[Ip-health] Re: impact of the HIF on generic industry in
developing countries
James Love
james.love@keionline.org
Thu Nov 20 09:02:20 2008
http://www.keionline.org/blogs/2008/11/20/impact-of-hif-on-generics/
Dear Aidan,
I would like to review the reasons why the HIF will undermine the
generic industry in developing countries.
One core issue concerns economies of scale and scope. I would not be
surprised if Thomas Pogge was not particularly savvy about the empirical
realities of economies of scale and scope, but I would expect that you
would. Generic firms will not enter a market that is too small, or if
the costs of entry are too high. The HIF would shrink potential generic
markets, reducing economies of scale.
By reducing the number of generic products, HIF would also reduce
the potential economies of scope, since there would be less know-how or
facilities used in similar products. This would raise entry costs.
The HIF would give drug developers the option to unconstrained
monopoly pricing, or accepting the HIF subsidies, in return for price
regulation of products. The cases where the HIF would be most attractive
would include the cases where developing countries (and donors) would
normally expect open licensing, through either voluntary (UNTIAID) or
mandatory (compulsory) licenses, or where a country would challenge the
validity of patents through litigation.
The HIF would move the market away from generic supply to the
monopoly supply in these cases. If Merck or GSK was being rewarded
through the HIF, they could lower prices enough to make it politically
difficult to credibly ask for a CL. Imagine a developing country trying
to issue a CL when US and European taxpayers were running a fund to make
the price officially =E2=80=9Creasonable,=E2=80=9D according to the HIF pri=
ce regulation
formulas. The country that issued the CL would almost certainly be under
attack for its ungrateful and unwise action. And, this is important, how
many countries have to issue such a CL to make the generic market
feasible in the first place? For some data on this point, you might want
to look at this document:
http://www.keionline.org/misc-docs/1/cost_benefit_UNITAID_patent_pool.pdf
Secondly, companies have ready told the UNITAID patent pool that
they cannot get important licenses in middle income country markets,
unless they link the licenses to some type of prize fund reward
incentive. If you embrace the HIF approach where the rewards are not
linked to the open license, you don=E2=80=99t get middle income countries
included in the UNITAID pool. Without middle income countries in the
pool, you get much much less generic entry (again, see the UNITAID cost
benefit analysis).
You also state in your report that the HIF will make it less
economically feasible for generic companies to challenge patent
validity.
=E2=80=9CFirst, the incentives to challenge patents will be relativ=
ely
weak, since generic companies will find themselves competing not against
a firm with high prices, but against a firm with low prices. If the
registrant sold the product at a price below the generic average cost of
manufacture, generic firms would find entering such a market
unprofitable until the end of the payment period . . . =E2=80=9D
http://www.keionline.org/blogs/2008/11/18/hif-on-intellectual-property/
It is not true that the HIF endorses licensing patents to the
UNITAID patent pool. The complete reference in your report is as
follows:
----------
PATENT POOLS
A new mechanism to assist with lowering drug prices in specific
countries is the patent pool approach recently espoused by Unitaid. What
makes this approach particularly interesting is that it could also
result in a reduction in transactions costs which could benefit
patentees too. A patent pool is a portfolio of patents related to a
particular technology and held by companies, universities, and
government institutions. The patents would be made available under a
non-exclusive license to manufacturers and distributors, and the pool
operated through the auspices of a licensing agency. The licensing of
patents to the pool is to be done on a voluntary basis with royalties
paid, and there could be geographic limits on the license. The appeal of
this approach is particularly for formulations which may require patents
from multiple firms, since the pool would substantially reduce the
transactions costs of dealing with separate patentees. Unitaid has
initially suggested a focus on patents relating to pediatric
anti-retrovirals and new combination products.
----------------
This almost makes it sound as if the UNITAID patent pool would be
limited to upstream research and product development, rather than as a
downstream access pool, the least aggressive implementation of the pool.
Contrast your assertion of support for the UNITAID patent pool with
the assult on voluntary licensing contained in page 22 of your report.
Here are just a couple of points you make in the HIF report:
-------------
http://www.keionline.org/blogs/2008/11/18/hif-voluntary-licensing-not-requi=
red/
1. There are a number of reasons for preferring a system in which
the registrant must forgo only pricing freedom, rather than giving up
the exclusivity rights created by the patent.
2. First, the licensing approach would require registrants to
forgo some intellectual property protection, which is not necessary as
long as the registrant is willing to sell the product at the
administered price.
3. In some cases, the intellectual property arrangements may be
complex, and licensing may therefore be difficult. In other cases, the
intellectual property may have many applications, and the patentee might
prefer not to grant an open license for its use.
---------------
These arguments hardly are an endorsement for licensing to the
UNITAID patent pool. Consider also these comments by Thomas Pogge from
the i+a list.
-------------
http://www.keionline.org/blogs/2008/11/19/why-hif-rejected-open-licensing/
In exploring reform ideas, Jamie, it seems to me reasonable to
take prospects of implementation into account. The pharmaceutical
industry has a lot of political influence. Other things equal,
therefore, a reform proposal is improved when it is modified so that the
pharmaceutical industry has less reason to oppose it.
In previous work, Aidan and I have both explored the possibility
of requiring immediate open licensing as a condition of receiving health
impact rewards. In long discussions we have come to the conclusion that
allowing innovators to retain IP is actually the better way of
specifying the Health Impact Fund. One reason is that the proposal is
then less unacceptable to pharmaceutical companies and therefore more
likely to be adopted. A second reason is that such companies would then
be less reluctant to register a new medicine for HIF rewards (which, in
our scheme, would result in the HIF paying for all registered medicines=E2=
=80=99
health impact at a lower rate). A third reason is that open licensing
would typically be redundant: given the prospect of health impact
rewards, the registered innovator would typically have incentives to
sell the product below the price generic competition would result in.
(The way we have it now, the registered innovator is required to sell
below the price generic competition would result in: namely at the
lowest feasible cost of manufacture and distribution. The innovator=E2=80=
=99s
profits come entirely out of health impact rewards as diminished by the
antecedent R&D outlays. Most innovators would in fact contract out
manufacture of their medicines to generic producers who can manufacture
at lower cost.) A fourth reason is that counterfeiting (drugs that don=E2=
=80=99t
contain the listed ingredients) of new drugs is easier to control when
the genuine item comes in only one variant.
-------
For you to assert, on the NGO monitored ip-health list that
------ We expect the HIF to have approximately zero impact on the
generic drug industry. -----------
seems less than candid.
A more realistic assessment of the impact of the HIF approach is
that it would marginalize the generics industry in developing countries,
make it harder to credibly threaten a compulsory license, raise the
costs of generic suppliers (fewer economies of scale or scope), and make
the political environment for CL or UNITAID type VL quite difficult.
To add insult to injury, the HIF=E2=80=99s negative impact on the econo=
mic
viability and efficiency of the generics supplier would influence in a
negative way the HIF price control formulas.
Finally, it is only a minor virtue that the HIF would ask for an
open license after ten years. For many products, the effective patent
and product life is not much longer than this anyway, particularly given
late product registrations in developing countries.
On Wed, 2008-11-19 at 20:23 -0700, Aidan Hollis wrote:
> Dear Jamie,
> Thanks for your question. We expect the HIF to have approximately zero
> impact on the generic drug industry. It would reduce barriers to competit=
ion
> at the end of the reward period of ten years, by requiring open licensing=
of
> all outstanding patents required for the manufacture and sale of the
> registered product at that time. This would of course reduce litigation
> costs in those markets where litigation occurs, which would benefit gener=
ic
> manufacturers. The HIF could result in decreased sales of some generic
> medicines if there were cheaper and better HIF-registered drugs available=
at
> low prices, which could harm generic manufacturers. (Of course, in the
> latter case, consumers would benefit.) Generic firms might also benefit f=
rom
> increased opportunities for contract manufacturing of HIF-registered drug=
s.
>
> It bears repeating that the HIF is intended to be complementary to other
> mechanisms for increasing innovation and increasing access. To the extent
> that, in the book, we recognize the shortcomings of other mechanisms, tha=
t
> is not intended as a claim that those mechanisms are worthless, but that,
> like all mechanisms including the HIF, they are incomplete and imperfect.
> Our hope is that the HIF can be a complement which meaningfully improves
> outcomes by increasing the set of mechanisms. The idea, which you have be=
en
> promoting, that the HIF proposal is an attack on compulsory licensing or =
the
> Unitaid patent pool, is quite erroneous. The Unitaid patent pool could b=
e a
> very useful mechanism for increasing access to important medicines, and w=
e
> have only positive discussion of it in the HIF book (see page 100).
> Similarly, compulsory licensing has a role, as you will find I have
> expressed in my own published research specifically on that topic. Thomas
> has also publicly expressed support for the right of states to use
> compulsory licensing ( eg
> http://www.cptech.org/ip/health/c/thailand/riceschwabthailand21dec06.pdf)=
.
>
> Finally, for readers who are learning about the HIF through this exchange=
,
> you main gain a fuller understanding of the HIF proposal by visiting
> www.healthimpactfund.org. The e-library there features a short summary as
> well as a book-length exploration. And the events pages provide informati=
on
> about forthcoming workshops and discussions with members of the HIF team.
>
> With kind regards,
> 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
>
> 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: "Thomas Pogge" <thomas.pogge@yale.edu>; "Aidan Hollis"
> <ahollis@ucalgary.ca>
> Sent: Wednesday, November 19, 2008 2:15 PM
> Subject: impact of the HIF on generic industry in developing countries
>
>
> > Dear Thomas and Aidan,
> >
> > Have you or will you predict that impact of the HIF on the generic
> > industry in developing countries, in the event that the HIF is
> > implemented as you suggest?
> >
> > Jamie
> >
> > --
> > 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
> >
> >
> >
>
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--
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