The Market Kills Its Own Heroes

 When a Life-Saving Drug Cannot Survive the Market

What should happen when a company develops a drug that society urgently needs? Most people would say that this company should succeed, as an efficient market should give high return to goods with high demand compared with its supply. However, the story of Achaogen, a biotechnology company developing a new antibiotic called Plazomicin, isn’t like this.

 

Achaogen spent 15 years and hundreds of millions of dollars to develop Plazomicin, a new antibiotic to treat superbacterial infections that can no longer be cured by previous antibiotics. But less than a year later, they went bankrupt. Their core assets were sold for only $16 million (Wells, Nguyen and Harbarth, 2024). It’s a really amazing business story. It shows how the market will fall when private incentives couldn’t match social value. So here's the question, why can’t an invaluable drug support the success of the company that developed it?

 

Plazomicin was so powerful that doctors refused to prescribe it widely, keeping it locked away as a last resort so bacteria wouldn't develop resistance to it. Completely the right medical call, but it’s completely catastrophic for business. With barely any sales and a healthcare system that didn't reward innovation, the company couldn’t survive.

 

Market Failure in the Antibiotic Industry

The collapse of Achaogen is a market failure rather than a business failure. To understand why Plazomicin couldn't survive in the market, we must look at marginal private benefit (MPB) and marginal social benefit (MSB) of consuming Plazomicin.

Figure 1: Negative Externality

 

Take a look at Figure 1. In reality, the cost of producing additional medicine is constant and that’s our horizontal marginal private cost (MPC) line. The marginal social cost (MSC) and supply (S) curves are identical to MPC. Imagine that producing Plazomicin doesn’t generate negative effects on the environment and society. However, consuming more Plazomicin would lead to a significant and increasing marginal external cost (MEC_C), as antimicrobial resistance is one of the top global public health threats, and the overuse of antimicrobials is the main driver in the development of drug-resistant pathogens (World Health Organisation, 2023). Also, the level of resistance is correlated with the level of antibiotic administered (Bell and Gouyon, 2003). The MPB and demand (D) curves are negatively sloped. Imagine when you’re ill and take one unit of medicine, the condition would become better obviously. However, after consuming the second unit, the effect wouldn’t be as visible as the previous one. The MSB equals MPB – MEC_C.

If the government doesn’t control using antibiotics, the equilibrium would be at point A. However, under Q₂, the society bears too much risk that this kind of antibiotics would lose its effect soon because of the overuse. Therefore, the state must use policies to limit people to use it, controlling the equilibrium from A to B and the quantity from Q₂ to Q_1.

 

Misaligned Incentives and Moral Hazard

The persistence of Q₂ is driven by the moral hazard among consumers. More antibiotics use can bring clear private benefits. Patients using more of it would recover quicker. However, there’s a wider cost, like more antimicrobial resistance, fewer effective drugs in the future and greater pressure on the health system. It’s not only attributed to some specific consumers who overuse antibiotics, but also affects the whole society.

 

That’s where the incentive problem comes in. Patients may consume antibiotics all the time until their MPB matches MPC, even though the MSC is much higher.

 

What’s more frustrating is that it’s in stark contrast to the situation in the pharmaceutical industry. Companies which develop new antibiotics face the opposite incentive problem. They need to bear huge research and development costs and face years of uncertainty. Even if it is successfully listed, the economic return may be negligible (Wells, Nguyen and Harbarth, 2024). The collapse of the Achaogen company after the launch of Plazomicin is a strong example of this broken system. Innovation comes with risks, but the market does not provide enough rewards to maintain such innovation.

 

Therefore, the antibiotic market has suffered a double blow. For companies trying to solve this problem, the market returns are often unsatisfactory. On the other hand, it underestimates the costs of action that exacerbate the problem. This kind of social cost is extremely huge. According to the Centers for Disease Control and Prevention (CDC), antimicrobial resistant infections affect more than 2.8 million people in the United States every year. Also, it causes more than 35000 deaths (CDC, 2024).

 

For that reason, antibiotic resistance should not be seen only as a medical problem. It’s also an economic problem driven by misaligned incentives.

Why Can’t the Market Correct Itself?

If the incentive mechanism is so distorted, why can't the free market solve it? Coase's theorem refers that if property rights are defined, private sectors can negotiate to get an efficient outcome.

 

However, the example of antibiotics is not suitable here. No one can easily own or trade the future effectiveness of drugs. Also, affected populations include patients, hospitals and governments in many countries, so transaction costs are huge. Therefore, the government's structural intervention is essential.

 

Curing the Market

So, how could policymakers intervene both overconsumption and underinnovation?

1. Reduce the use of antibiotics: Policymakers need to reduce unnecessary use of antibiotics. This doesn’t mean to set the price higher. Patients in need shouldn’t be excluded. A more effective method is to manage stricter. Stricter prescription rules should be utilised to ensure that strong drugs like Plazomicin are only used when truly necessary.
2. Delinking Profit from Volume: The government should decouple profit from volume to solve the dilemma. The British National Health Service (NHS) recently launched a subscription model, which requires a fixed annual fee to get new antimicrobials, no matter how many pills are actually prescribed (National Institute of Health and Nursing Excellence, 2019). This cuts off the link between profit and sales, thus rewarding those companies that develop drugs.

In conclusion, the collapse of Achaogen is not just a story of a failed company. It also reminds us how important it is to recognize the limitations of the market. We need Plazomicin, but we also need to use it carefully. Therefore, the usual market logic is not applicable. Without strict policy intervention to protect innovations, the tragedy of Achaogen may occur frequently, and the society will continue to lose valuable medicines.

References

Bell, G & Gouyon, P.H. (2003). ‘Arming the enemy: the evolution of resistance to self-proteins’, MICROBIOLOGY SOCIETY, 149(6), pp.1367. https://doi.org/10.1099/mic.0.26265-0. (Accessed: 7 April 2026).

 

Centers for Disease Control and Prevention (CDC) (2024). Antimicrobial Resistance Facts and Stats. Available at: https://www.cdc.gov/antimicrobial-resistance/data-research/facts-stats/index.html. (Accessed: 7 April 2026).

 

National Institute for Health and Care Excellence (NICE) (2019). A new model for evaluating and purchasing antimicrobials in the UK. Available at: https://www.nice.org.uk/what-nice-does/life-sciences-how-to-get-your-product-to-market/a-new-model-for-evaluating-and-purchasing-antimicrobials-in-the-uk.(Accessed: 7 April 2026).

 

Wells, N., Nguyen, V.K. and Harbarth, S. (2024). Novel insights from financial analysis of the failure to commercialise plazomicin: Implications for the antibiotic investment ecosystem. Humanities and Social Sciences Communications, 11, 941 (2024). Doi: https://doi.org/10.1057/s41599-024-03452-0. (Accessed: 4 April 2026).

 

World Health Organisation (2023). Antimicrobial resistance. Available at: https://www.who.int/news-room/fact-sheets/detail/antimicrobial-resistance. (Accessed: 18 March 2026).