[Ip-health] CL and HIF

[Sean Flynn]

For the record, below is what Aidan, Mike and I say about open licenses
in the paper coming out soon. The upshot is that it recognizes the value
of open licensing strategies while also endorsing (in a broad non-HIF
specific way) the need to create a system for providing better
incentives for innovation, particularly for neglected diseases.

I have not signed on to HIF and don't have an opinion about how the open
licensing system advocated here would interact with the HIF. I suppose
if the HIF price controls were effective and broadly used, it would make
the kind of competition standards advocated here harder to get buy in
for. If the HIF prices were both too high and broadly used, then the
open license strategy advocate here would have been better, but it may
be impossible to get the open license if the companies can refer to the
HIF ruling that whatever price they are selling at is "cost." I would
still want to argue that the countries should license anyway because big
phrma's "cost" may be much higher than generic costs in a competitive
world.

To be pragmatic, which is what HIF attempts to do, I personally feel it
would be easier to get developing countries to adopt aggressive open
licensing standards in competition and patent law/regulation than it
would be to get a workable HIF price control system in place.

I share the many concerns expressed about closed vs. opening licensing
systems, including that it shifts the last decade of political action
into a direction that has not been endorsed by the civil society
movement and that it denies the dynamics of competition in lowering
prices over time.

I doubt that in 1999 the HIF board would have concluded the marginal
cost of the first line cocktail was less than $200 when companies were
declaring their no-profit price to be around $3,000. Indeed, the higher
number may have been the cost for the multinationals because their costs
are higher than that of a generic supplier trying to compete for market
share after attaining sufficient economies of scale and scope.

One question for HIF would be how it will decide what expenses of the
company attributed to the drug in question are reasonable -- as we do in
utility rate making proceedings. The utility experience has taught us
about "gold plating" and other problems trying to base prices on an
administered evaluation of the cost of production. HIF would need a
system for deciding what "costs" are reasonable (CEO salaries, marketing
expenses, lobbying expenses, administration, the corporate jet, . . . ).


Another lesson from utility regulation is industry capture. We found
that boards of experts were not very effective at determining the public
interest when the whole discussion was between them and the companies
with no watchdog at the table. The solution of consumer advocates was to
create relative well resources organizations to advocate for consumer
interests in the utility rate making proceedings - with full access to
all information and standing to sue the final decisions. Ideally HIF
would also have structured and resourced consumer advocacy in the
process with full access to all information and ability to challenge
phrma statements and appeal the decision on the price as unreasonable.
We would need a "citizen utility board" for medicine pricing -- to
borrow an innovative Nader idea that was put in place in several states.



Excerpt from An Economic Justification for Open Access to Essential
Medicine Patents in Developing Countries, Forthcoming JLME


	As shown above, in the case of needed medicines in developing
countries where highly convex demand curves are the norm, benefits from
lower prices may exceed any potential losses owing to reduced future
innovation.  This is because demand for needed medicines in developing
countries has very special properties, contributing to larger deadweight
loss relative to extra producer surplus when monopolies restrict output
and raise prices.  In these circumstances, the use of compulsory
licensing becomes one obvious remedy to problems created by the
indiscriminate enforcement of property rules through patent laws in
situations where they do not increase social welfare.  Converting the
property rule to a liability rule through a compulsory license allows a
country to change most of the deadweight loss into consumer surplus by
using competition to achieve the lowest possible price while providing a
measured contribution to research and development expenses through a
royalty payment.

	. . .

	The more direct, effective and available tool to accomplish
lower prices in developing countries with high income inequality is for
such countries to grant open licenses, permitting competition by any
qualified supplier, for essential medicine patents. Outterson and
Kesselheim proposed a voluntary mechanism towards such licenses: the "GO
license", similar in spirit to the UNITAID-sponsored patent pool.  Such
licenses maximize the ability of competitive markets to push prices down
as close as possible to the marginal cost of producing the drugs.  The
key will be for countries to adopt legal standards that will quickly and
easily recognize a duty to license intellectual property rights, a
refusal of which would trigger an open license remedy.
	One such source of legal authority for open licenses may be
found in "essential facility," "refusal to deal," and related
competition law doctrines.  On October 16, 2003, the South African
Competition Commission issued a declaration finding that pharmaceutical
firms GlaxoSmithKline and Boehringer Ingelheim violated the South
African Competition Act by refusing to grant licenses for patents on
essential AIDS medicines.   The Commission found that the drug patents
of the companies were "essential facilities" for which it was
economically feasible to grant competitors access,  and that the refusal
to grant licenses to generic firms caused an anti-competitive effect
that "outweighs its technological, efficiency or other pro-competitive
gain."   As a remedy, the Commission sought "an order authorising any
person to exploit the patents to market generic versions of the
respondents patented medicines or fixed dose combinations that require
these patents, in return for the payment of a reasonable royalty."  In
our view, the South African Competition Commission correctly weighed the
benefits and costs of monopoly pricing in that case, and indeed, our
analysis suggests that there may be merit in a wider application of this
approach.
The solution of compulsory licensing, of course, leads to new problems -
in particular that the firms' incentives to innovate may be weakened.
While this is true, one of the points made here is that for markets in
which firms can expect demand to be highly convex - which is likely to
be true in markets for medicines in most developing countries - the
patent system will be ineffectual in delivering much innovation. It is
not just that the countries are poor - it is that extreme income
inequality leads to a highly convex demand curve.
Ultimately, the problem of finding an adequate and equitable mechanism
to fund research and development for medicines in developing countries
must be found elsewhere.  While compulsory licensing in developing
countries is likely to do little to hurt the existing (negligible)
incentives to innovate produced by such markets,  it clearly would not
help.   The most difficult problem here is that of so-called "Type III,"
or "neglected" diseases, which are mainly prevalent in low- and
medium-income countries, and for which there is no substantial market in
high-income countries.  For these diseases, patent exclusivity offers
relatively little incentive to invest in R&D, despite the potentially
large health gains that might be realized.   Evidently, some other
system for encouraging innovation for developing countries is required,
such as government funded basic research, global research and
development pools, rewards and prizes, or other strategies.