[Ip-health] The Health Impact Fund and product monopolies

[James Love]

http://www.keionline.org/blogs/2008/11/17/health-impact-fund-monopolies/

The Health Impact Fund and product monopolies
Knowledge Ecology Notes
By James Love
November 17, 2008

KEI will later issue a more detailed comment on the Health Impact Fund.
One of the key issues that will be addressed is the way that Hollis and
Pogge propose turning the prize fund proposals that are based upon open
licensing of patents into something that reinforces the monopoly supply
chain.

We understand that one motivation for doing this was to attract support
from some large pharmaceutical companies, and the European governments
that protect them.

This is an important issue because we are at a point where India is
implementing the TRIPS agreement, and there are some important
challenges for those who want to obtain compulsory licenses. In
particular, who will be the suppliers of generic products, after
pharmaceutical product patents become common in India, China and other
WTO members?

The Hollis/Pogge approach would borrow the reward mechanisms from the
prize fund proposals, but gut them of the open licenses. This
effectively creates a deep subsidy for the monopoly product in the
markets where compulsory licenses might be issued, creating an
anti-competitive dumping type effect, reducing the potential market for
generic suppliers.

Hollis and Pogge are not unaware of these issues. They know there are
strong economies of scope and scale on the pharmaceutical and vaccine
markets. These issues have been discussed extensively off list.
Professor Hollis' rationale for eliminating the open licenses from the
prize funds is his assertion that prize controls are better than
competition. Hollis and Pogge should be prepared to explain why it is a
good idea to further marginalize the generics sector at this point in
history.

As a further aside, it is frustrating to see the HIF marketed as
something new in terms of the reward mechanism, since it is largely
Pogge accepting Hollis=E2=80=99 2005 approach to the prize fund valuation, =
which
in turn was influenced by the earlier proposals that Hubbard and I
developed with Aventis in 2002, and which were incorporated in the two
Sanders bills (HR 417, 109th Congress, S.2210, 110th Congress) and a
variety of other proposals, including those most recently advanced by
Barbados and Bolivia in the WHO discussions. Pogge in particular could
be more forthcoming about this. But this is a minor quibble compared to
the assault on open licensing of patents.

The Hollis/Pogge proposal is being marketed in a big roll-out right at
the time that UNITAID is trying to set up an open licensing patent pool,
and when Johnson & Johnson and Gilead have endorse the idea of
connecting (1) the licensing of patents to the UNIAID patent pool, (2)
to the opportunity to participate in a prize fund, at least for certain
Type II or III diseases. Hollis and Pogge would give the prizes without
asking for the licenses in return.

In WHA61.21, WHO member governments have now endorsed the development of
proposals to de-link R&D incentives from product prices, and also to
enhance the role of competition in providing quality generic products,
including through downstream patent pools and open licensing.

The Hollis/Pogge proposal is an effort to fend off the threat of an open
licensing approach, by dealing with some of the inefficiencies of the
current system, specifically by using the prize fund approach of
de-linking the rewards from consumer prices. But Hollis and Pogge
propose to keep and strengthen the monopoly supply chain.

Since the HIF is voluntary, it will only be used when the expected
profits from the HIF are higher than the expected profits from an
unconstrained monopoly. The HIF will increase expected profits from
unconstrained monopoly pricing, precisely because the HIF would make it
harder to find an efficient generic supplier, in the event that a
compulsory license be issued. Consider the consequences of this. If
expected profits from unconstrained monopoly pricing are higher, the
voluntary participation in a prize fund becomes more expensive. The HIF
not only undermines generic competition, it undermines any incentive to
voluntary give up unconstrained pricing, and it makes the prize fund
more expensive and less cost effective.

One can understand why the HIF appeals to certain pharmaceutical
companies. It is less obvious why anyone else should support it.

For those who have not looked at the data on the relationship between
competition and prices, one place to start would be the June 20, 2008
cost benefit analysis of the proposed UNITAID patent pool:
http://www.keionline.org/misc-docs/1/cost_benefit_UNITAID_patent_pool.pdf. =
There are many other sources of data that tell a similar story.

One final note. Hollis has indicated in several conversations that he is
skeptical of the benefits of generic competition, and he anticipates
more benefits from negotiations with a sole source supplier. In making
this argument, Hollis draws attention to some products for which
competition among several suppliers is unlikely. However, even in a case
where economics of scale are such that a single supplier is desired,
there is no benefit to being legally locked-in to that supplier. If the
patent barriers can be addressed, through licensing or otherwise, the
parties involved in procurement can threaten or actually replace a bad
supplier with a better supplier. From an economics perspective, ex ante
competition can be quite important even when ex post competition is
unrealistic. In layman terms, this means, if you can choose your
supplier, you are always better off than when you have no choice at all.
--
James Love, Director, Knowledge Ecology International
http://www.keionline.org | mailto:james.love at keionline.org
Wk: +1.202.332.2671 | US Mobile +1.202.361.3040 | Geneva Mobile +41.76.413.=
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