Sunday, April 1, 2007

What is Abbott's profit maximization price in Thailand?

Thanks to Pharmalot, I have been following the recent spat between Abbott and the Thai govt regarding Abbott's pricing of AIDS drugs in Thailand. The Thai govt claims that Abbott charges a lot and has therefore decided to break Abbott's patent. Much of the dispute centers around Abbott's Kaletra & Sanofi's Plavix. Some online sources claim that Abbott has offerred to lower its price from approx $4000 per year to $2000 per year. Other sources say that Abbott already charges $2200 per year and point out that this is well below the US price of $7000 per year.

I have been wondering as to why Abbott chose to price this drug at the $2000 level. In our microeconomics classes, we learn that pricing in these situations is determined by the utility of the drug. For life saving drugs, the utility tends to be infinite and therefore the only limiting factors may be the availability of substitutes and the ability to pay. To gauge the Thai's ability to pay, consider the fact that their per capita GDP is about $7400 . This compares to $37,800 for the United States. Therefore at $7000 per year, Abbott is pricing Kaletra at 18.5% of the US per capita income. For the Thai people at $2200 per year, this works out to approx 30% of their per capita income.

Any ideas you have on why Abbott chose to price the drug this high relative to GDP would be greatly appreciated. I would imagine that at a lower price, more Thais would take Kaletra & Abbott would make more revenue in volume. One reason I can think of, is that they want to avoid arbitrage (if the prices fall lower in Asia, someone will find it attractive to buy in Asia & ship to the US)...Perhaps if Abbott tightens their supply chain like Pfizer & Novartis in the UK, then they may be more willing to drop prices. Please let me know if you have any other thoughts on this. Thanks

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