Pricing Issues in Improving Access to Essential Medicines

1
Pricing Issues in Improving Access to Essential
Medicines

• Keith E. Maskus
• UC-Berkeley Law School
• Course on Neglected Diseases
• February 17, 2009

2
Scope of Problem

• Halting progress in treating 3 major diseases
• HIV/AIDS declining?
• Estimated global deaths 2.7 million in 1999 2.0
  million in 2005
• Falling mortality, somewhat reduced morbidity
• Reasons better prevention, more access to ARV
  treatments developed for rich countries.
• Still, less than 10 of patients in poor
  countries have ARV access.
• Malaria growing?
• Estimated global deaths 1.1 million in 1999 1.9
  million in 2005
• Rising mortality and morbidity
• Continued race between disease resistance and
  drug development
• Tuberculosis stabilized?
• Estimated global deaths 1.7 million in 1999 1.6
  million in 2005
• Better prevention and treatment
• Health problems likely reduce GDP growth by 1-2
  percentage points per year (could worsen with
  current economic crisis).

3
Rising Global RD Investments in Neglected
Diseases

• Total RD 2.7 billion in 2007
• HIV/AIDS (Type II disease) 1.083 billion (not
  much aimed at specific DC conditions)
• Malaria 468 million (84 million in 1993, US
  military)
• Drug development 46
• Basic RD 24
• Vaccines 19
• TB 410 million
• Drug development 35
• Basic RD 32
• Vaccines 20
• Others 739 million

4
Sources of 2007 RD

• OECD governments and multilateral organizations
  69 (of which USG 70)
• Philanthropic and not-for-profit groups 21 (of
  which Gates Foundation 84)
• Private companies 9 of which
• Research-intensive MNEs 80
• Small companies, biotech 20
• Data source Moran, et al, Neglected Disease RD
  How Much Are We Really Spending? PLoS Medicine
  Policy Report, Feb 3 2009

5
General Market and Policy Failures in Inducing RD

• Small market demand fails to cover fixed
  investment costs.
• Standard appropriability problem for innovators
• High RD costs
• Low marginal costs and ease of copying or
  inventing around.
• Consumption externality in vaccines spillover
  gains reduce individual willingness to pay.
• Time consistency problem that governments want
  low price ex-post. Can achieve this through
  price controls, purchase agreements, compulsory
  license threats, etc.
• Lack of exclusive rights reduces incentives to
  launch medicines in specific markets.

6
Access to Medicines Problems in Poor Countries

• Low household incomes in relation to other needs
• Very low investments in public health and low
  shares devoted to medicines
• Inadequate health care infrastructure and
  delivery systems
• No public and/or private insurance mechanisms for
  pooling risk (except for richest groups)
• Tariffs, taxes and monopolized distribution in
  imported or licensed drugs
• Weak generic competition from domestic or
  regional producers (even without patents)
• Patent protection an insufficient incentive for
  investments in new drugs and other forms of
  treatment
• Results limited availability and affordability
  of medicines.

7
Need for Global Action

• Patent reforms (WTO/TRIPS) are unlikely to offset
  income-based demand deficiencies for investment
  incentives.
• RD externalities (collective action problem)
  policy by any one country to encourage RD (raise
  price, adopt patents, subsidize RD) would shift
  benefits to other countries.
• Pricing externalities policies to reduce prices
  close to marginal cost in poor countries may
  inefficiently affect prices in richer countries.
• Importance of divorcing global research
  incentives from pricing/access policies in poor
  countries.

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Global Pricing Issues Definitions

• Differential pricing same drug is priced at
  different levels across countries for any reason
  (eg., price controls).
• Discriminatory pricing prices differ due to
  profit-maximizing strategies.
• Equity pricing price in each country is related
  to income or other measure of economic capacity
  and patient need or disease burden. Set by
  government or firm policy to increase
  affordability for poor patients. (Also called
  tiered, preferential or access pricing.)

9
Price Discrimination

• The practice of charging different prices to
  consumers with different marginal values for a
  good.
• In diagram below, region M are profits for
  monopoly if just one price can be charged. If
  (expected) M exceeds RD costs, investment is
  made. Net consumer gains are area A. Consumers
  in region B go unserved.
• First-degree PD (perfect PD) charge each
  consumer her marginal valuation. Monopoly
  extracts all net consumer value as profits.
• All consumers are served.
• More RD is induced ex ante.
• Not sustainable if consumers are in integrated
  market.

10
p
Monopoly vs. perfect price discrimination
A
pm
M
B
c
mr
prescriptions
11
Price Discrimination

• Second-degree PD different prices for different
  quantities sold.
• Third-degree PD different prices for groups
  segmented by location (or other feature).
• Requires market power protected by exclusive
  rights, brand power, etc.
• Demand elasticities vary by market group.
• Markets are segmented and insulated from
  arbitrage by trade costs, restraints on parallel
  trade, etc.

12
Determinants of Price Elasticity

• Per-capita income (presumption demand becomes
  less price-responsive as incomes rise)
• Existence of product substitutes
• Marketing and prescribing practices
• Concentrated buyer(s) or individual purchasers
• Income distribution
• Insurance markets
• Taxes, trade barriers, other factors.
• Basic markup equation pi c/(1-1/ei) for market
  i. p 2c for e 2 p 1.25c for e 5 p c
  for e very large. The lower the elasticity the
  higher the price.

13
Third-degree PD

• Permit patent-holder to sell in 2 segmented
  countries.
• In diagram below, price is higher in less-elastic
  demand market H and lower in more-elastic demand
  market L.
• If firm is forced to sell at uniform price it may
  choose not to sell in market L in order to
  protect profits in H.
• Is PD superior in welfare terms to single price?
  Yes if the lower price serves more markets
  without reducing supply in high-priced markets.
• Note that PD generates net consumer gains in L of
  area A and contributes profits of area M, raising
  RD incentives.
• It is possible that in serving market L the firm
  would restrict supply in H, causing higher price
  there.

14
p
Prices with different demand elasticities
pH
A
pL
M
c
prescriptions
15
Do Prices Rise with Income?

• In general, yes but correlation is weak (around
  0.35 for sample of 15 drugs in 1998).
• Next 2 charts show that identical drug baskets
  can have higher wholesale prices in lower-income
  economies.

16
Average Drug Prices and Incomes (1998)
Source Maskus, WIPO Report, 2001
17
Relative Wholesale Prices for 15 ARV drugs,
1995-99
Source Scherer and Watal, JIEL 2002
18
Why the limited price variations?

• Price controls and single-buyer price
  negotiations may be more rigorous in OECD
  countries.
• Generic competition is often stronger in OECD
  (but note low prices in India).
• Firms sell at high markups to high-income
  consumers with private insurance in DCs.
• Firms set or negotiate higher prices in DCs to
  avoid
• Smuggling
• Parallel trade back to high-price markets
• Reference-pricing pressures on price controls
• Political pressures to reduce prices in home
  countries (for Type I and II disease drugs)

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Comments on Reference Pricing (RP)

• Forms of pharmaceutical price regulations
• Cost-based (estimate production costs, perhaps
  some allowance for RD and fixed-cost recover,
  and a negotiated profit margin)
• Price negotiations based on costs and
  therapeutic value or patient needs
• RP Authorities set price based on prices of
  similar products on home market and/or similar
  and identical products on foreign markets.
• Examples of RP
• Portugal, Ireland and Italy use baskets of lowest
  prices in EU and several DCs.
• Spain and France use such baskets as benchmark
  for negotiations.
• Global web of RP is extensive (diagram) but
  most rich countries do not include prices of poor
  countries.
• The bigger information spillover is political
  pressure on home markets to match prices in
  foreign markets.

20
Source Dr. E. Schoonveld, Report on the Workshop
for Differential Pricing and Financing of
Essential Drugs, WTO WHO
21
Comments on Parallel Imports (PI)

• PI is unauthorized cross-border trade in
  legitimate goods protected in import market by
  some IPR.
• Legality depends on scope of rights exhaustion
  (varies by country or region and by type of IPR).
• PI takes place overwhelmingly at wholesale or
  distributor level, not consumer arbitrage.
• Main benefit of PI should be to reduce prices in
  importer nations.
• One detailed study Ganslandt-Maskus, JHE 2004.
  Relative wholesale prices of medicines in Sweden
  subject to PI falls as much as 12-18.
  Significant entry of PI firms in blockbuster
  drugs. Not much impact on retail prices as
  hospitals and pharmacies absorbed higher margins.

22
Comments on Parallel Imports (PI)

• Main static costs of PI
• Transport costs and tariffs in act of trading
  identical goods.
• Higher prices in exporting nations if significant
  volumes leave. GM study found little evidence of
  this (Sweden is small compared to EU).
• Strategic market segmentation behavior.
• Strategic pricing IPR-holding firms may
  set/negotiate higher prices in export markets to
  limit arbitrage.
• Risk of importing price controls.
• Main dynamic costs of PI
• Delayed launches of new products in lower-priced
  countries (evidence supports this claim).
• Diminished profits of originator firms may reduce
  RD incentives (probably, though RD indicators
  in EU are approaching those in US).

23
RP and PI Policy Issues for Equity Pricing

• The objectives
• A sustainable global policy of greatly tiered
  equity pricing
• Encouraging pharma and vaccine companies to be
  willing to launch new products in poor countries.
• This outcome presumably requires
• An agreement by OECD and middle-income countries
  not to set price controls with reference to poor
  countries.
• A political agreement not to try to import prices
  from poor countries.
• Sufficient exclusive rights in poor nations to
  encourage product entry (imports, licensing) at a
  price covering marginal cost.
• Permission of PI into poor countries.
• A ban on re-exportation of goods from poor
  countries.
• May be useful to permit regional marketing with
  PI to encourage scale economies with price
  discipline.

24
Direct Equity Pricing Policies in Purchasing
Countries

• Price regulation with exclusive rights (patents,
  EMRs)
• Pooled procurement policies and bulk purchases
• Enhanced threats of generic entry through
• Limitations on patent scope (see India 2005
  patent law)
• Short periods of protection for confidential test
  data
• Compulsory licenses (CL) issued to domestic
  competitor(s).
• Note importance of generic competition (graph).

25
The Importance of Generics
26
Impact of Global Trade Rules

• Main framework TRIPS Agreement at WTO
• Parallel trade Article 6 is interpreted to mean
  each country can set its own policy.
• Legal challenge South African Medicines Act
  1997, US eventually dropped lawsuit.
• Test data must be protected but terms and
  duration are left unspecified.
• Compulsory licenses
• extremely complex set of conditions under Article
  31
• Or declare public health emergency
• Issue government-use license.

27
Problems with CL Regime

• Article 31.f permits CL only where production is
  predominantly for supply of domestic market to
  prevent industrial policy leading to exports.
• Of no value for countries without domestic
  production capacity who need to import.
• The fix 2003 WTO Waiver (made permanent Dec. 1
  2007)
• Firms can export under CL issued by their
  governments to meet needs of importers
• All countries without production capacity are
  eligible importers but understanding limits use
  to poorest.
• So far its been sparingly used just one case
  (Rwanda imported the ARV TriAvir from Canada
  2007-08).

28
Direct CL Experience

• US has actively used CL as part of antitrust
  rulings.
• The cipro scare in 2001.
• Canada frequently issued CL in medicines prior to
  CAFTA/NAFTA.
• US and EU discourage CL use in middle-income
  countries and in FTAs.
• Recent Thailand case.
• Conclusion CL a useful tool in some
  circumstances.

29
Other Approaches to Date

• Voluntary price discounts by pharma firms.
• Voluntary licenses of (generally older)
  technologies.
• Drug donations with tax incentives.
• These have sometimes been effective, especially
  with threat of generic competition.
• Difficulties
• Perhaps sub-optimal selection of products
• Sustainability is a question
• Agreements may be short-term and not encourage
  investments in delivery and treatment.
• Conditions may be attached that risk lock-in with
  particular drugs.
• May not work with newer therapies that must be
  patented in DCs, particularly where markets exist
  in middle-income and rich countries (eg,
  HIV/AIDS, heart disease).

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Summary Assessment of Global Regime

• So far largely reliant on market incentives and
  philanthropy.
• No global pricing agreement exists.
• Markets have not generated sufficient price
  differentiation.
• Global purchase programs (eg, Global Fund,
  PEPFAR, World Bank) have helped but offer no RD
  incentives.
• Philanthropic and public-private RD mechanisms
  are improving but not yet sufficient.
• Licensing issues regarding IPR in new therapies
  remain difficult but clear allocation of rights
  is essential.
• Resort to compulsory licenses has been
  contentious and generally unworkable in poorest
  countries.

31
Broader Approaches

• Proposals to deal comprehensively with investment
  and access issues.
• Example DEFEND proposal
• International publicly funded program to buy
  patent licenses in target markets.
• Payments to cover portion of fixed RD costs and
  reflect social value of drugs.
• Distribute drugs at price just above mc.
• Direct subsidies to delivery in poorest
  countries.
• Ban on re-exports outside of target areas.
• Tough questions
• How to determine which countries to include?
  Many underserved patients exist in middle-income
  countries.
• Which firms would be eligible to receive
  licenses? Generic exporters in middle-income and
  developed countries?
• Determination of license fees?
• How to purchase licenses on drugs with multiple
  patents?

32
Broader Approaches

• Virtually coerced abandonment of patent rights in
  poor countries
• Lanjouw Proposal
• Patent buyouts
• Patent pools
• UNITAID proposal 2008
• Similar problems of implementation exist for
  buyouts and pools.

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Concluding Remarks

• Working on price differentiation has been a long
  and difficult process.
• Relying on market segmentation and philanthropy
  is insufficient.
• Compulsory licenses are not a realistic solution
  for poorest nations.
• Broader approaches that reward RD but permit
  targeted price advantages and delivery
  investments need to be developed.