Countries entering negotiations with patent holders of ARVs and other essential medicines for price reductions will enhance their effectiveness by considering negotiations in the context of other mechanisms for cost-containment. On the one hand, the benefits of negotiated price reductions will be enhanced by combining negotiations with other tools, such as eliminating import taxes (a measure already taken by China) and rational national dispensing practices. On the other hand, countries can strengthen their bargaining power by fully informing themselves of the potential benefits of other tools. For example, an awareness of the price reductions available from compulsory licensing or local state production will provide important information for countries entering into negotiations. Negotiations conducted against the backdrop of considerable efforts to introduce generic competition will also improve the government's bargaining power.
A negotiation will inevitably involve trade-offs, and, in most circumstances, a government is not likely to achieve everything it desires. Although it may offer major benefits, a negotiated resolution is also likely to include price or other conditions that to some extent frustrate the government. It is therefore particularly important for governments to be aware of certain limitations that patent holders may seek in a price reduction agreement, and to be aware of the relative risks of such provisions before agreeing to them.
Such conditions and limitations include:
• Limitations on re-export of discounted products. There is a legitimate patent holder interest in seeing products specially discounted for one market not leak into other markets. However, governments should recognize the potential difficulties in preventing their re-export. Overly burdensome requirements for governments to track, monitor, oversee and report on pharmaceutical distribution and consumption may strain government resources, and add significantly to the cost of providing essential medicines. At the same time, governments should be cognizant of the other tools available to deter cross-border re-sale. For example, most rich country markets maintain legal restrictions on unauthorized re-importation of pharmaceuticals from developing countries, as well as well-resourced and effective enforcement systems to ensure these restrictions are respected. Where these are inadequate, pharmaceutical companies are well positioned to urge those countries to improve enforcement. Pharmaceutical patent holders also retain significant ability to restrain re-export, including by changing the presentation of products (so pills are a different colour) or through labelling (labelling in Chinese characters would deter export to non-Chinese-speaking markets).
• Duration of the discount. Discount terms may only be available for a limited time. Where the need giving rise to the discount arrangement is not likely to recede, limited-term discount arrangements may only postpone the day of reckoning. For products such as ARVs, which must be taken for the life of the patient, limited-term solutions are particularly problematic. Of course, discounts need only be afforded during the period of effective patent protection, if an effective generics market is operational.
• Static price discount. The negotiated discount is likely to provide a set price over an extended period. By contrast, competition offers dynamic benefits and ongoing price reductions as competitors improve manufacturing technique and gain economies of scale. Thus, as government officials negotiate a set price, keeping in mind what price benefits they might obtain from compulsory licensing or state production, they should also be mindful that the cost savings from these approaches would grow over time. A discount price should be negotiated against a backdrop of awareness of the dynamic benefits of competition and local production.
• Secrecy. Patent holders may request that the terms of a final negotiation -- price, ancillary conditions, or both -- remain confidential. Confidentiality does not directly weaken the government's negotiating hand; obviously, the government knows what it negotiated. But a practice of confidentiality among multiple government beneficiaries of price reductions weakens them all. Each operating individually, they deprive themselves through secrecy of the collective knowledge of other discount deals, and the leverage afforded by knowledge of what others were able to negotiate. Similarly, secrecy protects the patent holder from international public pressure in support of more generous terms.
• Policy conditions. Patent holders may request that governments agree to certain TRIPS-plus legal or regulatory changes in exchange for discount products. They may also request that governments agree not to undertake compulsory licensing of other products. Such agreements may severely limit the government's flexibility, and have long-term impacts on the overall national pharmaceutical bill.
• Restrictions on number of patient beneficiaries. Patent holders may agree to provide discounted treatment only to a limited number of patients, leaving others in need of medicines to purchase them at the market rate, or to go without.
• Restrictions on type of patient beneficiaries. Patent holders may agree to provide discounted treatment only to a certain category of patients. Price discounts may only be available to those classified as impoverished, for example, with others required to purchase products at the market rate. The patent holder goal in this circumstance would be to bifurcate the market, and maintain a viable market for less poor consumers who may be able to afford to pay more. However, many of those consumers denied discounts may be unable to afford any medicine at the market rate.
• Restrictions on type of distributing institution. Patent holders may provide discounts only to public hospitals, thus restricting the number of people who benefit from price reductions. Or they may provide discounts confined to certain lower-income geographical areas. Again, the patent holder goal may be to maintain a market for better-off consumers, even though many in this category may not be able to pay, or their insurance providers may refuse to pay, the higher rates. Patent holders may also require the dispensing institution to demonstrate its capacity to properly handle patient treatment and care related to the discount product. While governments must ensure the safe and efficacious provision of medicines, demonstrations of such capacity may be onerous or administratively complicated such that relatively few institutions are able to meet externally imposed tests.