[Ip-health] Re: impact of the HIF on generic industry in developing countries

[James Love]

Dear Aidan,

The situation in developing countries can be described as follows.

For more than 3 decades, India did not have patents on medicines.
Neither did a number of other developing countries.   Even though these
countries had low incomes, they were sufficiently large, taken together,
to create a viable market for generic drugs, for several but not all
products.

In recent years, the Canadian market has been larger than the entire
African market.

In 1996, an effective treatment for AIDS was available.  But there was
no effective generic market for the range of AIDS drugs necessary for
treatment (it takes at least a feasible combination of 3).  Even though
there was a large population of AIDS patients in developing countries,
including India, generic firms did not enter the market.

In 1996, Brazil, a middle income country, began to purchase and
manufacture generic aids drugs, spending around $150 million annually.

When Brazil started buy generic AIDS drugs, prices were pretty high.  A
kilo of generic 3TC active pharmaceutical ingredients was selling for
more than $20,000.  After a few years of competition, API prices for 3TC
fell below $5k, and soon after, much lower.

It was the decision by Brazil to buy generics that created a global
competitive market for AIDS drugs.  This allowed me in January 2001 to
negotiate the first CIPLA offer of $350 per year.  This CIPLA offer in
turn stimulated the creation of the Global Fund and PEPFAR.

If 3TC APIs had been selling for $25k per kilo in 2001, no one could
have negotiated a price low enough to interest donors in treatment.  The
decision by a single middle income country with a large market created a
market dynamic that now benefits millions living in Africa and other
lower income countries.

Today you can buy 3TC+d4T+NVP in a formulated fixed dose combination for
less than $300 per kilo.

Except for a single recent compulsory license, Brazil stopped buying
generic AIDS drugs that were invented and patented after the change in
the 1996 patent law.

As a consequence of Brazil's decision to only buy from patent owners,
prices for "second generation" AIDS drugs have been very high, and
rarely used in treatment in developing countries, even though they are
widely used for treatment in Canada and other high income countries.

Every time a country with any purchasing power, including India, China,
Thailand or Brazil, has bought generic products, it has created POSITIVE
economies of scale and scope externalities for other developing
countries.  Every time the DO NOT buy generics, it creates NEGATIVE
externalities.    These effects are dynamic.  Things get better over
time, witnessed, for example, by the steady drop in prices for generic
AIDS drugs.  The Jan/2001 $350 CIPLA offer was $250 by the end of 2001,
and less than $80 this year.

I very much resent the tone of this comment you made:

"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."

First, as a reader of this list, you must know that there is in fact a
very difficult battle being waged over the future of generic markets, in
developing countries.  Perhaps you can review the USTR 301 list reports
over the past ten years, or the press coverage of the Thailand and
Brazil compulsory licenses to appreciate how this is playing out.

Second, what do you think the UNITAID patent pool is about?

Third, I don't expect philanthropy.  Quite the opposite, I expect
companies to do what is most profitable for them.

This has lead to numerous documented cases where companies have sought
to control and partition markets for generic APIs (BMS with ddI, Roche
with oseltamivir, Gilead with Tenofovir).  There are cases of donation
program designed to undermine generic markets. (Fluconazole, Imatinib
Mesylate).

India now has patents.  China now has patents. Thailand now has patents.
Brazil now has patents.  All WTO members with any income have patents.
The PCT and other measures are ensuring that patent coverage is as wide
as possible.  Applications for patents on the AIDS drug FTC were filed
in 38 sub-Saharan African countries.

If the HIF was created as a prize program without open licensing, it
would reduce market shares for generic products.

For you to suggest that it would have ZERO impact on generic markets, is
an astonishing and to me an arrogant statement.  How uninformed do you
think people are?  How much evidence of the importance of economies of
scale and scope are we supposed to ignore?

Thomas Pogge has been candid.  He said the HIF rejected open licensing
because "the proposal is then less unacceptable to pharmaceutical
companies and therefore more likely to be adopted."

If everyone had worried about what was acceptable to the pharmaceutical
industry at any given time, if they had allowed a handful of PR agents
and lobbyists to set the parameters of ambitions, Brazil would have
never bought generic AIDS drugs.   There would be no 1999 WHO Revised
Drug Strategy.  There would be no global compulsory licensing campaign.
There would be no Clinton Executive order on AIDS and IP.  There would
have been no 2001 CIPLA offer.  There would be do Doha Declaration.
There would be an even worst 301 list.  There would be no WHO 60.30 or
61.21.  There would be no UNITAID patent pool.  There would been no
global fund or PEPAR.

 Jamie


On Fri, 2008-11-21 at 09:42 -0700, Aidan Hollis wrote:
This is a multi-part message in MIME format.
> --
> [ Picked text/plain from multipart/alternative ]
> Jamie,
> I appreciate your concern for how the HIF will affect the
pharmaceutical industry. 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-run marginal cost of production and distribution, as
determined by the HIF, wherever the product is legal and needed." Thus,
the following paragraph, taken 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 license 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 emails 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 reasonable".
>
> 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 future, drug companies will "normally" expect to
license out their patents whenever 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 producers, and to continue to
benefit from payments based on health impact from all sales of the
patented product (including by licensees, providing that the price
limits of the HIF are maintained). Thus, if patentees of HIF-registered
drugs wish to arrange voluntary licenses, this "normal" outcome can be
supported by the HIF -- but our proposal for the HIF does not *require*
companies to offer such licenses unless they fail to supply at the
specified terms. Thus, generic producers do not seem to be in any way
disadvantaged 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 the 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 naturally 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 poor 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 you 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 correspondence:
>
> 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
reasons I have already explained in previous emails. However, the HIF is
a different 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, it is not a necessary part of the HIF. As I mentioned,
however, HIF registrants 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 HIF.
>
> 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-required/
> >       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
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
> >> generic
> >> 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
> >> 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
extent
> >> 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.
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
> >> 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
> >
> >
> >
> --
>
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