PRIORITY WATCH COUNTRY
Market Access for Pharmaceuticals
The Pharmaceutical Research and Manufacturers of America (PhRMA) and its member companies' affiliates in New Zealand believe that the policies of the New Zealand Government, insofar as they govern and direct the policies, practices and acts of the agencies that have been granted the power by that Government to set the reimbursement price of medicines, largely deny market access for the American research-based pharmaceutical industry to the New Zealand market.
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 Pharmaceutical Schedule (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 Pharmaceutical Schedule; 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:
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.
Denying a PS listing when PHARMAC [subjectively] considers that "sufficient" products are available to meet patients' needs;
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;
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;
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;
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 Pharmaceutical Schedule, have had reimbursement denied, restricted, or have had their products removed from the PS;
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 subsidy or reimbursement levels.
PHARMAC has been able to institute these policies through it's statutory exemption from anti-trust provisions of the New Zealand Commerce Act. The extent of this exemption recently has been tested in the New Zealand courts: the High Court held that the Minister of Health's approval of PHARMAC's Operating Policies and Procedures constituted sufficient "consultation" for PHARMAC to avail itself of the very wide exemption contained in legislation passed by the New Zealand parliament in 1994 (S2, Finance Act 1994). Thus, while pharmaceutical companies are bound by normal commercial competition law, a government appointed 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 Researched Medicines Industry Association (RMI), together with some individual member companies, appealed the High Court decision, but did not prevail in that appeal.
PHARMAC has recently expanded its restrictive listing policies in efforts to further reduce Government expenditure on pharmaceuticals. Several options have been proposed including those for expanded national tendering and further restricting indications and/or patient eligibility criteria for which a medicine can be prescribed. PHARMAC has already successfully implemented a number of tenders during 1998, and is currently in the process of publishing another tender which will take effect in Qtr 2 / Qtr 3 1999. This tender is for a selection of patent expired pharmaceuticals, representing in value around 10% of the total PHARMAC spend. The tender offers either sole supply, or preferred supply, status for up to three years to those companies winning the tender at the lowest price.
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' contracts 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 upfront registration fees, should they win the tender. Such successful tender products are therefore promised sole or preferred status before they are even registered.
As a result of tenders to date, at least three companies have significantly reduced their staff numbers, as well as withdrawing 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 the U.S. industry has pursued dialogue with New Zealand Government officials to modify the discriminatory aspects of their system over the past three years, no progress has been made and the New Zealand Government has been regularly implementing new policies that further prohibit market access for imported products. As such, in 1998, the U.S. industry sought strong engagement by the U.S. Government with the New Zealand Ministry of Foreign Affairs. To avoid citation in the 1997 Special 301 Report, the New Zealand Government agreed, as a "downpayment," 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 to discuss the following proposal in the bilateral consultations:
1. Market Access
a) 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. b) Elimination of government-mandated cross therapeutic reference pricing. c) Separation of reimbursement price from market price for patented products. d) Separation of patented products from generics in therapeutic/ reimbursement groups. e) Elimination of national tendering for patented pharmaceuticals.
2. Governance of PHARMAC
a) Implementation of a dispute resolution process, particularly a formal process that would allow for appeal to PHARMAC's decisions. b) 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
a) Inclusion of industry in the policy review process, including the establishment of an industry-government working group. b) 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. Government and New Zealand Government stated their positions and agreed to continue the consultations and focus future discussions on the development of new procedural mechanisms. The proposed procedural measures include:
1. Proposed changes to PHARMAC's policies for listing pharmaceuticals on the reimbursement schedule.
a) 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. b) Elimination of the practice of government-mandated cross therapeutic reference pricing which conditions an initial PS listing on reduction of the price of one or more other medicines. c) Separation of patented and generic products in therapeutic grouping for reference pricing.
2. Development of a procedural mechanism that supports an independent review and appeal process for listing applications.
a) Reform of the independent scientific experts committee (PTAC) that reviews applications submitted to PHARMAC; b) Recommendation for PS listing decisions made within 3 months; c) Establishment of 30-day public comment period at public hearing of experts; d) Final decisions on listing within 6 months; e) Establishment of an independent appeal process for listing denials, and public disclosure of analysis of reasons for denial; f) Automatic initiation of appeal process for inaction on applications.
3. Retraction of decree for the single tendering of medicines, which are listed in therapeutic subgroups with patented products.
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. 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 on 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, the author 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. We believe 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.
Potential Exports/Foreign Sales
The current size of the New Zealand pharmaceutical market is NZ$ 729 million (US$ 379 million), of which the U.S. companies enjoy a market share of around US$ 109 million or 29%. 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, were the Government of that country to change its policies regarding reimbursement of medicines. However, despite the fact that New Zealand is one of the smaller markets in the Asia-Pacific region, the costs of New Zealand maintaining its present course are significant.
New Zealand is one of the leading developed economies in the Asia-Pacific region, yet its model of reference pricing provides wholly inadequate credit to the contribution of innovative medicines to health care and, in effect, denies 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 are now being adopted by the Australian government.
Secondly, by implementing its current policies regarding reimbursement of medicines, New Zealand, which is an OECD member, plays the role of global "free-rider" in its total lack of contribution to the necessary efforts to support research and development for new medicines to treat new and yet uncured diseases both within and outside New Zealand.
Lastly, it is one thing if New Zealand wishes to declare itself a net "importer" of medicines, and to declare that it has absolutely no interest in establishing itself as a center for pharmaceutical R&D and manufacturing. It is entirely something else if the New Zealand Government then enacts 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.
For all the aforementioned reasons, PhRMA believes that New Zealand should be listed as a Priority Watch Country under Special 301 in 1999.