Pharmaceuticals for Free

Wed, 09 Nov 2011

As pharmaceutical companies begin to implement initiative such as patent pooling and providing cheap consumer drugs to the developing world, just what’s behind this new ‘ethical pharma.’ And can it really work?

Pharmaceutical sales reps are rarely welcomed with open arms when they turn up at doctor’s surgeries. In an industry which prides itself on the lofty ideals of compassion and the sanctity of human life, the cash-driven salesmen who are looking to profit from the scourge of disease represent the uglier side of healthcare. Thus, they find themselves at best ignored by physicians, and at worse ridiculed – doctors working in Britain’s NHS rather cruelly refer to them as reptiles, a nickname which those in the medical profession believe aptly sums up the cold-blooded nature of drugs companies towards their patients.

Of course, if pharmaceutical companies are derided in the West for their supposed profiteering when it comes to life saving, they are positively attacked for doing so in the developing world. Criticism of their practices has been comprehensive, and it has come from a wide variety of sources. Journalists, activists and politicians have all lined up to stick the boot in to both the multinationals and their personnel and even Hollywood has gotten in on the act with the film version of author John le Carré’s 2001 novel The Constant Gardener – a box office hit which even scooped an Oscar.

Such denigration, however, my now be a thing of the past thanks to the ethical approach to drug supply now taken by some pharmaceutical companies. Although it may be a stretch to imagine drug companies being lauded as a force for good in the world – even in an age when banker-bashing has become more fashionable, this seems unlikely – Andrew Witty, CEO of GlaxoSmithKline plc is certainly trying his very best to make ‘big pharma’ ethical.

His company recently announced that it would sell its Rotarix vaccine in the developing world at a fraction of the price for which it is marketed in the West, potentially saving the lives of thousands of people who die each year from complications liked to diarrhoea – a move which was welcomed by UNICEF as well as the Bill and Melinda Gates Foundation. That GlaxoSmithKline had already embarked on a number of initiatives to improve access to its medicines in less economically developed countries, including pooling patents with its rival Pfizer. The goal was to improve the efficacy of HIV medicines, and it meant that almost overnight, one of the world’s largest pharmaceutical companies had also become amongst its most ethical.

Nor are GSK and Pfizer alone in examining ways to take a more conciliatory line when it comes to getting the best pharmaceuticals to some of the poorest people in the world. Most drug companies have made real strides in improving their practices in recent years highlighted by their proactive attitude to implementing stringent guidelines on self-regulation, even though they already operate in one of the most heavily regulated industries in the world.

So far, so good. After all, who could really complain about improved corporate responsibility or providing cheap pharmaceuticals for the third world?

The answer, perhaps predictably, could be shareholders if Mr Witty and others are not able to translate cheap drugs strategies in the developing world into profit announcements in Western stock exchanges. Ultimately, ethical formulae are largely untested, at least when it comes to selling one’s intellectual property at cost price. Time will tell whether highly publicised business strategies not completely geared to profit scare off long term investors - certainly, this might be the logical conclusion of anyone who has watched GSK’s share price stagnate over recent years.

Nonetheless, GSK also has a specific set of assets – and one very particular objective – which may mean that the move to ethical pharma is not so foolish at all when examined in greater detail.

First, pharmaceutical companies have the very real advantage of operating in a marketplace where there are relatively few significant competitors. The industry is remarkable for the fact that almost all companies operating in it are both Western and well-established – big players who operate in big marketplaces. Their sheer size means that pricing which affords them a penny for every drug sold need not sound the death knoll for individual companies – a boon when you are trying to push prices down to help individual consumers.

Second, pharmaceutical companies tend to deal in high-end and expensive products, ones which require a great deal of care and attention to develop. Research and development into pharmaceuticals is vastly expensive - a black hole into which billions can be thrown without any tangible results. The number of truly ground breaking drugs marketed since the release of Sildenafil citrate – better known as Viagra – in 1998 can be counted on one hand. This reality means that pharmaceutical companies are generally loathe to cut their prices if there is no compelling reason to do so (as there is, when it comes to Rotarix and HIV). The ‘price wars’ seen in other industries – for example, when supermarkets undercut each other over the price of beer – are therefore almost non-existent. Of course, this means that prices are sometimes kept artificially high. Yet it also means that pharmaceutical giants have much more freedom to change their prices as they fit or when asked to do so precisely because they are not under constant strain from deflationary practices by competitors.

Finally, for those in the business of developing new products rather than those who simply knock off old ones with cheaper ‘generic’ alternatives there is another factor which makes ethical pricing a safe bet. As soon as the compounds for individual products are registered, they are protected from being replicated for up to twenty years. Of course, these must be kept in place to make the business of product design commercially viable but they do mean that towards the end of a product’s life, pricing cuts can be made without significantly impacting on company’s profits.

All this means that flexible pricing structures are well within the capabilities of large drug companies. Yet it does not answer the question of why they would want to do so. After all, even if a company can theoretically make pharmaceuticals cheaper, why would they want to? The answer is perhaps not just to make the world a better place as some marketing strategists would have us believe.

Regions which have benefitted from the cheap pharmaceuticals at the end of their patent-life could also provide fertile markets for pharmaceutical companies if they continue to develop at current rates. Proportionally, India’s population suffers more from Rotavirus than most others, but the country also has a large population and a growing middle class, many of whom would be willing consumers of new pharmaceutical products.

Access to emerging markets could therefore be the prize for helping the developing world (terms which in reality often the same countries). If this strategy works, pharmaceutical companies could end up looking very shrewd indeed, particularly if governments are brought on-board to help better protect the intellectual property rights which are constantly under threat in certain areas of the globe.

For those living in poverty, however, this administrative change won’t matter one bit. They will get the medicine they need whilst big pharma will get access to new markets and governments will get healthier and happier citizens. As for the sales reps, they will still probably not be welcomed when they turn up at doctor’s surgeries. But at least they will be safe in the knowledge that they are a force for good in the world.

by Thomas Thatcher