HIF on why voluntary licensing of patents is not required

In book on the Health Impact Fund,* Aidan Hollis and Thomas Pogge discuss why voluntary licensing of patents is not required.

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Voluntary Licensing

Under the system proposed above, the drug registrant retains exclusivity rights in its product, but accepts an administered price in exchange for payments from the HIF. An alternative approach would instead require that the registrant offer a voluntary license with a zero royalty for any generics to produce the product. Assuming a competitive generic drug industry, such licensing would lead to prices roughly equal to the average cost of production and distribution.

There are a number of reasons for preferring a system in which the registrant must forgo only pricing freedom, rather than giving up the exclusivity rights created by the patent.

First, the licensing approach would require registrants to forgo some intellectual property protection, which is not necessary as long as the registrant is willing to sell the product at the administered price. In some cases, the intellectual property arrangements may be complex, and licensing may therefore be difficult. In other cases, the intellectual property may have many applications, and the patentee might prefer not to grant an open license for its use.

Second, in cases where the generic drug industry is not competitive—as is the case in many countries— licensing to generics would fail to achieve the goal of low prices. If competition is ineffective in reducing the price to near cost, registrants would benefit from high prices and still receive reward payments from the HIF. Competition may fail to be effective for a variety of reasons:

a. Competition can take a long time to push prices down. Generic firms need to ramp up their manufacturing capacity and obtain the approval of regulatory authorities, which can take years.
b. In many countries, generic competition does not lead to low prices because of other distortions (including insurance) in pharmaceutical markets.
c. For many products (such as complex biologics and some vaccines), generic versions simply don’t exist, or there are very few generics, even when patents do not obstruct entry.
d. Even if generic competitors have access to patented technologies, hey may be significantly disadvantaged if they lack access to unpatented trade secrets or supplies of an essential ingredient. Thus, generic competition will not always lead to low prices. There are some situations in which generic competition might, however, be more effective in achieving low prices. In particular, generic producers may sometimes have lower costs which are simply not revealed unless competition occurs. On balance, however, direct price control seems like a more effective way of ensuring low prices than open licensing.

Third, the fact that the HIF is optional introduces additional considerations in favor of price control rather than open licensing. If the HIF mandated open licensing rather than price controls, every product for which no generic competition was anticipated even given open licensing of the relevant patents would register for HIF rewards. There are many such products. Many firms producing very expensive biologic drugs, for example, have no generic competitors because of the complexity of the manufacturing process. Since these expensive products would have no generic competition, they could be registered with the HIF and would benefit not only from the usual high prices, but potentially also from HIF rewards. In this case, much of the money paid out by the HIF would be a supplementary payment for high-priced products, leaving less for rewarding other products.

** Aidan Hollis and Thomas Pogge, The Health Impact Fund, Making New Medicines Accessible for All, A Report of Incentives for Global Health, 2008