Impact of the HIF on generic industry in developing countries

This is an exchange from the ip-health list, that will be updated as the conversation continues, about the impact of the HIF on the generic drug industry developing countries.

—– Original Message —–
From: “James Love”
To: “Ip-health”

Cc: “Thomas Pogge” “Aidan Hollis”
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

The response by Aidan Hollis is as follows:

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

Incentives for Global Health
http://www.healthimpactfund.org

My response was as follows:

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:
https://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 . . . ”
https://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:

https://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.

https://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.

–

James Love, Director, Knowledge Ecology International