Novartis Sows the Seeds of Its Own Demise

India has done something awesome (for India): rejected Novartis’s patent for Gleevec (a cure for some types of lukemia) in India.  This is less awesome for Novartis, obviously.  While the decision in question lies on a seeming technicality, it falls in line with India’s general disrespect for Western drug patents.  Why does India just insist on pirating America’s rightful intellectual property?

Saving lives, naturally.  Gleevec treatment, which is a near “miraculous cure” in some cases, costs about $70,000 per year.  The generic version costs a mere $2,500.  There are few people in the United States who could afford to pay that $70,000 out of pocket – which is why we have insurance plans to pay for it, which in turn is why we have a skyrocketing cost of healthcare.  But there are many fewer people who could afford to pay for treatment in India, and so the government has been very aggressive at disrespecting American patent rights and licensing generic versions of drugs.

Faulting Big Pharma morally is cliché; I’d argue they are also at fault in the most narrow economic sense.  Selling expensive pharmaceuticals in India is the exact situation for which price discrimination is made for.  The reason generic Gleevec costs $2,500 is because it is rather cheap to produce; the reason licensed Gleevec costs $70,000 is to amortize the costs of Novartis’s entire R&D portfolio.  A bare minimum of common sense should tell you that Novartis cannot sell Gleevec for $70,000 in India because it is a price far beyond what the market will bear.  Furthermore, there is clearly some regulatory hostility to that approach that will likely engender some negative knock-on effects for Novartis.

If the optimum price on the supply-demand curve for Gleevec in India is anywhere north of $2,500, Novartis should sell it at that price.  It will then maximize the profit available to it in the India market, and it will do a better job coming off as a responsible corporate citizen to the Indian government. If the optimum price is at or below $2,500 then it should let it go to some generic manufacturer to lose money on it instead of Novartis.  In short, by lowering prices the only foregone revenue is revenue that never would have materialized.  Novartis should be setting prices to maximize its total overall profit rather than insisting it will sell only at the price appropriate for its richest large market.

If you imagine someone attempting to do this in rice instead of drugs it seems more clearly absurd.

Novartis doesn’t set differentiated prices because it is terrified of price-discriminating strategies undermining the fat profit margins in the American market, which as the NYT mentions constitutes two-thirds of its profits.  The worry is twofold: simple drug reimportation/smuggling, and greater political pressure to lower its US prices in line with its overseas prices.  But I’m not shedding any tears for Novartis struggling to maintain monopoly profits – it has only itself to blame for its new predicament in India.

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