Tuesday, October 10, 2006

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."


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