Skepticism about the Barton/Pfizer Access-to-Medicines Pricing Proposal

Feb. 17, 2009

by Prof. Brook K. Baker, Health GAP

Stanford Professor John Barton and Pfizer CEO Jeff Kindler are coming to Washington this week to propose a "new international framework" on drug pricing.  They are doing so in an industry-dominated, off-the-record meeting with invited stakeholders on Feb. 20, and Professor Barton is also speaking at a more open forum this Thursday at 7:00 p.m., organized by Knowledge Ecology International and American University Washington College of Law Program on Information Justice and Intellectual Property.  It is no accident that GlaxoSmithKline and now Pfizer are trying to put some new treads on their developing-country business model as they search for ways to exclude generic competition, to respond to demands for increased R&D on neglected diseases, and to maintain unrestricted access to better-off consumers in middle-income countries and to the new drug purchasing mechanisms such as the Global Fund to Fight AIDS, Tuberculosis and Malaria and UNITAID that can promise them long-term, high-volume sales and a "reasonable" rate of return.  Like the GSK proposal, the Barton/Pfizer proposal eliminates many more promising options in favor of preserving monopoly-based intellectual property and pricing policies.

In August last year, in response to a request from Senate Finance Committee Chairman Max Baucus, Professor Barton and CEO Kindler outlined their "practical vision for addressing the access to medicines issue in developing countries, while preserving incentives for innovation."  I will list the six proposals in their letter, the probable outline of their "new international framework," and provide a brief critique of each.

1.  Developed-world nations would commit themselves to develop detailed mechanisms to ensure that their government pharmaceutical purchasing authorities pay an adequate price to encourage research and also that, as donors, they pay a price adequate to cover an appropriate share of research costs for their purchases of new products of primary value to developing nations.

This first proposal actually has two sub-proposals:  one to limit developed countries' ability to enact price controls or to use therapeutic formularies to ensure value for cost by government and other purchasers, and the second to ensure that donors pay for the R&D costs associated with the development of medicines for so-called neglected diseases. 

Big Pharma with the assistance of the USTR has been pushing for elimination of price controls and therapeutic formularies through Special 301 Reports and trade agreement negotiations, e.g., Australia and South Korea.  In Pharma's view, if a medicine is new, it should be expensive, Pharma should be permitted to relentlessly market these medicines to prescribers, and governments should be restricted from weighing price versus therapeutic value or controlling abusive prices via reference pricing and other price controls.  It is no accident that the U.S. has the least regulatory control of drug company prices and thus pays the highest prices for medicines.  Pharma would like the same untrammeled ability to set prices at a profit-maximizing price in every rich country.  As the letter to Baucus makes clear, Barton and Kindler want a sector-specific trade agreement among developed countries to ensure that pricing and reimbursement policies recognize and reward innovation and that government practices that undermine incentives must be disciplined.

The second sub-proposal attempts to ensure that Pharma will be reimbursed by donors for R&D costs for medicines of primary value to developing countries.  It is certainly true that Pharma has historically conducted little R&D on neglected diseases because of the absence of a profit motive (poor people and poor countries can't afford costly new medicines).  More recently, governments and private foundations, such as the Gates Foundation, are subsidizing neglected disease R&D through grants, prizes, and advanced purchase commitments.  But Pharma will not be satisfied with these inducements, it wants a separate promise that donors will pay a price that Pharma deems "adequate" to cover R&D costs.

Both these sub-proposals have to be weighed against other, possibly superior, methods for incentivizing innovation such as grants, prize funds, open source collaboration, and other alternatives.

2.  Under WTO rules, least developed countries (the world's poorest countries, primary in Sub-Saharan Africa) are not obligated to provide IP protection to medicines, at least through 2016.  We agree with this rule.  That said, we need to keep in mind that the goal is to promote access to medicines, and that there are a range of policies that countries need to put in place to achieve that goal effectively.  We also recognized that as these countries develop and become more viable locations for investment and R&D, they should consider time-limiting such a suspension of IP.  We believe it appropriate that the global and national funds purchasing for these countries pay competitive prices but also believe that these prices should cover an appropriate share of research costs for new products whose primary value is in developing countries.

In their second proposal, Barton and Kindler continue to promote the fictions that increased IPR protections will spur pharmaceutical investments in least developed countries and that increased domestic IPRs are necessary to incentivize local innovation.  Numerous studies have raised doubts about the alleged positive impact of increased R&D on pharmaceutical investments in developing countries (other than marketing investments).  Many other factors bear on such decisions, including human and infrastructure capacity that are not going to magically be solved in the short or middle term in the poorest countries.   Likewise, a creative inventor in a poor county already has ample incentives to innovate and patent his or her medical innovations in rich countries, where 87% of global pharmaceutical sales are made.  A country with higher IPRs does not suddenly have increased GDP-related purchasing power and diseases are rarely local.  Accordingly, the proposal that LDCs prematurely adopt heightened IPRs is simply non-responsive to the realities of developing country R&D incentives.

As they did in their first proposal, Barton and Kindler repeat their request for prices that cover an appropriate share of research costs for medicines addressing neglected diseases.

3.  Middle-income nations would protect IP, but markets would be divided:  the poorer sections would get the benefits of low prices, and the wealthier sections would pay  price more aligned with the developed-world price.  Some countries would need to de-regulate their pricing regimes to allow this to happen. 

Pharma wants to achieve market segmentation so that it can sell at profit-maximizing prices to upper- and middle-consumers in middle income countries.  These consumers are currently the major engine of continuing sales growth for Pharma as it has exhausted the purse and the patience of consumers and payors in many upper-income countries.   Admittedly, there is a silver lining in this proposal, namely that possibility that poor residents (and the governments that buy medicines for them) will be able to buy more affordable medicines rather than being priced out of the market altogether.  But there are costs and dangers in this proposal as well.  The first major risk is product diversion - or arbitrage - from the public sector to the private sector because of significant price differentials.  This arbitrage incentive can lead to corruption in the drug supply chain and can even incentivize counterfeit medicines.  Product differentiation in packaging, labeling, and trade dress can help somewhat, but they cannot prevent all the arbitrage that is likely to occur in middle-income countries' poorly regulated drug distribution systems. 

In addition to arbitrage, there is the reality that many poor patients - perhaps the majority - are forced to rely on private sector pharmacies because of unavailability of public-sector  supply and/or inconvenience.  A recent article in the Lancet documents the inadequate supply of essential medicines in many public sector pharmacies in a majority of developing countries.  Although it is unstated, there may be a hidden assumption in this and other proposals, that Pharma will be the exclusive producer and marketer of middle-income-country medicines, effectively squeezing out generic competition.  Having a single-source supplier creates risks of inadequate supply and supply interruptions - problems that are reduced when there are multiple generic competitors in the mix.

4. All nations would prohibit trade in counterfeit and fake drugs, would cooperate with generic and research pharmaceutical firms to help suppress it, and would assist in preventing the reverse flow of low-income-nation generic drugs to high-income countries.

As stated above, high prices in the private sector will encourage product diversion, arbitrage, and even counterfeiting.  Although it is certainly desirable to prevent the proliferation of substandard medicines, the issue of trademark counterfeits is really an IP enforcement issue, not an access-to-medicines issue.  The industry has a very aggressive and misleading enforcement agenda underway in which it is erroneously using the concept of counterfeits to cover unsafe medicines as well.  Pharmacovigilance throughout the supply chain is important, and industry has a right to seek private enforcement of its IP rights, but technical capacity to limit diversion is limited and some anti-diversion methods could end up being quite costly.

5.  All beneficiaries of low-margin pricing would remove all legal tax, duty, and similar barriers to the import and marketing of pharmaceuticals.  They would further agree to accept new drugs on the approval of those drugs by an appropriate international process.

Taxes and duties can add to the eventual costs of pharmaceuticals and many developing countries have wisely moved to reduce or eliminate them on essential medicines.  However, developing country governments do have a need to collect revenues to support their drug regulatory system and it is not obvious that the elimination of taxes and duties will lower the ultimate prices of medicines given the actions of other entities in the distribution system.  Likewise, proposals to speed up the process of regulatory approval for new medicines are important, though there is certainly a lack of clarity in the Barton/Kindler proposal.  For example, Pharma has been quite reluctant in the past to cooperate with the WHO Prequalification Programme which uses First World standards and personnel to confirm the safety, efficacy and quality of medicines for HIV, TB, and malaria.  It would be nice to know whether "an appropriate international process" includes fast-track approval of WHO prequalified medicines as well as medicines previously approved by other stringent drug regulatory authorities.  Even here, there may be occasions when a country could disagree with the registration of a particular medicines either because it is unsatisfied with the overall safety and efficacy of a brand new medicine or because it believes in good faith that some clinical testing with local populations may be necessary.

6.  Donor nations would commit themselves to support the global funds (whether multilateral or national) at a defined level.

Pharma obviously wants market certainly about the presence of guaranteed funds to subsidize the purchase of its new medicines in developing countries.  Such assurances reduce risk and allow longer term R&D and eventual commitments of pharmaceutical capacity to occur.  As important as such funding certainty is, there are underlying concerns whether Pharma will price fairly and whether its low-profit price will match the price charge by generic competitors.  At this point, the proposal is unclear that the bulk of sales of "low-margin" medicines will be made by Pharma alone or by competing generic producers, operating at efficient economies of scale, to low-income consumers in least developed, low-income, and middle-income countries.  Some pharmaceutical companies are still pursuing an anti-generic agenda of continued monopoly control and discount pricing.  However, generic companies can produce most medicines at a far cheaper cost (at least 30-40% less) than Big Pharma, which carries higher overhead costs.  Until Barton and Kindler clarify whether Pharma would be cooperating in licensing to low-cost generic producers, it may not be wise for global funders to write a blank check for Pharma's higher, discount-priced medicines.

Conclusion:

In this proposal, Pharma has made a shrewd calculation - it may be preferable for it to creates greater access to low-income consumers who are not otherwise buying its products in exchange for continued access to upper- and middle-income consumer in big middle-income countries and in exchange for the relaxation of price/value containment measure in rich country markets.  The eventual gain in pro-poor access may not be trivial, but the actual gain will depend in part on whether this proposal advances robust generic competition or whether it relies on old-school tiered pricing.  Likewise, there is little in the proposal that addresses innovation except via a request for research-reimbursing prices for new medicines addressing neglected diseases.  Thus, innovation is still tied to monopoly rights and high prices subsidized by donors. 

This Pharma-initiated proposal must be compared with bolder proposals to separate the market for innovation from the market for access, such as those being proposed by Knowledge Ecology International and Doctors without Borders.  Hopefully, listeners will be asking hard and skeptical questions to Professor Barton and CEO Kindler this week in Washington.

WWW www.healthgap.org

429 W. 127th St, 2nd Fl, New York, NY 10027

Tax ID Number 20-505-3765

Fax 212-937-5283

info@healthgap.org