Market failures cause antibiotic resistance. Here’s how to address them

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Katherine Klemperer, Research Associate, Center for Global Development, Anthony McDonnell, Senior Policy Analyst, Center for Global Development

• Antibiotics are highly successful in tackling infectious diseases but the pipeline for them has dried up and they have become less effective over time.
• The main stumbling blocks are economic, not scientific, and the production and distribution of antibiotics is riddled with market and government failures.
• If we fix the economics behind the discovery, manufacturing and distribution of antibiotics, the necessary science will follow.

In the 15 years following the dawn of the antibiotic era in 1937, the rate of death from infectious diseases fell by a factor of four in the US alone. It halved again in the 30 years after that. This success is worth celebrating, but almost 100 years on since the discovery of antibiotics, we have become complacent.

The pipeline for new antibiotics has dried up. Twenty-six classes of antibiotics had been discovered by 1962; since then, only seven new classes have been found, and only one since 1987.

In any other area of medicine, having effective treatments would mean that this lack of innovation wouldn’t matter much. A vial of insulin from 1922 would still treat diabetes as effectively today as when it was made.

However, bacteria evolve defence mechanisms to evade antibiotics, rendering them less effective over time. And the more we use antibiotics, the faster this happens. Right now, almost nine million people die every year from bacterial infections and about half of these are from resistant infections.

Bad economics makes bad science

We need to manage our antibiotic use to reduce the speed with which bacteria develop resistance – and we need to speed up innovation.

This is as much an economic failure as a clinical one. Almost every aspect of the process of discovering, producing, buying and consuming antibiotics is riddled with market and government failures that are well-known to economists from other contexts, from pricing carbon dioxide (CO2) emissions to ensuring energy markets function.

The common pool problem

This is the overarching problem of antibiotic resistance: our stock of effective antibiotics is a finite resource for which there is no effective mechanism to moderate demand. The result is a tragedy of the commons: everyone uses antibiotics a little too much, and we will be left with none that work.

The economics of antibiotic supply failures

Like all pharmaceutical research, innovations in antibiotic development have public good characteristics. They are non-rivalrous (i.e., many people can use any new idea to produce an identical drug) and, without government intervention in the form of patents, they would be non- excludable.

Whilst this government intervention is sufficient to generate substantial innovation in many fields, it falls short for antibiotics because of other failures. This is, in part, because the social and private value of new antibiotics are poorly aligned.

The private value is limited by the fact that health officials often limit the sales of new antibiotics to protect them for cases where they’re really needed. By being available when resistance becomes more prevalent, reserve antibiotics have an insurance value, that we do not pay for.

Regulatory challenges exacerbate market failures: governments require drugmakers to prove that all new medicines are safe and effective, but it can be very difficult to demonstrate the efficacy of new antibiotics because of the short time people are sick and challenges recruiting resistant patients.

Finally, there are market failures in access. New drugs are generally not registered in most low- and middle-income countries and the supply of generic antibiotics can be unreliable. They are not profitable enough for producers to invest substantially in supply chain resilience. This means that even when we have drugs, they are not available to many of the people who need them most.

Demand failures

As well as producing too few new treatments, economic failures mean that the drugs we do have are lost to resistance unnecessarily fast. Infection control can prevent the spread of bacteria and so reduce the number of infected individuals needing antibiotics.

However, whilst many of the costs of good infection control are private (nobody helps you wash your hands), everyone benefits from these actions, meaning people are under-incentivised to undertake them. By getting people the most appropriate antibiotic, we reduce the burden of resistance.

However, the cost of medicine, concern over misuse, and poor diagnostics result in misallocation problems: often, people get the wrong antibiotic, wealthier people take too many antibiotics, and/or people in the poorest countries take too few.

Pharmaceutical production often results in the discharge of active pharmaceutical ingredients into rivers, exposing bacteria to antibiotics in the environment. Deactivating most antibiotic waste is inexpensive, but because all of society pays the price when this isn’t done, and manufacturers save money by not deactivating, they don’t always do it.

A second negative externality occurs around agriculture, when farms use antibiotics for growth promotion in livestock – again because they’re not adequately incentivized to care about how this contributes to resistance.

Antibiotic resistance is an economic and government failure

These problems are all fixable. Greater funding for early-stage research and a funding model that buys antibiotics on subscription – the UK already does this – rather than paying for use would greatly improve the antibiotic market.

It is estimated that $3.1 billion is required for each new drug, although in practice this will likely equate to about $310 million a year for the approximately 10 years of patent protected sales. This might sound like a lot, but it is only about a third of the revenue of the world’s 200^th bestselling drug in 2021.

Purchasers pooling their procurement could greatly enhance access to drugs and diagnostics, solving part of the misallocation problem. Well-designed regulation or taxation can remove most externalities.

None of this is radical – most of the solutions about reducing demand are used in other settings. There are countless examples of governments stepping in to change the market around innovation.

The most substantial intervention is the introduction of patents, but more recently many jurisdictions have brought in laws to encourage orphan drugs, and since the 1980s most governments have effectively insured vaccine manufacturers to protect them from costly lawsuits.

If we fix the economics, many of the scientific challenges will right themselves, and the world will have the tools in its arsenal to adequately fight bacterial infections.