[Ip-health] HIF and generic competition

[robert weissman]

I hope that Aidan Hollis and Thomas Pogge will reconsider the element of
their Health Impact Fund (HIF) relating to marketing monopolies.

The HIF model aims to lower price for new medicines in developing
countries. It deepens monopoly power for patent holders, while aiming to
achieve low price through a global price control regulator.

I share the concerns that others have raised on this list that
abandoning generic competition as the key means to lower price is a
mistake. There are many reasons to be skeptical of the HIF approach.
Generic competition has proven itself very effective at driving down
price over time, as Jamie Love has noted on the list. The "over time"
element is crucial: The initial best price from generics improves as
they achieve economies of scale, learn how to manufacture more
efficiently, and become subject themselves to more competition. An
administrative process is very unlikely to capture these or equivalent
benefits. Relatedly, it is very hard for an administrative agency on its
own to determine the cheapest possible price for a medicine. One very
important piece of evidence in this regard, as Brook Baker noted on the
list, is that the "no-profit" price for AIDS drugs from brand-name
companies has fallen dramatically over the last decade =85 thanks to
generic competition.

The HIF proposal is designed to address this concern: It aims to give
brand-name companies an incentive to lower price expand access --
because they are paid more from the Fund if more people benefit from a
product. I think there are good reasons to be skeptical of this
approach. Even if it will help ensure that brand-name companies lower
price, however, there's still no reason to not also get the benefits
from generic competition.

There is also a broader concern, at least as important, which the HIF
proposal cannot address: HIF is a big idea, but is actually designed to
deal only with a niche problem in drug development and access ("the most
neglected diseases"). HIF is introduced in the context of a broader
global debate about innovation and access for all kinds of diseases. To
the extent it buttresses a monopoly-based model, it politically
undermines other campaigns and initiatives that, appropriately, rely on
generic competition to lower price and promote access.

I'm among those who have worked over the last decade, with some
considerable success, on access campaigns that have relied on generic
competition as the structural means to lower price. At every turn, we've
faced proposals that offer to lower price but defend monopolies. Not
only have all those proposals turned out to be chimeras, each was
another obstacle we had to overcome to achieve on-the-ground results.
Some of these proposals were made in bad faith, but a lot of them were
made in good faith. Even the good faith ideas, though, dovetailed with
the efforts of Big Pharma and its allies to protect the monopoly model.

The HIF proposal is an interesting presentation. In the context of the
proposal, the decision to rely on monopolies rather than competition is
discretionary -- in other words, as Aidan has correctly noted, the core
idea is perfectly compatible with generic competition.

I hope that Aidan and Thomas take this into account and revise the
current HIF approach to facilitate open licensing and generic competition.

Robert Weissman,
Essential Action

---------

For folks on the list interested in more detailed thoughts on these
issues, keep reading.

What follows is: 1) a description of the HIF proposal; 2) an example of
how brand-name companies might game the system to charge too-high
prices; 3) responses to an earlier e-mail from Aidan on concerns about
generic competition.

1. THE HIF PROPOSAL

For list readers who may be unclear about what the back-and-forth on the
HIF is about, and who have not read the book or summary: The HIF is a
proposed opt-in arrangement for pharmaceutical companies. Under the HIF
plan, for each new pharmaceutical product, either you accept existing
patent rights and monopolies, or you opt-in to the HIF scheme.

If you opt-in, on a worldwide basis you agree to sell your drug at an
administratively set price, which aims to be between the average cost of
making a medicine and the marginal cost (the cost of making the last
pill). Then, instead of getting rewards from high prices, you get paid
from the Health Impact Fund. How much you get is based on the health
impact of your medicine, as used in the field. Because the size of the
HIF is fixed, how big a claim you get on the overall fund also depends
on how many other companies have made claims. If you opt in to the HIF,
you also get a 10-year global marketing monopoly.

Hollis and Pogge have an argument about why it makes sense to grant this
10-year marketing monopoly (see below), but on the merits it is not
intrinsic to the plan.

Instead of granting a 10-year marketing monopoly, a different system
might require that the patent holder issue an open license to any party
to manufacture and distribute the drug. That would either a) get the
benefits of generic competition in addition to the benefits available
from the HIF; or b) push the patent holder to reduce prices; or c)
achieve no benefit, but cause no harm.

2. GAMING THE HIF; WHO PAYS FOR MEDICINES FOR VERY NEGLECTED DISEASES?

Hollis and Pogge argue that the HIF proposal will give brand-name
companies an incentive to charge low prices. But there may be ways for
brand-name companies to game the system. For example --

One important feature of the HIF is that it requires patent holders
opting in to the fund to charge a no-profit price on a global basis.
Effectively, this means the HIF only covers the most neglected diseases
-- what the WHO Commission on Intellectual Property Rights, Innovation
and Public Health calls Type III diseases, the diseases endemic only to
developing countries, where consumers and many governments have very
little buying power. Given the size of the fund, it will not be worth it
for brand-name companies to sacrifice the ability to charge patent
monopoly prices in rich countries and -- very importantly, in
middle-income countries, for drugs that treat illnesses common among
what is called the middle class.

There's nothing wrong with this per se -- developing incentives for Type
III diseases is a very great need. But this feature has important
consequences in light of the decision to preserve brand-name company
monopolies.

Type III diseases are generally prevalent in the poorest countries, or
among the poorest people and communities (rural, indigenous, slums) in
middle-income countries. These are people with very little buying power.
For these people, prices must be extremely low for there to be even
partial access. The only genuinely affordable price is zero -- meaning
that medicines are provided for free, with governments or foreign donors
paying the cost.

The HIF proposal aims to give brand-name companies an incentive to lower
their price -- even apart from the administratively imposed price --
because lower prices will mean more access, more access will translate
into more health benefits, and more health benefits means a bigger
payout from the Health Impact Fund. But the reality of government/donor
funding to promote access changes the equation. Because governments and
donors have greater budget flexibility than very poor people, Big Pharma
companies may be able to game the HIF system, by encouraging governments
to spend more on drugs, with as many people treated as if prices were
lower. Pharma companies would not be able to game this system to
infinity -- prices very much do affect what government and donor
purchasers will buy -- but there is some latitude. Consider AIDS drugs,
for example (though AIDS drugs would almost certainly not be covered by
the HIF, since AIDS drugs have a significant market in rich countries).
For first-generation/first-line therapies, drug prices are now a
relatively small portion of the cost of treatment per person. Does a
price difference between $100 and $200 per year for drugs make a big
difference if overall treatment costs are $1000/person? More to the
point, would it make a big enough difference to justify a brand-name
company choosing to lower its price to $100 to gain a bigger claim on
the Health Impact Fund? That's not clear.

Now, one might say, if you can find examples where the price decline
doesn't have a big enough impact on treatment provision, then what's the
big deal if you get the last increment of price decline? But while it's
true that this hypothetical is self-limiting, it doesn=92t mean you get
the optimal result. Why create a system with this potential problem when
-- with open licensing and generic competition -- you can get the same
benefits and guard against the risk?

At a more general level, and without walking through all of the details
of the HIF proposal and possible permutations, it seems to me that there
are a lot of potential ways for brand-name companies to game the system.
The HIF proposal imagines a very extensive and detailed monitoring
operation to assess not just the health benefit of a new drug, but the
extent to which it is taken up. Given the challenges that even Pepfar
has had in precise monitoring of number of people getting treatment
under the program, it seems very possible to me that a brand-name
company could find ways to sell at a relatively higher price, and then
gin up its numbers on sales. One way to do this would be through
inappropriate promotional campaigns.

Aidan and Thomas are optimistic that the HIF model so changes Big
Pharma's incentives that they become a kind of model advocate for
consumer education, efficient procurement and distribution systems, and
good public health policy.  I find that view implausible. Among other
things, the HIF-covered medicines will only be a small part of a
brand-name company's portfolio, so even good incentives from HIF will
not offset the bad incentives they have for the bulk of their portfolio.

3. RESPONSES TO HOLLIS ON GENERICS

Aidan responded to earlier concerns about the monopoly element of the
HIF proposal in a message on this list:
<http://lists.essential.org/pipermail/ip-health/2008-November/013201.html>.
Below follow responses.

**Hollis: 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 paid out to other firms which were
actually supplying drugs at low prices to poor 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 licenses of relevant intellectual property no longer seems
necessary. Requiring licenses is not, however, without costs.

** Weissman reply: First, the likelihood of this as a problem -- even
absent price controls from the HIF -- is overstated. Generally, given a
removal of regulatory restraints, generic competition emerges even where
the technology is purportedly too complicated for generics. A classic
example of this is oseltamivir (Tamiflu), where Roche said it would take
generics at least two years to reverse engineer the product =85 and
Taiwanese scientists did it in 18 days. Moreover, even for genuinely
complicated products, the HIF could simply mandate that participation in
the fund requires not just licensing of patent and associated IP rights,
but licensing of relevant know-how.

Additionally, HIF proponents can't have it both ways on this point.
Either the structure of the HIF arrangement gives brand-name companies
an incentive to keep prices low -- and this is the crucial argument they
make, even more important than saying prices will be limited by
administratively established maximum prices -- or it does not.

In any case, there is another solution, as Aidan suggests: Establishing
a maximum price. Then you get the benefits of generic competition
wherever possible, and you have another protection in the form of price
controls.

** Hollis: 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 able 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 variable 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 higher mark-up.

** Weissman reply: This claim ignores the very strong evidence that
generic firms will be able to cut manufacturing costs below that of
brand-name companies. It is very hard to imagine the scenario in which
generic competitors compete effectively by charging *more.* This
argument tends to prove too much: By this logic, pharmacies should
currently refuse or be reluctant to carry generic drugs, because they
can take bigger mark ups on higher-priced branded products.

** Hollis: 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.

** Weissman reply: This is the kind of argument that is especially
disturbing from HIF proponents. It buttresses Big Pharma's overall
campaign to link generics with counterfeiting, and the positioning of
Big Pharma as the dependable adversary of counterfeiting. There is no
basis for this claim in general, or in this case. Counterfeits get on
the market because they are fakes of genuine products, not because there
are multiple suppliers. Having a brand-name company monitor its sales
volume will do very little or nothing to limit the incentive or
opportunity for counterfeits. As Aidan and Thomas themselves note, the
structural basis for counterfeiting is high price -- there's more money
to be made making a fake expensive medicine than a cheap one.

The monitoring point doesn't carry much weight. Generic firms can be
required to keep records of sales -- and report them to the HIF -- as a
condition of getting licenses. Presumably they keep such records anyway.

** Hollis: 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.

** Weissman reply: Again, this introduces a complication where there is
none, as the compulsory licensing cases show. There is no need to work
out an elaborate patent landscape: All that need be done is to transfer
all of the IP rights needed to make a medicine. The maker of a drug
already holds these rights.

The patent complications come on the front end -- does the drug maker
hold the patent rights to manufacture a drug? -- not on the subsequent
licensing side.

** Hollis: 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.

** Weissman reply: The HIF could simply establish that patent and
related licenses apply only to the licensed products (and related
combinations and follow-ons).

It is almost certainly the case that brand-name companies would prefer
to give up control over price -- especially for products for which there
is no consumer market demand -- than the patent monopolies. But if
that's so, it only suggests that they believe the patent monopolies let
them retain exactly the kind of control or influence over price, access
and follow-on inventions that the HIF presumably aims to strip away from
them.