Medicines for the poor: not the Oxfam way

International pressure-group Oxfam says nearly two billion people cannot get the medicines they need because of the prices charged by Big Pharma. Unfortunately, the alternatives are much worse.

Last week, the US Food & Drug Administration revealed that American pharmaceutical innovation fell to a near-historic low last year: recent developments, backed by the British-based Oxfam, help explain why.

In December the Thai government again declared that it could not agree on lower prices for patented medicines from Western pharmaceutical companies, so it would copy them itself or have them copied in India. Indonesia may follow suit, as it has in the past. Both countries, like Brazil, Kenya and India, have Oxfam's support, with policy recommendations and PR campaigns.

An alternative to the free market comes in Oxfam's report "Investing for life", demanding transparent "tiered pricing" in which prices would be set by a formula reflecting a country's wealth, disease prevalence and the "price of generics where they exist."

Some drug companies already use differential pricing to charge less in poor countries, based on income and disease rates, which is both efficient and equitable. Differential pricing allows firms to recover their research and development investment (and allow future R&D) and provide life-saving drugs to large numbers of the world's poor whose governments would otherwise be unable to afford them.

But tiered pricing as proposed by Oxfam would be imposed by officials and comes with an unusual stipulation: drug companies should set their prices based on available generics (Oxfam assumes that all such imitations, legal or illegal, are of equal quality, which is itself an heroic assumption). It is a strange logic that says the price of a copy (which can be very close to production cost since no R&D has to be recovered) should dictate the price of an original drug.

Forced to set prices in line with copycats, western companies can be expected to withdraw from these markets altogether (as happened in India in 1972, after the abandonment of patent law legalized the copying of all patented drugs). At the very least, they can withdraw new products from the market (as Abbott did recently in Thailand when its proposed pricing was rejected).

And everyone wants the lowest price out there. Thailand, for example, wants the same prices that are paid for HIV drugs by the poorest African countries--even though its national income is ten times greater and its HIV rate is ten times lower. This is neither efficient nor equitable but Oxfam backs it.

Underlying the whole issue is the fallacy that price is the main factor in healthcare. While high drug prices have attracted widespread publicity, even medicines that are "far cheaper and easier to deliver," such as vaccines or treatment for intestinal worms, are not reaching the people who need them, as Harvard health economist Michael Kremer has noted--along with WHO officials and many others. This is the result of bureaucratic inefficiencies, political corruption and, fundamentally, a lack of health infrastructure in developing countries.

Furthermore, drugs are not the only (or even the most important) determinant of good health in the developing world: today, clean hands and clean drinking water would save more lives in poor countries than any single drug could.

Despite a long history as one of the most lucrative modern industries, pharmaceutical companies have consistently underperformed the stock market over the past five years--and this is not just a problem for shareholders or employees in rich countries.

As profits weaken, innovation suffers: last year saw 18 new drugs approved by the US FDA, near the lows of 17 in 2002 and 14 in 1983, compared with 53 in 1996. Just as badly, companies may become even less willing to sell or invest in poor markets, particularly when governments such as Thailand's, Brazil's and Indonesia's are prepared to simply seize their intellectual property.

To prevent this, companies must retain the freedom to price their own products. Otherwise, the health of the poorest will suffer the consequences.

Roger Bate is a Resident Fellow of the American Enterprise Institute, a US think-tank