[Ip-health] HIF and bid auctions

Wed Dec 17 09:24:01 2008

I am surprised and, recognizing the source, not so surprised that this
right of first refusal is part of the HIF scheme.

There is not a serious lawyer, and until now I hadn't thought there was
any economist, who does not know that granting a right of first refusal to
one party immediately stops serious bidding for any good. As part of a
scheme designed to achieve the lowest market price, it is simply a deal
breaker. It is almost as if the scheme were vetted by industry, which in a
sense it has, before being published.

Mickey Davis

> This is a multi-part message in MIME format.
> --
> --
> [ Picked text/plain from multipart/alternative ]
> In response to my post about competition and price regulation, Hollis
> and Pogge have reminded me that they intend to get to cost estimates
> through a bid auction - a competition-based means to force suppliers to
> bid their costs in a market. They don't call it an auction, but I think
> that is the right term for the mechanism they are trying to use. It
> allows firms to bid to supply the contract with the idea that the lowest
> bid (reflecting the lowest cost estimate by any single firm) would win.
> Except there is a hitch - the innovator can elect to supply the contract
> at the lowest bid price,  even if it was not theirs.
>
>
>
> This is also an area where the utility experience can lend some insight.
>
>
>
> In the US we shifted many regulated price systems to supplier auctions
> in the 90s. The idea was similar - that in a competitive auction firms
> will bid their costs into the market in order to get the contract. In
> some areas the result was amazingly pro-consumer. Where demand is
> relatively restrained and suppliers are many, prices for supply at
> auction dived far below the previous cost findings in the regulated
> process - more evidence that it is difficult to get to true costs
> through price regulation regimes.
>
>
>
> But the experience also has a key counter example. The problem with
> essential services is that they are essential. Demand does not tend to
> drop very much when prices rise. And there often legal mandates (like
> the right to health) that mandate states and other parties to purchase
> the product even where prices become unreasonable. So when supply can
> predict that demand will require them to be selected, at least in part,
> to meet the contract, then they can hike prices without affected demand
> much. In other words, they have market power in the auction.
>
>
>
> Take electricity prices during the 2000 heat wave in California. When
> the suppliers foresaw shortages - when they knew their bid had to be
> accepted at least in part to meet demand -- they knew they could raise
> prices without much restraint. (The buyers in these markets are
> distribution utilities under a legal obligation to purchase the amount
> they need). Electricity "cost" bids went from about $35 a wholesale unit
> (I forget what the unit was) to over $10,000 for the same unit an hour
> or day later.
>
>
>
> This problem of not enough excess suppliers to exceed demand may be a
> frequent and structural problem in patented essential medicines markets
> - where almost be definition there will be limited or no actual
> competition in the market.
>
>
>
> If, for example, you did the supplier tender auction for first line ARVs
> around 1998 or so, before broad entry by the Indian companies, the
> innovators and Brazil would have bid around $3,000 or so, those being
> the costs at the time. If you did the auction in 1996, I guess there
> would just be the innovator companies so maybe they would just bid
> $10,000/ year. There would be no other bidders.
>
>
>
> Even with Brazil, since Brazil could not (and did not want to) supply
> the world, the innovators could have bid higher and they would still get
> at least a big piece of the contract, assuming you had a legal mandate
> to buy the supply you needed to meet the global demand. The innovators
> would have market power in the auction.
>
>
>
> The second problem is with the right of first refusal for the
> innovators, which I believe Jamie has commented on.
>
>
>
> As I understand it, after the bid, even if they are not the low bid, the
> innovator may elect to supply the contract at the price of the lowest
> qualified bid. I have never heard of an auction with this kind of rule.
> It is certainly not how electricity supply auctions are run. This would
> seem to serve as a large counter-incentive for any non-innovator firm to
> participate in the auction. It takes a lot of work to put together a
> tender offer for a drug, especially if it is a new drug that the firm
> does not already produce. Why would a firm enter that kind of process if
> they can't get the contract with a low bid, unless their bid is so low
> that the innovator will not match it?
>
>
>
> In 1998-ish when the lowest price of ARVs was around $3,000, why would
> cipla, Ranbaxy, et al work over the next decade to decrease their cost
> of production just to submit bids into a process they would be unlikely
> to ever win, even if they bid the lowest price?
>
>
>
> How do we get a generic market for APIs if the innovators can have the
> right to take any contract? We have been seeing efforts of innovators to
> try to snuff out generic API markets by segmenting markets so that none
> of the mid income countries can be supplied by the generic firm. Some
> (including myself) think the reason is to prevent the generic firms from
> gaining sufficient economies to force the global market for APIs lower.
> (See the KEI gillead complaint).
>
>
>
> How would you guard against predatory pricing in the first refusal
> process - i.e. the innovator accepting a contract below their real cost
> just to stamp out competition from being able to scale up and force
> prices lower in the future as greater economies emerge? I assume such
> action would remain illegal - or would the auction have a global
> antitrust exemption?
>
>
>
> If you can't fix these problems with an auction structure, then you are
> back to trying to figure out real and reasonable costs. That is exactly
> where electricity markets are now. States are re-regulating, auctions
> have price caps and a lot of effort and tons of cash is being spent
> trying to figure out how to get real competition in the markets (e.g.
> with more transmission and big incentives for building new generation).
> I am not sure what the parallel effort would be to perfect the essential
> meds bidding market.
>
>
>
> If you land back on the struggle to figure out real (not just bidded)
> costs, then you are back in the problem I identified previously - how do
> you design a cost investigator, and then a process to watch dog the
> investigator to prevent capture.
>
>
>
> I am not opposed to the effort to perfect a price investigation
> personally. Indeed, I think we have to do it for drugs where no generic
> competition may emerge to sufficiently signal what real costs are. What
> is the cost of Fuzeon?
>
>
>
> -Sean
>
>
>
>
>
> PIJIP <http://www.wcl.american.edu/pijip/>
>
> American University, Washington College of Law
>
>
>
> Sean Flynn, esq.
> Associate Director
>
> Program on Information Justice and IP
> Washington College of Law
> American University
> 4801 Massachusetts Ave NW
> Washington DC 20016
> <http://maps.yahoo.com/py/maps.py?Pyt=Tmap&addr=4801+Massachusetts+Ave+N
> W&csz=Washington+DC+20016&country=us>
>
> sflynn@WCL.American.edu <mailto:sflynn@WCL.American.edu>
>
> tel:
> fax:
> mobile:
>
> 202-274-4157
> <http://www.plaxo.com/click_to_call?src=jj_signature&To=202-274-4157&Ema
> il=sean_flynn@post.harvard.edu>
> 202-274-0659
> 202-294-5749
> <http://www.plaxo.com/click_to_call?src=jj_signature&To=202-294-5749&Ema
> il=sean_flynn@post.harvard.edu>
>
>
>
> Add me to your address book...
> <https://www.plaxo.com/add_me?u=4295128176&v0=319422&k0=-742922918>
>
> Want a signature like this? <http://www.plaxo.com/signature>
>
>
>
> --
> Content-Description: image001.gif
>
> [ image001.gif of type image/gif deleted ]
> _______________________________________________
> Ip-health mailing list
> Ip-health@lists.essential.org
> http://lists.essential.org/mailman/listinfo/ip-health
>

--
Mickey Davis
_________________________________
Prof. Michael H. Davis
Professor of Law
Cleveland State Univ. College of Law
1801 Euclid Ave.
Cleveland, OH 44115-2214
(mailing address: 2121 Euclid Ave. LB 234)
216-687-2228
_____________________________________________________________
Patent Attorney Admitted to Practice Before the US Patent and Trademark
Office Reg.No. 45,863

Peace, Love, and Vegetable Rights!
Eat Meat and Save the Plants!