Merck & Co., Inc. is a pharmaceutical company headquartered in New Jersey that has specialized in research, manufacturing, product marketing, and service marketing. In 1986, the company invested a lot of money to develop an antiretroviral drug that it named Crixivan. It took the company several years before it could discover indinavir sulfate, the drug’s most active ingredient. By 1995, the clinical trials for this drug had reached Phase Three. In March 1996, Merck obtained approval from the Food and Drug Administration (FDA) to begin distribution of Crixivan, the new antiviral drug that has been proven to be effective in fighting the acquired immunodeficiency syndrome (AIDS). The approval had been done in record time of 42 days from the date of submission of the FDA application. The approval also came six months earlier than the company’s executives had expected. Merck’s production plants were not ready to produce the drug at a rate that would satisfy the prevailing demand. On the other hand, however, the company was under great pressure to introduce Crixivan in the market as soon as possible to avoid giving its competitors an advantage by cutting their distribution lead time.Merck’s Crixivan
The main obstacle, however, was the company’s limited production capacity. Initially, Merck would start by producing a limited amount of Crixivan sufficient to treat between 25,000 and 30,000 patients. Due to the drug’s effectiveness, however, it was expected that thousands of other patients would need it. Although Merck was driven by the need to increase the supply of the drug, it also paid a lot of attention to ensure its continuous supply to every patient as required by the FDA, which feared that any discontinuation of the drug would result in the emergence of a more resistant strain of the virus among the infected patients. The team involved in developing and distributing the new drug grappled with a new question: How do they distribute this drug when it is still in short supply? It became clear that one of the prevailing dangers was to put patients on therapy and later stop their treatment due to failure by the company to continue supplying the drug. The situation would set the stage for the emergence of a new virus that would worsen the AIDS epidemic.
After detailed deliberation, Merck executives decided to avoid traditional product distribution channels and instead chose to use a single distributor to allow the company to efficiently and effectively monitor and control the number of patients using the drug. To this effect, Merck entered into a contract with Stadtlanders Pharmacy that gave it a temporary virtual monopoly as the sole distributor of the new drug.Merck’s Crixivan
Merck had made huge investments in terms of both time and money that led to the discovery and development of the drug. Already, it had proved effective when used in combination with AZT and 3TC, its only two antiretroviral predecessors. The company, having realized the benefits the drug would have to millions of HIV-positive patients, priced the drug way below the expectations of different players in the industry.
Merck considered its decision to distribute the new product through Stadlanders to be the best option. Although the company thought that contracting this particular mail-order pharmacy would produce benefits that outweighed any possible dissension arising from restricted access to the drug, it eventually found itself facing criticism for entering into a contract with a firm that had imposed a 37% mark up on Crixivan price to consumers. AIDS activists accused the two companies of exploiting the vulnerable patient population. On its part, Stadlanders argued that the profit it earned averaged 14% given that a significant proportion of customers were entitled to discounts. Moreover, Merck did not feel culpable despite being accused of being insensitive to the pharmacists/patient relationship since it considered forcing Stadlanders to lower its price as vertical price fixing. To solve the current problem, Merck has three options: admit mistakes, firmly support the decision made by the executives, or take no action at all.Merck’s Crixivan