We estimate that the total cost savings resulting from price reductions for patented drugs was approximately US$1.2 billion from 2001 to 2005.

This is the first real study of how much developing countries must spend on patented drugs, and it reveals many interesting observations. For instance, Brazilian generics turns out to be more expensive that those available internationally, resulting in an extra cost of 10%. Simultaneously, patented drugs account for over 80% of total drug costs for the treatment program.

The most interesting observations are however, in where the negotiations work best…

Brazil generally has limited power to threaten to issue compulsory licenses and negotiate prices for drugs when no generics or APIs are available; often no generic competitors exist for several years after Brazil integrates the newest ARVs into treatment guidelines. Brazil’s negotiations have therefore been most successful for ARVs for which generic competition is emerging, including lopinavir/r, efavirenz, and tenofovir, and less so for atazanavir, which does not yet have a WHO-prequalified generic competitor. Two recent examples highlight how generic competition has influenced global prices with direct effects on Brazil. First, in May 2006 Indian generic manufacturer Cipla launched a price of US$700 PPPY for generic tenofovir, which coincided with both Gilead’s 50% price reduction for tenofovir in Brazil and Gilead’s announcement that it would issue voluntary licenses to generic manufacturers to produce tenofovir. Second, emerging competition also likely prompted Abbott’s seven-year US$920 PPPY contract with Brazil for heat-stable lopinavir/r in 2005 and Abbott’s 2007 decision to further lower lopinavir/r prices for 40 more low- and middle-income countries, including Brazil.

…and where the Brazilian model does not work so well:

While Brazil’s model has been highly effective in lowering prices for patented ARVs, middle-income countries without domestic pharmaceutical industries or public drug production capacity have less power than Brazil to negotiate prices for patented drugs and may choose not to take the international political risks associated with issuing compulsory licenses. Moreover, even if other middle-income countries opt to issue compulsory licenses, importing generics may be cheaper and more feasible than producing drugs locally. Our cost findings may be less relevant to low-income countries, which typically enjoy the lowest global prices for patented ARVs but often do not integrate the most costly ARVs into treatment guidelines.

Brazil’s model has affected ARV prices around the globe. First, Brazil’s model set an important precedent for price negotiations and tiered pricing schemes for other developing countries. Second, Brazil’s treatment policies have helped create a market for generic ARVs; in turn, generic competition has facilitated Brazil’s price negotiations and lowered global ARV prices. Third, other countries have also used compulsory licenses in order to import drugs and reduce drug prices. For example, Thailand issued compulsory licenses for several antiretroviral and cardiovascular drugs in 2006 and 2007, including lopinavir/r and efavirenz, among others. Thailand’s decision to issue compulsory licenses, in turn, fostered greater transparency about global ARV prices and set a new precedent for middle-income countries. Shortly after Thailand issued compulsory licenses, Brazil issued its first compulsory license for Merck’s efavirenz. Additionally, in April 2007, Abbott further lowered its prices for original and heat-stable lopinavir/r from US$2,200 to US$1,000 PPPY in more than 40 lower middle-income and low-income countries (including Brazil and Thailand) and to US$500 for nine additional low-income countries outside sub-Saharan Africa

What does this mean for India?

What this seems to suggest is simple - compulsory licenses are a good thing for governments. They shift the balance of power somewhat towards the buyer (government) from the seller (big pharma). Of course, they should be used only sparingly, but just enough to make future threats credible. And the existence of a strong domestic generic industry helps the process by making the threat even more credible.

India, it would seem, is ideally suited to adopt this strategy. It is a large economy with substantial buying power. It also has a healthy generics industry. And it has traditionally had a loose patent regime. So why is it not doing so?

The answer may lie in the aspirations of the Indian pharma industry to become outsources of pharma manufacturing and R&D. Rather than challenge the business model of big pharma, Indian pharma wants to keep the model, and replace the players. Essentially, much of Indian pharma wants to be big pharma.

This was evident, as I noted previously, from a survey of the pharma industry after 2005 (when a new patent regime came into place). It noted that the Indian pharma industry has focused private R&D investment towards treating the diseases of the rich world. This may be good for parts of the Indian pharma industry, but is hardly as good for India’s public health priorities.

Unfortunately for us in the poorest nations, these health activists are missing the forest for the trees. Inadequate infrastructure, not prices, is the chief obstacle blocking access to high-quality medicine to poor countries.

Imported drugs often sit for months in Africa’s dirty, non-air-conditioned storage facilities - either losing quality or expiring before reaching patients. Hospitals lack doctors, nurses, equipment and sometimes even electricity to effectively administer available medication. Roads are often in disrepair, making it particularly difficult to reach rural populations, where disease rates are the highest.

So far, so good. Cudjoe is absolutely right is saying poor delivery is the biggest immediate hurdle to improved health outcomes in Africa and Asia. But then he goes a bit too far. He criticizes recent compulsory licensing in Brazil and Thailand, saying:

By most estimates, it costs Western pharmaceutical companies around $800 million to develop a new drug and bring it to the market. The risk of losing a product through compulsory licensing will only discourage investment in future research.

Yet antipatent activitists, with their myopic fixation on price, are relentlessly bullying bureaucrats to follow their advice. Let’s hope the WHO won’t succumb to the misconception that compulsory license can cure Africa’s health problems. Instead, economic development remains the continent’s best hope for eradicating the diseases of poverty.

While Cudjoe does point out the forest from the trees, his own analysis simply side steps part of the problem.

First, he fails to recognize that the problem of health is both poor delivery and high drug prices. It is true that “better health systems come with economic development”, but in focusing solely on that aspect, he fails to acknowledge the importance of the later challenge.

Second, in suggesting that pharmaceutical companies would be unwilling to invest in research when faced with the possibility of compulsory licensing, he is being disingenous. The $800 million estimate he uses comes from a study funded by big pharma itself, and has been vehemently contested by many. Regardless of its accuracy, what is clear is the drug R&D is decided on drug sales, and therefore is almost never directed to the needs of poor developing countries. Cudjoe’s assertion that firms may reduce investment in poor country diseases is wrong because such investment simply does not happen (see a detailed 4-part analysis of drug R&D and the patent system, starting with part 3).

Finally, in dismissing the value of compulsory licensing he does not realize that compulsory licensing is more a political and bargaining tool for negotiating lower drug prices than it is an actual instrument of policy. The issuance of licenses in some countries makes the threat of further licenses credible, allowing Brazil, India, or any other country to negotiate lower prices with big pharma. Cudjoe may, of course, say that high prices are not the main problem, but if countries can receive lower prices, why should they not?

Cudjoe’s analysis is, in summary, rather disappointing. Rather than address the criticisms leveled at the patent system and understand the reasons for high drug prices, he simply dismisses them in favor of another problem. He would do better to appreciate the problems of the patent system. High cost is one of them, but hardly the most important one. The biggest problem is simply that the patent system stifles innovation. The analysis of Joseph Stiglitz on the healthcare market is illuminating (covered on TDZ here):

It is a matter of simple economics: companies direct their research where the money is, regardless of the relative value to society.

Most people do not pay for what they consume; they rely on others to judge what they should consume, and prices do not influence these judgments as they do with conventional commodities.

The market is thus rife with distortions. It is accordingly not surprising that in the area of health, the patent system, with all of its distortions, has failed in so many ways.

The two issues brought forth - poor delivery and high drug costs - should not be treated as being related when they are separate and independent problems. The first is a challenge to delivering solutions that are available. In contrast, the patent system has a set of problems entirely its own that relate to the innovation of future treatments. Cudjoe would do well to address both rather than select one over the other. In exhorting the WHO to focus on the former and ignore the latter, he actually does “his” poor countrymen a great disservice.

It bears mentioning that Mr. Cudjoe runs the Imani Center for Policy and Education in Ghana, an organization backed by, amongst others, The Heritage Foundation - a well known conservative US think-tank. The article’s defense of big pharma should not, therefore, come as a surprise.

There are some startling statistics on just how much is being pumped into these fashionable diseases - HIV, malaria, and into vaccine research. For instance, in Rawanda, a third of all IDA for health (about USD 47m) went to HIV/AIDS. In comparison, malaria received USD 18million, and only USD 1 million was spent on integrated management of child illnesses - though both were judged more serious priorities by the authorities.

Is it any surprise then, that such massive aid programs as Pepfar, the GAVI alliance, the Global Fund, and the Gates Foundation, are reported to be creating dangerous collateral damage in the countries they hope to “serve”:

One concern is how far such programmes prove counter-productive by displacing resources from health threats that may be just as important or even more so. Roger England from Health Systems Workshop, an advisory group, argued in the British Medical Journal this year that HIV, which he dubbed “the biggest vertical programme in history”, was receiving too much money. HIV consumes more than one-fifth of all health aid around the world, he pointed out, but accounts for just one-twentieth of the burden of disease in low- and middle-income countries and causes lower mortality than stillbirths, infant deaths or diabetes.

Sophisticated equipment, heavy demands on medical staff and costly medicines mean HIV consumes large amounts of money for each patient treated. Alan Fenwick, a professor at Imperial College in London, argues that far more modest resources could transform the lives of millions of sufferers of such debilitating but “neglected” conditions as the hookworm parasite, trachoma (a bacterium that causes blindness) and schistosomiasis (bilharzia).

A second worry is that HIV and other vertical programmes funded by individual donors - each with their own different criteria and conditions for evaluation - create wasteful administrative burdens and encourage a brain drain of medical experts away from already weak state health systems. A study published last year on Rwanda showed that $47m of international assistance for health - or three-quarters of the total - went to HIV, while just $18m was for malaria and $1m for integrated management of child illnesses - although both alternatives were judged more serious priorities by the authorities.

Furthermore, the government controlled just 14 per cent of this aid, with 55 per cent channelled at the insistence of its 21 donors through non-governmental organisations instead. These groups hired many of the country’s best medical staff from the state health system, typically paying doctors six times as much.

Elaine Gallin from the Doris Duke Charitable Trust, who helped design a $100m African Health Initiative grant programme launched this week to strengthen fragile health systems, says: “There is so much money being poured into certain areas that it is skewing the delivery of primary healthcare. It’s as if you were fixing only one piece of the car and forgetting to put the wheels on.”

The FT does not conclude here, suggesting instead that a debate is on between those who favor vertical and horizontal programs. Yet, this finding by itself is not surprising. It is just a manifestation of the aid curse.

A related criticism of such health assistance has appeared previously suggesting how general health delivery systems are being completely ignored. Indeed, the BMJ recently criticisized the the Gates Foundation for ignoring how health delivery systems:

For although the foundation has given a huge boost to research and development into technologies against some of the world’s most devastating and neglected diseases, critics suggest that its reluctance to embrace research, demonstration, and capacity building in health delivery systems is worsening the gap between what technology can do and what is actually happening to health in poor communities. This situation, critics charge, is preventing the Gates’s grants from achieving their full potential. 

Development “experts” would do well to look beyond their narrow boxes to the environment in which they operate. Given the amounts involved, particularly in relation to the general budgets in most countries that receive HIV/AID assistance, these cash infusions cause serious damage to public health systems. Experts may, of course, argue that those systems are weak and the governments running them corrupt. But is that reason to undermine them further?

An interesting factor in the migration of the disease may also be changing temperatures:

Professor Antoine Flahault, who coordinates French research on chikungunya, said the Italian outbreak was a “world first” outside the tropics. 

“The mosquito vectors (carriers) of this disease have been in Italy for several years. All we know is that increased temperatures and humidity make the climate more tropical and favour the proliferation of mosquitoes,” he said.

We all know of the bird flu virus, which has been a headache for authorities in Europe and the rest of the developed world. Bird flu migrates with people, a natural corollary of globalization. Globalization increases the likelihood that a disease will be able to move.

This migration of a virus suggests that worse may yet be on its way. As the planet and Europe warm, the likelihood that a disease will be able to stay also goes up, by homogenizing the climate across regions.

There is a silver lining though. If the rich world is afflicted by the same diseases as the poor, maybe we will no longer have such things as “neglected diseases” and the 10/90 global health gap.

What section 3(d) actually does is to allow genuine improvements and at the same time bar frivolous ‘tweaking’ which are passed under the garb of incremental innovation.

In this regard, section 3(d) is trendsetting provision as it is the first legal provision in the world not to be found in the patent legislation of any country, which provides a check on frivolous patenting.

Incremental enhancements that do not really do anything and have been one of the many banes of intellectual property law. They grant monopoly power without any significant innovation, and thus act as an incentive to drive R&D towards such enhancements rather than truly pathbreaking drugs.

Meanwhile, Kaiser Daily is reporting that a patent application in India for its antiretroviral drug atazanavir was considered “abandoned” by the Indian Patent Office, after Novartis failed to respond to inquiries within the alloted time. Curiously, Novartis India seems to have no clue about the application, which may have been “filed by the company’s international arms.”

Combined with the news that Novartis may be moving significant investment out of India - either out of genuine concern for protecting its intellectual property, or for retribution - this seems to suggest Novartis is now clueless about what to do in India. It clearly is not going to get exactly the patent regime it is used to elsewhere. But considering India is likely to be one of the largest drug markets in the near future, will it it adapt, or die?

First, Novartis’ objection to the Intellectual Property Appellate Board (IAPB) on the appointment of Mr. Chandrasekaran has been rejected. This is a further setback to its legal challenge to the Glivec patent decision (covered here).

Second, CNNMoney, amongst others, is reporting that Novartis has decided to move “hundreds of millions of dollars in planned investments” in R&D away from India. This is following of Novartis’ loss of the challenge to the Indian Patent Act that was recently thrown out by the Chennai High Court.

Commenting after an Indian appeal court ruled against a patent claim by the Swiss pharmaceutical group, CEO Daniel Vasella told the newspaper that ‘concrete plans’ for investments in research in India will now go elsewhere instead.

‘We will invest more in countries where we have protection,’ he said, without specifying further.

After the verdict and legal loss Novartis had expressed concern the judgement would discourage investment. This move is clearly meant to follow through on the implied threat in that statement -but is hardly symptomatic of a wider industry trend, which Novartis would like to see.

In the long term, this will probably harm Novartis more than India. For one, it is unclear how big a move this will be. The company has substantial planned investments in India, including a Rs. 500 crore R&D project in Hyderabad. Just how much will be affected is unknown, till Novartis says just how much investment it will move away.

Second, Novartis may need India more than India will need Novartis. A McKinsey report covered in the FT says India’s drug market will be worth USD 20 billion by 2015.

India’s pharmaceuticals market will more than triple to $20bn by 2015 on the back of rising personal incomes, the spread of chronic diseases and the growth of hospitals and clinics across the country, according to McKinsey, the consultancy. India’s projected growth would rank it 10th globally in 2015, from 14th two years ago, McKinsey said in a report released on Wednesday. The retail sales value of India’s drug market was $6.1bn in 2005 and $3.4bn in 2000.

The forecast by McKinsey implies a compounded annual growth rate of 12.3 per cent, compared with 9 per cent from 2000 to 2005.

Clearly, that is a lot of money even for Novartis to ignore.

Indeed, underlying many of the cases of increasing Gini coefficients is a growth process in which those at the top of the distribution (top 20% here) have seen their expenditures/incomes grow considerably faster than those at the bottom (bottom 20% here).

This report is follows on my previous post on the IEB on income inequality in India. In that I made some fairly basic points that a) income inequality was increasing in India (as measured by the Gini index), b) this was undesirable because income inequality reinforced social exclusion, (as a case I showed that inequality negatively impacted access to healthcare), and c) insofar as growth had not reduced, and possibly contributed to, inequality, India should revisit the kind of growth it engendered.

This report further strengthens the case for a more equal growth. It also indicates that our current growth path does indeed exacerbate inequality and how policy interventions could help. The following points, in particular, stand out.

First, why is inequality important? This being an economic report, it does not delve into the ethical choice inherent in that question, but it suggests two more practical reasons - because it damps the “poverty reducing impact of a given amount of growth”, and because it may hinder growth prospects (there is also a very readable introduction on measuring inequality, and how appropriate the gini index is to that measurement).

Second, is the inequality a result of growth? The report suggests it is not growth per se, but the kind of growth we are witnessing that is resulting in inequality, with three proximate causes: growth differentials between rural and urban divides, between sectors (agriculture vs. services and industry), and between the educated and those not. In fact, “widening differentials in earnings of the college-educated vis-à-vis less educated individuals appears to be the single most important observable factor accounting for increasing inequality.” Somewhat simplifying, the BBC quotes the report as saying:

The bank said the main reason for widening wealth gaps in recent years was the discrepancy in investment between urban and rural areas which favoured better-educated, better-off urban populations.

This is particularly important. In my previous post I had made a similar observation regarding healthcare - that inequality affected access to health, a key to equality of opportunity . This report suggests a similar dynamic leaves the uneducated poor in a vicious cycle of social exclusion. Since economic growth prospects favor the educated and the poor lack quality education, it is unlikely they will be able to benefit from those prospects and move up - leading to further inequality.

What role for policy? The ADB suggests increasing reforms that generate income and growth for the poor, as the way forward. The emphasis, clearly, needs to be on ensuring equality of opportunity, through for instance better access to finance, removal of social exclusion, and redistribution of wealth through public funding of rural education and basic health.

The discussion to my previous post was vigorous particularly on the last point. Some suggested that private healthcare (in this case education) is better. But that argues only for private operation of these services, not their funding (two separate debates). The second major criticism, that is countered here, is whether it is public spending - or spending in general - that is important, and the public sector should in fact stay out of funding healthcare. That argument is rather counter-intuitive - since the poor are, by definition, poor and pay a premium for most services, the only way for them to spend more on education (or health) is if someone else does it for them (say the government). I will grant, however, that given the scale of the challenge, it is more appropriate to talk of public and private spending. This is particularly true in agriculture, where distortionary public policies keep private investment out of the supply chain (a point reiterated by the ADB).

I have not seen the entire report, but even the summary makes fascinating reading. It should remind us that GDP growth is not the final measure of success. Since we compare India so often to China, here’s a statistic - China’s GDP increased the most amongst the economies studied, but so did its income inequality. Perhaps we can learn something from that too.

This post originally appeared on the IEB.

The news has received near blanket coverage (covered in IHT, Forbes, as well as SciDev, MSF). Interestingly, Novartis has suggested it will not appeal the decision.

“We disagree with this ruling however we likely will not appeal to the Supreme Court,” a Novartis spokeswoman said by phone from Basel in Switzerland.

This decision is significant both for what it does and for what it does not do.

Novartis’ case asserted that the Indian Patent Act violated rules of the WTO. In the short term it is good news for supporters of generic medicines. It may not, however, be so good for the intellectual property regime in general, because it leaves the status of the IPA in limbo. Novartis had essentially challenged the TRIPS flexibilities made available to developing countries under the Doha Declaration. By sidestepping the issue of the legality of the IPA, the Court has not provided any guidance and left open the door for further challenges.

The court’s issue of jurisdiction also weakens India’s ability to pass national laws that benefit the public interest. The decision gives jurisdiction of public health concerns to a multi-lateral forum which is designed not for the dispensation of justice but for international negotiations and bargaining. This is in sharp contrast to the US’ approach, which has categorically and repeatedly refused to accept the jurisdiction of multilateral institutions on issues of national interest, including human rights and criminal law.

This post has been updated since its original publication. A further update is now available on Desicritics.org.

One of the most repeated truisms about the U.S. health-care system is that, for all its other problems, American patients at least don’t have to endure the long waits for medical care that are considered endemic under single-payer systems such as those in Canada and Britain. But as several surveys and numerous anecdotes show, waiting times in the U.S. are often as bad or worse as those in other industrialized nations—despite the fact that the U.S. spends considerably more per capita on health care than any other country. In addition, 48 million people without insurance do not have ready access to the system.

One disturbing study published last year by researchers at the University of California at San Francisco found average waits of 38.2 days to get an appointment with a dermatologist to check out a possibly cancerous mole.

Note that the U.S. spends the most on healthcare. According to the Progressive Policy Institute, it was 15.2% of GDP in 2004. The U.S. also spends significantly more on a per capita basis. In 2003, per capita spending was 5,635 USD (adjusted for PPP), more than twice the OECD average of 2,307 USD. For a global comparison, the OECD average was 8.6% (see table for other countries).

The reasons for this, and other problems are also interesting to note. For one, BusinessWeek notes that only a third of U.S. doctors are family doctors or general practitioners, compared to half in Europe. The OECD also notes that health care resources are generally scarcer in the U.S. despite the high expenditures: “In 2002, the United States had 2.3 practising physicians per 1,000 population, below the OECD average of 2.9. The number of acute care hospital beds in the United States in 2003 was 2.8 per 1 000 population, also lower than the OECD average of 4.1 beds per 1 000 population.”

For more on U.S. healthcare expenditures, the Kaiser Family Foundation offers an excellent set of trends and indicators.

Prior coverage on U.S. healthcare:

1. The Dilemna of Privatizing Healthcare
2. Big Pharma Attacks Michael Moore

The Economist’s analysis of drug patents under attack in the developing world (from Thailand, to India and Brazil) is very illuminating:

At first sight, this row reflects an old dilemma that pits today’s patients against tomorrow’s. Compulsory licensing means that more Thais will get HIV drugs now, but it also means that drugs firms will be less keen to invest in drugs for Thailand in the future. Yet look closer and this is more than a fight between the poor-country sick and rich-world drugs companies. What makes it different is the role of two new actors: muscular middle-income countries and the rising generics industry.

BusinessWeek writes about Big Pharma’s addiction for lifestyle drugs:

Try as they might to distance themselves from the lifestyle drug sector, pharmaceutical companies can’t seem to kick their addiction to these lucrative products. Even as consumers and government regulators grow more alarmed over drug safety, an examination of four popular lifestyle categories—weight loss, hair loss, sleep, and sexual dysfunction—shows that the pharmaceutical industry is by no means shying away from this controversial territory.

What does this mean for drug development? Big pharma’s “truly innovative” drugs are being squeezed, and they can no longer count on a safe regulatory environment. And simultaneously, “lifestyle drugs” offer ample reward. Will innovation suffer - even more?

Beyond bringing to the surface that rhetorical question, the Economist does raise a pertinent point. The war on patents in the developing world is probably a good thing, as it pushes the envelope on what is legally possible under the Doha agreement - an agreement that has not yet been tested in international courts.

But it does create a problem. Countries such as India, Brazil and Thailand can indeed get cheaper access to certain drugs by issuing compulsory licenses. But the really poor countries cannot do the same as easily - not because they do not have local drug industries, but because they cannot resist pressure from the EU and US as effectively. As the Economist says, “a perverse result of this trend is that middle-income countries are getting cheaper drugs, whereas quieter and perhaps more deserving neighbours are not.”

It also shows how India’s own response to high drug costs will have to be more nuanced in future. India’s generics drug industry benefits from compulsory licensing. But its “R&D intensive” segment of the pharma industry - which includes Dr. Reddy’s and Ranbaxy - suffer. It was that segment that was most euphoric in embracing new TRIPS legislations. Expect them to lobby for stronger - not weaker - patent legislation. At the cost of India’s poor.