Merck & Co., Inc. is a global, research-driven pharmaceutical company that disco
ID: 2391917 • Letter: M
Question
Merck & Co., Inc. is a global, research-driven pharmaceutical company that discovers, develops, manufactures, and markets a broad range of human and animal health products. The following are excerpts from the financial review section of the company's annual report. MERCK & CO., INC. Financial Review Section (partial) In the United States, the Company has been working with private and governmental employers to slow the increase of health care costs. Outside of the United States, in difficult environments encumbered by government cost containment actions, the Company has worked with payers to help them allocate scarce resources to optimize health care outcomes, limiting potentially detrimental effects of government actions on sales growth. Several products face expiration of product patents in the near term. The Company, along with other pharmaceutical manufacturers, received a notice from the Federal Trade Commission (FTC) that it was conducting an investigation into pricing practices. Instructions Answer the following questions: 1. In light of the above excerpts from Merck's annual report, discuss some unique pricing issues faced by companies that operate in the pharmaceutical industry. 2. What are some reasons why the same company often sells identical drugs for dramatically different prices in different countries? How can the same drug used for both humans and animals cost significantly different prices? 3. Suppose that Merck has just developed a revolutionary new drug. Discuss the steps it would go through in setting a price. Include a discussion of the information it would need to gather, and the issues it would need to consider.Explanation / Answer
1. The following are the key issues faced by the pharmaeucital industry:
1. With a lot of Government rules and regulations pharmaeucital company have to cap the pricing of their product, whcih can lead them to a very less profir margin for such companies.
2. Since pharmaeucital company spends a lot of amount in R & D it becomes difficult for them to decide the price of the product because of the large amount spend in R & D of the medicine.
3. Every medicine has its expiration date. So, if its not consumed within the prescribed time period it has to be scraped, So price of the medicine have to be decide keepig in mind that fact.
4.Since prices of the medicnes are generally caped by the government , it result in lower amount of profit of the compant which indirectly affect the R &D of the company and hence the pricing of the company.
5. Pharmaceutical industry is one of the most fragmented industry , which makes it volatile and instable. With this level of competition it becomes difficult to accurately decide the price of the product.
6. Moreover, This industry always have a human side rather than just money making entities , which make it even more difficult to price the product.
2. Reason behind difference of prices of same medicine between different countries :
1. One of the reasons for such higher prices is the cost of import. Money spend during the process of import becomes the part of the cost of the medicines and hence has to be sell at a higher rate.
2. Moreover, medicines that are selling at a higher rates are branded medicines,. So, they sell at a higher rate to earn the maximum profit that they can earn to till they have patent rights.
3. Steps to Go thorugh in setting up the price:
1. Estimate the total cost of production of medicine including R & D Cost.
2. What are the Government rules and regulation regarding the capping of the price of the product.
3. For how many years patents is being granted for the medicine.
4. It should also take into account countries to which medicines can be exported.