Ideas to Action:

Independent research for global prosperity

X

Global Health Policy Blog

Feed

JP Garnier, chief executive of GSK is interviewed in the Observer today. He makes an interesting (and probably ill-considered) observation about international drug prices:

'We are supplying drugs for no profit whatsoever to countries in Africa and have licensed people to make low-cost, generic alternatives,' says Garnier. 'But that means the price of medicines in the developed world must be higher. Our costs are rising: the average bill for developing a new drug - from its inception in our laboratories until it reaches the market - is $1bn. We must act commercially, otherwise we would have to cut research and development, and then the business would wither and die.'

This is not correct. Price discrimination - that is, pricing products more cheaply for people who are less willing or able to pay higher prices, and more expensively for people who are - does not raise the price of drugs in the developed world.

Suppose that a drug company charges a single price in all markets. Then people in poor countries will not be able to afford the drug, will buy none of it, and will contribute nothing towards the firm's revenues to cover its R&D costs. The consumers in rich countries will have to meet all the firm's R&D costs.

But if the company is able to charge a lower price in poor countries, then the consumers in that country will be able to buy the medicine, and (if the price is above the marginal cost) the firm will earn some profits, albeit less per patient than they are getting from richer consumers. Then the poor countries will make some contribution - perhaps very small, but more than nothing - to the firm's costs. The consumers in rich countries will, if anything, pay a little less; but they certainly won't pay more as a result of this arrangement.

So JP Garnier's claim that consumers in rich countries have to pay more if goods are made available more cheaply in poor countries is simply incorrect.

Price discrimination is good for everyone. For firms, it enables the firm to obtain some revenues, however small, from consumers in middle- and low-income countries. For rich consumers, it means that the R&D costs are spread across more consumers who contribute something - however small - to the costs they have to pay. And most importantly, for poor consumers, it means that they have access to essential, life saving medicines that they would otherwise not be able to afford.

Every time a member of congress complains that Americans are paying more for prescription drugs than people in less affluent countries, or government procurement agencies for European health services use prices in poorer countries as a reference point for monopsonist buying, it becomes a little harder for drug companies to maintain different prices for their products across the world. Governments should do more to make price discrimination easier - for example, by acting to prevent reimportation, using regulatory powers to prevent drugs sold in one country to be re-sold in another, and by eschewing reference pricing. Greater use of price discrimination would be a win for consumers in rich countries, a win for pharmaceutical companies, and a win for the poor.

Perhaps JP Garnier was misreported. If not, you would expect a senior company executive - even one with an MBA - to have a better grip on the basic economics of drug pricing than has been reported here.

Related Topics:

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.