Nov. 24, 2008

by Prof. Brook K. Baker, Health GAP

According to its authors, Professor Thomas Pogge and Professor Aidis Hollis: 

The Health Impact Fund, our flagship proposal, is a new way of stimulating research and development of life-saving pharmaceuticals. To provide wide access, medicines need to be affordable-but low prices don't create strong incentives for innovators to invest in research and development. The Health Impact Fund is an optional mechanism that offers pharmaceutical innovators a supplementary reward based on the health impact of their products, if they agree to sell those products at cost. The proposed Fund is to be financed mainly by governments.

Knowledge Ecology 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.

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