Compulsory licensing

This is from an exchange on IP-Health.

Dear Aidan and Thomas.

There are several things I could mention about this revised position on compulsory licenses, but I will begin with these.

1. There is no evidence that strong patent protection has stimulated R&D for Type II and III diseases. I think you could acknowledge the comments by the CIPIH and others on this point. And if the whole point of strong patent protection is to allow high prices, you really don’t want this type of outcome for Type II and III diseases.

2. With respect to the middle income countries, I have the strong feeling that both you and Professor Pogge are ignoring points that I (and others) have made in on- and off-line exchanges for about a year. The markets in middle income countries are quite important to attract generic entry, and also to obtain decent economies of scale. Africa would never had attracted an offer of $350/250 per year in 2001 for NVP+3TC+d4T if Brazil had not already been buying generic APIs for several years for all three components, and stimulated entry and competition. India was a large enough market to induce entry for all sorts of other generic products. If you remove Brazil, China, India, South Africa, Thailand, Chile and other middle income countries from the generic market, you lose the feasibility of doing compulsory licensing in the poorer countries.

Not everyone understands the economics of generic drug markets in developing countries. But when you and Professor Pogge launch a high profile roll-out of a self billed “major” public health initiative, you should not have missed these points, in my opinion. Particularly when the evidence has been presented to both you and Professor Pogge on several occasions.

The prize fund approach that Tim Hubbard and I proposed in 2002 was to separate the reward for products from the price. We called for the elimination of the legal monopoly on products, to be replaced by a system of cash rewards, based upon the incremental impact on health outcomes. The 2002 Aventis scenarios, among other things, identified the weakness in longitude type prize mechanisms, that relied, as did the early APC proposals, and a technical specification and a prize budget for a specific outcome. We proposed a system where all qualifying products would win something, and rewards would be connected to the value of the products, as determined, in a zero sum competition, by relative merits — relative impact on health outcomes. The first Sanders bill was developed in 2004 (introduced in 2005), to provide a concrete illustration of how the approach could be implemented in the largest pharmaceutical market — the US. We thought was necessary also to counter some early (2004) criticism against the proposal by Professors Grabowski and DiMasi, that we thought described incorrectly the approach we favoured.

Following the Aventis Scenarios and the Sanders bills and the Barbados Bolivia proposals, everything in the academic literature has been trending toward the 2002 valuation designs. Your 2005 papers were essential voluntary applications of the design.

Pogge’s early proposals consistently avoided any mention of anyone else’s work on this topic, and his valuation design was fundamentally flawed. He proposed a fixed QALY reward system, and a treaty that would have provided an unlimited liability to pay for QALYS supplied. It not only vastly underestimated the noise in QALY measurement, and scared budget officials, but it imposed a “cost” of every use of a drug, much like a reimbursement liability under the current system. Thankfully that ill advised idea has been rejected.

(The comparison of the various design issues is set out in the Big Idea paper).

To implement prize funds for Type II and III diseases across many developing countries, you are pretty much stuck with a voluntary approach in the sort run, with the rewards largely funded by Northern Donors. But even here, a really important medical innovation should be subject to compulsory licensing pressures if the voluntary license is not forthcoming.

To have a larger transformation change in access, including Type I diseases, countries have to introduced non-voluntary licenses on patents, in connection with an alternative (not complementary) reward system.

> This is a multi-part message in MIME format.
> –
> [ Picked text/plain from multipart/alternative ]
> James Love, commenting on the HIF book, asked in a recent email to this

> list
> “I would like to know from Aidan Hollis or Thomas Pogge if they think the
> HIF book was in error in not providing the more compelling case for the
> use
> of compulsory licenses, in light of the issue of the relative quantitative
> impact on innovation and access?”

> We are happy to oblige in this matter. Compulsory licenses clearly can
> have
> a place in enabling access to patented drugs which are priced outside of
> the
> reach of consumers in a country. Particularly for the poorest countries,
> compulsory licenses make sense. Jamie refers to the case of

> Africa, which as he notes represents a very small share of global
> pharmaceutical expenditures and perhaps even less of patented
> pharmaceuticals. It is clear that for drugs for global diseases,
> compulsory
> licenses in African countries are unlikely to have any significant impact
> on incentives

> for pharmaceutical innovation; in the case of drugs for diseases which
> primarily affect the very poor, compulsory licenses could however have
> non-trivial impacts on the incentives for innovation.
> The situation with respect to “emerging” markets is less clear. India,
> China

> and Brazil represent significant and growing markets in their own right. I
> believe that compulsory licensing in those countries might have negative
> consequences for global incentives for innovation, even for global disease
> therapies. That does not, in my view, mean that compulsory licensing would
> necessarily be unjustified, (and in fact Sean Flynn, Mike Palmedo, and I
> have a paper forthcoming in JLME which develops a new economic rationale

> for
> compulsory licensing) but there may be effects on innovation which have to
> be considered.
> In any case, of course, compulsory licensing is at the
> discretion of the government of each country, including of high-income
> countries. The price controls almost universally exercised by developed

> countries are second cousin to compulsory licensing: both have the effect
> of
> reducing price, so the governments of developed countries should not
> pretend
> to be shocked by compulsory licensing in countries like Thailand and
> Brazil.

> If Jamie is concerned that the HIF book may be used to beat developing
> countries over the head to stop them from exercising their legitimate
> rights
> of compulsory licensing, that wasn’t our intention, and he should feel
> welcome to use this letter as a clarifying statement.

> Our intention was merely to point out that there can be a trade-off
> between
> access and innovation if the tools used to enable access simply cause a
> reduction in price (though the trade-off in many circumstances will of
> course favor access over innovation). The advantage of the HIF in this
> respect is that it can be used to maintain the incentive for innovation

> while also enabling the widest access.
> As I mentioned in a previous email to this list, we have learned a lot
> from a number of recent meetings on the HIF, and from correspondence
> including ip-health. We welcome further comments, whether by email,
> telephone, or this list-serve, and we will in due course try to respond
> adequately to comments on the proposed design of the Health Impact Fund.

> We believe that there is room for improvement, and take the comments we
> have received very seriously.
> Aidan Hollis
> Associate Professor
> Department of Economics, University of Calgary

> 2500 University Dr NW Calgary AB T2N 1N4 Canada
> tel: +1 403 220 5861 fax: +1 403 220 5861
> email:
> web:
> Incentives for Global Health

> —– Original Message —–
> From: “James Love” <>
> To: <>

> Cc: “Thomas Pogge” <>; “Aidan Hollis”
> <>
> Sent: Thursday, November 27, 2008 9:00 AM
> Subject: Trade-off between access and incentives

>> Knowledge Ecology Notes
>> Trade-off between access and incentives, November 27, 2008
>> This is a comment on the references to compulsory licensing in the
>> Hollis/Pogge HIF book that are quoted below.

>> <<——————-start quote
>> Aidan Hollis and Thomas Pogge, The Health Impact Fund, Making New
>> Medicines Accessible for All, A Report of Incentives for Global Health,
>> 2008.

>> Strengthened intellectual property protections in the less developed
>> countries burden the poor immediately by pricing vital medicines out of
>> their reach. Yet, such protections may benefit only future poor people,
>> starting in 2025, when patents on medicines that owe their existence to
>> such protections expire. Appealing to this time difference, one might
>> then propose to resolve the dilemma in favor of Pre-TRIPS on the ground

>> that it is morally impermissible to cause severe harms, including death,
>> to poor people now for the sake of protecting millions of poor people
>> from similarly severe harms later on. Many endorse such a principled
>> stance. Yet, one can not be satisfied with such an outcome in view of
>> all the harm that stimulating new drug development could avert from so
>> many future lives.

>> . . . compulsory licenses weaken the innovation incentives that were
>> supposed to result from the extension of strong intellectual property
>> rights into the less developed countries. Pharmaceutical companies will
>> understandably discount any such incentive if they are uncertain whether
>> and to what extent they will actually be allowed to reap the financial
>> reward from inventing a new medicine. . .

>> Third, while systems of compulsory licensing may provide an
>> expedient solution to short-term health problems, they discourage
>> investment in R&D for diseases whose remedies may become targets for
>> compulsory licenses. The welcome relief from the problem of high prices
>> compulsory licenses bring thus aggravates the neglect of diseases
>> concentrated among the poor. Pharmaceutical companies spend less on the

>> quest for vital medicines – especially ones needed mainly by the poor –
>> when the uncertainties of development, testing, and regulatory approval
>> are compounded by the additional unpredictability of whether and to what
>> extent successful innovators will be allowed to recoup their investments
>> through undisturbed use of their monopoly pricing powers. Compulsory

>> licensing may thereby even exacerbate the health crisis facing
>> developing countries over the medium and long terms (Pogge 2008b, 240).*
>> ————-end quote—————->>
>> I was struck by the HIF discussion on this topic, because Thomas Pogge
>> has a background in ethics, and Aidan Hollis was involved in a

>> competition case in South Africa in 2003, where these tensions were
>> explored.
>> Missing from the Hollis/Pogge discussion was a realistic assessment of
>> the quantitative impact of the access and incentive trade-offs.
>> During the first major compulsory licensing meeting in Geneva in March

>> 1999, Dr. Richard Laing put up a slide that showed that the entire
>> continent of Africa represented about 1 percent of the global market for
>> pharmaceuticals. He said, patent protection Africa was irrelevant to the
>> pharmaceutical company decisions about whether or not to develop a new
>> drug. This was certainly true in 1999. It is certainly true for a number
>> of market segments where consumption of high priced patented medicines

>> are basically zero. When the Thailand government sought a compulsory
>> license for patents on Plavix, for use in the public sector health
>> programs, there was zero consumption of this product in that market.
>> When fluconazole as too expensive for HIV patients in Thailand and South
>> Africa, there was almost no access to this drug. In these and in
>> countless other cases, the harm from the lack of access is huge, and the

>> incentive effects are incredibly small. These empirical realities are
>> quite important in evaluating the trade-offs.
>> In a 2003 patent dispute, a number of economists and human rights
>> scholars looked at this issue, including the economist William Jack of
>> Georgetown University, and Aidan Hollis. Hollis noted that when “patent

>> protection has very weak effects on stimulating innovation but large
>> effects in terms of harming poor consumers . . . government-granted
>> compulsory licenses can be used to mitigate the negative effects of
>> government-granted patents.” This point is missing from the HIF book,
>> which now could easily be quoted by patent owners to oppose compulsory

>> licensing requests.
>> In 2006, the WHO Commission on Intellectual Property, Innovation and
>> Public Health issued a report that also addressed the relative
>> quantitative significance of the effects of patents on innovation and
>> access developing countries:

>> <<———start quote—
>> Intellectual property rights have an important role to play in
>> stimulating innovation in health-care products in countries where
>> financial and technological capacities exist, and in relation to
>> products for which profitable markets exist. In developing countries,
>> the fact that a patent can be obtained may contribute nothing or little

>> to innovation if the market is too small or scientific and technological
>> capability inadequate. In the absence of effective differential and
>> discounted prices, patents may contribute to increasing the price of
>> medicines needed by poor people in those countries. Although the balance
>> of costs and benefits of patents will vary between countries, according
>> to their level of development and scientific and technological

>> infrastructure, the flexibility built into the TRIPS agreement allows
>> countries to find a balance more appropriate to the circumstances of
>> each country (page 22). . .
>> There is no evidence that the implementation of the TRIPS agreement
>> in developing countries will significantly boost R&D in pharmaceuticals
>> on Type II, and particularly Type III diseases. Insufficient market

>> incentives are the decisive factor. (page 85)
>> There is very little real evidence, one way or the other, on how the
>> availability or possible use of compulsory licences will affect
>> willingness or reticence to invest in R&D. (page 120)
>> ———–end quote—->>

>> The WHO CIPIH even saw a positive role for compulsory licenses in
>> promoting research:
>> <<– 2.10 Countries should provide in their legislation powers to use
>> compulsory licensing, in accordance with the TRIPS agreement, where this

>> power might be useful as one of the means available to promote, inter
>> alia, research that is directly relevant to the specific health problems
>> of developing countries. (page 55)——–>>
>> I would like to know from Aidan Hollis or Thomas Pogge if they think the
>> HIF book was in error in not providing the more compelling case for the
>> use of compulsory licenses, in light of the issue of the relative

>> quantitative impact on innovation and access?
>> This is particularly interesting since quotes from their book on the
>> topic of compulsory licensing may later be used by patent owners to
>> oppose compulsory licenses in developing countries.
>> —-

>> *It is interesting to compare the issues raised in the HIF Book in
>> opposition to compulsory licenses to the views set out by Harvey Bale of
>> the IFPMA in 1999;
>> –

>> James Love, Director, Knowledge Ecology International
>> | at
>> Wk: +1.202.332.2671 | US Mobile +1.202.361.3040 | Geneva Mobile
>> +41.76.413.6584
> –
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