Friday, April 4, 2008

Academic and Healthcare Activists Secretly Discuss Possible Thai Compulsory Licensing Pricing Strategy to Undermine USTR/PhRMA

The following colloquy took place during April 1-4, 2008, between James Love of Knowledge Ecology International (KEI), a George Soros-funded health and human rights activist group, and several left-leaning US, UK and Australian university professors:

Northeastern University Professor Brook Baker, Boston University Professor Kevin Outterson, Cleveland State Univ. College of Law Professor Michael Davis, London School of Economics Professor Ken Shadlen, Australia National University Professor Peter Drahos and an anonymous professor who identifies himself by the pseudonym "Miles Teg" (Miles Teg is a fictional character in the Dune universe created by Frank Herbert... Miles Teg was a military genius and became Supreme Bashar of the Bene Gesserit, winning many victories. He had a very strong sense of honor, loyalty, and had the many characteristics of House Atreides. He is well known for doing the unexpected. See Wikipedia, at: ).
------------------------------------------------------------------------------------------------ mailto:B.Baker%40neu.eduTue Apr 1 11:07:01 2008

I think there are four interest facets of the U.S. statement in the Thai NTB report (reprinted below).

"Thailand's Ministry of Public Health has issued compulsory licenses on certain patented drugs. The United States acknowledges Thailand's ability to issue compulsory licenses to address public health emergencies, subject to Thailand's domestic and international legal obligations as a WTO Member. At the same time, the United States has expressed concern regarding a lack of transparency in the process and about the potentially expansive use of compulsory licenses. The United States has urged Thailand to address judiciously the complexities of the relationship between health and intellectual property policy and to do so in ways that recognize the role of intellectual property in the development of new drugs."

1. The U.S. continues to misinterpret the circumstances where compulsory licenses can be issued, suggesting that they are appropriate only to respond to public health emergencies.

2. The U.S. continues to suggest that the licenses were issued in a non-transparent manner, thereby failing to acknowledge the protracted negotiations that preceded the 2006-07 licenses on efavirenz, clopidrogel, and lopinavir/ritonavir and the even more intensive consultations that preceded the issuance of the four cancer CLs in 2008.

3. The U.S. adds a new concern, namely that the use of compulsory licenses will become "potentially pervasive." Of course, Thailand has been careful to set up a stringent screening process, has established strict needs-based standards, and has issued CLs on only a tiny portion of the medicines patented in Thailand.

4. Finally, the U.S. has used relatively muted language and has not in any sense "signalled" an intention to identify Thailand as a Priority Watch Country, despite earlier publicity about this possibility.

Jamie Love has previously suggested that Thailand (and perhaps other middle-income countries) could address the stated U.S. concern about "contributing to the development of new drugs" by revising upwards the royalty rate on its compulsory licenses (currently ranging from .5%-5% on the generic price). Although international compulsory licensing practice and commercial practice support royalty rates in this range, it is important to note that commercial royalty rates are ordinarily based on sales at monopoly prices, resulting in much higher absolute payments per pill.

Even though it is by no means required to do so, Thailand could gain credibility with U.S. Congressional leaders and undermine USTR/PhRMA attacks, by offering an additional, and perhaps targeted R&D royalty. One idea would be to target the royalty to type-I and type-II (neglected) diseases affecting the Thai population. If the affected drug company were willing to accept the additional royalty on this basis, the R&D could be done anywhere. However, an even better alternative would be that the targeted research be conducted in Thailand in universities, research institutes (if any), or even in the GPO. Agreements would need to be reached in advance about the eventual co-ownership/marketing of innovative products, but this kind of targeted research could entail technology transfer, building of research capacity, and perhaps even expansion of pharmaceutical capacity in Thailand.

There are risks in such a proposal, including that the standard royalty rate will be higher and that fewer patients will be treated from the same health budget, but there may be political advantages from indicating a willingness to pay a little more for innovative R&D as long as it focuses on developing country needs.


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)


mko mailto:mko%40bu.eduWed Apr 2 06:26:04 2008

I agree that middle-income countries should explore higher royalty rates on generically-priced drugs sold under a CL. Doing so wouldn't harm access much; indeed if the higher royalty reduced opposition from USTR & IFPMA, then access could be dramatically improved. I've tried to model these CL royalties or patent buy-outs from the opportunity cost in R&D from the foregone revenues:

Kevin Outterson
Boston University

Boston University School of Law
765 Commonwealth Ave., Boston MA 02215
617 353 3103


Miles Teg mailto:b.miles.teg%40gmail.comWed Apr 2 09:20:02 2008

Why should developing countries reduce their legal flexibility to determine royalty rates by such "self regulation"? Is it a realistic that opposition to CLs in developing countries would reduce?


------------------------------------------------------------------------------------------------- mailto:michael.davis%40law.csuohio.eduWed Apr 2 09:54:00 2008

There is no reason for them to do that. It is a classic trap, the kind of advice you would give to a prisoner at Guantanamo ("Behave and we won't torture you.") It also smacks too much of the unstated "Trust me," which is never advice you should take from an adversary.

Mickey Davis

------------------------------------------------------------------------------------------------- mailto:B.Baker%40neu.eduWed Apr 2 14:47:10 2008

Miles and Mickey have raised sensible questions about whether it is politically wise to raise royalty rates in the hopes of encountering less resistance from patent holders and their governmental proxies in the USTR and European Union. It may well be that there is no real appeasing of opponents to lawful utilization of TRIPS-compliant compulsory licenses - that they will always use disinformation and misinformation to challenge CLs and whatever royalties are paid.

Evidence of such continuing opposition can be found in the still strident attacks against Thailand's recent compulsory licenses on cancer drugs, even though Thailand raised the royalty rate from .5% to 5%.

All that Article 31 of the TRIPS Agreement requires is that "the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization." This clause gives wide latitude to governments to assess the circumstances and the economic value of the license. As Jamie Love's detailed study of
remuneration rates showed, countries can make such choice by weighing factors or pursuant to percentage royalty guidelines, so as long as individual determinations are made in each case.

However, contrary to Miles' and Mikey's critique, I think it is useful for ATM activists to speculate about royalty rates that "might" reduce political opposition and about royalty schemes that might actually increase research and development into neglected diseases and/or spur increased R&D activity in developing countries. There is no presumptively "polically correct" royalty rate, and Thailand engaged in a politically astute, self-determined decision to raise its royalty rate on the new cancer CLs. Did they do so as Guantanamo prisoners or as colonial subjects - I think the suggestion is a little insulting.

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)


mko mailto:mko%40bu.eduWed Apr 2 14:47:32 2008

I'm sure I've been misunderstood here.

My point is simply that CL, while entirely legal under TRIPS, is politically difficult given the sustained attack by USTR and big phrma. Modifying the royalty structure might take away one argument in their quiver: "CL will destroy innovation!"

I'd describe it as disarming your opponents by being reasonable.

Having said that, being reasonable with phrma doesn't have a great track record.

Kevin Outterson
Boston University


James Love Apr 2 15:34:01 2008

My view regarding royalty rates and trade pressures is that royalty payments that are too low will be considered unreasonable, and will not be politically sustainable. As a matter of some recent history, I did not want to defend a .5 percent royalty rate, applied to generic prices, and I don't think it helped the countries that choose that rate. Even if people don't understand much about this topic, .5 percent sounded pretty low.

The more recent higher royalty rates in Thailand have I believe made it easier to Thailand to keep the new compulsory license. Even more important, of course, have been the actions of the Thai activists, who have done the really important work in pushing the Thailand government
to protect consumer interests.

In the longer run, we think that governments in developing countries should simply set aside an appropriate fraction of health or drug purchase budgets, to reward drug developments, and de-monopolize all drug purchases. Some people in the Thai government have suggested doing this, and there is a discussion about whether or not this is a better business model for the Global Fund and other donor funded drug purchases. Agree on how much money goes to innovators, and then buy everything at marginal cost, increasing access and improving outcomes.

Once the negotiation turns to the fraction of the drug budget that goes to innovators, and marginal cost pricing of products is accepted, you can begin to have a rational policy discussion.



Peter Drahos Apr 3 08:10:02 2008

I do not believe that upping the royalty rate will reduce the pressure on countries like Thailand. During the Uruguay Trade Round, the US made a lot of promises about backing off on its trade unilateralism if developing countries signed up to the WTO, TRIPS and its jolly nice dispute resolution mechanism. The FTA IP jihad followed soon after. I also think there may be cases where .5% will be appropriate. Hard to see how a country like Laos can afford much more.

Of course, this Thai saga has in part been about sending a message to other countries in the region about what to expect if they exercise their lawful rights =AD Al Capone and the boys are
gonna pay you a visit and now there=92s a minimum rate you can=92t go below=.

Chomsky somewhere has a nice line about domination in the world today =AD =93the rule of law
for the weak, the rule of force for the strong=94

Peter Drahos


James Love Apr 3 10:40:03 2008

There is no doubt that there is plenty of bullying, lying, angling for industry jobs after leaving the government, and other mean spirited stuff going on here.

Even so, Thailand has benefited at least somewhat from interventions from some sympathetic members of the US Congress and government (and the European Parliament and EC), and this has and I hope will continue to moderate somewhat the full brunt of the fury that PhRMA would like to see unleashed. To this end, the .5 percent royalty rate was unhelpful, bad PR, and almost completely unnecessary in terms of the policy.

To make things more concrete, the price of Plavix dropped from 77 to 1 baht once competition was introduced. A royalty of .5 percent of 1 baht was .005 baht per pill, or 1.825 baht per year, equal to about 6 US cents at current exchange rates. A 5 percent royalty, 10 times as high, would have been a royalty of 18.25 baht per year or 58 US cents, per year.

The price of Plavix before the CL was $888 per year. After the CL, it was $11.53 per year. Arguing about 6 cents versus 58 cents is losing sight of the big picture, I think.



Ken Shadlen Apr 4 18:04:02 2008

But if the difference between the amount per unit that goes to the originator firm whether the royalty rate is .5% or 5% is so tiny as to be nearly insignificant from the government's perspective, which is what I'm reading here in Jamie's post, then wouldn't it also be insignificant to PhRMA? I see the point about not wasting energy wrangling about 6 cents vs. 58 cents, but I can't see how this would reduce the backlash. To the contrary, I think Jamie has presented a pretty good argument as to why a CL with 5% -- even higher -- would still leave PhRMA far from satisfied in the context of a reduction of ~$775/unit.

I write this without being in Washington or having close daily contact with Washington. Are there people in Congress (or USTR) that would be more sympathetic to the Thai government were they paying .58/unit rather than .06/unit?



James Love Apr 4 23:05:03 2008

The reduction is per unit of sales. But note also that sales were approximately zero for the bottom 80 percent of the population.

... First off, PhRMA is focused on maintaining the monopoly. In Malaysia, where the "government use" CL proposed a 4 percent royalty, GSk didn't even want to take the money. They thought it would signal an acceptance of and legitimacy for the CL. In some cases, when a country was serious about a CL, the patent owner announced they would give away the drug, to undermine efforts to issue a CL. This was the outcome of the fluconazole case in South Africa, for example. PhRMA is entirely devoted to opposing the use of CLs, because they want to a monopoly, and they believe a monopoly will lead to higher profits than government set royalty payments, and they see each of the CL cases as setting precedents for the future.

Thailand and other countries feel some pressure from PhRMA members, but the biggest pressures come from governments in the North, particularly from the US and the EC and the EU member states. While it may seem so at times, governments in the North do not take their instructions verbatim from the patent owners. The US and the EC have much broader interests and concerns, and the demands of the PhRMA companies are part of a larger calculus that also includes non-PhRMA trade with Thailand and other countries, and genuine concern about the poor in developing countries. If the USTR or DG-Trade goes ballistic in demanding high prices for life saving drugs in Thailand, it can't exactly expect to achieve all of the other demands it might want to make, to address the concerns of other US or EU companies. USTR and DG-Trade spend a fair amount of time fighting off PhRMA lobbying, so they can address the broader trade agenda (which is why we have the 2001 Doha Declaration). In this respect, something like the royalty rate becomes relevant, because it is used in the EU and the US Congress as evidence one way or another that Thailand is acting reasonably.

The Average US royalty rates are probably close to 5 percent, and in fact, that is the number used in some PhRMA submissions to USTR. And profit rates in competitive sectors of the economy probably run around 3 to 5 percent. In this respect, royalties of 3 to 5 percent seem, on their face, pretty reasonable, to a lot of people. Royalties of .5 percent seem pretty low, particularly to hill staffers and others who have little time for detailed economic analysis of the Thai pharmaceutical market.

Our own work on royalties has been more nuanced and sophisticated than this, and in the 2005/WHO/UNDP Tiered Royalty Method (TRM), I recommended a system of royalty setting that is based upon a percentage of the putative value of the medicine in high income countries, adjusted for the relative income of the countries where it is consumed. This is conceptually an appealing way for setting royalties in developing countries, but because it is novel and more complicated than simply using a percent of the generic price, it has not been used.

In general, however, it may be easier just to simplify everything even more, and link the de-monopolization of the drug sector (for marginal cost pricing of products), with a system of rewards for drug developers that is pegged to some fraction of the drug purchase budget or health care budget. The political demand from developing country governments and consumer groups would be to ensure access through marginal cost pricing of products, while conceding the legitimacy of a separate argument over the amount that a country gives to innovators. I think this is an argument that can be won, and it can be the basis for a sustainable long term change in the business model for paying for innovation. The rewards to innovators could be rationally linked to the impact of products on improvements in health outcomes. The more the "ask" makes sense (and is perceived to make sense) in terms of the legitimate interests of both consumers and drug developers, the higher are the odds of really changing things.


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