Three years ago, the BBC ran a story about the most hated man in the United States. Some of the comments included “morally bankrupt sociopath”, “scumbag”, “garbage monster”, and “everything wrong with capitalism”. He bullied female journalists on Twitter and was booted off the platform. No, not Donald Trump — the man in question was Martin Shkreli.
His claim to fame was that as chief executive of Turing Pharmaceuticals, Shkreli had acquired an old drug called Daraprim, used to treat patients with weakened immune systems, such as Aids patients, and other conditions. Its average retail price was $13.50. As soon as Shkreli acquired the rights to the drug, he upped its price to $750 a pill.
Patients who relied on the drug suddenly faced an affordability crisis. The backlash against Shkreli was based on the universal acknowledgment that, while drug manufacturers are within their rights to sell drugs at prices that reward them for their investment in the product, Shkreli’s drug had been around since 1950. The cost of research, development and marketing the drug had long been recovered by 2017. This made the justification for the price inflation difficult to understand.
Shkreli’s view? This was a natural iteration of capitalism and society needed to learn to live with it. The practice — commonly called price-gouging — is not unique to Shkreli. Valeant — a company backed by Bill Ackman himself — had raised the price of its diabetes drug Glumetza from $572 to between $3 432 and $5 148 between June and July 2015.
Mylan — the manufacturer of EpiPen, a drug used to treat allergies, raised its price from $265 to $609 in just three years.
These practices are often met with public outrage and hard statements from regulators whose job it is to guide the conduct of market participants.
The current quest for the coronavirus vaccine brings to light the mechanics of drug research, development, pricing and distribution.
An expensive endeavour
The development of any vaccine is an expensive endeavour. By the time one vaccine succeeds, the cumulative costs need to be recovered by the manufacturer. That alone is a significant driver of pricing. But seeking to recover the investment immediately by charging the highest price possible may be self-defeating if patients cannot afford it.
Decision-makers then need to balance affordability with cost recovery. The compensating mechanism — intellectual property protection — provides manufacturers with a “guaranteed” market until competitors or generics eventually emerge. Unfortunately, the looming approval of competitor drugs creates an adverse incentive for existing incumbents to drive up prices and extract maximum returns just before an alternative is approved. This was the case in the Daraprim case study.
Runaway pricing is a permanent challenge for medical regulators. If the drug is manufactured by just one entity, the natural monopoly limits the powers of regulators to intervene. But regulators in this industry have the unique ability to instruct incumbents to share some of their expertise with their potential competitors.
This practice is best illustrated through the bioequivalence process. This requires potential new drugs to be tested against existing drugs in order to assess commonalities or therapeutic equivalence.
The logic is that if regulators have already assessed and approved a drug, it makes sense for new options to be tested against the existing successful product. This cuts the regulatory approval part of the process down. Under capitalism, which abhors the idea of assisting competitors, this is a grudge process.
This forced solidarity is a unique intervention to promote the public interest.
In trying to prepare for what is hoped to be the discovery and rollout of the corona vaccine, the World Health Organisation (WHO) has had to deal with the reality that — in the absence of a similar approach towards solidarity — the distribution of such a vaccine may be suboptimal. This would occur if the distribution follows geographical and economic boundaries rather than the scientific pathway of the pandemic.
The virus has affected rich and poor nations indiscriminately. The challenge is what happens when a vaccine is found and rich countries simply outpace poor nations in purchasing it. This is already visible in the number of wealthy nations that have “banked” vaccine doses. Countries identify strong prospects in the drug development pipeline and enter into contracts guaranteeing them supplies in cases of successful development.
In this model, poor nations neither have the financial capacity nor the negotiating power to secure supplies — particularly when the outcome is unknown.
The most comprehensive assessment of healthcare indicators is the WHO’s annual universal health coverage (UHC) report. An index made up of multiple indicators is aggregated to compute the national score, with 100 being the highest ranking.
The latest UHC report indicates that Africa and low-income countries lag far behind wealthy nations. Africa’s score moved from the mid‑20s in 2000 to just over 46 in 2017. Low-income countries — predominantly but not exclusively in Africa — saw a move from 23 in 2000 to just over 40 in 2017. Lower-middle-income countries progressed from the mid-40s to the upper 50s in the same time frame.
This is in contrast to the world average that moved from 45 in 2000 to 66 in 2017. The problem is that the low-income and lower-middle-income countries made up 50% of the global population in the report.
If the vaccine were to be priced out of the affordability range for low-income and lower-middle-income nations, that would leave half of the world exposed to the pandemic.
Given the supply constraints that will inevitably emerge, the prospect of even more nations being priced out looms, and is made more acute when we consider the economic fallout associated with the pandemic. It has decimated national budgets, which forces decision makers to make difficult calls.
The Covax vaccine solidarity approach initiated by the WHO is an important step. In seeking to reduce the possibility of significant parts of the world being denied access to treatment due to pricing and supply constraints, the WHO has created an alliance of rich and poor nations who have committed to a fair-allocation mechanism for the distribution of vaccines — whenever they arrive.
The WHO has proposed a two-phase process premised on proportional allocation for all countries, followed by a weighted allocation based on risk assessment.
In the initial phase, the idea is to provide access to all countries based on population size. Given the nature of the virus, the plan has merit in that it will ensure proper planning at national level once allocation volumes are known. But as the data of the past nine months indicates, the virus evolves differently across different countries and within countries.
The secondary phase — based on health risk assessment — then allocates resources based on actual need.
The thinking behind this approach is more practical than perfect. The Chinese and US data provide an illustration. The US, with a population of 331-million people, makes up 4.25% of the global population.
China, population 1.4-billion, makes up 18.5% of the global population. Under phase one, China would be allocated four times the dosages allocated to the US. According to Johns Hopkins University, China has 90 500 cases with 4 740 fatalities. The US has 7-million infections and 205 900 fatalities.
In the initial phase, China would end up with an excess of dosages while the US will fall short in both phases. This illustration shows the extremes of the possible results under the proposed model. Far less explicit in the model is the question of what the final exit price will be and whether poorer nations will be able to take up their share of the vaccine.
The challenge for poor nations is now to figure out what resources will be needed to fully participate in the Covax process. Failing to plan for that will mean the best-laid plans of the WHO and the 150 countries that have signed up will have suboptimal outcomes.
The great irony is that the two nations that explicitly illustrate the limitations of Covax, and also hold the title of the original source and the highest infections, have opted to stay out of the Covax pact altogether.
Khaya Sithole is a chartered accountant, academic and activist who writes regularly for the Mail & Guardian and discusses the issues raised in his columns on his Kaya FM show, On The Agenda, every Monday from 8pm to 9pm