The case of market-based pricing

Milind Sathe

Pricing of patented medicines is a burning issue especially for fragile economies planning heavy expenditure on healthcare. It provides possibly the last chance to sovereign to guard its domain in the onslaught of lopsided version of IPR. Normative practice of pricing patented articles including medicines dictates a perfect use of Trade-Related Aspects of Intellectual Property Rights (TRIPs) flexibilities via Compulsory Licensing (CL). This should not be compromised for market-based pricing of patented medicines unless market-based price is ensured to be lower than the price that any other company would offer under CL.

“Essential medicines are not a luxury whose availability can be left to private market forces only, but an essential component of the fulfillment of the right to health.”1 The price of medicines is a critical issue in rich countries like the UK and the US, as well as in developing countries (DCs) and least developed countries (LDCs).

Vigilant pricing strategy for patented medicines

Big financially powerful pharma companies, a major class of patentees seek complete freedom of operation to enforce their patent rights even against sovereign priorities. Their invincible command over politics and political leaders in their parent country exert tremendous influence in determining rules of the IPR-based global trade. Their collective market capitalisation is greater than the sum of economies of DCs from Africa or from Latin America or South East Asia. It enables them to create suitable political and legal frames to support their business within any nation and globally. Unrestricted freedom given to a big patentee is a direct manifestation of shrinking sovereign domain and identity diffusion2. Sure and predictable end of omitting sovereign expression in determining internal policies is, loss of control over national economy, debilitated indigenous industries and political chaos leading to loss of social tranquility, uprooted sustainable development and permanent political instability. Pricing of patented medicines is a volatile issue for all nations including developed nations for several reasons. It discloses sovereign abilities to guard its domain and extent to which IPR per se is understood, by members of apex institutes and the subject population. The relationship between some unique aspects of patented medicines and evolving global trend of expanding government subsidised health care leads to some critical issues that have a powerful long lasting impact on economy and industrial abilities of the nation.

(A) Unique aspects of patented medicines

• These are marketed in developed nations first
• Being medicines, they have to conform to regulatory requirements of the nation where these are intended to be marketed
• Its prices are always dictated by the patentee in developed nations without disclosure of costs incurred
• These may involve some new technologies
• Active ingredients and to a great extent formulation can be produced by non-patentees if patentee exhibits adamant behaviour and domestic government invokes CL either for internal use or under DOHA declaration
• Patented medicines have been priced higher in DCs and LDCs than prevailing in developed world, sometimes
• Free samples provided in the initial stages are higher whereas at the later stage in the life cycle of the patented medicine, less number of free samples are provided.

(B) Metamorphosis of global healthcare scene

• In many DCs and LDCs, medical expenses are through private pockets
• All nations of the globe are bulging their healthcare budgets
• Bigger volumes or a large portion of subject population in each country is targeted to be covered by subsidised health care schemes
• In future governments of DCs and LDCs would be spending HUGE on medicines.
• Which patented medicines are essential for DCs and LDCs is a critical issue and provides scope for miscalculations and wrong conclusions.
• Patented medicines will be included in subsidised healthcare schemes
• Patented medicines are costly as their prices are practically not controlled by any government for whatever reason.
• There is awareness that prices of patented medicines should be controlled.

Issues emerging from (A) and (B)

Why to control the prices of patented medicines? What happens if prices of patented medicines are not controlled? Which patented medicines should be included in government-aided healthcare schemes? At what price the government should purchase these? Is pricing of patented medicines an avenue to boost industrial progress, distribution and redistribution of wealth, internalisation of essential technologies? Is the issue closely related to sectors of vital importance? Is price control mechanism an effective tool to prevent the misuse and abuse of IPR and patents in specific? Should patentee be given unrestricted freedom and allowed to fix the price or the nation should take positive efforts to assess the cost of materials and allow prevailing mark ups to arrive at the price? Does this issue need a vigilant scrutiny to confirm if the nation has right IP laws in place and if these are appropriately enforced? Is the government machinery well coordinated and oriented to interpret and use the laws for the benefit of the nation? In IPR dominated knowledge economy, should price control bodies antagonise IPR/patent laws or should reinforce them for effective price control and to ensure fulfillment of sovereign objectives? And so on…

Eye opening facts of MBP of patented medicines

Normally a country regulates prices of patented medicines, through fixed cost-plus prices policy3 and review mechanisms. Albeit MBP is the easiest approach to price patented medicines, it is not based on the factual production and marketing costs. MBP simply takes into account prices of the same medicine in developed countries. These countries exhibit glaring disparity as compared to DCs and LDCs in several economy indices besides per capita income and gross national income. The most interesting fact is that patentee never divulges factual cost details to any reference governments. The main strength of developed economies is that they can afford sky high prices albeit. People voice that the prices of patented medicines are exorbitantly high. In these nations public opinion about the reputation of pharma industry is far from satisfactory primarily because of lack of transparency and perceived priority given by pharma companies to their financial success over social responsibility.

Data on pricing of patented medicines in general

Indicative price structure of patented medicines suggests R&D costs to be about 15±2 per cent. Manufacturing and labour costs about 26±2 per cent, marketing costs about 35±2 per cent and 24±2 per cent is said to be net profit.

By this logic, prices of generic drugs should be only 15±2 per cent lower than patented medicines as rest are all costs. If we neglect/delete (which is never the case), generics should be priced at 100 per cent – (15±2 per cent+24±2 per cent) = 61±4 per cent of patented drug. But that is not the case. After patent expiry, prices collapse far more than 35 per cent, to about 90 per cent to about 96 per cent, sometimes in less than a month.

It means that the realistic cost of patented medicine is not above four per cent. Some reports say that patented/ branded medicines are priced 100+ to 300 times costlier than generic medicines. By this logic the realistic cost of patented medicines is far below four per cent. So, alternatively, when prices are to be fixed by negotiation, the price of patented medicine must be discounted to arrive at a price anywhere between the lowest price in reference markets divided by 300 to lowest price in reference market discounted by about 96 per cent, which ever lower. Logic dictates to opt for the lowermost price among the price offered by patentee, and the prices calculated using factor of 300 or discounting by 96 per cent or the price offered by domestic pharmaceutical company.

Despite doing this exercise, a negotiated price may not be reasonably affordable price because patentees are capable of lifting prices in reference markets by virtue of their influence. Therefore relying on MBP is always a risk. It will dent the economy of DC or LDC. It is surely and certainly not reasonably affordable price. This is because MBP neglects riders of domestic factors such as cheap manpower, expertise in cost effective procurements of other factors of production which make this land a global outsourcing destination, differences in gross national income, and the inherent structure of economy.

These riders are given full-effect in cost-based pricing and provides a very effective option for negotiating price. Refer to Korean experience in price negotiations. A body constituted by Apex Institute of any nation is expected to work for the subject population, a sovereign primacy.

France planned to cut over 500 million euro primarily by efficient control over prices of patented/branded medicines. EU nations are creating several barriers to restrict price rise and to ensure huge savings. Germany, insists for proof of the new drug’s superiority over other available treatments. Chinese pricing authority exercises tighter controls over the pricing of foreign pharmaceuticals and was exhibited when prices of medicines produced by several multinational non Chinese companies received an average price cut of 19 per cent, in 2011. National Development and Reform Commission (NDRC) of China routinely conducts drug price investigations and have audited about 1000 products and their pricing. China reduced prices of drugs 20 times in 12 years. Besides promoting generic medicines, Japan uses a bi-annual price cut system. Russian regulation allows the government to decide on maximum mark-up prices for drugs. It enables the government to slash prices to make them affordable.

In knowledge economy price control mechanisms to control prices of patented madicines should aid IPR laws to prevent misuse and abuse of IPR and to facilitate sovereign expression within the nation. Sane pricing mechanisms and regulatory framework should never intersect or contradict IPR laws in any nation but should enhance effectiveness of IPR laws, by aiding their enforcement by clarifying ambiguities created by complex international agreements and unworthy interpretations suggested by unfaithful patentees.

Role of regulatory bodies

Regulatory body of the nation should grant permission to patentee to trade in patented medicine in the country only if the patentee promises to produce in approved domestic facility where it intends to produce. Failure of the patentee to substantiate his application by his domestic capabilities to manufacture and market the patented medicine should result into delay or refusal. A regulatory refusal keeps the issue of pricing beyond the reach of patentee. Refusal should automatically open the patent for CL. Patentee’s inability to procure the license to manufacture the same in the country and his inability to work the patent in three years after grant justifies CL in most TRIPs signataries. Failure of the patentee to obtain license because of his failure to conform to regulatory requirement should be published by regulatory wing. This is yet another manner to ensure working of patents and collection of realistic cost data. This approach supports and ensures achievement of sovereign priorities without compromising its domain power.

Break down of product costs

Besides research costs elements of cost in case of patented medicines, are costs incurred in a) inputs: active ingredient, excipients, manpower, machines, and cost of finance. The cost of active ingredient is the only product specific element. Rest all factors such as excipients, machines, manpower are similar to other products produced and therefore can be factorised. A liability free company does not incur cost of finance. b) conversion: are governed by guidelines related to price control orders and mechanisms prevailing in the country. c) distribution: Data available about distribution costs in case of domestic companies can be used to assess distribution costs. In fact distribution costs in case of government supplies, government hospitals and health care subsidy schemes will be considerably less as several agents and multiple agencies are not involved in distribution. Information which NDRC of China collects from manufacturers is exemplary in this regard. d) marketing and advertisement:In case of monopoly products these may be company and product specific but need to be deliberated and questioned.

So, the cost of active ingredient is the main component in the costing of patented medicines. Estimations of remaining elements of costs is a matter of routine work for any pharma company and patentee need not be relied upon if he quotes exaggerated costs. Excessive costs are to be attributed to his inherent inefficiencies. However, if he quotes lower costs, then price fixing body should review and correct their data and system to have lower costs. These costs are also available across the industry. Therefore higher costs fixed by price fixing body should be audited and appropriate effect given.

Pricing of imported vis-a-viz domestically produced patented medicine

If price determining body is unable to adopt the approach stated above, they may have to resolve the issue of pricing imported patented medicines because patentee successfully overrides sovereign and refuses domestic production. The price of imported patented medicine will be different than when produced domestically for the reasons sated above. A price lower among the two should be selected for negotiation.

Should only imports be allowed? In India Section 83(b) states that “patents are not granted merely to enable patentees to enjoy a monopoly for the importation of the patented article”. Article 5(A)(1)4 of Paris convention suggests a remedy short of forfeiture in case of importation. Nation should interpret that remedy to be CL to “manner conducive to social and economic welfare, and to a balance of rights and obligations” i.e. Section 83(c) and Section 83 (a) to (e) and (g) in India and TRIPs Article 7, Objectives. Only import arrests socio-economic and technological development, and is not good for sectors of vital importance. Where patented medicines are produced in a country and exported to developed nations, then a critical study of differences in invoicing prices of drugs exported and the price at which the same are sold in that market will give a fair idea about how to account for cost of labour and profits. Invoicing price includes the mark ups of the company producing the drug formulation.

Absence of such data will indicate the lack of coordination in different departments How should patented medicine of patentee be priced if he is only importing it? It is a matter of national prestige as to how a nation is going to treat patentee who in daylight contradicts law of the land. Should such patentee be given special privilege which is not offered to subject population of this land? It is matter closely related sovereign identity, sovereign duties and ability of the sovereign to retain and protect its domains. Carelessness in this regard will manifest dissolving sovereign identity, intellectual void, diminishing patriotism pushing an alleged independent nation in-d-pendant.

(Views expressed in this article are personal views of author)

References:

1.   TRIPS, R&D AND ACCESS TO MEDICINES: A GUIDE TO THE POST 2005 WORLD External briefing document, February 2005, Médecins Sans Frontières (MSF) Campaign for Access to Essential Medicines Based on a January 18th 2005 presentation to Members of European Parliament by Ellen ‘t Hoen http://www.msfaccess.org/sites/default/files/MSF_assets/Access/Docs/ACCESS_briefing_GuideToTRIPS_ENG_2005.pdf Last accessed on 25th March 2013.
2.   Compulsory Licensing in Knowledge Economy – it is NOW or NEVER – What, Why and When about CL – by Milind Sathe Chapter 3.18.1 Identity Crisis: Identity diffusion and identity loss
3.   Page 5/6, Access to Essential Medicines in Developing Countries: Does the WTO TRIPS Agreement Hinder It?- Jayashree Watal
4.   (1) Importation by the patentee into the country where the patent has been granted of articles manufactured in any of the countries of the Union shall not entail forfeiture of the patent