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: 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 PS, 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 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: Market Access Discussion Issues 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. Elimination of government-mandated cross therapeutic reference
pricing. Separation of reimbursement price from market price for patented
products. Separation of patented products from generics in therapeutic/
reimbursement groups. Elimination of national tendering for patented pharmaceuticals. Governance of PHARMAC Implementation of a dispute resolution process, particularly a
formal process that would allow for appeal to PHARMAC's decisions. 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. Transparency and Consultative Mechanism Inclusion of industry in the policy review process, including
the establishment of an industry-government working group. 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: 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: 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: 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.