Manufacturing costs for second line AIDS drugs*

by James Packard Love

For medicines invented before 1996 and produced or imported as generics in Brazil, the global market for active pharmaceutical ingredients (APIs) is highly competitive. The most widely used 1st line AIDS drug is a twice a day regime of Stavudine (d4T), Lamivudine (3TC), and Nevirapine (NVP). The main factor driving the price of this HAART regime is the cost of the APIs. The total amount of APIs in this cocktail is 284,700 milligrams per year, or .2847 kilos per patient per year.

Drug/APIs in milligrams	Dose	Daily	Yearly
Stavudine (d4T)	40	80	29,200
Lamivudine (3TC)	150	300	109,500
Nevirapine (NVP)	200	400	146,000
Total		780	284,700

Following our price negotiations with CIPLA on behalf of MSF, the price for this regime was $350 in January of 2001, and has fallen steadily, to recent prices as low as $109. Some companies have privately indicated to UN agencies that bulk prices of $70 per year are feasible, if quantities are large and financing is solid.

For this HAART regime, the cost of a kilo of delivered and formulated APIs in Africa was initially more than $35 thousand. With competition, this fell to roughly $3,900 per kilo by 2000, $ 1,229 per kilo in 2001, and $383 per kilo by early 2007.

The $70 per year per person future price that some manufacturers suggest is feasible for this HAART regime is equivalent to $246 per kilo for the fully formulated and delivered APIs.

APIs are the principal cost component of finished pharmaceutical products. The price of APIs fall according to three factors: (1) improved manufacturing processes, (2) economies of scale (larger and more sustained product runs), and (3) sufficient competition between multiple efficient producers. All of these factors have occurred with respect to the first-line HAART regime when Brazil as a large customer "made the market" for generic products, many based upon APIs manufactured in India or China. The Brazil purchases creating economies of scale and incentivizing multiple API manufacturers. Efficiencies and incentives were later enhanced by the presence of global funding mechanisms including the Global Fund to Fight AIDS, Tuberculosis and Malaria and the U.S. PEPFAR program.

What does this analysis suggest concerning the pricing dynamics for the new "second line" regimes? Below we compare the prices per formulated and delivered APIs for the first-line d4T+3TC+NVP regime (Triomune 40) to the prices of formulated and delivered APIs for Kaletra (lopinavir/ritonavir) and Atripla (efavirenz/emtricitabine/tenofovir).

The regime for Kaletra is 4 gel tabs containing 200 milligrams of lopinavir and 50 milligrams of ritonavir -- 1,000 APIs per day, and .365 kilos per year. The once a day regime for Atripla is 600 milligrams of efavirenz, 200 milligrams of emtricitabine and 300 milligrams of tenofovir disoproxil fumarate -- 1,100 APIs per day, or .4015 kilos per year.

Prices per formulated and delivered APIs are currently much higher for Kaletra and Atripla than for the Triomune HAART regime, principally because of the relatively low number of patients on second-line therapies and because of the absence of dynamic generic competition. However, as demand grows for second-line therapies and as Atripla is adopted as a preferred first-line therapy because of its adherence advantages (one pill, once-a-day) and its reduced adverse side effects, we can expect the potential economies of scale to increase and prices to fall, if generic producers are permitted to compete, and to compete in markets that collective are large enough to stimulate entry and competition and to realize economies of scales for the generic suppliers.

Efforts to partition markets or limit markets for generic suppliers will undermine the potential benefits of generic competition in lowering prices for second line drugs.

Prices per formulated and delivered APIs are currently much higher for Kaletra and Atripla than for the Triomune HAART regime, principally because of the relatively low number of patients on second-line therapies and because of the absence of dynamic generic competition.

The price points for Kaletra include the Abbott price for Thailand before the issuance of the compulsory license (roughly $3,800), the prices of generic alternatives in January 2007 (roughly $1,370), and the initial Abbott price in Africa ($500).

The price points for Atripla are the two tiers of prices for developing countries just announced by Merck.

Drug/APIs per year		Price	Price per kilo of API
Triomune
.2847 kilo	Cipla 2001	$ 350	$ 1,229
	Cipla 3 in 1	$ 250	$ 878
	Clinton	$ 140	$ 492
	2007	$ 109	$ 383
	Future low	$ 70	$ 246
Kaletra
.365 kilo	Thailand before CL	$ 3,800	$ 10,411
	Thailand after CL	$ 1,370	$ 3,753
	Abbott initial price in Africa	$ 500	$ 1,370
Atripla
.4015 kilos	"Middle income"	$ 1,033	$ 2,573
	"Low income"	$ 603	$ 1,502

The high prices for Kaletra and Atripla should come down if there a competitive market for generic APIs is permitted to develop. As demand grows for second-line therapies and if Atripla is adopted as a preferred first-line therapy because of its adherence advantages (one pill, once-a-day) and its reduced adverse side effects, we can expect the potential economies of scale to increase and prices to fall, if generic producers are permitted to compete, and to compete in markets that collective are large enough to stimulate entry and competition and to realize economies of scales for the generic suppliers.

Efforts to partition markets or limit markets for generic suppliers will undermine the potential benefits of generic competition in lowering prices for second line drugs. Generic suppliers should have access not only to the poorest countries that are subsidized entirely by Northern donors, but also to countries with somewhat higher incomes that can pay for medicines from national health care budgets.

Efforts by national governments to bargain with patent owners for lower prices for Kaletra and Atripla are unlikely to be as effective in lowering prices for these products as will be the creation of a large global market for generic products. The Triomune example illustrates both the possibilities of lower prices per delivered APIs, as well as the importance of dynamic savings, as entry, competition and efficiency is increased over time.

* Thanks to Brook Baker for many helpful comments.

Michael Abramowicz on "Perfecting Patent Prizes"

by Ben Krohmal

Professor Michael Abramowicz presented “Perfecting Patent Prizes” yesterday at CPTech. The presentation was based on his lengthy 2003 law review article of the same name. Michael began his presentation with an overview and critique of much of the literature proposing prizes or buyouts (see this annotated list of much of this literature) in lieu of patent monopolies: Guell and Fischbaum’s eminent domain proposal, Shavell and van Ypersele’s optional prize system, Kremer’s auction guided buyout proposal, Duffy’s buyout with shareholder compensation, and Lichtman’s coupon approach. Of these, Michael thinks the Duffy proposal (apparently to date it has only been published as a footnote) is generally the strongest. Briefly, Duffy’s suggests that the government meet secretly to decide whether to seize various pharmaceutical patents. When the government does seize a patent, it reimburses those who held shares of the patent holder immediately prior to the seizure by the amount that the company’s stock falls in a given period after the seizure is announced. Michael argued that each proposal has several critical flaws (see his PowerPoint presentation).

Michael’s proposal is to have a fixed prize fund to which patent holders could apply in exchange for turning their patent over to the public domain. A government body would be given broad discretion in awarding shares of the fund, with assumption that the resulting uncertainty would not significantly diminish research incentives so long as there is no pattern in which sort of innovations tend to be over- or under-rewarded by the fund. Significantly, decisions about what share of the fund a given innovation would receive would not be made until ten years after the patent is transferred to the public domain, in order to provide more opportunity for information about the social value of the drug to be revealed.

Michael concluded by suggesting that the Medical Innovation Prize Fund Act (H.R. 417) could be improved by making the proposed prize system an optional alternative to traditional patents. He argued that an optional prize system would be more likely to attract the support of the pharmaceutical industry, that it would lend itself to implementation on a smaller scale trial basis, and that it would be able to better accommodate the possibility that appropriate levels of R&D spending as a percentage of GDP will change over time.

Peter Pitts on Prizes

by Ben Krohmal

Peter Pitts took part in a brown bag discussion today at CPTech during which he covered several topics, including prize fund approaches to medical innovation like H.R. 417 (title from 109th Congress). Peter co-founded and currently works full time for the Center for Medicine in the Public Interest (CMPI), a group that is funded by major pharmaceutical companies. Peter previously served as the FDA’s Associate Commissioner for External Relations, and has held positions at the Hudson Institute, as well as the Washington Times, the New York Post, Readers Digest, McCalls, and other publications. (See his CMPI bio here).

Pitts was invited to CPTech to present his perspective after writing some critical posts about the prize fund on CMPI’s blog www.drugwonks.com. The visit consisted of a fruitful give and take with Peter asking as much as he was asked. Peter expressed a number of concerns about a prize system for medical innovation, but the main complain was this: Pitts did not want governments to determine the value of pharmaceutical innovations.

In response to the concern about government involvement, it was suggested that prizes should be compared the current system, which involves a government run patent system that is frequently gamed by pharmaceutical lawyers, and prices set by third-party payers, including employers, insurers and increasingly, governments. Indeed, the role of the government in setting "prices" is likely to expand following the Democrats' takeover of the US House and Senate this week. Peter agreed that the patent/monopoly price system for drugs was flawed, but was skeptical that a prize system could be better.

One key feature of the prize system approach was discussed at length. The Sanders bill from the 109th Congress (HR 417) would look at evidence of the "incremental therapeutic benefit" of a drug. Pitts was quite uncomfortable with the notion that the incentives to innovate would be focused on incremental benefits.

A related technical issue that was discussed concerned the ways that a Prize fund would treat products that were in development at roughly the same time, and how incremental benefits would be calculated in such cases -- a point earlier raised by Dean Baker. One proposal by participants was to consider drugs that were developed at roughly the same time as if they were simultaneous developments, for purposes of determining incremental benefits.

Noah Novogrodsky on “Compulsory Licensing in Ghana – the Continuing Barriers to Affordable Medicines”

by Ben Krohmal

Last Tuesday, November 7 2006, at the Consumer Project on Technology (CPTech) Washington, DC office, Professor Noah Novogrodsky gave a talk on attempts to improve access to medicines in Western Africa, using the example of Ghana’s compulsory license for HIV-AIDS drugs (slides).

Professor Noah Novogrodsky is a Visiting Professor of Law at Georgetown University Law Center and the Director of the University of Toronto Faculty of Law International Human Rights Program. For each of the past three years, Professor Novogrodsky has taught a seminar titled “The HIV/AIDS in Africa Project” in connection with the work of Stephen Lewis, the UN Secretary-General’s Special Envoy on HIV/AIDS in Africa. Professor Novogrodsky’s current research agenda focuses on the HIV/AIDS pandemic as a threat to human security.

The presentation provided background on the “traditional” compulsory license regime under article 31 of the TRIPS and the 2001 Doha Declaration as a realization of the Human Right to Health.

However, the majority of the presentation focused on the new compulsory license mechanism under the WTO August 30th 2003 decision that was recently incorporated permanently into the TRIPS agreement under article 31 bis. The August 30th decision permits countries with generic manufacturing capacity to manufacture and export generic versions of patented drugs to developing countries which lack such manufacturing capacity (the so-called Paragraph 6 mechanism).

Professor Novogrodsky explained the University of Toronto-based Access to Drugs Initiative (ADI) work with Ghana to use the WTO decision. These efforts were initially geared toward providing a test for the Canadian patent reform implementing the Paragraph 6 mechanism, “Jean Cretien’s Pledge to Africa Act” (formerly known as Bill C9), that was intended to enable Canada’s robust generic industry (robust due in part to past use of compulsory license flexibilities by the Canadian Government) to take advantage of the WTO decision for the benefit of developing countries.

ADI hoped that Ghana would become the first country to import drugs under C9, and offered technical assistance filing a compulsory license. However, the effort did not go smoothly. Noah reported that the HIV community in Ghana is marginalized and securing treatment did not always seem to be a high priority for government officials. Noah also described a lack of communication between the Ghana Department of Health and the Department of Justice, a generally unsubstantiated perception of pressure from the U.S. government, and evidence of threats by pharmaceutical companies to retaliate for compulsory licenses by raising prices for other drugs.

Besides difficulties with coordination in Ghana, features of C9 itself created further impediments, including restrictions on eligible drugs (Schedule 1), eligible recipient (only listed countries can use the mechanism, and not NGOs or others), and a limited 2 year duration for the compulsory license that makes it difficult for generic manufacturers to recoup their costs.

Noah and the attendees commented on three attempts that have been made to modify the list the drugs eligible for exportation under the Canadian C9 regime:

First: The unsuccessful request by Essential Invention with the drug Glivec.
Second: The successful request by MSF that lead to the addition of AZT/3TC.NVP on September 2005.
Third: The successful request by Biolyse that lead to the addition of Oseltamivir on September 2006.

ADI was not able to obtain a Canadian Compulsory License to export, but Ghana finally issued a compulsory license in October 27, 2005 to allow importation of ARVs for government use. The supplier was an Indian generic manufacturer.

The presentation concluded with Noah’s proposal for a bigger picture solution. Noah suggested that it would be preferable for one country to obtain a license and then export drugs that it manufactures or imports to its neighbors with similar health needs. If this were permissible, he argued, Ghana could further develop its limited generic manufacturing capacity to serve the whole region, especially Nigeria, a country with a large HIV+ population.

Noah suggested implementing a regional arrangement to permit exports under GATT article 24. He claimed this would permit a developing country that is a party to a regional trade agreement (RTA) to export a product imported or locally produced under a compulsory license to neighboring countries belonging to the RTA. Noah suggested the Economic Community Of West African States (ECOWAS) as an example of a potential platform to do this, and he reported that ADI has worked with Ghana to incorporate an exception into its law based upon Article 24 of the GATT.

Noah and audience discussants debated if Article 24 of the 1947 GATT would actually allow this. There were also discussions of other efforts to reduce the need for redundant compulsory licensing including those operating through TRIPS article 6 (exhaustion of rights), anti-competitive grounds of article 31.k of the TRIPS Agreement, proposals for the use of patent pools. Some also speculated about the potential of the "goods in transit" exceptions.

Thomas Pogge on "Social Justice and Pharmaceutical Innovation"

by Ben Krohmal

This week at CPTech Thomas Pogge presented “Social Justice and New Approaches to Promoting Pharmaceutical Innovation,” based roughly on his paper “Human Rights and Global Health: A Research Program.”

Thomas began his presentation with a brief exposition of one of his better known moral arguments, namely that the imposition of global institutions (e.g. TRIPS) that prevent the poor from satisfying their basic needs constitutes a violation of human rights. As a result, changing existing policies and institutions to better serve the poor is not a matter of charity or being a Good Samaritan but rather is mandatory in order to stop violating the rights of the global poor.

Thomas followed with an impressive overview of the scope and ramifications of global poverty before describing his proposal for making medical innovations more responsive to global medical needs.

Pogge proposes giving innovators a choice between two types of patent for new drugs and vaccines, Patent I or Patent II. Patent I is the same as pharmaceutical patents currently issued. Patent II requires open-licensing the innovation in exchange for a yearly payment for some duration based upon the actual impact of the innovation on the global disease burden. Thomas suggests that with the prospect of substantial rewards, innovators would opt for Patent II rather than Patent I to cover most drugs for diseases that significantly impact the developing world. Basing rewards on actual medical impact is intended to solve the “last mile problem” of getting medicines from the cargo plane to the people who need them: Patent II holders will have strong incentives to create the infrastructure necessary to ensure their product does as much good as possible. Funding for Patent II rewards would be provided by a “coalition of the willing” – countries would sign up and pledge to pay a given amount per unit of medical benefit (QALY, DALY, or some other metric) provided by drugs under Patent II, with richer countries expected to pledge more. As more countries sign on, reward amounts or the scope of eligible innovations could be increased (for instance, to begin with only drugs for communicable diseases might be eligible for Patent II, but eventually this might be expanded to all drugs).


After the presentation, much of the discussion involved comparing the Pogge proposal to other proposals for accessible medical innovation such as the Kremer et. al APC/AMC proposals, the Love/Hubbard prize fund/R&D Treaty approach, the Sanders Bill (HR 417), the Hollis voluntary prize fund, proposals to combine outcomes based rewards as incentives to voluntary licenses of patents to a patent pool for developing countries (possibly targeting CIPIH type II and III illnesses), and various patent buy-out proposals.

Particular attention was devoted to discussing the rationale for offering innovators a choice between Patent I and Patent II, rather than doing away with Patent I altogether. Thomas suggested that offering innovators a choice would be more politically feasible because the pharmaceutical industry might support the proposal. Others suggested that the political advantages of making Patent II mandatory might be greater, since it would presumably offer greater benefits to patients in rich countries (because given the choice, most innovators would chose Patent I for drugs with significant rich-country markets).

Thomas also answered questions about his proposal that countries pledge to pay an amount per unit of benefit rather than a fixed amount per year. Some suggested that countries would be unlikely to go along with open-ended financial commitments. Thomas stressed that one advantage of pledging funds per unit of benefit would be that countries would only pay if the proposal were successful in promoting the development of clinically significant open-licensed drugs. He also suggested that having a fixed amount awarded per year regardless of the quality of innovations could encourage collusion among innovators in an attempt to game the system – though he agreed that the possibility of this would be remote.

The majority of the questions focused on how a drug’s actual impact on the world’s disease burden would be measured and isolated from other influences. Thomas explained that the process would require “cutting corners” since an exact calculation of impact would be impossible. He suggested that standard public health sampling methodology be used to estimate the expected progression of diseases over the next decade or so. A drug’s impact for the purpose of determining Patent II rewards would be determined by comparing expected disease burden to actual disease burden as determined by similar sampling methodology. Background factors causing fluctuations in disease burden would be ignored and so introduce an added element of risk for innovators, but according to Thomas this would be no different than the risk faced by auto–makers that gas prices will increase and suppress demand for SUV’s. Innovators would work out rules in advance to decide how to divide rewards in cases of sequential innovation and multiple treatments for the same disease. While basing rewards upon expected rather than actual medical impact would be more difficult, Thomas suggested that using actual impact would be preferable because it addresses the “last mile” problem.

Overall reaction to many aspects of the proposal was positive, though many attendees expressed remaining concerns – particularly about the possibility of obtaining the requisite drug impact information, the ability of innovators to agree amongst themselves to an adequate system for dividing shared rewards, and the political feasibility of open ended financial commitments.

Kevin Outterson on “Patent Buyouts”

by Ben Krohmal

Today Kevin Outterson gave a presentation at CPTech, on "Patent Buyouts." The talk was based upon the paper Patent Buyouts for Global Disease Innovations for Low- and Middle- Income Countries. American Journal of Law & Medicine. 32:159-173.

In his presentation, Kevin most notably called attention to the toll of human papilloma virus (HPV) in the developing world and the potential benefits of newly developed HPV vaccines to women in less developed countries. HPV is a necessary condition for the 470,000 diagnosed cases of cervical cancer worldwide each year that result in 230,000 deaths per year. According to Kevin, while only 8% of worldwide cervical cancer deaths occur in 30 high-income countries, these countries are expected to account for an estimated 90% of expected revenues from an HPV vaccine. While the vast majority of cervical cancer deaths occur in lower income countries, the incidence of cervical cancer in high-income countries is significant, and HPV has not been neglected by pharmaceutical companies. In the past year, both GlaxoSmithKline and Merk have received patents for HPV vaccines that appear to be 100% effective in preventing infection with the most dangerous strains of HPV. The cost will be $360 per vaccination cycle in the United States. Outterson said these vaccines, developed with high-income countries in mind, would be of much greater benefit globally if they were made available at cheaper prices in lower income countries.

Outterson briefly discussed and critiqued several proposals for making HPV and other vaccines available in lower income countries, including manufacturing un-licensed generics, voluntary differential pricing, compulsory licensing, and prizes or advance purchase commitments.

Outterson's proposal is as follows. Leave in tact the existing pharmaceutical system in the 30 high-income countries that would account for 90% of vaccine revenues. For all other countries, the vaccine patent owners would voluntarily permit generic competition. In return, Outterson suggested that patent holders would receive money. He called this a buyout (more on this choice of words later).

There was some difficultly at first following the method of determining the amount of money for the "buy out" of the patents, but it turns out to be fairly simple. Whoever is paying for the patent "buy out" would give the patent owners an amount equal to 14-17% of the price of the cheapest generic product, multiplied by the number of generic units sold in the low income countries, paid every year.

In the case of the two HPV vaccines, Outterson reckoned that this would come to $30 million for each patent holder per year for the life of the patent assuming that every 12 year old girl in the world is vaccinated.

Quick math..... if vaccinating every 12 year girl in the world reduced deaths in the developing world from cervical cancer by 70 percent, preventing roughly 150 thousand deaths per year, the patent owners would receive roughly $400 per life saved. (The cost to society would be the $400 to the patent owners plus the cost of making, distributing and administering the vaccine to every 12 year-old girl in the developing world).

The amount is intended to compensate the patent holders for R&D funding lost by opening up lower income country markets to generic competition.

Seminar attendees raised a number of questions. Some suggested that Outterson’s plan did not seem like a true patent buyout, and instead more closely resembled a proposal for licensing patented products. Outterson agreed that his proposal was not for traditional patent buyouts that involve paying for full rights to a patent up front.
(There was some discussion of who should bear the risk that a product would turn out to be better or worse than expectations.)

Most questions focused on the rationale for Outterson’s formula for calculating buyout amounts. Kevin explained that the 14-17% was the PhRMA estimate of the rate of investment in R&D from sales. The price of the cheapest generic product is intended to approximate the marginal cost of production, and was chosen for inclusion in the formula on the normative ground that vaccines should be available to people in lower income countries at the most efficient price. Kevin had not spoken to anyone in the industry about the proposal, and some questioned whether patent holders would be likely to voluntarily accept the proposed "buyouts."

IRS Data Shows Increasing Pharma Income From Royalties

by Ben Krohmal

CPTECH has requested and received from the United States Internal Revenue Service tax return data for the years 1995 to 2003 for companies in the pharmaceutical and medicine manufacturing industry.

Among the more striking findings is a dramatic increase in the level and share of income received from royalties.

First, a few notes about the data.

Data cover the pharmaceutical and medicine manufacturing industry (NAICS code 325410), filing U.S. Corporation Income Tax Return Form 1120. Virtually all pharmaceutical corporations are required to file form 1120, with the exception of those meeting nine requirements including having gross receipts, total income, and total assets under $500,000.

Sales: we use line 1c on form 1120, for gross receipts or sales less returns and allowances. I believe this normally would include both US and foreign sales for US firms, but only income from US subsidiaries for foreign owned firms. There is also an exclusion of some income that qualifies under the form 8873 "Extraterritorial Income Exclusion." The sales reported on this form will also include some non-pharmaceutical sales, for companies with broader product lines. The number of firms filing form 1120 ranged from 1,150 to 1,801.

Royalties: we use line 7 on the form 1120, for "gross royalties." We assume that royalties are primarily from patents, but also include royalties from the use of know-how, copyrights and other royalty generating items. The number of firms reporting royalties is much smaller, ranging from 101 to 151 in years for which we have data.

Year	Sales	returns	Royalties	returns	%
1995	144,919,796	1,312	3,472,600	106	2.4
1996	165,914,444	1,418	4,200,321	147	2.5
1997	175,317,302	1,801	5,001,710	133	2.9
1998	189,613,246	1,493	7,309,528	144	3.9
1999	201,290,916	1,150	9,811,938	151	4.9
2000	203,210,319	1,231	11,356,862		5.6
2001	218,514,161	1,367	12,486,640		5.7
2002	249,096,548	1,278	13,415,678	101	5.4
2003	273,870,756		18,064,648		6.6
Total	1,821,747,488		85,119,925		4.7

A note on obtaining IRS SOI Data

Statistics of income data are a fruitful source of information on corporations’ costs and earnings. General SOI data, including data from the health care industry, are available online. More detailed breakdowns by industry, including the pharmaceutical and medicine manufacturing industry (NAICS code 325410), are available from the IRS for a negotiable fee.

Using information to measure benefits

by Aidan Hollis

One of the most common criticisms of drug prize plans like HR417 is that they would require a tremendous amount of information to be able to allocate prizes correctly. However, as an article in the NYTimes ("Smart Care via a Mouse, but What Will It Cost?") discusses today, exactly such information is becoming available.

---snip ---
The technology backbone for more efficient health care markets is being called the “national health information network.” Such a network — with patient records stripped of their personal identifiers — is intended to someday allow doctors, nurses, researchers and ordinary people to track the outcome of various therapies, drugs and devices.

The idea is that they could tap into a public Web site to sift through health databases that are based on millions of records, updated regularly. Clever software would help them to understand what works and what doesn’t — and to seek answers about side effects, recovery times and vitamin regimens. A result, health experts say, is that fewer decisions about how to treat patients would be based on studies by drug companies and medical device makers, as they often are now.
---snip---

The information system described would be ideal for measuring the benefits of specific drugs.