[Ip-health] Health Impact Fund

[B.Baker@neu.edu]

I think Jamie and others are right to be concerned about the impact of the
Health Impact Fund on the generic industry in developing countries (and
perhaps more broadly).  In particular, the HIF leaves the fundamental
feature of a patent regime intact - it perpetuates the right to exclude.
Moreover, it subsidizes low cost sales, which undoubtedly has a benefit of
increasing access by poor people, but at the cost of creating even greater
disincentives to generic entry because companies will be entering against
an established competitor, who has a 100% market share, who has brand and
prescriber loyalty, and who can continue to undersell, even in a predatory
sense, as the generic company struggles to gain market share and to achieve
economies of scale.  The incentives for countries to issue compulsory
licenses at least partially to develop local or regional or Southern
manufacturing capacity and sources of supply will be greatly reduced.
Likewise, incentives for more-pro-generic options like the UNITAID Patent
Pool will be undermined at least indirectly by an option that is far more
financially rewarded to medical monopolists.

In terms of incentivizing generics, the HIF's option for open licenses at
the end of a 10-year, post-marketing approval period of marketing
exclusivity is largely illusory as the patent term will be near expiracy in
most cases.  As the authors admit, most medicines do not come to market
until 8-10 years after first innovation as they must go through expensive
and time-consuming pre-clinical testing, clinical trials, and marketing
approval.  Although drug companies might regain some period of patent
exclusivity through patent term extensions in the U.S. and elsewhere, the
unadjusted post-registration patent term is likely to be 10-12 years only
and even with patent term adjustments is likely to be less than 15 years.
Accordingly, the so-called open license provision in the HIF proposal
provides very little real relief to market exclusivity and only at the very
end of the patent term when better products, including incremental
innovations are already likely to be on the market.

Although its proponents suggest that the HIF is an alternative to
ever-greening, it is hard to see how this is true.  Whether you call heat
stable versions of lopinavir/ritonavir (Kaletra/Aluvia) as ever-greening or
not, it is clearly a superior product and the improvement will capture
market share whether registered with the HIF or not.  In fact, it is
possible that the HIF will work against incremental innovation for
medicines for neglected diseases because a company might have an incentive
to continue to earn higher "health impact royalties" on the original
product than to pursue beneficial incremental improvement that would gain
very little payment from the HIF even if it supplanted the original
product.

The proposal for a pricing mechanism seems incomplete at best.  For one
thing, there is no reimbursement for the costs of research and development
as such, though there is an untested assumption that these costs might be
recovered, at least in part, by the therapeutic effect payment from the
HIF.  The lack of this payment alone might greatly reduce the footprint of
the proposed HIF, especially since impact royalties from the HIF are
themselves unstable and unpredictable because they go up or down depending
solely on the number of registrants to the HIF - something that the
potential registrant has no chance to predict.

A second problem with the pricing mechanism is that it is going to set a
one-time price range based on expert assessments (unspecified) and contract
price quotes.  This is a naive and static choice given the dynamism of
price reductions that are achievable:  (1) as economies of scale and
competitive effects develop in the market for APIs (as Jamie ably describes
re Brazil); (2) as economies of scale and competitive effects develop in
the final product market (as has occurred in the first-line ARV market
where Cipla's price in 2001 - $350 - has now fallen to $87/pppy); and (3)
as improved production methods are developed.  Even the innovators' price
for first line therapy - an alleged no-profit price - has fallen from
approximately $727 in 2001 to $331 in 2008.  How exactly are ad hoc experts
or year-one price quoters likely to anticipate these kinds of developments
in a truly competitive generic market?,

Third, it is unclear what the authors mean when they say that the price in
the window between average manufacturing and distribution cost and marginal
manufacturing and distribution costs by "generic" firms.  Once again, there
is great pluralism in the generic industry, but by far, at this point the
lowest cost, standard quality producers are found in India.  Are Pogge and
Hollis planning to use the cost structure of the Indian generic industry
(at 1/7 the cost for manufacturing plants and most labor inputs) or are
they going to use First-World generic companies as their benchmark.  To the
extent that they are intending to use Indian generic costs, innovator
companies will typically and predictably be selling below their own average
and marginal costs of production - something they will only do if the HIF
therapeutic incentives are even higher yet.  As an alternative, innovator
countries can out-source, sub-license product manufacturing to Indian
companies, something they are already doing.  Although this has costs
advantages, it does little or nothing to develop a more robust generic
market (except for contract manufacturers).

Finally, as the authors admit, the HIF is likely to attract interest only
with respect to so-called neglected diseases.  For chronic diseases such as
heart disease, hypertension, diabetes, cancer, psychiatric disorders and
the like, that affect developing and developed countries equally, Big
Pharma is likely to pursue a patent-based policy only.  It will sell at
high prices to rich countries and to local elites in poor countries - the
rest of the poor will be damned.  Partially this is a result of the small
funding base of the HIF.  A Fund of $6 billion a year is hardly likely to
interest the patent holder on Plavix (despite the suggestion to the
contrary on page 5-6) which sells over $6 billion per year!  Accordingly,
the HIF offers a very incomplete solution to the problem of separating the
market for innovation from the market for manufacturer/sale.

Let me turn briefly again the advantages of a competitive generic market.
In some of their previous communications to the IP-health list, Pogge and
Hollis, especially Hollis, have indicated that generic entrants will not
always be incentivized to enter all potential markets and that they might
have special difficulties in doing so with respect to bio-similars and
other very complex technologies.  Disincentives to entry increase as the
market of paying or subsidized patients gets smaller.  Thus, Pogge and
Hollis are correct that generics will not always be a solution for orphan
diseases and other small/poor market situations.  However, because generic
entry cannot solve all problems, they have a proposal that turns its back
on generics altogether.  They essentially come up with a plan that
subsidizes and rewards some therapeutically desirable innovation that might
not occur otherwise, but then paradoxically monopolize manufacture and sale
thereafter, admittedly at a lower price that increases accessibility.

Of course, this option is potentially more interesting to Big Pharma
because it has historically wanted to squash the competitive industry that
nips at its heels not only post-patent expiracy but also through
challenging weak patents.  This option is also interesting to Big Pharma, I
suspect, because it reduces the likelihood of compulsory licenses and it
potentially takes the steam out of some innovation-and-access proposals
that are more radical and that challenge the basic, monopoly-based regime
upon which it rests.  However, for poor patients waiting for earlier and
affordable access to life-saving and life-enhancing medicines for a broad
spectrum of prevention and treatment therapies, robust generic competition
at efficient economies of scale is far more likely to deliver than is the
HIF.

Professor Brook K. Baker, Health GAP
Northeastern U. School of Law
Program on Human Rights and the Global Economy
400 Huntington Ave.
Boston, MA 02115
617-373-3217 (office)
617-259-0760 (cell)