Pharmaceutical giant GlaxoSmithKline [Get Quote] appears to have knocked almost everyone into a cocked hat with its announcement last week of slashing prices of drugs for the poorest countries and sharing part of the profits with these countries to beef up health facilities.

In the past five days, GSK [Get Quote] chief executive Andrew Witty has detailed the company's new philosophy twice, and on both occasions the halo was firmly in place. 'Society expects us to do more in addressing these issues,' Witty was quoted as saying. 'To be frank, I agree. We have the capacity to do more and we can do more. The question is can we, big pharmaceutical companies, rise to the challenge and be a genuine catalyst for change?'

This was in a speech titled Big Pharma as a Catalyst for Change delivered at the Harvard Medical School, and clearly a challenge to the rest of industry to match GSK's offer.

Witty's plan has four components. The most interesting of these is to set up a patent pool for medicines for neglected tropical diseases in which GSK would put its small molecule compounds or process patents to allow free access to anyone wanting to develop medicines and products. This is on the lines of several such open source drug discovery initiatives -- India, too, has one -- to speed up the development of new drugs for Third World diseases, such as TB and malaria.

GSK's patent pool proposal was first unveiled in June 2008, and this column had hailed it as GSK's big bang on open drug discovery. However, Witty has clearly ruled out patents for HIV/AIDS medicines because he says there is enough innovation in this area. 

The other offer from Witty, and one that has snagged the headlines, is the plan to sell medicines cheaply to 50 of the least developed countries. Prices will be slashed to a quarter of the rates GSK charges in the US and the UK -- and even less if possible. Along with this is a promise to reinvest 20 per cent of any profits it makes in these countries in hospitals, clinics and staff. Besides, drugs would be made more affordable in middle-income countries such as Brazil and India. Naturally, many are hailing it as the best thing to have come from a deeply-maligned industry.

The Guardian of London, which carried a long interview with Witty, was clearly bowled over. The GSK CEO's plan, it said, was the answer to the toxic question facing a 'heartless' industry, 'a question of redefining the unwritten contract that major drug companies have with society.'

Now, that's something a lot of people would have trouble swallowing. Medecins Sans Frontieres, the world's leading health NGO, for instance, says Witty's prescription of cutting prices by 75 per cent is welcome but not a panacea for availability of drugs. Michelle Childs, director of policy and advocacy at MSF, reminds us that competition among multiple generic producers is the tried and tested way to drive prices down. Since 2000, prices have crashed by as much 95 to 98 per cent for the first generation of AIDS drugs.

Childs is also upset that HIV/AIDS medicines are excluded from the patent pool because 'the gap between what is needed and what is available is large.' Given MSF's priorities, they believe GSK should encourage innovation in areas where it is not happening.

There are others who see the price cuts as a clever market segmentation strategy which several other drug MNCs are using in a rather limited way, even in middle-income countries such as India. The primary reason is that drug companies are under increasing pressure to push up sales as profits come down on account of a narrowing pipeline of new drugs. Such a strategy is called differential pricing and is based on the ability of different markets to pay different prices and also on the demand for certain kinds of drugs. Companies usually describe it as part-social responsibility and part-economics.

At the risk of sounding rather sceptical of Witty's offer, I would like to point out the LDC market is insignificant for a company like GSK. As the world's second-biggest drug maker by sales (2007 revenues: $32.8 billion), GSK generates just about $40 million annually in revenue from these LDC countries. So is it such a generous offer?