E-DRUG: Skepticism about the Barton/Pfizer Access-to-Medicines Pricing Proposal
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Prof. Brook K. Baker, Health GAP
Feb. 17, 2009.
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 create 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.
Professor Brook K. Baker, Health GAP
Northeastern U. School of Law
Program on Human Rights and the Global Economy
400 Huntington Ave.
Boston, MA 02115
617-373-3217 (office)
617-259-0760 (cell)
B.Baker[at]neu.edu