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Demographics played a key role in the marketing of Retrovir. The target market for Retrovir is patients with AIDS, caused by HIV. AZT is classified as an antiviral drug that interferes with the replication of HIV, and is a treatment for AIDS. Research was conducted to focus on identifying high-risk individuals, determining the geographical concentration of the disease, and arriving at estimates of the number of people afflicted with HIV and AIDS. Results from the research found that almost 90% of AIDS victims were homosexual men or intravenous drug users.

Research also found that around 50% of reported cases were located in the San Francisco, Miami, New York City, Los Angeles, and Houston metropolitan areas. Internal Analysis: Performance Analysis Eighty-nine percent of Burroughs Wellcome’s fiscal 1989 revenue is human health care products, including prescription and nonprescription drugs. Two prescription products account for 34 percent of its human health care revenue: Zovirax and RetrovirIn fiscal 1989, sales of Zovirax were $492 million, and sales of Retrovir were $225 million.

North America is the largest market for the products sold by Wellcome PLC, with annual sales of $997 million. In the United States, sales are approximately 42 percent of their global sales. In the United Kingdom, sales are about 10 percent of global sales. Profitability & Sales: Wellcome PLC recorded total revenues of $1. 75 billion and net profit before tax of $262. 1 million in fiscal 1987. Total revenues for fiscal 1989 were $2. 1 billion with net profit before taxes of $475 million. Financial and Operating Ratio Analysis, performed on the economic data available in 1989, indicates some shortfalls.

In light of Exhibit 1, the sales and net income growth rate of Wellcome PLC kept increasing trend from 1985 to 1989. With a 20 percent reduction in selling price in Dec. 1987, the growth rate of both sales and net income from 1987 to 1988 reduced 2. 2 percent. From 1988 to 1989, the growth rate returned to the old rate. Wellcome PLC’s Gross Profit Margin Return on Sales, Return on Assets, and Return on Equity are below industry average. Operating Ratios appear to be higher than those competitors, indicating high operation costs.

Relative Cost: The direct research and development costs for Retrovir were estimated to be about $50 million, according to industry analysts. However, this cost was lower than the typical cost of developing a new drug in the United States. Generally, the typical cost of developing a new drug in the United States is $125 million. Indeed, Wellcome PLC had spent $726 million for research and development on dozens of drugs in the five years preceding approval of Retrovir without producing a major commercial success.

Including costs of new plant and equipment, the total research and development cost estimates ranged from $80 million to $100 million. As shown in Exhibit 3, selling, general, and administration costs/ sales declined from 39. 2 percent in 1987 to 36. 9 percent in 1989. Determinants of Strategic Options Past and Current Strategy: By saving the cost in the manufacturing process of Retrovir, Wellcome was able to reduce its price by 20 percent in the U. S. in December 1987. Retrovir produced positive results in postponing the appearance of AIDS in HIV-infected people.

This development expanded the potential users of the drug to between 600,000 and 1 million people. Recognizing the expanded potential patient population and anticipated production economies, the capsule price of Retrovir was again reduced by 20 percent in September 1989. Unit volume for Retrovir in fiscal 1990 was forecasted to be 53 percent higher than fiscal 1989 unit volume. However, this number would be changed by the new FDA guidelines for the recommended dosage. FDA reduced daily dosage to 500 mg per day for some symptomatic AIDS patients from the original recommended dosage of 1200 mg per day.

The decrease in the recommended dosage will greatly reduce Retrovir’s sales revenues. Strategic Problems: Burroughs Wellcome must decide whether they can afford to lower Retrovir’s price and still remain profitable or whether the company’s best interest would best be served by maintaining the drugs current price. Burroughs Wellcome officials have stated that they did not plan to further reduce the price of Retrovir. At the same time, the pressure from the government, the activist groups, and the media remains strong.

This controversy is greatly damaging the company’s reputation and, as a result, they must once again re-think their pricing strategy. Strengths & Weaknesses: The company’s strengths are that patent protections are given by the government to permit it natural monopoly status, and good financial situation. Patients would be dependent on Retrovir. Meanwhile, they also have some weakness. They did not have experience producing the drug in mass quantities, and they cannot predict the demand of future market. Alternative Analysis

There are three major alternatives that will be evaluated for Burroughs Wellcome. The first choice is for the company to keep Retrovir at the same price of $120 per unit for an indefinite period of time. Due to new prescribing guidelines that will cut the average dosage by more than half, maintaining the current pricing is important to counteract this loss of sales volume and continue to increase revenue. Also, within the next two years, Retrovir will face the introduction of possibly several new competitors. These competitors will surely cut into Burroughs’ sales revenue.

The company must produce as much revenue as possible from Retrovir before the arrival of the competitors. It is also important to remember that the price of the drug has been decreased twice in the past to address the social criticisms of the high cost of Retrovir. A second option for Burroughs Wellcome would be to decrease the price of Retrovir immediately for the 1990 fiscal year by 20%, a decrease used before by the company. This better serves to speak to the condemnation of the high cost of the drug that the company is still facing.

However, this strategy would cost the company significant potential revenues. The decrease in cost, coupled with reduced dosages and potential new entrants to the market could serve to cost Burroughs a fortune. Though the government overseers and advocacy groups may be placated for a time, the stockholders would not find satisfaction in having the company’s profits cut. A third alternative would be to maintain the pricing schedule of Retrovir for 1990 at $120/unit and then reduce the price by 20% to $96 in 1991, when sales have increased further and the new competitors have come into the market.

This way, the company can capture that additional revenue for one more year before being faced with competition and lower pricing. Advocates for cheaper treatment could be assuaged by the reduction in cost, though they would have to wait one more year for the price reduction. Recommendation The best recommendation from the alternatives is the third option. Maintaining the $120/unit price for 1990, then dropping it to $96/unit for 1991, best addresses the threats and concerns of the company. It allows Burroughs Wellcome to reap as much of the economic reward possible for one more year, before new competitors would effect Retrovir’s sales.

This also allows the company to deal with the effects of new dosage guidelines without facing decreased revenue from price cutting. To wait until 1991 to reduce the price by a proposed 20%, Burroughs can counteract the loss through the increase in unit sales that is estimated at an additional 25% from 1990 to 1991. This growth figure is much lower that previous sales growth, due to the competition that should be entering the market at that time. Several other AIDS treatment drugs are on the horizon and will begin competing with Retrovir for market share.

They may come in at a lower price, which the price cut for Retrovir can then address. As seen in the Pro Forma Income Statements in the Appendix, the net profit before taxes for 1990 would remain the same as option one at $19,936,202. 00. For 1991, the NPBT would drop significantly to $9,785,371. 79, but this is still substantially higher than the NPBT of 1990 shown under the second option. Another benefit of reducing the price under Option #3 is the increased availability to critically ill sufferers of AIDS and HIV.

Burroughs Wellcome is in the business of saving lives and treating those with illnesses through superior drug treatments. The company recognizes and welcomes its responsibility to help those it can and make its therapies available to as many as possible, while maintaining its own financial and organizational viability. By giving away some $10 million in free treatment to those least capable of affording it, and cutting the price of Retrovir by 20%, as it has done twice in the past, Burroughs Wellcome is continuing to do all it can for the consumers.

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