E-DRUG: CPT presentation Norway
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[crossposted from Pharm-Policy with thanks. NN]
Without the footnotes, and probably with typos, given my lack of sleep,
here are my comments that I will deliver today in Norway. We can talk
to the press after around 1 or 2 pm Norway time. My local cell is
47.452.91.289 Jamie
Policies that ensure access to medicine, and promote innovation, with
special attention to issues concerning the impact of parallel trade on
the competitive sector, and a trade framework to support global R&D on
new health care inventions.
Presented at the WHO/WTO Joint Secretariat Workshop on Differential
Pricing and Financing of Essential Drugs.
April 11, 2001
Hotel Hrsbjrr, Norway
James Love
Director
Consumer Project on Technology
http://www.cptech.org
draft, version 1
1. This position paper will examine several issues related to the
creation of a global system that will accommodate the interests of the
poor, while also supporting investments in R&D for new health care
inventions. I will begin by briefly discussing problems in the "strong"
IP regime, address issues relating to parallel trade, and then describe
a proposal for a new global convention on R&D. In brief, I believe
developing countries should be permitted to embrace weak levels of
intellectual property protection on medicines, and specifically either
exempt essential medicines from patent protection (certainly for the
WTO's "least developed" countries), or use compulsory licensing
liberally. The policy would ensure that prices for essential medicines
would be close to marginal costs, a key policy objective, and one that I
believe will only be achieved under this approach. Also, in the richer
countries, there is a need to restrain pricing of medicines in order to
extend treatment to uninsured groups and to expand access to medicines
on formularies, and perhaps less appreciated, to address the growing
problems of excessive levels of protection in new biomedical
technologies, as well as the growing problem of evergreening of patents
on older products. The combination of these policies would likely
decrease big pharma drug company profits, at least to some extent.
Moreover, at any level of company profits, there are still many
important underfunded R&D projects, and much controversy over who should
pay for R&D, even among the developed countries. I therefore review
proposals for a global R&D convention, an issued raised by CPT, MSF and
HAI in previous occasions, including for example the Amsterdam
Statement.
Problems with the IPR system
2. The IPR system is a system of government regulation, and like any
other system of government regulation, it looks better in theory than it
does in practice. I think that everyone understands that patents create
monopolies, and that this leads to high prices, which is the expected
cost of the patent system and of course, and one way to pay for R&D. In
1999 Glaxo claimed to have re-invested 14.6 percent of its revenues in
R&D, so for every dollar of drug sales, the global R&D budget increased
by 15 cents, which is why we permit Glaxo to charge thousands of dollars
per year for drugs that cost much less to manufacture. The WHO reckons
that most patented medicines are sold at 20 to 100 times their marginal
costs, so this is a fairly expensive way to pay for R&D, but it works.
That is, it works if you can afford it. But as we also know, many
cannot afford such an expensive mechanism to fund R&D, and we are here
in Norway to consider the 90 percent of the global population that
cannot afford to pay, including for example the 20,000 persons per month
dying in South Africa of AIDS, while Glaxo and other big Pharma
companies sue the South Africa government to keep cheaper generic AIDS
drugs off the market.
3. There are also huge problems with the new medical technologies.
Here
big pharma itself is a consumer, because it licenses most of its
technologies from the competitive sector, including universities and
other government funded researchers. In the past, in a one patent one
product world, this was not a huge problem, because big Pharma was
needed to put marketing muscle behind a new invention, and it could
license inventions for reasonable terms. However, in the new world of
lower standards for patentability and the broader scope of new
biotechnology patents, big pharma is facing growing problems in
obtaining and consolidating intellectual property rights. When
Columbia University tried to extend its biotech Cotransformation Patent,
big pharma lobbied against the patent extension. They were paying
royalties to Columbia University. When the University of Rochester was
awarded a patent for a new class of drugs known as Cox-2 inhibitors, big
pharma was concerned. There are lots of these stories.
4. Big pharma has been concerned about patents on genes, and this is
also huge problem for the competitive research community itself, as
reported in this LA Times story.
Aggressive Patenting May Stifle Gene Discovery Benefits
LOS ANGELES TIMES -- WASHINGTON
In one of the landmark cases dealing with the controversy involving
human gene patenting, researchers at the University of Pennsylvania
argue that patent holder Myriad Genetics, a Utah company, used its
ownership claims on two genes to stifle development of new tests and
treatments for breast cancer.
Early work on the genes, called BRCA1 and BRCA2, followed what used to
be a familiar pattern. Scientists at several institutions raced to
locate and decode the genes, which are linked to families with high
rates of breast and ovarian cancers. Myriad, collaborating with the
National Institutes of Health, got to BRCA1 first and later claimed it
was first to BRCA2 as well.
Researchers, including Pennsylvania University's lab research director
Arupa Ganguly, followed up by developing tests for variations in the
genes that can signal susceptibility to disease. By 1998, the Penn lab
was performing more than 700 tests a year.
That's when Myriad used its patent to pull the plug. It notified Ganguly
and her colleagues that they could no longer do more than a handful of
tests. The company also required the genes' co-discoverer, former NIH
collaborator Phillip Futreal, to pay Myriad for tests he needed for his
research. And it set a $2,580 fee for the test, more than twice that
charged by most other labs, including Penn's.
Recently, after a furor over the fee, the company relented and agreed to
charge only $1,200 when federally funded research such as Futreal's is
involved.
5. Another set of concerns are those relating to the practical issues
in
running a patent system. The first issue concerns what it costs to run
a patent office. In the United States, it is $1 billion per year and
growing. Not many developing countries can afford to spend a $1 billion
to examine patents.
6. Despite these massive expenditures, the quality of US patent
examination is poor. According to a study by Lemley and Allison of
patents litigated to judgment, 54% were found to be valid, and 46% were
invalid.
7. Critics of US patent examinations believe a much larger number of
issued patents are not valid under any reasonable tests of utility and
invention, and would be busted if the patent owners sought enforcement.
Patent examinations in developing countries, if they exist at all, are
under staffed, under trained and have less access to research materials
on prior art.
8. The costs of litigation are not trivial. In (December 27) 1998, the
New York Times reported the median cost of US patent litigation was $1.2
million, per side, and the costs of litigation in complex cases is much
higher. In Polaroid v. Kodak, each side reportedly spent over $100
million. Consider this quote from a Judge in the AZT patent dispute.
In the twenty-five months transpiring between the filing of the initial
complaint in this consolidated patent infringement action on May 14,
1991, and the commencement of the trial on June 28, 1993, approximately
five hundred forty-one pleadings have been filed and dozens of hearings
on motions and discovery matters have been conducted by the court. The
court has entered eighty-eight written orders and numerous bench
rulings. Thus, the court is intimately familiar with the facts of this
case and the legal contentions of the parties. To state that the case
has been hotly contested would be an understatement. The parties have
amassed learned, experienced and sizable trial teams who have
represented their clients zealously and competently. The administrative
complexity [of] conducting a trial of this magnitude has been enormous
for the court and the parties. The sixty-year- old courtroom in New
Bern, North Carolina, has been converted into a contemporary high tech
facility utilizing real time court reporting and six computer-integrated
video display monitors. It is highly conceivable that the cost of this
trial for the parties exceeds $100,000 per day, in addition to the time
and expense associated with this court and the jury. As the case enters
its fourth week of trial, the parties estimate, somewhat conservatively
the court suspects, that the trial will last an additional six to eight
weeks.
9. See also this quote by Professor Michael Meurer:
First of all, frequency of litigation and the cost of litigation for
biotech patents is very high. Drug and health patents are litigated more
than any other kind of technology. There is one empirical study that
showed that six lawsuits are spawned by every 100 corporate biotech
patents. There is also research that shows that most of the start-up
companies are spending a comparable amount on legal costs to what they
are spending on research. So this is a very big concern for start-up
companies.
10. Given these facts, one has to ask how realistic it will be for poor
countries to administer a good patent system, and how reasonable is it
to expect poor patents to be busted in developing countries? I believe
the best evidence suggests that as in the Thai ddI patent case, bad
patents will keep cheaper medicines off the market for years. The
policy consequences are bad. The poor will face more IPR protection
that the rich, because they will lack the ability to reject or bust bad
patents.
11. I have written elsewhere that poor countries should adopt
compulsory
licensing or government use laws that are consistent with the TRIPS, but
that suit the needs of the poor. They should be easy to use, nearly
automatic in terms of getting the licenses or authorizing public use,
and they should not permit the drug companies to tie matters up in court
for years. Fortunately, the TRIPS permits this. Unfortunately, WIPO
and the WTO give poor countries really bad legal advice. Indeed, I
think the technical assistance on IPR issues borders on legal
malpractice, because the advice benefits the big pharma companies, but
not the poor who live in these countries. My own recommendations are on
the web here:
http://www.cptech.org/ip/health/cl/recommendedstatepractice.html.
Compare my advice to the model laws that countries get from WIPO, and
then ask yourself, who benefit the most from the WIPO versions? The
poor or big Pharma? If the developing countries wanted to change
things, they should give Carlos Correa a top job at WIPO.
12. Competition is what drives prices to marginal costs. If the
global
community wants the poor to have access to essential medicines at close
to marginal costs, then there should be lots of compulsory licensing.
You can have interesting discussions about the compensation to the
patent owners under a compulsory license, but at the end of the day,
public policy should not be a barrier to access. In the least developed
countries, they should just not have patents on medicines. If you want
to kill the competitive generics sector, then you force everyone to buy
from big pharma, you link donor aid to purchases from big pharma, you
subsidize big pharma exports to poor countries, you impose IPR systems
that big pharma can manipulate, you do all of these things and more, and
there are people in the WHO Commission for Macroeconomics and Health who
are pushing this big pharma agenda. Which is odd, because the WHO is
supposed to be helping the poor, not protecting big pharma profits.
Considerations concerning parallel trade
13. Sellers of pharmaceutical drugs routinely engage in price
discrimination. Differences in prices are typically a response to market
issues, on the supply and demand side. Supply side issues include
differences in marketing and distribution costs, including in some
cases, taxes or tariffs. Not to be overlooked are the wide differences
in financing arrangements, and the lack of confidence that purchasers
pay timely, if at all.
14. Demand side issues include such items as (a) the income and ability
of consumers to pay, (b) competition from generics or therapeutic
alternatives, and (c) government price controls.
15. While most people think it would be better if the poor would pay
less for medicines, often the contrary is true. In the USA, for
example, the unemployed or uninsured pay much higher prices for
medicines than do those who are insured and benefit from the ability of
insurance companies and HMO's to use formularies to negotiate lower
prices.
16. Many differences in prices are explained by the inefficiencies in
the distributions systems. This is true for products that are on or off
patent. Consider for example, the December 31, 1998 report in the Wall
Street Journal, which indicated that US pharmacies routinely impose
enormous mark-ups on retail prices of generic products (see
http://www.cptech.org/ip/health/generic/nobargain.html). For example,
Atenolol, a drug for high blood pressure, was sold by the generic
manufacturer for $.62, and retailed by the pharmacy at $14.68, a 2,368
percent increase. In some countries pharmacy margins are regulated,
but this too can introduce distortions. In Bangladesh low cost generic
suppliers complain that pharmaceutics are reluctant to sell the least
expensive products, because the retail mark-ups are smaller. There are
also many perverse incentives at the point of prescription. In some
countries, such as South Africa, doctors also dispense products, and
earn substantial income from prescribing expensive brand name products.
And of course there are countless stories all over the world of
manufacturer kick-backs and gifts to doctors who prescribe products.
17. Methods of funding pharmaceutical drugs vary of course. In states
with a large public sector role in paying for medicines, the government
can and do negotiate, solicit bids or engage in other strategies to
obtain favorable prices on products. The ability to speak for larger
quantities is a plus in obtaining good prices.
18. Price controls are used in some countries, with very different
methodologies and outcomes.
19. Intellectual property rules vary from country to country;
particularly during the period before WTO rules are in place, but even
within the WTO framework. The WTO rules in general provide minimum and
mandatory rights for IP owners, and maximum and voluntary rights for the
public. Rules on the scope and term of patents, and on a wide variety
of sui generis rights, including those that are presented as regulatory
measures, vary from country to country. As a consequence, products
may be marketed as a monopoly in one country, and face competition in
another.
20. As a consequence of any number of the above factors, prices for
pharmaceutical products, brand name or generic, on patent or off patent,
differ, between countries, and often within countries.
21. The price differences between countries create opportunities for
cross border (parallel) trade. WTO rules generally restrict the grounds
under which countries can restrict cross border trade, and some legal
scholars say that the provisions in the GATT obligate countries to
permit cross border trade in pharmaceuticals. In any case, parallel
trade in pharmaceuticals is only done to a limited extent.
22. Restrictions on cross border trade in pharmaceutical drugs are
typically enforced though regulatory barriers. For example, in the US,
the barriers to cross border (parallel) trade in pharmaceuticals are not
based upon intellectual property rules, but rather on FDA health and
safety regulation.
23. The possibility of parallel trade can restrain pricing, and in
general consumers in any one country benefit from the opportunity to
seek out alternative sources of supply. There are arguments that the
global free trade in pharmaceutical drugs (parallel imports permitted in
every country) would lead to prices that are higher for some consumers,
and there are other undesirable aspects to parallel trade as well,
including problems with quality control and maintaining distribution
systems. The reasons to consider parallel trade are to benefit from
better prices in more competitive markets.
24. Competition is the single most important force to protect consumers
on pricing issues, and consumers who live in countries with small
internal markets or inefficient or monopolistic distribution systems can
obtain very significant benefits from parallel trade, for some
products. This is true for both government and private sector buyers of
medicines.
25. If "big pharma" companies were to face extensive global parallel
trade, a situation that is not the case outside of the European Union,
they would be faced with choices when products are not protected by
patents, sui generis or regulatory regimes in some countries, but are in
others, or for whatever other reason there was more competition in some
markets than others. If they lower prices in the competitive market,
they face parallel trade back to the less competitive markets. The
existence of parallel trade would restrain big pharma ability to lower
prices. This would benefit the competitive sector, including the
smaller domestic generics companies. To the extent that the competitive
sector would achieve larger market shares on popular products coming off
patent or other exclusivity restrictions, it would be larger and
ultimately more efficient.
26. We support restrictions on parallel trade from poor countries to
the
United States, the European Union, Japan and other wealthy counties, and
this is currently illegal in each of these countries. However, even if
such trade was legal, poor countries would have options to protect
consumers in the event that big pharma set a single global price for the
rich countries. The poor countries could issue compulsory licenses to
the competitive sector. This too would strengthen the generic sector
in the developing countries. Extensive use of compulsory licensing the
poor countries would drive prices closer to marginal cost, which is a
good result from an ethical standpoint. Concerns about the appropriate
burden sharing for global R&D would be addressed explicitly in the
setting of compensation for the licenses. This would be a transparent
and direct approach to the issue of supporting R&D.
Production for Export
27. Under the WTO TRIPS accord, the general rule is that compulsory
licenses will be predominately for the domestic market. There are
several provisions in the TRIPS that would permit exports. One way
concerns Article 31.k, regarding anticompetitive practices. The US
government uses Article 31.k extensively, and several developing
countries are looking at Article 31.k as they revise their patent laws.
The TRIPS council may also examine "production for export" exceptions to
patent rights under Article 30, an issue that will be discussed in
Brussels in the May TACD meeting.
Global convention on R&D
28. There is are real concerns that downward pressures on pricing would
lead to inadequate private investment in R&D, and even with higher
rather than lower IPR protections, there is still too little invested in
many important public health projects, including for example basic
research, neglected diseases, adverse effects, health and the
environment, appropriate technology, health care delivery systems,
vaccines and many other important public health concerns. There are
also concerns about the fairness of global burden sharing for R&D. What
is needed is a global convention to obligate member countries to provide
adequate contributions to R&D.
29. The WTO TRIPS accord was a response to IP owner lobbying efforts,
and it addresses their concerns. But it is not about R&D, it is about
the rights of property owners. The whole framework for the TRIPS is
minimum property owner rights and maximum public rights. There are no
obligations to fund R&D, just to enforce one mechanism that is a highly
imperfect way to fund R&D.
30. Governments can and do mandate investments in a wide range of
areas.
For example, in the employment area, there have been various proposals
for mandated investments in worker training. A recent example is the US
H-1B program for temporary workers in the technology sector. Under this
program the employer pays a fee of $500 for each employee, which is used
for training and scholarships for US citizens. In the US banking
sector, there is the "Community Reinvestment Act," which requires US
banking institutions to invest in low income neighborhoods. This law
was first passed in the 1970s, in response to criticisms that banks were
"redlining" poor neighborhoods.
31. The government can also raise money from one part of the economy to
address entirely different needs. For example, in 1997 US Senator
Specter sponsored legislation (S. 435) to create to create a "Healthy
Children's Trust Fund," to provide funds so that eligible children could
get vouchers to purchase state health insurance. The funding for the
trust fund was to come from an auction of spectrum for wireless
telecommunications.
32. In early 1995, Senator Specter introduced S. 18, the "Health Care
Assurance Act," which, among other things, would have created a "Trust
Fund for Medical Treatment Outcomes Research." This R&D fund would have
been funded by a tax of .1 percent of the premiums on private health
insurance. Later the same year, Senators Hatfield, Harkin, Boxer,
Inouye, Simon, Kerrey, Mikulsk and Moynihan sponsored S. 1251, "the
`National Fund for Health Research." The money for the fund would have
come from an increase in the excise taxes on tobacco products. This bill
also would have created a voluntary check-off system, whereby taxpayers
could designate $1 of their tax refunds be donated to medical research.
33. In 1997, Senator Specter and others proposed, at the urging of
Bristol-Myers Squibb, that the US government's Hatch/Waxman "data
exclusivity" protections be extended from 5 to 10 years, in return for
the government receiving 3 percent of a drug's revenues to be used for
research, and a commitment that the company would spend another 3
percent on R&D.
34. Other countries have explored similar approaches. In the
United Kingdom, the government permits higher reimbursement prices for
pharmaceutical when companies have above average R&D expenditures. In
several countries, including Canada, the drug companies have negotiated
promises for increased R&D levels, in return for changes in public
policy. In India, the government has tried to push for minimum levels of
R&D investments, but has meet resistance. In Argentina, there are
proposals in the domestic industry for a tax on pharmaceutical sales to
fund an Argentine R&D program.
35. In the 1999 "Amsterdam statement to WTO member states on access to
medicines," CPT, HAI and MSF called for a global agreement on R&D, and
also endorsed the use of "compulsory research obligations, such as
requirements that companies reinvest a percentage of pharmaceutical
sales into R&D, either directly or through public or private sector R&D
programs."
36. The advantages of mandates or strong linkage are many, including:
i. Governments can determine by policy the aggregate level
of R&D funding.
ii. Governments can determine the composition of R&D
funding.
iii. It is possible to increase access to medicines and
increasing R&D at the same time.
iv. The system can be as transparent as policy makers wish.
v. Mixed funding models are possible. Governments can
decide if R&D funds are invested by governments or companies or a
combination
of both.
vi. Mandates and strong linkage can be use in combination with other
approaches, including intellectual property rights and direct public
investment via general tax revenue.
37. Our general proposal for the global convention is one that would
replace the TRIPS as it relates to medicine, and give countries direct
obligations to fund R&D, according to their ability and stage of
development, through the policy instruments that make sense for them.
Any combination of high IPR and high consumer prices, public funding of
R&D or mandatory R&D requirements could satisfy the obligation, so long
as the member country actually did something to fund R&D. Others have
proposed a convention that only deals with funding diseases for the
poor, or just deals with a specific issue, such as the funding of
vaccines for malaria, TB or AIDS. Some WTO officials think it should
work within the TRIPS framework, and some public health groups think it
should be a replacement for TRIPS. It would not have to be the
convention that I would draft, but it is something that should be done,
on some level. We have to begin to think about pro-active globalization
initiatives to address the needs to the public, including the poor,
rather than the needs of firms that are global. Even if we fail to
adopt the best convention, we should try, because it is our job to try
to do what is best for the poor, and also because the effort will help
us put into perspective the value of alternatives. We can at a minimum
create a yardstick to measure where we should be going. And with time,
enough hard work and good will, we might surprise ourselves and change
the world
38. Thank you for the invitation to address this gathering.
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Attachment on Ramsey Pricing
The WTO paper discusses price discrimination for drugs in terms of
Ramsey pricing, and others have addressed this. Ramsey is a term used
first to describe issues in public utility regulation, where there were
big fixed costs and low marginal costs, and hence increasing returns to
scale, and departures from marginal cost were necessary to recoup the
fixed costs. Since marginal cost pricing would not meet the budget
constraint of the enterprise, Ramsey and others (before him) examined
the issue of how best to price the good or service. In particular, he
focused on classic notions of economic efficiency, as
measured by consumer surplus, and like most such analysis, ignoring
distributional issues.
Ramsey's insight (he was not the first it turns out), was that pricing
similar to a monopolist was economically efficient, if both could engage
in price discrimination. The less elastic the demand for the good (the
higher the willingness to pay), the less consumer (social) surplus that
was lost. The Ramsey solution was not the monopolist solution, however,
because Ramsey limited the increases over marginal cost to only that
necessary to pay for the fixed costs. Ramsey would price according to
what the market would bear, but only up to a point when the enterprise
met its budget constraint. The Ramsey solution is often used to some
degree by regulators, but with some limitations, because it has some
problems.
One illustration of this is from the optimal tax theory, where it was
quickly shown that a ramsey solution would involve shifting taxes away
from many luxury goods, and more problematic, to things like life saving
medicines. For example, under ramsey pricing, one would have *very*
high taxes on insulin, and use this revenue to say pay for roads. Any
medicine that treated a severe illness was a target for a Ramsey tax.
The demand was "inelastic" because people really needed it. Not very
many people thought this was a great way to design taxes. It turns out
people do care about distributional issues.
Monopolies of one sort or another were fascinated with Ramsey pricing,
because it provides a nice rationale for behavior that looked a lot like
what a monopolist wanted to do. Thus, for example, in the early 80s the
railroads claimed that deregulation of "captive" shippers of coal and
grain, was "Ramsey efficient," because they were recouping fixed costs
from those who had no alternatives, and hence, were relatively price
inelastic. The railroads even got Ken Arrow to sign a letter on this.
Price gouging (whoops, I mean Ramsey efficient pricing) of captive
airline markets also leads to similar claims that this is just an
efficiency justified pricing scheme (not a true statement, of course).
The big problem with Ramsey pricing is that everyone loves to push the
price discrimination part, which is pricing according to what people are
willing to pay, but there is considerably less enthusiasm for the other
part, which is the budget constraint. And, without the government
regulation of the budget constraint, you just have monopoly pricing,
which is not in fact efficient, in most cases, not to mention the
ethical issues, or the rather messy empirical realities of industry
pricing practices.
So it is somewhat ironic that at the center of a debate over how to help
the poor, we are showcasing theories of why letting big pharma engage in
monopoly like price discrimination, without any price controls, is the
answer.
--
James Love
Consumer Project on Technology
P.O. Box 19367, Washington, DC 20036
http://www.cptech.org
love@cptech.org
1.202.387.8030 fax 1.202.234.5176