[Ip-health] Re: The Health Impact Fund - a response to Love

[Aidan Hollis]

Thanks to Jamie Love for his comments on the Health Impact Fund proposal.
The proposal, for those who are not familiar with it, is explained in detai=
l
at http://www.healthimpactfund.org.

Jamie has forcefully -- and not for the first time on this list -- argued
that the HIF proposal is imperfect because its design enables marketing
monopolies during the first ten years that a registered product is being
marketed. It is important to recognize that during that time the registrant
would be obliged to sell the product at or below a price approximately equa=
l
to the average cost of production as determined by the HIF, i.e.
approximately the price that would arise if there were robust generic
competition. In addition, following the 10-year reward period, the
registrant would be required to openly license any intellectual property
required to produce and sell the product.

In these circumstances, why not just require licensing by the registrant of
the product? The chief concern is simply that generic competition may not
always be effective in delivering prices at or below those required by the
HIF. There are a number of reasons why this may be so.

* First, for generic competition to be effective in achieving low prices,
there should be multiple generic sellers. This may take some time even for
relatively straightforward molecules, as the generic competitors must gear
up for production and obtain regulatory approval, in countries around the
world.

* Second, for some products the composition and processes involved may be
technically difficult. For example, for many biologics, generic competition
is not always easily obtained. (In some cases, duplicating the molecule and
obtaining regulatory approval may be very time-consuming, costly, and
difficult.)

* Third, for many products there may be trade secrets and proprietary
know-how, not revealed in the relevant patents, which could inhibit
competitive entry.

This is not to say that generic competition cannot be effective in
delivering low prices. But it is not *always* effective. There are, for
example, many unpatented drugs in most countries -- including developed
countries -- which are sole source.

Unfortunately, if generic competition is ineffective in only some products,
that is a serious problem for an optional reward system like the Health
Impact Fund. What would invariably happen is that firms with products for
which generic competition was not anticipated in the near future would find
registering their products with the Fund irresistible: they could charge
high prices *and* earn rewards based on health impact. The Fund would, of
course, have only a limited amount of money to disburse, and so paying out
rewards to firms which were also charging high prices is not an appropriate
use of the limited resources, and would reduce the amount that could be pai=
d
out to other firms which were actually supplying drugs at low prices to poo=
r
patients. (I have already raised exactly this point with Jamie in our last
correspondence.)

The obvious solution to this problem is for the HIF to set a maximum price.
However, if the HIF is setting a maximum price, then also requiring license=
s
of relevant intellectual property no longer seems necessary. Requiring
licenses is not, however, without costs.

An attractive feature of the HIF is that the firm obtaining a reward has an
incentive to maximize measured health impact. That means that it may be abl=
e
to earn a profit even from selling the product at or below variable cost,
and requiring distributors to limit mark-ups. In general, it will be harder
for the registrant to require generic licensees to sell at or below variabl=
e
cost, and distributors will refuse to carry a product with limited mark-up
if they can instead sell a generic version of the same product with a highe=
r
mark-up.

Second, having only a single supplier with a strong incentive to monitor
sales volumes is likely to reduce the incentive and opportunity for
counterfeit products to enter the supply chain and may allow better
monitoring of the sales data of the supplier, which is important for the
Health Impact assessment.

Third, monitoring intellectual property arrangements between firms is not a
trivial exercise, as intellectual property is complex and there are
typically many patents related to a variety of aspects of a product and
underlying production processes.

Finally, the idea of the HIF is that firms are compensated for registering
their products by the payment of rewards based on health impact. To the
extent that giving up control over price is easier than issuing global open
licenses -- for example because some of the intellectual property may have
uses in multiple products -- the rewards will have to be higher to attract =
a
given product away from monopoly pricing.

I think that it is fair to note that requiring open licensing also has
benefits. In particular, when it works well it can be effective at lowering
the price. In addition, suppliers may learn from each other. These are not
inconsiderable benefits. However, ultimately, we felt that if the HIF can
reasonably set a maximum price which reflects the average cost of
manufacturing, without getting into the business of overseeing the licensin=
g
of IP, that would be an appropriate goal. We would certainly be happy to
consider modification of the HIF to include mandatory open licensing: we ar=
e
merely proposing, not prescribing. The key challenges for this proposal
relate to obtaining stable funding and to the measurement of health impact.
In the context of these challenges, the issue of administered low price vs.
mandatory licensing is a detail.

A few other notes
*******************
I don't understand the claim that either Thomas or I has failed to
acknowledge Jamie's contribution to this area. I have consistently
acknowledged -- from my first paper on prizes in the first half of 2004 --
Jamie's contribution to my work in this area. If Jamie would like to take
credit for this idea, he is welcome to it. However, as his own paper "The
Big Idea" notes, the history of research on prizes in medicine involves man=
y
contributors. Clearly, the HIF is different from what Jamie has proposed, i=
n
that it is optional, involves payments strictly based on assessed health
impact, and allows monopoly supply at controlled prices. His intellectual
contribution is acknowledged in the HIF book. Did he expect to be listed as
a dissenting co-author?

Jamie refers to evidence that generic competition has led to lower prices
compared to outcomes in which there is a monopolist setting a
profit-maximizing price. This comparison is irrelevant in the context of th=
e
HIF, since sales made by registrants under the HIF would have to be a low
prices, not at unconstrained monopoly prices.

A more relevant analysis is the effectiveness of generic competitors in
generating low prices. In many countries, including Canada, generic drug
prices at the retail level do not tend to reflect the cost of production.
(See, for example,
http://www.competitionbureau.gc.ca/epic/site/cb-bc.nsf/en/02495e.html.) In
the United States, which is generally considered to have a particularly
well-functioning generic drug industry, and one in which large numbers of
generic firms participate, prices seem to be considerably lower when the
number of generics is higher. For example,
http://www.fda.gov/cder/ogd/generic_competition.htm shows the generic price
(as a percentage of the branded product price) by product grouped by number=
s
of generic competitors. When there are four or fewer generic competitors,
the average generic price is over 40% of the branded price. With over 15
competitors, the generic price averages in the range of 10% or less of the
brand price. One interpretation of this is that the true costs of productio=
n
tend to be in the range of around 10% or less of the branded product price,
but with fewer generic competitors, competition is not driving down prices
to these levels. Thus, while generic competition can be effective, it isn't
always as effective as we might like, and especially when the number of
competitors is small. In most countries, there is no likelihood of having 2=
0
generic firms participating in sales of a given product, and so it is not
clear that competition would do a better job of obtaining low prices than
the HIF administrators could do.

The HIF approach does not eliminate the ability of generic firms to
participate. As now, they would have the right to produce following the
expiration of the relevant exclusivity period. The HIF does, however,
require open licensing of all relevant patents following the ten-year rewar=
d
period, so that some barriers to generic competition which currently exist
would be eliminated for HIF-registered products. It is also possible for
registrants to contract out production to generic producers. For what it is
worth, the idea that the generic drug industry is being particularly
weakened doesn't seem consistent with the growth of generic drug revenues
globally. For example, the IMS 2008 Global Pharmaceutical Market Forecast
predicts global market revenue growth of 5-6% for all drugs, but 15% for th=
e
generic sector. (No doubt these growth figures will be weakened by the
current financial crisis, but the relative growth of generics is likely to
be strong.) (See
http://www1.imshealth.com/web/content/0,3148,64576068_63872702_70260998_828=
29532,00.html)

Thomas and I strongly support the Unitaid proposals. If Unitaid can persuad=
e
companies to license their patents into a pool with revenues arising from
generic producers who pay royalties, I applaud Unitaid and the companies. I
appreciate that there may be some concern that the mere possibility of the
HIF may weaken companies' resolve to license important patents into the
patent pool. However, the HIF cannot start up in the very near future, sinc=
e
there is significant work to do to demonstrate feasibility of the health
impact assessment approach.

Finally, I would just like to state my frustration at what I perceive to be
really inappropriate comments. Jamie stated in his post copied below that
"The Hollis/Pogge proposal is an effort to fend off the threat of an open
licensing approach." This seems to suggest that we have some ulterior motiv=
e
to protect drug companies. That would be, as anyone who knows my work or
that of Thomas could testify, false. I do not think that kind of innuendo i=
s
appropriate or helpful. We do, however, always welcome comments which could
help in improving the proposal, including those which are critical of
various aspects of the Health Impact Fund.

There are several lectures with discussion on the Health Impact Fund over
the next couple of weeks in Vienna, London, Cambridge, Oxford, and
Washington DC for those who are interested, including Jamie. Details at
www.healthimpactfund.org.

Aidan Hollis

Associate Professor
Department of Economics, University of Calgary
2500 University Dr NW Calgary AB T2N 1N4 Canada

tel: +1 403 220 5861  fax: +1 403 220 5861
email: ahollis@ucalgary.ca
web: http://econ.ucalgary.ca/profiles/aidan-michael-hollis

Incentives for Global Health
http://www.healthimpactfund.org

----- Original Message -----
From: "James Love" <james.love@keionline.org>
To: "Ip-health" <ip-health@lists.essential.org>
Cc: "Aidan Hollis" <ahollis@ucalgary.ca>; "Thomas Pogge" <tp6@columbia.edu>
Sent: Monday, November 17, 2008 12:33 PM
Subject: The Health Impact Fund and product monopolies


> 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
> +41.76.413.6584
>
>
>