A Tale of Two Vaccines -- Why Price Discounts for Developing Countries Show Limits

GlaxoSmithKline (GSK) was caught red-handed last week selling Synflorix, a vaccine that protects children from pneumococcal disease, for USD $150 in Uganda -- European prices, in effect -- when at the same time, the pharmaceutical company is withholding the same vaccine from an international subsidy that hopes to introduce it in developing countries for $21 per child.

The incident exposed the deep contradiction between the image GSK's new CEO Andrew Witty puts forward of promoting access to the company's products in developing countries, and the profit-hungry reality on the ground. It also illustrates the problems associated with company-driven 'tiered' price discounts.

Offering a discount to the poor seems like an unequivocally good thing. But do price discounts really make medicines more affordable in developing countries?

Tiered pricing -- when companies price their products at different levels in different countries -- is first and foremost a profit-maximizing strategy, as any economics textbook will tell you. In order to make the most profits, companies seek to achieve in each country the most favorable balance between the price and the volume they can sell at that price.

Earlier this year Witty announced a 'radical shift' in GSK's pricing strategies, promising to slash prices on GSK products in the poorest countries. But tiered pricing is not the win-win solution companies claim.

Ten years ago, GSK cut the price of its AIDS drug Combivir from $16.50 to $2 a day in Africa -- a move also hailed as radical at the time. Yet rival generic manufacturers now sell the medicine at 25 cents a day. Generic competition has proven to be much more effective than company discounts in making medicines affordable, and therefore should be promoted as the most efficient solution to boost access to medicines.

That's not to say that there aren't times when tiered pricing can be useful, for example when competition is technically not possible right away.

Vaccines are a case in point. Manufacturing vaccines is a more complex procedure than for drugs, and even in a best-case scenario it takes a few years for a generic competitor to come up with a similar product. So tiered pricing is important as a bridging strategy, so that people in developing countries have at least a chance of accessing a new vaccine in its first years.

This is why the international subsidy that GSK agreed to participate in is welcome -- in principle. Known as the Advance Market Commitment, the idea is for donors to pay GSK (and other companies) in exchange for it selling the pneumococcal vaccine at prices low enough for developing countries to afford. The poorest countries thus get to access the vaccines at discounted rates, and sooner than otherwise would have been possible.

But the policy shows limitations. The prices negotiated are still too high -- initially $7 and later $3.50 per dose. And GSK is making the public sector in developing countries wait two years more for a two-dose vial to be ready, when it is already selling a one-dose vial presentation of the same vaccine at extortionate prices in the private sector -- like Uganda's. The one-dose vial is approved and ready to be rolled out, but GSK is not ready to share it with the AMC, so until the two-dose vial is approved, kids go without -- and no price discount is changing that reality.

One tricky issue with tiered pricing is determining what price is the right price. Companies often claim their discounts are so deep they are selling their products 'at cost' -- only to significantly reduce prices further once competition sets in. In 2001, Novartis agreed to sell its malaria medicine Coartem 'at cost' for close to $2.50. When a competitor undercut this price in 2006, Novartis responded, coming in under $1.50. In the absence of transparency about production costs, only generic competition gets you close to the lowest possible -- and still profitable -- price.

Deciding which country gets which price is a second dilemma. Which thresholds should one use to consider a country 'poor' or 'underdeveloped' enough to deserve a discount, but not its neighbor? Companies set the rules, not countries, and different companies divide the world up using different criteria.

Particularly contentious here are 'middle-income' countries, a group which includes some of the fastest-growing economies like Brazil or India but whose populations still mostly live in poverty. The prices offered by companies are usually lower than in rich countries, but still too high to ensure broad access to the population.

There aren't many people in Uganda that can afford to vaccinate their child with three doses of a pneumococcal vaccine at $50 per dose, which GSK itself admits. Or even at $7 per dose. Yet drug companies cling on to price discounts, arguing they are the only strategy to make medicines affordable in a way that also rewards medical innovation. I would turn that argument on its head: innovation has to happen in a way that avoids the need for high prices.

That means finding new ways of paying for research and development that don't depend on high prices. All except the poorest of countries can be asked to make a contribution to the R&D costs for new medicines and vaccines. Instead of paying for overpriced drugs for its citizens, governments would be better off stimulating innovation more directly, or upfront. There are multiple strategies: contributing to product development projects, helping set up sizeable innovation prizes or buying-out the innovation cost when the product is ready.

And here another vaccine offers a salutary tale -- in December, Doctors Without Borders will begin immunizing children in Mali and Niger with a new Meningitis A vaccine. The vaccine costs 50 cents -- a price made possible because the product was developed using a dramatically different model to the usual patent-based, profit-driven one. The result is an affordable product tailored to suit developing country medical needs.

Answering the medical needs of developing countries means taking this kind of approach -- and not seeing how best to squeeze revenue from developing country markets, by selling discounted blockbuster vaccines that weren't produced with developing country needs in mind.