Excerpt from PhRMA Submission to the US Trade Representative for 301 Report



For the reasons described below, PhRMA requests that Australia be included among the 2001 “Special 301” Watch Countries.

Market Access Barriers

The Australian Government operates effectively as a monopsony purchaser of prescription pharmaceuticals through its operation of the Pharmaceutical Benefits Scheme (PBS). The PBS system accounts for approximately 80% of total prescription drug sales. The PBS aims to provide reliable and affordable access to medicines for the Australian community. Under the PBS, capped co-payments and safety net provisions limit the cost of pharmaceuticals to consumers, with the government paying the remainder.

The Industry Commission Inquiry into the Pharmaceutical Industry (May 1996) found that “the Government’s use of market power saves taxpayers up to $A860 million a year.” In effect, the industry thus subsidizes taxpayers to this extent.

In recognition of this price suppression, in April 1997, the Australian Government announced the Pharmaceutical Industry Investment Program (PIIP), under which the Government will allocate A$300 million over the next five years to eligible companies in return for activity.

One month later, in May 1997, the Australian Government announced its intention to introduce Therapeutic Group Premiums (TGP) (reference pricing) from February 1, 1998, for certain classes of drugs which have “similar clinical activity.” For each of these classes, a base or benchmark price was established. The government reimburses drugs in the class to the level of the base/benchmark price product. For other drugs in the class, patients have to pay any additional premium.

Originally, six classes of drugs were proposed for the TGP; however, strong opposition by industry and medical groups to the inclusion of beta-blockers and SSRIs resulted in their exemption from the TGP. The four remaining classes affected by the TGP include: ACE inhibitors and calcium channel blockers used to treat high blood pressure and heart disease; the HMG class of drugs for treating high cholesterol; and, H2 receptor antagonists for the treatment of ulcers.

The government hopes to achieve PBS savings of A$460 million over four years, through the introduction of TGPs. The TGP proposal is expected to return to government revenue almost double the average A$60 million per year foreshadowed in the PIIP. The TGP proposal should be considered in the context of Australia’s mandatory cost effectiveness criteria, under which manufacturers must already justify the price of their drug through economic and therapeutic evidence, in order to gain reimbursement.

The research-based pharmaceutical industry maintains the position that there are several reasons why TGPs are not appropriate in the Australian reimbursement system. More specifically, TGPs:


In the Australian context, market access effectively equates to reimbursement. This is because the PBS system accounts for approximately 80% of total prescription drug sales.

The 1996 Australian Industry Commission inquiry found evidence that community access to some drugs was adversely affected by the PBS; and that while Australia has not suffered too much in this area, the position is unlikely to be sustainable because when low prices are taken into account, the overall impact of the PBS has been to reduce sales revenues of some companies, increasing the risk of non-supply.

The introduction to TGPs inevitably will lead to increased risk of non-supply. As Paul Gross, a consultant to the research-based industry, concludes in his report, “There is serious concern amongst pharmaceutical manufacturers that a second stage of TGP pricing in Australia might attempt to use the price relativities established in prior economic appraisals of different drugs (cost effectiveness analysis) to readjust the first year relative prices between reference priced and non reference priced drugs. Such an adjustment would debase both future and past economic appraisals of drugs on the PBS and places manufacturers in double jeopardy when an arbitrary price control scheme (i.e., TGP) is superimposed on the more objective world recognized economic appraisal guidelines.”

A concise example of Gross’s conclusion is where a new proton pump inhibitor would have to prove cost effectiveness against generic Cimetidine. Given the low price of Cimetidine, it will be hard to justify cost effectiveness to a level sufficient to make it economically worthwhile for a manufacturer to gain reimbursement of the PPI. The likely outcome is that the PPI will not be reimbursed because the subsidy offered by the government is too low, and the product will not be made widely available to the Australian community. Market access is effectively denied.

Intellectual Property Protection

The TGP system effectively negates the economic value of the entire remaining patent life of a patented medicine in the affected classes. This occurs through a combination of the way in which the proposal operates and the culture of the Australian health-care system. The system involves the grouping of newer patent-protected products with generic versions of older molecules within a therapeutic class (e.g. generic captopril is grouped with patented enalapril; generic Cimetidine is grouped with patented famotidine).

The benchmark product/price for each class is likely to be set by a generic product – in effect, this generic product becomes the ‘de facto’ generic for all other patented products in the class, regardless of patent life. The government will reduce the level of reimbursement it currently provides to all products in the class to that of the benchmark product. The government claims that the TGP system allows manufacturers to charge whatever price they wish – a claim that is theoretically correct.

However, the PBS, which has operated for over 50 years, has created a climate in which free medicine (apart from the co-payment to Government) is seen as the norm. Market experience has shown that consumers are unwilling to pay more than a A$2 premium for any medicine (in addition to any co-payment).

Given this environment, manufacturers have the choice of maintaining their current prices and losing substantial volume, or reducing their price and revenue. In either case, the economic return is substantially less than would otherwise have occurred in the absence of TGPs. The reduced return is sustained throughout the remaining life of any patent, devaluing the value of the intellectual property.

Patent Term Length PhRMA considers it essential for an adequate patent life to be afforded to pharmaceuticals in Australia, as in the rest of the world. Many members of PhRMA’s International Section maintain affiliates in Australia, and consider Australia an important country in their overall global business and investment planning. PhRMA welcomes recognition by the Australian Government of the importance of patent protection to the pharmaceutical industry, particularly to encourage research, development and investment in Australia.

In 1998, the Australian Government enacted patent term extension for pharmaceuticals by up to five years, in order to bring Australia into line with international practice. The new policy applies to patents that were still viable as of July 1, 1999. The five-year extension makes possible an effective patent life of 15 years. Where patent extensions are granted, “spring boarding” or Bolar-type provisions will apply, so that generic manufacturers are able to do all necessary testing of their products before the expiration of the innovator’s patent rights.

The Australian Government long has viewed any extension for existing patents as a “windfall” for the industry, as several companies could benefit from the immediate extension of the patent life for their products. It therefore made the commitment to offer generic firms a “spring boarding” benefit in exchange for the “benefit” to the researchbased industry of patent term extension. However, the Australian Government overlooked at least two issues in this regard:

(1) that the market launch of pharmaceuticals in Australia is delayed by the complex and lengthy requirements in a strict cost containment environment, which includes the submission of “cost effectiveness” data; and

(2) that economic returns from currently marketed products in Australia provide the funding for future research and development (R&D), so patent term restoration applied to current products on the market in Australia will provide the foundation for investment to support future R&D in that country.

PhRMA does not agree with the necessity of maintaining a “spring boarding” provision that basically undercuts the current value of intellectual property protection in Australia, and certainly does not agree that a “spring boarding” provision is needed to “compensate” for the value of patent term restoration.

Protection of Proprietary Data

PhRMA applauds the recent enactment by the Australian Government of a law governing data protection that commits Australia to abide by the WTO TRIPS Agreement. PhRMA hopes that the Australian Government would provide protection for confidential data to all chemical entities, to the extent a particular use for which approval is sought has not been granted approval for that particular entity. This should include new indications for entities already approved, in addition to the first approved usage.

Furthermore, while the Australian Government has moved to provide five years of data protection for new chemical entities in the first instance, PhRMA believes that this period of protection should be ten years from the date of marketing approval, to allow for the additional time that it takes for a product to be listed on Australia’s Pharmaceutical Benefits Scheme (PBS). If the period of data protection begins before this date, the effectiveness of such protection would be eroded through the lengthy time needed for listing approval.

Damage Estimate

PhRMA is currently studying methodology for estimating damages caused by the aforementioned trade barriers in Australia. Australia’s cost containment policies, particularly the recent TGP initiative, are undermining the intellectual property rights of pharmaceutical manufacturers, by devaluing the value of patents and effectively denying market access to new medicines.

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