[Ip-health] Re: impact of the HIF on generic industry in developing countries
Aidan Hollis
ahollis@ucalgary.ca
Fri Nov 21 15:00:04 2008
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Jamie,
I appreciate your concern for how the HIF will affect the pharmaceutical in=
dustry. Please let me reply.
I had some difficulty in interpreting your comments, as it appears that you=
don't fully understand the HIF mechanism. The HIF mechanism would require =
that the registrant sell the product at a price "no higher than the long-ru=
n marginal cost of production and distribution, as determined by the HIF, w=
herever the product is legal and needed." Thus, the following paragraph, ta=
ken from your email, makes no sense in the context of the HIF.
> 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 "reasonable," according to the HIF price 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?
You wish us to imagine a developing country trying to issue a compulsory li=
cense for a drug which is being supplied to it at or below production cost.=
Why would it bother?
And what do you mean, Merck or GSK could "lower prices enough"? As you will=
find in the Health Impact Fund book, and as I have described in several em=
ails to you, the HIF would *require* the registrant to sell the product at =
or below a price determined by the HIF. It is a gross misrepresentation of =
the HIF to suggest that the standard for the price would be "officially rea=
sonable".
You proceed to comment:
> 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.
While I encourage all drug firms to engage in philanthropy, I am not aware =
that developing countries or donors "normally" expect open licensing either=
of the voluntary or mandatory sort. It appears that in your idea of the fu=
ture, drug companies will "normally" expect to license out their patents wh=
enever it would be good for patients. Perhaps this may come to pass. As it =
happens, the HIF also allows for patentees to voluntarily license generic p=
roducers, and to continue to benefit from payments based on health impact f=
rom all sales of the patented product (including by licensees, providing th=
at the price limits of the HIF are maintained). Thus, if patentees of HIF-r=
egistered drugs wish to arrange voluntary licenses, this "normal" outcome c=
an be supported by the HIF -- but our proposal for the HIF does not *requir=
e* companies to offer such licenses unless they fail to supply at the speci=
fied terms. Thus, generic producers do not seem to be in any way disadvanta=
ged by the HIF.
Happily, for drugs registered with the HIF, the registrant would be equally=
rewarded for health impact from the registered drug, no matter where in th=
e world it occurred. In your vision of the future, the patentee can expect,=
I think, little gain from selling drugs in the poorest countries, and natu=
rally this will reduce the incentives to engage in research or development =
of drugs which primarily address the diseases and conditions of poor people=
, or of development of versions suitable for resource-constrained settings.=
Under the HIF, successful treatments for diseases and conditions of the po=
or can be appropriately rewarded.
As for your assertion that "It is not true that the HIF endorses licensing =
patents to the UNITAID patent pool," I can only assume that you believe the=
HIF to exist. It does not, yet, and so cannot endorse anything. In case yo=
u don't find the comments about UNITAID in the book sufficiently positive, =
let me state the following, as I have already indicated in our previous cor=
respondence:
I personally endorse the UNITAID patent pool. Thomas has assured me that he=
personally endorses the UNITAID patent pool.
The HIF proposal does not require open licensing of patents, for the reason=
s I have already explained in previous emails. However, the HIF is a differ=
ent mechanism from the UNITAID patent pool, so I see no conflict in saying =
that while licensing of patents may be a necessary part of a patent pool, i=
t is not a necessary part of the HIF. As I mentioned, however, HIF registra=
nts could still, if they wanted, offer open licenses of their patents into =
any number of patent pools.
I hope that these comments are helpful to you in better understanding the H=
IF.
Yours,
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: "Aidan Hollis" <ahollis@ucalgary.ca>
Cc: "Ip-health" <ip-health@lists.essential.org>; "Thomas Pogge"
<thomas.pogge@yale.edu>
Sent: Thursday, November 20, 2008 6:58 AM
Subject: Re: [Ip-health] Re: impact of the HIF on generic industry
indeveloping countries
>
> 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 "reasonable," according to the HIF price 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't 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.
>
> "First, the incentives to challenge patents will be relatively
> 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 . . . "
>
> 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-req=
uired/
> 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'
> 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's
> 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't
> 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's negative impact on the economic
> 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
>> competition
>> at the end of the reward period of ten years, by requiring open licensin=
g
>> 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
>> generic
>> manufacturers. The HIF could result in decreased sales of some generic
>> medicines if there were cheaper and better HIF-registered drugs availabl=
e
>> at
>> low prices, which could harm generic manufacturers. (Of course, in the
>> latter case, consumers would benefit.) Generic firms might also benefit
>> from
>> increased opportunities for contract manufacturing of HIF-registered
>> drugs.
>>
>> It bears repeating that the HIF is intended to be complementary to other
>> mechanisms for increasing innovation and increasing access. To the exten=
t
>> that, in the book, we recognize the shortcomings of other mechanisms,
>> that
>> 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
>> been
>> promoting, that the HIF proposal is an attack on compulsory licensing or
>> the
>> Unitaid patent pool, is quite erroneous. The Unitaid patent pool could
>> be a
>> very useful mechanism for increasing access to important medicines, and
>> we
>> 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. Thoma=
s
>> 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 a=
s
>> well as a book-length exploration. And the events pages provide
>> information
>> 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
>> >
>> >
>> >
>>
>> _______________________________________________
>> Ip-health mailing list
>> Ip-health@lists.essential.org
>> http://lists.essential.org/mailman/listinfo/ip-health
>>
> --
> 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
>
>
>
--