A TRADE FRAMEWORK FOR INTELLECTUAL PROPERTY RIGHTS, EQUITY PRICING AND MARKET SEGMENTATION Juan Rovira The World Bank Health, Nutrition and Population

TWO APPROACHES FOR MAKING DRUGS AFFORDABLE TO LOW INCOME POPULATIONS 1. Single price and (cross)subsidies to the poor 2. Equity pricing Within countries and across countries

WHAT IS MENT BY EQUITY PRICING? A price structure where prices for each market segment (population group) are lower, the lower the economic capacity of the segment By extension, the arrangement leading to the defined price structure Not to be identify with Ramsey pricing Differential, preferential, tiered pricing?

RATIONALE FOR EQUITY PRICING It potentially is a win-win solution for funding a global public good: therapeutic innovation Patent holders obtain a higher share of the consumer surplus than under a single international price scenario (although probably less than under a Ramsey pricing approach). Consumers (even in richer countries) benefit as well from likely larger R+D

APPROACHES TO EQUITY PRICING 1.Centralized production by the patent holder or originator, charging different effective prices 2.Tiered royalties and multiple producers Option 1 makes control of quality and diversion probably easier. It can be seen as a form of unfair competition, that may inhibit industrial development in low income countries. Option 2 promotes industrialization in developing countries and generic competition. However, it may not lead to low prices if there is no competition in the respective markets.

IMPLEMENTATION OF EQUITY PRICING Selection of products individually decided by patent holders on a voluntary basis. There should, however, be a commitment to transparency and to sustainability, e.g. by setting maximum prices in the lower price segments, as a stable percentage of the price in the high price segment. Buyers should be allowed to use existing tools in order to further reduce the effective price

MARKET SEGMENTATION Market segmentation or separability is a necessary condition for any type of significant price differentials, such as those envisaged in equity pricing proposals

MARKET SEGMENTATION OPTIONS Two or more segments? Criterion: economic capacity, burden of disease? Indicator: GNP per capita? How are tiered prices/royalties set and updated

EXISTING COUNTRY CATEGORIZATIONS (1) World Bank. World Development Reports: 1.Low income (GNP per capita of US$ 755 or less) 2.Lower-middle income (US$ 756-2,995) 3.Upper-middle-income (US$ 2,996-9,265) 4.High income (US$ 9,266 or more) Source: Europe Economics. Medicines Access and Innovation in Developing Countries, September 2001.

EXISTING COUNTRY CATEGORIZATIONS (2) UN. World Economic and Social Surveys: developed economies, economies in transition and developing countries (includes as a subcategory, LDC) IMF. World Economic Outlook: advanced economies, developing economies, economies in transition. UNICEF. Global access to vaccines: A, countries in need of financial support; B, Countries for which support should be moderate; C, Countries becoming rapidly independent; D, Self-sufficient countries

EXISTING COUNTRY CATEGORIZATIONS (3) UNIDO. State of the pharmaceutical industry (Criterion: type of prevalent pharmaceutical firms): 1.A, Sophisticated PI (pharmaceutical industry) and significant research base; 2.B, PI with innovative capacity; 3.C, PI with reproductive capacity; 4.D, no PI

PRODUCT FLOWS IN THE PROPOSED MODEL OF MARKET SEGMENTATION O O O O HIGH INCOME CONTRIES INTERMEDIATE INCOME COUNTRIES LOW INCOME COUNTRIES

WHAT ARE THE OBSTACLES TO MARKET SEGMENTATION (SEPARABILITY) Low priced drugs in developing countries suffer fatal attraction from high price countries. Potential beneficiaries are not only parallel traders, but also consumers, providers and insurers in developed countries and industry and treasury in exporting countries. Accessibility problems in developed countries. Belief of the urbi et orbi goodness of free markets in spite of market failures (also know as market fundamentalism). May be honest or interested.

WHAT CAN BE DONE TO ENSURE SEGMENTATION? Industry: Physical differentiation of products aimed at each segment Developed countries: Use legislation, sanctions and control in order to prevent improper imports Developing countries: Use legislation, sanctions and control in order to prevent improper exports International organizations, consumer associations, etc: support and legitimize market segmentation for equity pricing

EQUITY PRICING IS NOT THE PANACEA! It is only a way to address some market and policy failures, but it does not solve: Financial and physicals constraints The problem of neglected diseases The questionable goals and efficiency of how R+D and innovation is currently done Other sources of monopolistic power and market failures BUT IT MAY BE A GREAT STEP FORWARD !