in the “Big Pharma” companies are characterized by long investment cycles in the hope of
discovering new blockbuster drugs followed by years of cashing in on these to recover the incurred costs. As a
result the real productivity and profitability are never clear at any point of time. The entire organization is
structured around the success of these blockbusters resulting in creation of large marketing and sales teams
which further increase costs. These companies rely on scale to diversify the risks of uncertain investments in
R&D and commercialization and hence believe in maximizing revenues as long as the patents provide protection
from competitors and generics. This kind of approach to the market results in the profit making mode that has
led to the AIDS crisis. With arbitrage opportunities ruling out differential pricing strategies to extract the surplus
from buyers with different willingness to pay and with the Big Pharma companies’ emphasis on cost recovery,
many of these life saving drugs have become inaccessible to the general public, and hence their approach to this
market is unjustified.

The search for a multi-lateral solution

The concerned parties in the crisis are – the drug manufacturers from the developing nation such as Cipla who
do not have patents but have the acumen to produce the drugs at a low cost, the MNC drug manufacturers who
have spent a lot of money on drug discovery and now want to reap its benefit through patent protection, the
customers who simply want access to life-saving drugs and the governments who have to protect the interests
of all the above parties. The governments have a big role to play in the search of a multi-lateral solution that
benefits the interests of all parties. While the TRIPS does prevent the MNC drug manufacturers from having
their expensive ideas stolen, it does not really cater to any of the other segments. It is the duty of the
governments and the WTO to step in and have a cap on the prices they charge to the end consumer. They can
do it through the following means:
1. Audit the MNC pharmaceutical companies to find out the costs they have incurred in the R&D for the
drug and ensure that they don’t overstate it and use it as an excuse to overprice their drugs
2. Provide a platform for cross-licensing or compulsory licensing if need be. This will ensure that while the
Cipla’s of the world can leverage their low cost manufacturing and delivery capabilities, they will do so
by appropriately compensating the MNC drug companies who have spent millions of dollars on the
research
3. Drug discovery is an expensive process. At times, it might be impossible to produce a drug at affordable
prices. The government must ensure that its citizens are not deprived of potentially lifesaving drugs due
to the price. It can do so by giving funding a part of the research which will bring down the costs and
therefore the price of the drug.
4. The funding of the research for lifesaving drugs can also come from charitable foundations such as
Clinton foundation, Médecins Sans Frontières etc which receive huge donations
5. Negotiations with the MNC to have a system of ‘tiered’ pricing. Tiered pricing means that the price is
calculated using formulas based on average income per head, leading to lower prices in poor countries