Drug companies are in a strange and difficult position—as the inventor and supplier of a stream of life-saving products, they are essential to mankind, but at the same time, they are almost friendless. Their large profits sometimes raise eyebrows, but the costs of continuous drug development are significant and can only be undertaken by companies with deep reserves of expertise and cash. And if global patent battles escalate, fewer companies will have the incentive to bring us life-saving remedies.

Brazil is the latest country to balk at accepting the terms offered by a drug company, following closely on the heels of Thailand. Brazil’s President Lula da Silva announced Friday that negotiations with Merck over its HIV drug, Efavirenz, have broken down. Lula says his country will break Merck’s patent and import a cheaper, generic Indian-made version of the patented drug, Efavirenz.

The price discrimination model requires better-off countries to subsidize the poorer ones, and this holds all the way up the chain, so that American and European patients, who pay the most, subsidize everybody else in the market.

While this is a popular move with anti-pharma activists and even increasingly anti-capitalist donor agencies, it is not good news for patients with HIV, at least in the long term. Aside from quality risks of copied drugs, the repeated undermining of the drug companies' commercial position can only reduce their incentives for continued involvement in developing country markets. This is particularly serious for HIV because it is a chronic condition where new drugs will be essential to replace existing ones when they inevitably become ineffectual.

Brazil's cause for complaint is that the same drugs are being made available in other countries at even lower prices than the discounted rate Merck offered it, and it too, wants to pay less. What Brazil and Thailand refuse to acknowledge is that the countries receiving the cheapest prices are also those least able to pay. In effect, this is a price discrimination model that requires better-off countries to subsidize the poorer ones, and this holds all the way up the chain, so that American and European patients, who pay the most, subsidize everybody else in the market.

For the drug companies, the ability to tier their pricing structure and recoup the value of their products through patents is vital if they are to continue research and development of new products.

Particular companies developing medicines, such as antiretrovirals for HIV, have incurred a wide range of development and even manufacturing costs. These depend on harvesting plant extracts and complexity of drug production, but also on different requirements for profitability, given shareholder demands, other drug successes and failures and wide-ranging fixed costs. Different companies therefore price their competing drugs differently within a single country. And a single company tiers the price for a single product across countries—often based on the countries' wealth and burden of disease related to that particular product. Therefore, pricing of even quite similar products is quite varied and is somewhat mystifying to commentators.

The industry has failed to adequately explain the reasons for price discrimination and the differences in pricing across similar drug classes in the same country. It faces a worrying dilemma in increasingly global debates: an inability to coordinate responses when concerns become more specific.

The current international patent battle, which began in Thailand, epitomizes its problems. Countries combating devastating pandemics, such as from HIV or malaria, have nearly everyone’s sympathy.

Brazil has about 187,000 people and Thailand about 120,000 people on treatment for HIV. They have similar per capita GDPs (Brazil $8,600 and Thailand $9,100, based on purchasing power parity) but Brazil has a lower HIV rate of about 0.5 percent of the population, whereas Thailand’s rate is closer to 1.4 percent.

What Brazil and Thailand refuse to acknowledge is that the countries receiving the cheapest prices are also those least able to pay.

Merck, the company under attack in Brazil, prices its HIV medicines based on income levels and HIV rate, with the lowest price reserved for those countries with HIV rates above 1 percent. (Merck is the only company to operate in exactly this way). So Brazil pays more than Thailand. Until last week, Brazil had remained relatively quiet over the past year, but now it is demanding the same price that Thailand extracted from companies. Thailand threatened to issue compulsory licenses for three drugs (two HIV and one heart disease) in the past six months and as a result, some companies lowered their prices.

Brazil wants to buy Efavirenz for the 65 cents a day per person that is currently charged in Thailand. At the moment Brazil pays $1.57 for the drug. On April 24^th it told Merck to lower the price to the Thai level of else face a compulsory license of its drug. Merck offered a 30% reduction to $1.10 but Brazil rejected the offer. Now Brazil’s president says it will import Indian copies at 45 cents a day.

But the public seems to be unaware of the price difficulties of the companies or the unfair tactics of the anti-pharma industry. Activists and some governments take on one company at a time, demanding they lower their prices. The rest of the industry stands back, doesn’t get involved and is relieved that it isn’t their turn in the spotlight. But as soon as one company caves in, agreeing to a deep discount in pricing, the activists move on to another company, until they too cave, creating a domino effect. Today it is Abbott Labs in Thailand and Merck in Brazil that are the targets, next month it could be Gilead, or BMS, or Novartis in the crosshairs. One reason that the companies don’t act in unison is because of concerns that they will be sued for breaches of antitrust rules, disallowing any form of collusion. But the end result is that companies make very little profit from mid-income countries, as all are eventually pressured to lower prices.

The job of providing drugs to the poor and suffering of these countries lies with charities and mainly their own governments, not western drug companies. Companies will continue to invest in drug research for HIV because of historic commitments, the desire of their scientists, and ironically the same activists who would attack them for quitting. But while they make little from mid-income markets, their training and pharmacovigilence (monitoring of drug resistance build up) and other activities that users benefit from in those locations, will be minimal. Ultimately, everyone who will need new drugs in the future loses from the current patent attacks. It is time industry put an effective communication project together to explain how it sets its prices in different locations and why.

Roger Bate is a Resident Fellow at the American Enterprise Institute.