Pharmaceutical Research and Manufacturers of America - Policy Views - Issues Around The World - Special 301 Report

WATCH COUNTRY

New Zealand

The Pharmaceutical Research and Manufacturers of America (PhRMA) and its member company affiliates in New Zealand believe that the policies of the New Zealand Government, with regard to policies, practices and acts of the agencies setting the reimbursement price of medicines, act to largely deny market access for the American research-based pharmaceutical industry to the New Zealand market. Accordingly, PhRMA requests that New Zealand be included in the 2000 "Special 301" Priority Watch List.


Barriers to Market Access for Patented Pharmaceutical Products

Once regulatory approval has been obtained from the New Zealand Ministry of Health, market access is effectively determined by entry to the government Pharmaceutical Schedule (PS). Access to the PS is determined by the Pharmaceutical Management Agency (PHARMAC), a wholly-owned subsidiary of the Health Funding Authority (HFA). The PS lists the medicines that attract a Government reimbursement for patients and specifies the ex-manufacturer reimbursement level that will be paid for each listed medicine. The PS also defines the supply conditions by restricting prescriptions of a product when it decides to reimburse a product.

Since the New Zealand Government has instituted a socialized health insurance system, PHARMAC functions as a monopsonistic power in the market by controlling the level of and entitlement to reimbursement. PHARMAC's monopsonistic position allows it to control market access for new medicines and exploit the negative impact of premiums to control prices for currently reimbursed medicines. PHARMAC also controls supplier or prescriber restrictions that further restrict the true or potential market for pharmaceuticals in New Zealand. Due to PHARMAC's practices, and the nature of a socialized health insurance system, significant sales of most medicines in New Zealand are not possible unless the medicine is reimbursed on the Pharmaceutical Schedule. Moreover, all private medical insurers in New Zealand reimburse claims only for medicines that are included on the PS; this means that no one will underwrite a premium or co-payment for the cost of a medicine unless it is "acceptable" to PHARMAC. The absence of a PS listing also severely limits the in-hospital use of some medicines. Hospital doctors often prefer to initiate treatment with medicines that are reimbursed so that the medicine does not have to be changed when the patient is discharged.

PHARMAC's management of the PS creates barriers to market access by denying or conditioning the listing of new medicines on the willingness of manufacturers to accept discriminatory pricing and reimbursement policies. PHARMAC applies its discriminatory policies in the following manner:

  1. Grouping together of patented products with generics for reference pricing — PHARMAC's use of reference pricing differs significantly from that used in other countries, by including patent products in therapeutic reference groups with generic products. This policy erodes the value of intellectual property accrued through innovation.

  2. Denying a PS listing when PHARMAC [subjectively] considers that "sufficient" products are available to meet patients' needs.

  3. Denying or conditioning PS listing upon the manufacturer's acceptance of a reimbursement level that is less than or equal to the current PHARMAC-imposed reimbursement level of existing medicines — effectively limiting the price of new medicines to the price of older products.

  4. Denying or conditioning PS listing upon the manufacturers' agreement to set the introductory market price at the reimbursement level, in effect imposing a maximum price control at the time of listing.

  5. Denying or conditioning PS listing upon the manufacturer's agreement to government-mandated cross therapeutic reference pricing which requires a major price reduction on one or more other medicines.

  6. Delisting of medicines based on the award of a single tender or preferred provider status. All competing suppliers not awarded, including those currently on the PS, have had reimbursement denied, restricted, or have had their products removed from the PS.

  7. Lack of transparency in reference pricing methodology — methodology is capriciously applied to different therapeutic sub-groups. Clinical evidence and therapeutic differences, as well as the views of physicians, are ignored in favor of products with lower reimbursement levels.

Anti-Trust Exemption: PHARMAC has been able to institute these policies through its statutory exemption from the anti-trust provisions of the New Zealand Commerce Act. Thus, while pharmaceutical companies are bound by normal commercial competition law, a government agency has the right to act in such a way as to lessen competition significantly in the market without legal redress by affected companies. The New Zealand Government continues to retain the exemption from Part II the NZ Commerce Act 1986 in favor of the "PHARMAC". The industry has pursued the removal of PHARMAC's exemption with the New Zealand Government and this has been rejected.

At the time of the health reforms in 1993, PHARMAC enjoyed an exemption from Part II of the Act. The rationale for this exemption was to enable PHARMAC, as agent for the then four Regional Health Authorities (RHAs), to manage and operate the PS and the reimbursement regime for medicines. It was perceived that, in the absence of such an exemption, the RHAs could be indulging in collusive conduct and price fixing in breach of the Act. The point was that by all four RHAs agreeing to subsidize and, therefore, purchase medicines at the same price under the reimbursement regime, this would, prima facie, breach provisions in Part II of the Act and, ss27/30, in particular.

Now that the four RHAs have been disbanded and there is a single Health Funding Authority (HFA), there is no further justification for the exemption. However, the NZ Government chooses to overlook the significant change in circumstances, where now there is only one monopsony buyer, the HFA, and PHARMAC is acting as its sole agent. There is also an inherent contradiction in the NZ Government's stance. On the one hand it claims that PHARMAC's practices and objectives are pro-competitive, but on the other, still insists that the exemption must be retained. If the former were true, the latter would be unnecessary.

The reality is that if the exemption is retained, PHARMAC will continue to be insulated from quite proper challenges of misuse of market power. This is a crucial point of principle, as through the administration of the reimbursement regime, PHARMAC/HFA can dictate who enjoys market access. They have the ultimate market power in circumstances where they can restrict, deter or eliminate suppliers from the market place, something which would otherwise be in clear breach of s.36 of the Act, if it were not for the exemption.

The empirical evidence shows that if pharmaceutical suppliers do not have their medicines fully subsidized, their ability to access the market is extremely limited, if not impossible, in most cases. Accordingly, PhRMA strongly urges that the U.S. Government seek the complete removal of the exemption from the Act. This will have no prejudice to PHARMAC/HFA, as they have publicly stated that they are quite prepared to comply with the Act without the protection of the exemption.

The exemption is also a complete anomaly in the current "light-handed regulatory environment," where the principles of competition and open market access are to the fore in terms of current economic thinking in New Zealand. There is no proper purpose to be served by retaining the exemption, as the restructuring of the health sector ensures that, with the sole HFA as the monopsony buyer of medicines under the reimbursement regime, there is no longer any possibility of collusive or anti-competitive conduct, in breach of the Act, in the management and operation of the Pharmaceutical Schedule. PhRMA believes, therefore, that the exemption should be removed without delay.

Sole Supply Tenders: PHARMAC has expanded its restrictive listing policies in efforts to further reduce Government expenditure on pharmaceuticals. Several options have been enforced including those for expanded national tendering and further restricting indications and/or patient eligibility criteria for which a medicine can be prescribed.

PHARMAC successfully implemented a number of tenders during 1998, an additional tender may have been released in December 1999. If so, the selection of tender winners would be scheduled for the first and second quarters 2000. Sole supply arrangements will be implemented in the third and fourth quarter 2000. The value of the products in the existing tender is approximately NZ$55 million plus.

As with past tenders PHARMAC could reduce reimbursement of products that are not part of the tender process through reference pricing, to the level of the lowest priced sole supply product in the established therapeutic sub-group. While the majority of these affected products are generic, a couple still retain patent protection (amlodipine (Norvasc), felodipine (Plendil/Agon) the active ingredient for felodipine patent expired June 1999 but the formulation and extended release formulation still has another eight years to run).

There are a number of potential distortions to the market and restriction upon competition from awarding sole supply arrangements. Likely distortions include: (a) the risk of price increases, or withdrawal, of alternative dosage forms; (b) the risk of the emergence of monopoly suppliers; (c) the risk that there will be a significant increase in the number of medicines with premiums over and above the level of patient reimbursement available and also increases in the amounts of those premiums; and, (d) the risk that companies' ability to make available modern medicines to the New Zealand market will be further restricted.

Manufacturers who are unsuccessful in the tender process would have their currently reimbursed products de-listed, in cases where a sole supply tender was granted. In other cases, where a preferred supply tender was granted, the new Pharmacists' contract with the HFA compels them to dispense only the "preferred" product on generic prescriptions, or alternatively on branded prescriptions from doctors who have given blanket consent (or specific consent) to substitute.

New generic entrants are encouraged to provide low cost tender applications, not only by the attractive sole or preferred status arrangements, but also (in some cases) by undertakings by PHARMAC that PHARMAC will pay up front registration fees, should they win the tender. Such successful tender products are, therefore, promised sole or preferred status before they are even registered for sale in New Zealand.

As a result of tenders to date, at least three companies have significantly reduced their staff numbers, as well as withdrawn from clinical research programs and terminated funding for independently run post graduate education programs. The next round of tenders may affect many more major companies in a similar way.

Industry and U.S. Government Action: Although U.S. industry has pursued dialogue with New Zealand Government officials to modify the discriminatory aspects of their system, no progress has been made and the New Zealand Government has been regularly implementing new policies that further prohibit market access for imported products. In 1998, the U.S. industry sought strong engagement by the U.S. Government with the New Zealand Ministry of Foreign Affairs. The New Zealand Government apparently agreed, as a "down-payment," to engage in consultations with the U.S. Government to address U.S. concerns regarding PHARMAC's policies and practices. The New Zealand Government agreed at least to discuss the following proposals in the bilateral consultations:

  1. Market Access Discussion Issues

    1. Based on presentation of health economic data which supports the cost-efficacy of new drugs, the New Zealand Government would remove the requirement that new drugs must accept a reimbursement level equivalent to or lower than the current reference price in order to gain access to the Pharmaceutical Schedule.

    2. Elimination of government-mandated cross therapeutic reference pricing.

    3. Separation of reimbursement price from market price for patented products.

    4. Separation of patented products from generics in therapeutic/ reimbursement groups.

    5. Elimination of national tendering for patented pharmaceuticals.

  2. Governance of PHARMAC

    1. Implementation of a dispute resolution process, particularly a formal process that would allow for appeal to PHARMAC's decisions.

    2. Elimination of PHARMAC's exemption from Part II of the New Zealand Commerce Act of 1986 that governs antitrust behavior through legislative remedy or a change in the PHARMAC rules.

  3. Transparency and Consultative Mechanism

    1. Inclusion of industry in the policy review process, including the establishment of an industry-government working group.

    2. Transparency and publication of procedural changes.

In September 1998, USTR engaged in the first round of bilateral discussions with the New Zealand Ministry of Foreign Affairs (MOFA) to address the highly restrictive and anti-competitive policies and practices of PHARMAC. Although no formal resolution of the industry's issues was achieved at the meeting, both the U.S. and New Zealand Governments stated their positions and agreed to continue the consultations and focus future discussions on the development of new near term procedural mechanisms. The proposed procedural measures included:

  1. reform of the independent scientific experts committee, the Pharmaceutical Technical Affairs Committee (PTAC) that reviews applications submitted to PHARMAC;
  2. recommendation for PS listing decisions made within 3 months;
  3. establishment of 30-day public comment period;
  4. a public hearing of experts;
  5. final decisions on listing within 6 months;
  6. establishment of an independent appeal process for listing denials, and public disclosure of analysis of reasons for denial; and,
  7. automatic initiation of appeal process for inaction on applications.

Progress on Procedural Measures: The pharmaceutical industry proposed to the government of New Zealand a series of procedural mechanisms to improve the operating environment. All but one of these proposals have been rejected by the NZ Government.

The industry presented to the NZ Government detailed views on the more immediately achievable and less difficult procedural mechanisms described at 2(a) — (g), plus:

  • The case for quarterly meetings between the Researched Medicines Industry (RMI) Board (local trade industry association) and PHARMAC representatives under the chairmanship of the Minister with an open agenda.
  • The appointment of membership of the PHARMAC Board and PTAC to be the responsibility of Ministers.
  • The transfer of the administration of PTAC to the Ministry of Health.
  • The removal of the exemption from the anti-competitive provisions of the Commerce Act enjoyed by PHARMAC.

More difficult issues, such as the separation of patented and generic products in therapeutic grouping for reference pricing and elimination of the practice of conditioning access to the Pharmaceutical Schedule upon setting price equal to or less than the level of reimbursement or other concessions were deliberately held over. This was to allow concentration on issues that could be implemented with minimal effort and cost to the tax payer should there be a willingness on the part of the NZ Government and its advisors to improve the harsh environment within which the international pharmaceutical companies operate. These could be seen as potentially confidence building steps.

All but one of these proposals have been rejected by the NZ Government. The NZ Government's single positive response for 2(a) "Reform of the independent scientific experts committee (PTAC) that reviews applications submitted to PHARMAC" has resulted in a largely inconsequential proposal that, if implemented, will do absolutely nothing to engender the confidence of the pharmaceutical industry in the appropriate independence and transparency of the operations of PTAC.

It is now clear from the pharmaceutical industry's perspective that 1999 has been a wasted year in our dealings with the Government, and its agencies, as we have strenuously attempted to address the very significant concerns held by our member companies in their dealings with PHARMAC and PTAC.

In its response the NZ Government has supported PHARMAC's future proposals to undertake:

  • extensive consultation on the review of its Operating Polices and Procedures;
  • increased dialogue between PHARMAC and pharmaceutical companies; and
  • increased reviews by PHARMAC of its clinical decisions.

These initiatives may well prove useful, and PhRMA welcomes the recognition implicit within them that all is not well with PHARMAC's relationships with its various stakeholders (including, but also going well beyond pharmaceutical companies). However, PhRMA believes that the much more fundamental issues raised by the industry in its submissions to the New Zealand government in the view of the industry remain outstanding.

Pharmaceutical reimbursement: The manner in which the pharmaceutical reimbursement system is implemented effectively erodes the value of patents for new, innovative, more-effective medicines. PHARMAC groups patented products in reference pools with generic products and allots the same reimbursement price for both. Without price differentiation between patented products and generics, the increased value of patented products is not recognized. In addition, the lack of access for patented products to the New Zealand Pharmaceutical Schedule, and requirements to subsidize the product cost by lowering the price of another product in a different therapeutic subgroup further devalues patented products to the level of generics.

Through its control of the levels of reimbursement and application of its reference pricing policies and other planned initiatives such as tendering, PHARMAC's actions burden and restrict of U.S. trade in pharmaceuticals, and negatively affect the value of the intellectual property on which these innovative medicines depend. This is because:

  • The period over which a level of reimbursement is negotiated or denied shortens the effective patent life. In discussing the problem of delayed listing in a 1997 report on the New Zealand pharmaceutical pricing situation, one authoritative article cites the view of the Researched Medicines Industry (RMI) Association that "companies can ill afford further delays to market (entry). [The RMI] estimates that the average effective patent term, already short at 7.72 years in 1995, will fall to 6.9 years by 2000." Indeed, without a known reimbursement level for a specific medicine, the supplier virtually is denied the opportunity to market the medicine.

  • Government-mandated cross therapeutic reference pricing by PHARMAC forces price reductions on patent-protected medicines, or can expose the manufacturer to significant volume losses. These, together with practices that effectively deny market access, reduce the opportunity to earn a expected return on medicines whose value is inherent within their intellectual property.

In order to achieve or maintain reasonable market share, research-based pharmaceutical companies are forced by PHARMAC to provide these medicines at the price of off-patent medicines or prices that prevail as a result of trade-offs for unrelated medicines. PhRMA believes that these practices by PHARMAC, which the New Zealand Government allows and encourages, seriously undermine the value of intellectual property and fail to give adequate recognition to the value of innovation.


Intellectual Property Protection

Of further concern to the industry is the burden of PHARMAC's policies and practices on the value of U.S. companies' intellectual property. PHARMAC is currently challenging the value of US companies intellectual property through its opposition in the NZ Courts to the awarding of Swiss-type patents. In 1997 the NZ Commissioner of Patents issued a Practice Note allowing the grant of pharmaceutical patents containing Swiss-type claims. A Swiss-type claim is a claim in the following general form: "use of a known pharmaceutical compound X in the preparation of a pharmaceutical composition for treating (or preventing) condition Y." This form of claim is used where a second use is discovered for a known pharmaceutical.

PHARMAC elected to bring judicial review proceedings against the Commissioner for Patents challenging his decision to grant patents containing such claims. PHARMAC says that the decision of the Commissioner was unlawful because a claim in this form does not fall within the definition of 'invention' in the Patents Act 1953.

The judgment of Justice Gallen on the December 17, 1998 found in favor of the Commissioner of Patents and the grant allowing pharmaceutical companies Swiss Type Patents was upheld.

In response PHARMAC made an appeal to the Court of Appeal. In the interim PHARMAC have also secured a "quasi" interim injunction regarding the granting of Swiss Type Patents by the Commissioner of Patents. Justice Gallen allowed for the processing of Swiss Type Patents up to, but not including, final grant. To date 50-100 Swiss Type Patents applications have been processed to the stage allowed by Justice Gallen. This leaves an estimated 600 or more Swiss Type claims remaining to be addressed.

The NZ Court of Appeal heard PHARMAC's appeal on 13 and 14 October 13 and 14, 1999 and has not yet released its decision.


Damage Estimate

PhRMA is currently studying methodology for estimating damages caused by the aforementioned trade barriers in New Zealand (see Appendix B). The current size of the New Zealand pharmaceutical market is NZ$811 million (moving annual total June 1999 (US$408 million), of which the U.S. companies enjoy a market share of around 29 percent or US$118 million. It is not possible at the current time to provide a reliable estimate of the increase in sales that would accrue to the research-based companies in New Zealand, in the absence of current market access barriers and intellectual property problems.

New Zealand is one of the leading developed economies in the Asia-Pacific region, yet its model of reference pricing has the effect of denying market access to the American research-based pharmaceutical industry. It thus renders the "value" of intellectual property protection in New Zealand, which PhRMA member companies would come to expect under all other circumstances, virtually meaningless in this market. This "New Zealand model" could serve as an unfortunate example for other countries in the region which are in the primary stages of developing health care and health insurance policies. Indeed, aspects of the New Zealand reference pricing system have been adopted in British Columbia and by the Australian government.

In addition, by implementing its current reimbursement policies, New Zealand, which is an OECD member, plays the role of global "free-rider" on global research and development for new medicines to treat new and yet uncured diseases both within and outside New Zealand.

Lastly, New Zealand may declare itself a net "importer" of medicines, and state that it has absolutely no interest in establishing itself as a center for pharmaceutical R&D and manufacturing. However, it is not appropriate for the New Zealand Government to enact measures to deny marketing opportunities to one of the most innovative and successful industries in the world. As a supporter of free trade, New Zealand's apparent support of anti-competitive policies, such as those of PHARMAC, contradicts the country's economic policies by "destroying" the possibility of an entire industry's presence in their country.

PhRMA understands that the New Zealand government has expressed its interest in concluding a Free Trade Agreement with the United States that might or might not include other countries in the Asia-Pacific region. PhRMA cannot and will not support such an arrangement that includes New Zealand until the aforementioned severe problems the industry encounters in New Zealand are rectified.