Filed at 1:23 p.m. ET

LONDON (Reuters) - Switzerland's Roche Holding AG (ROCZg.VX) on Monday priced its new HIV drug Fuzeon at a record-breaking 18,980 euros ($20,570) a year, fueling controversy about the cost of AIDS treatments.

Roche said the high cost -- more than double the cost of other HIV/AIDS drugs on the market -- reflected the complexity of manufacturing the revolutionary product, involving more than 100 production steps.

Fuzeon is the first in a new class of drugs known as fusion inhibitors designed for people resistant to other AIDS medicines and is expected to be approved next month.

Unlike existing drugs that work inside the cell, it blocks HIV from entering healthy human immune cells.

``This drug is 10 times more complex to manufacture than the next most complex class of drug in the HIV arena, which is the protease inhibitors,'' David Reddy, head of Roche's HIV business, told Reuters in a telephone interview.

The high price took industry analysts by surprise. Lehman Brothers, which had expected a cost of $15,000, said the higher figure might trigger upgrades to Fuzeon sales forecasts.

``This price is clearly above our expectations and shows that the limited amount that can be produced is supposed to be sold at the highest possible price in the industrialized countries,'' added Patrick Burgermeister of Zuercher Kantonalbank.

Reddy said Fuzeon, also known as T-20, had cost 840 million Swiss francs to develop, excluding marketing expenses. More than half of was accounted for by clinical trials and most of the rest reflected investment in specialist manufacturing. Pure research costs were only around one percent.

Reddy declined to comment on the profit margin that Roche would enjoy on sales of Fuzeon, which it believes could eventually have peak annual sales of up to one billion francs ($740 million).

The cost of the medicine will be similar in the United States, he added.

PRODUCTION DIFFICULTIES

The twice-daily injection is given in combination with existing drugs and is expected to win marketing approval from regulators in Europe in the coming weeks and in the United States by March 16.

In the meantime, however, Roche is launching a pre-license special-access program under which the drug will be available in certain European Union countries. Reddy said it was not yet clear which countries would participate in the scheme or how many patients would be involved.

Reddy said he did not envisage Fuzeon ever being suitable for use in Africa -- the epicenter of the global AIDS pandemic -- given its very high cost of production.

Global pharmaceutical companies, including Roche, have bowed to pressure from humanitarian groups in recent years to slash the cost of life-saving AIDS drugs in Africa and other poor countries. But Reddy said Fuzeon was in a different category.

``Even if we were to price this drug at cost, it is not going to be the type of drug that is suitable for the developing world,'' he said.

``We've thought long and hard about the price of this and we're coming through with something that we really believe is fair, based upon what we've had to invest and the risks that we've taken.''

Sidney Wolfe, director of Public Citizen Health Research Group, said the pharmaceutical industry has long exaggerated the cost of bringing new drugs to market to justify high prices, and ``it is likely Roche is doing the same kind of thing'' with Fuzeon.

``This is an industry that is rapidly losing the respect of the public because they are doing so much price gouging,'' Wolfe said.

Wolfe and other industry critics charge that there are drugs for all kinds of serious illnesses where people who could be helped are being denied the treatment because companies have chosen to try to make as much money as possible.

Including those already involved in clinical trials and an early free-access program, some 3,500 people worldwide are likely to be on Fuzeon by the end of March.

The total should rise to 12,000-15,000 by the end of 2003 -- a lot fewer than initially hoped, reflecting production difficulties at the main manufacturing facility in Boulder, Colorado, where initial yields were lower and cycle times longer than expected.

With analysts estimating that as many as 50,000 patients in North America and Europe are resistant to other AIDS therapies and ready for Fuzeon, demand is expected to outstrip supply for the foreseeable future.(TRMS.O) of the U.S. expect to be able to supply the drug to a maximum of 32,000 people, rising to 39,000 by the end of 2005.