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Demand and Supply Disequilibrium of Gilead’s Sovaldi

CASE FLYER, MANAGERIAL ECONOMICS
ET Cases, 5 pages
AUTHOR(S) : Vandana Jayakumar and Dr. Nagendra V. Chowdary

Case Preview

Demand and Supply Disequilibrium of Gilead’s Sovaldi

 

Expected Learning Outcomes

• The general workings and structure of the pharmaceutical industry
• Law of Demand, Law of Supply and the Role of Prices in achieving an equilibrium
• Factors influencing the demand for and supply of Sovaldi drug

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I. Pharmaceutical Industry and Drug Pricing

1. Who constitute the healthcare industry and how do you describe each constituent’s role to deliver effective healthcare?

2. Using the circular flow of economy, construct the interplay between all the constituents of healthcare industry.

3. What according to you is the general structure of the pharmaceutical industry?

4. What do you understand by blockbuster drugs and generic drugs? How does the pricing of a drug differ between these two forms of pharmaceutical businesses?

5. ...........................

II. Demand For and Supply of Sovaldi: An Elusive Equilibrium

1. What do you think should be the shape of the demand curve for life saving drugs/medicines?

2. Construct the demand and supply curves of Sovaldi drug for Greg Jefferys, the 61-year-old historian from Australia.

3. What are the unique features of the demand and supply curves of Sovaldi drug given the price differentials in the US and India, as quoted in the accompanying article?

4. ...........................

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Teaching Note Preview

Demand and Supply Disequilibrium of Gilead’s Sovaldi

 

Synopsis

This case flyer is suitable for teaching the concepts of demand & supply and the ‘elusive’ equilibrium between them. The case flyer helps understand these concepts taking the interesting example of Sovaldi drug whose demand and supply curves have unique characteristics and there exists supplier-led disequilibrium between the two. It is debatable if the disequilibrium is a ‘planned disequilibrium’ by Gilead, producer of Sovaldi. In trying to understand the demand and supply dynamics of Sovaldi and its price differentials in the US and India, the case flyer also enables a discussion on the structure and operation of healthcare and pharmaceutical industries.

Prerequisite Conceptual Understanding and Before the Case Flyer Discussion

  • • Paul A. Samuelson and William D. Nordhaus, “Basic Elements of Supply and Demand”, Economics, 19th Edition, McGraw Hill Education (India) Private Limited, 2010 – To understand the concepts of demand and supply and the equilibrium thereof
  • • Aditya Kalra and Zeba Siddiqui, “Gilead licenses hepatitis C drug to Cipla, Ranbaxy, five others”, http://in.reuters.com/article/2014/09/15/gilead-sciences-india-idINKBN0HA0TI20140915,
  • September 15th 2014 (accessed date: July 15th 2015) – To understand the dynamics behind sale of Sovaldi drug in India

 

Case Positioning and Setting

This Case Flyer can be used for:

  • • MBA Program in Managerial Economics course to teach the concepts of demand & supply and the equilibrium thereof
  • • MDP in Healthcare Economics course to teach the dynamics of pharmaceutical industry

 

Suggested Movies

The students/participants should also be encouraged to watch the following movies to get sensitized to the dynamics of healthcare and pharmaceutical industry, especially in the US:

  • • John Q, Directed by Nick Cassavetes, Produced by New Line Cinema, Burg/Koules Productions and Evolution Entertainment, 2002 – The movie highlights the travails of a patient’s father fighting for the provision of healthcare for his son
  • • Sicko, Directed by Michael Moore, Dog Eat Dog Films and The Weinstein Company, 2007 – The movie compares US healthcare industry with other countries
  • • Beyond Borders, Directed by Martin Campbell, Mandalay Pictures, et al., 2003 – The movie showcases some of the ethical problems faced by healthcare professionals in making available healthcare facilities to the impoverished in underdeveloped/poor countries

 

Preamble to this Case Flyer Analysis

This case flyer is an attempt to introduce the participants/students to the operation of law of demand and law of supply at multiple price points. Presented through the price differentials of Sovaldi drug, this case flyer also presupposes a basic understanding of healthcare industry in general and pharmaceutical industry in particular, out of which the relevant economics of the industry can be analyzed. Accordingly, this case flyer was orchestrated in the classroom......

During the Case Flyer Discussion in the Classroom

The discussion on the Case Flyer was conducted under three broad topics [Exhibit (TN)-I]. The classroom analysis of the Case Flyer was carried out by discussing the questions of the Case Flyer sequentially. In each section, the participants had an elaborate discussion on one of the questions which formed the ‘anchor point of discussion’ for the given section..............

Case Analysis/Case Flyer Discussion

I. Pharmaceutical Industry and Drug Pricing

• The first section of the case flyer focused on discussing the basics of pharmaceutical and healthcare industry which was required to have a meaningful discussion of the supply and demand dynamics of Sovaldi

Anchor Point Discussion – Identifying the constituents of the healthcare industry and analyzing their role in delivering effective healthcare [Exhibit (TN)-II].

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In the value chain, each constituent plays a role in achieving the final objective i.e., curing patients → Each unit of healthcare delivery requires the services of trained professionals (doctors, nurses, para-medical staff, etc.), medicines (blockbuster drugs and generic drugs), medical equipment, medical infrastructure (hospitals, clinics and diagnostic centres) and third party services (insurance, banking and administration) → The products, services and professionals are in-turn created by educational institutions, pharmaceutical companies, equipment manufacturers, construction companies, banking and non-banking financial institutions and third parties → All the product and services providers are governed by regulators and certifying bodies such as Central Drugs Standard Control Organization (CDSCO), Medical Council of India, Dental Council of India, The Indian Medicine Central Council, All India Council for Technical Education (AICTE), etc., in India → Thus, to create one unit of healthcare, each component of the value chain has to play its role..................

Exhibits

Exhibit (TN)-I: Discussion Dashboard

Exhibit (TN)-II: Constituents of the Healthcare Industry

Exhibit (TN)-III: Healthcare Industry and the Circular Flow of Economy

Exhibit (TN)-IV: Big Pharma Companies and Generic Drug Companies

Exhibit (TN)-V: Interplay of Scarcity, Choice and Efficiency

Exhibit (TN)-VI: PPF of an Underdeveloped Country

Exhibit (TN)-VII: Relationship between Public Goods and Quality of Healthcare

Exhibit (TN)-VIII: Inelastic and Elastic Demand Curves of Life Saving Drugs

Exhibit (TN)-IX: Demand and Supply of Sovaldi

Exhibit (TN)-X: Factors Influencing the Demand and Supply of Sovaldi

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Abstract


This case flyer and the accompanying article1 can be used to introduce the participants/students to the concepts of Law of Demand, Law of Supply and the elusive equilibrium between demand and supply. Presented through an intriguing, yet quite prevalent phenomenon, this case flyer debates on the high price differentials for a Hepatitis-C drug, Sovaldi. Produced by Gilead, while Sovaldi is sold at $84,000 for a 12-week treatment in the US, the same drug is available at $1000 in India. Mylan Pharmaceuticals - one of the five Indian generic drug manufacturers allowed to manufacture and distribute Sovaldi in India - makes it available at $1000. Enamored with huge price differentials, customers like Greg Jefferys from Australia, travel all the way to India for treatment. All at a total cost of $3000 which includes travel, boarding and lodging during the treatment. What explains this spiraling price differential? How can there ever be equilibrium between demand for and supply of Sovaldi? Can there be an equilibrium market clearance price?



Pedagogical Objectives

  • To illustrate the general workings and structure of pharmaceutical industry and discuss on the economics thereof
  • To understand the concepts of Law of Demand, Law of Supply and the Role of Prices in achieving an equilibrium
  • To discuss and debate on the factors influencing the demand for and supply of Sovaldi drug

Case Positioning and Setting

This Case Flyer can be used for:

  • MBA Program in Managerial Economics course to teach the concepts of demand & supply and the equilibrium thereof
  • MDP in Healthcare Economics course to teach the dynamics of pharmaceutical industry


1 Shannon Pettypiece and Ketaki Gokhale, "Americans Want to Pop Made-in-India Drug for 1% the Cost", The Economic Times, June 3rd 2015



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