How should we price life-saving drugs? Not the Oxfam way, says ROGER BATE.

In its recent report, “Investing for Life,” the British aid organization Oxfam highlights the most talked-about problem in international public health: the limited availability of life-saving pharmaceutical products. Nearly two billion people lack access to essential medicines, Oxfam notes, and most of them live in poor countries.

Oxfam blames Western drug companies, criticizing what it sees as their pursuit of profit at the expense of public health. Oxfam also criticizes bad governance and corrupt distribution channels in developing countries, but only as secondary concerns.It largely ignores tariffs, non-tariff barriers to the movement of products, and many governments’ lack of interest in their own impoverished citizens.

Pharmaceutical companies have invested too heavily in “blockbuster” drugs aimed at Western markets and too little in research and development (R&D)for drugs to combat diseases primarily afflicting the developing world, such as malaria, tuberculosis, and leishmaniasis, Oxfam writes. They have pursued opaque pricing, focused too much on donations to the poor, and mounted too rigid a defense of the patent system.

Its extensive rhetorical bomb throwing certainly hits some targets. Big Pharma has its problems, and Oxfam is not alone in disparaging the blockbuster model, which critics portray as a myopic focus on “star” drug performers that misdirects research. Like other activist groups, Oxfam expresses concern that pharmaceutical companies nurse drugs through formulation and pill-coating alterations merely to (artificially) prolong patents—a symptom of lawyers asserting too much power within some companies, or so the story goes.

While these concerns remain speculative, the drug industry’s overall performance and future R&D prognosis have become increasingly gloomy. The nearby graphic shows how the industry has significantly underperformed the S&P, a broad indicator of the stock market, over the past five years.

Oxfam’s critique of corporate drug donation programs—which is unfair to successful efforts such as the anti-river blindness campaign led by Merck correctly identifies the ways in which these programs enable companies to pick and choose pet projects without resolving wider pricing and patent protection issues. It also recognizes that drug donations can create market distortions, although it neglects to mention that such distortions occur with public and private donations alike, including Oxfam’s own humanitarian food drops, which can undermine local food delivery systems.

These points aside, Oxfam’s general policy proposals for improving drug access are problematic and representative of the one-dimensional “anti-Big Pharma” thinking common among many activists. Because of “their privileged access to a global market,” Oxfam writes, drug companies have a responsibility “to develop necessary products at prices that are affordable,in presentations that are usable, and to market them ethically.” This is best accomplished, Oxfam adds, by embracing transparent tiered pricing, based on a standard formula that reflects national income level, disease prevalence, and the “price of generics where they exist.” Oxfam also wants companies to give up technology to generic competitors, willingly relinquish old patents, and not seek new ones.

In general, transparency and tiered pricing are appropriate policy demands. But Oxfam applies both selectively. Pharmaceutical firms could increase transparency by telling the world how much they spend on research into diseases that affect poor countries. Oxfam believes this would shame companies into spending more. But it also might alarm many investors, given that drug companies are already pumping billions of dollars into research which, even if successful clinically, may not make the companies any real profit, because the only patients who will need the drugs live in very poor countries. Spending money in such ways is certainly humanitarian in intent; but at a time when companies are underperforming the market, better knowledge about actual company spending in unprofitable areas might cause some shareholders to switch to companies investing in products for wealthy markets. Take, for example, the pharmaceutical giant Eli Lilly. When activists blame companies about HIV pricing or patents, you never hear a complaint about Lilly, because it doesn’t work in HIV. But it used to. It made a decision a few years ago to drop that field of research.

Tiered pricing, based on income and disease rates, is efficient and equitable. It allows R&D firms to recoup their investment and provide lifesaving drugs to large numbers of the poor people whose governments otherwise would be unable to afford them. However, to be successful, transparency in drug pricing must be practiced universally—by Western drug companies and Chinese copycat firms alike. Otherwise, if a transparent Western firm enters a tender competition with a non-transparent competitor to supply drugs for a foreign government, it will nearly always lose the business, since the non-transparent competitor knows what the transparent firm will bid and hence can just undercut it.

“Tiered pricing” as proposed by Oxfam also comes with an unusual stipulation: drug companies should price based on available copy products (Oxfam implicitly suggests that all copy products are of equal quality, which is a dubious assumption). By what logic should the price of a drug copy dictate the price of an originator drug? Forced to price according to available copy products, Western companies might withdraw from these markets altogether, as happened in India in 1972, after the abandonment of product patents legalized the copying of all profitable drugs. At a minimum, Western firms might withdraw new products from the market, as the U.S. drug maker Abbott did recently in Thailand.

So while its rhetoric says otherwise, it is obvious from its policy prescriptions that Oxfam does not actually want tiered pricing. There are surely real-world instances where drug prices are too low, yet Oxfam apparently couldn’t find any.

Oxfam criticizes firms for “charging what the market [can] bear” in the “pursuit of maximum profits.” But is this not the very point of a market? The seller charges what buyers are prepared to pay—not what they want to pay. Yes, the market for medicines is somewhat atypical: desperate need is often more present than effective demand. And there certainly are instances where the pressure to hit sales and revenue targets has led companies to overprice particular drugs. In such cases, a local drug regulator can and should apply pressure, whether through negotiation with the company or, if that fails, pressure via the media, or at a last resort by breaking the companies’ patents and buying from a copycat firm.

In the current market, drug pricing is achieved through a push and pull between sellers and buyers, not through some “standard,” centralized system of price allocation. It is a discovery process, where ignorance of the “best” price is the norm. Tiered pricing comes with numerous unresolved questions.

For example: if tiered pricing is based on country income, who determines when—and by how much—prices should be increased? Many Asian countries are growing rapidly and can afford to pay far more now than they could a few years ago: should their prices rise as their economies expand?

Meanwhile, what is to be done with countries that use price transparency to lobby for the lowest prices possible? Thailand, for example, wants to buy HIV drugs at the same prices made available to countries in sub-Saharan Africa, even though its per capita national income is roughly 10 times greater than the sub-Saharan African average and its HIV rate is ten times lower. Thailand’s actions, although neither efficient nor equitable, have been lauded by the activist community. Indeed, there is some concern that by revealing prices charged to different market segments, drug companies may be ressured to slash prices across the board, leading to a downward spiral in prices ultimately culminating in the elimination of tiered pricing altogether. It is unclear to me whether this is actually what Oxfam wants.