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Reshaping Australian drug policy: the dilemmas of generic medicines policy

Reshaping Australian drug policy: the dilemmas of generic medicines policy Australia and New Zealand Health BioMed Central Policy Open Access Commentary Reshaping Australian drug policy: the dilemmas of generic medicines policy Hans Löfgren* Address: School of International and Political Studies, Deakin University, Melbourne, Australia Email: Hans Löfgren* - hans.lofgren@deakin.edu.au * Corresponding author Published: 1 June 2007 Received: 7 May 2007 Accepted: 1 June 2007 Australia and New Zealand Health Policy 2007, 4:11 doi:10.1186/1743-8462-4-11 This article is available from: http://www.anzhealthpolicy.com/content/4/1/11 © 2007 Löfgren; licensee BioMed Central Ltd. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. With this edition, Australia New Zealand Health Policy pub- ing changes to drug policy in order to extend the use of lishes four articles on the theme of Australian and interna- cheaper generic medicines. They face two central ques- tional generic medicines market dynamics and policy tions: to what extent and in what ways should the pricing dilemmas. Changes soon to be introduced to pricing of patented medicines be linked to the pricing of out-of- arrangements under Australia's Pharmaceutical Benefits patent drugs, and how can the cost of complex and expen- Scheme (PBS) make this focus particularly topical. sive sales and distribution systems be contained? Beecroft presents a community pharmacy perspective on these issues. Faunce and Lexchin explore the vexed issue PBS pricing arrangements have, until now, largely pre- of 'evergreening' in Australia and Canada, with a compar- cluded Australian tax payers from benefiting from the ative emphasis on the implications of bilateral trade ready availability of cheap generics. To address this anom- agreements between these countries and the US. In a sec- aly, the Health Minister, Tony Abbott, announced a policy ond article, Faunce investigates the generics sector from an package in November 2006 intended to ensure 'better industrial renewal perspective, arguing that it would be value' through lower prices in the off-patent market [2]. perilous to fail to develop a systematic approach to the As the number of major drugs facing patent expiry multi- promotion of this industry grounded in public good con- plied, pressures for lower generics prices had become siderations. The present author provides an analysis of increasingly compelling. The proposed reforms are international generics markets which highlights the rise of intended to rein in the interrelated problems of unneces- competitive Indian suppliers. sarily high PBS prices for generics and the large discounts (labelled 'secret kickbacks' in the media) provided to Most medicines do not have to be expensive. Manufactur- pharmacists by generics suppliers. It leaves to one side ing costs are generally low and many off-patent drugs can more difficult questions of transparency and accountabil- be sourced at prices which reflect intense competition in ity in the pricing of 'innovative' brand name pharmaceu- global markets. In September 2006 in Florida, for exam- ticals. ple, Wal-Mart announced that each of 331 generic drugs, covering 143 compounds in more than twenty therapeu- The government is hoping that the new initiatives will cre- tic categories, would be made available for a monthly cost ate a stable medicines policy environment for years to of US$4.00. This scheme has since been extended across come. This follows a period of uncertainty which peaked the US and competitors have introduced similar programs with the stop-gap introduction in 2005 of a mandatory [1]. In Australia and elsewhere, governments are introduc- 12.5% price cut on the launch of the first alternative brand Page 1 of 4 (page number not for citation purposes) Australia and New Zealand Health Policy 2007, 4:11 http://www.anzhealthpolicy.com/content/4/1/11 of an already PBS-listed drug. Following furious brand has hitherto delivered relatively favourable prices for pat- name industry lobbying the government stepped back ented drugs but, as noted by the Pharmaceutical Benefits from mandating, as initially intended, a repeat price cut Pricing Authority (PBPA), 'in general, the prices Australian on the introduction of each subsequent brand [3]. taxpayers pay for generic medicines are high compared to some other OECD countries' [[6], p. 12]. The reference As the number of big-selling out-of-patent drugs pricing system, administered by the PBPA, is at the centre increases, so does the possibility of achieving large PBS of this conundrum. It ensures that price cuts flow through cost savings through lower generics prices. But the realisa- to all other suppliers of the same or similar products, and tion of this potential requires a new pricing model accept- there is thus no incentive for suppliers to compete on able to all the major stakeholders: the manufacturers of price to the PBS. Generics suppliers have instead found an patented drugs and Australia's small group of specialised inroad into the PBS market though discounts or large generics suppliers, pharmacists, wholesalers, prescribers 'trading terms' offered to pharmacists, commonly around and consumers. Through a lengthy period of behind-the- 30% and sometimes in the order of 50% or more. In other scenes discussions, the government appears to have come words, pharmacists have been reimbursed by the govern- up with a reform package which enjoys the support of ment at prices well above the prices actually paid. From a major interest groups, most importantly the suppliers of pharmacy perspective, these 'trading terms' are considered originator brands (through Medicines Australia) and the ordinary business deals which reward efficiencies and Pharmacy Guild of Australia. This required the ditching of scale, and have come to be integrated into overall profita- models for tendering of generics, and for mandatory pre- bility, as explained by Beecroft. These discounts have also scription by generic name, though these had possibly provided incentives for pharmacists to encourage the served as government bargaining chips rather than serious uptake of generics by consumers. In their absence, the proposals. more attractive option would be support for the brand names rather than investing effort in converting patients The off-patent drug market in Australia is already large to generics. But the fact that a large share of the cost ben- and growing, comprising more than half of all PBS items. efits of cheap generics has flowed to pharmacists through Around 40% of listings have generic competitors and a these discounts, while PBS generics prices continued to further 12%, though still patented, are affected through approximate those of the originator brands, has riled the the reference pricing system (explained briefly below) [4]. government. In value terms, patent-expired PBS drugs represent annual sales of about $3 billion, with generics (non-originator Reference pricing, a basic premise of the PBS system, is, as brands) accounting for about $1.3 billion or 43%. This already noted, intended to deliver similar prices for drugs gives non-originator brands a share of total PBS expendi- with identical or similar therapeutic effects. Most OECD ture of around 18%, or about 25–30% of prescriptions countries apply some form of reference pricing, though [5]. Alphapharm, the dominant generics company in Aus- this approach is almost always accompanied by heated tralia, is the leading supplier to the PBS in volume terms, controversy [7,8]. In Australia, prices of alternative brands ahead of Pfizer [6]. But in comparison with the UK and and drugs in the same therapeutic class are key factors the US, where well above 50% of prescriptions are dis- taken account of by the PBPA when considering pricing pensed with generics, and European countries such as the issues. The critical question is: precisely which products Netherlands (around 44%) and Denmark (around 70%), should be considered interchangeable and, on that basis, the proportion of prescriptions dispensed with a generic be assigned the same (reimbursement) price? It is remains small in Australia. Originator products retain the accepted almost universally that, to all intents and pur- lion's share of the off-patent market and, in many cases, poses, alternative generic brands are identical to origina- continue to be the only brand available, particularly tor products. The contrary position used to be pressed where its price is relatively low, with consequent weak strongly by originator companies but cannot be held cred- commercial incentives for entry by new suppliers. Origi- ibly today, more than twenty years after the 1984 US Wax- nator brands continue to do well, even where a generic man-Hatch Act, which created the modern generics alternative is available: in this market segment, almost industry. But where are the lines to be drawn where prod- 40% of prescriptions are still dispensed with a brand pre- ucts have similar therapeutic effects without being chemi- mium. cally identical? Should patented products be referenced against off-patent drugs which deliver similar therapeutic The dominance of brand suppliers is explained by typi- effects? Here opposed perspectives clash: innovator com- cally small PBS price differentials between originator and panies seek premium pricing for all newly patented drugs, generics brands. Pricing incentives are consequently weak irrespective of the extent of their marginal benefits com- for doctors and consumers to choose a generic rather than pared with previously available alternatives. In contrast, the originator brand. The PBS listing and pricing process Page 2 of 4 (page number not for citation purposes) Australia and New Zealand Health Policy 2007, 4:11 http://www.anzhealthpolicy.com/content/4/1/11 the mandate of the PBS and similar insurance systems is It is too early to assess the implications of these changes. to deliver cost-effective outcomes for tax payers. Many aspects of the new arrangements are yet to be final- ised, such as how price disclosures are to be administered. A case in point is the statin group of cholesterol-lowering But a likely effect will be higher prices for newly listed drugs, considered interchangeable for PBS reference pric- (non-breakthrough) patented drugs than would have ing purposes. In August 2005, generic brands of simvasta- been the case under the present model. The details of the tin (principal brand name Zocor) were listed on the PBS legislation, which is expected in the present term of parlia- for the first time, and a reduction in the price paid by the ment, are to be worked through within a small group of government was to affect all statin products (as a conse- individuals from industry and government, apparently quence of the 12.5% mandatory price cut in such circum- excluding consumer representatives. stances), including Pfizer's still-patented Lipitor. A special submission by Pfizer to the Pharmaceutical Benefits Advi- A further reason for Medicines Australia not to be overly sory Committee (PBAC) was required for Lipitor to retain troubled by these changes is that its member companies its price 'on the grounds that Lipitor is more effective than are the suppliers, directly or indirectly, of many generics. simvastatin in lowering cholesterol' [9]. Clearly, the brand When launching the new policy, Minister Abbott asserted industry would rather not have to engage in such battles that '70 percent of the Australian generics market is occu- whenever regulators seek to reference a patented drug pied by companies which are not members of the Gener- against off-patent alternatives. The present system makes ics Medicines industry Association' (GMiA) but members this eventuality increasingly likely, as more patents expire of Medicines Australia [2]. Indeed, in Australia and inter- and the 'innovator industry' continues to 'churn out' nationally, the historical dividing line between the gener- modified versions of existing drugs (with new patents) ics and originator sectors has been much weakened, a and 'me-too' products bringing marginal (if any) thera- development explored in my article on 'The global biop- peutic benefits, rather than break-through products open- harma industry and the rise of Indian drug multination- ing up new 'blockbuster' (billion dollar plus) markets. als'. This has been made evident by, for example, the role of Novartis as the world's second largest generics supplier, The central role of Medicines Australia in the formation of through its subsidiary Sandoz. Sanofi-aventis has a similar the new generics policy may at first glance seem surprising subsidiary, while Alphapharm and other generics compa- since it is likely to result in an accelerated loss of market nies also market patented products. Originator companies share for originator products. But the major gain for its also manipulate markets through the shadowy practice of member companies is a weakening of the reference pric- 'authorised generics', launched to forestall genuine com- ing system, which will impact on the way that cost-assess- petition, common not only in the US but also in Australia. ment analyses are undertaken as part of the PBS listing These are originator products marketed by, or licensed process, through separation of all PBS items into two from, the originator company but sold under a generic groups, F1 and F2, subject to different pricing arrange- name [11-13]. Faunce and Lexchin argue that 'linkage ments. F1 medicines are those for which only a single evergreening' may loom as an increasing threat to a sus- brand is listed, mainly because of a patent, but will pre- tainable generics industry in Australia, and argue for the sumably also include off-patent drugs with only one sup- public health benefits of a regulatory agency to police this plier. F2 medicines have direct competition and are area similar to Canada's Office of Patented Medicines and divided into two groups: one for products 'where price Liaison. competition between brands is low' and one 'where com- petition between brands is high', i.e. those for which large For their part, pharmacists are pleased that they will be discounts have been provided. Prices for products in the largely compensated for the projected loss of income from first group will be cut by 2% over three years from 2008, the winding back of discounts. Changes to pharmacy and those in the latter group will be subject to a one-off remuneration will, according to the Health Minister, price drop of 25% on 1 August 2008. Price disclosure, that 'ensure that the position of pharmacists for the life of the is, a requirement that the actual price paid by pharmacists current [government-PGA] agreement is as it would other- be made known to the government, will be introduced wise have been' [2]. Most consumers will experience no over time for drugs in both groups. Pharmacists will be direct effects though it is possible that 'general consumers' compensated for the impact of these adjustments in the paying the full co-payment ($30.70 in 2007) will pay less period of the current Government-Pharmacy Guild agree- for some off-patent drugs priced below this level. ment (which runs until mid-2010) through increases in the dispensing fee and the mark-up, and some other new The argument pressed by Medicines Australia, and incentive payments [10]. accepted by other stakeholders, is that lower generics prices will free up financial resources for the listing of new patented medicines and allow for PBS prices that better Page 3 of 4 (page number not for citation purposes) Australia and New Zealand Health Policy 2007, 4:11 http://www.anzhealthpolicy.com/content/4/1/11 2. Abbott T: Transcrip Press Conference: PBS Reform. 2006. reflect 'rewards for innovation', including 'incremental 3. Department of Health and Ageing: New Pricing and Listing innovation', that is, marginal improvements that regula- Arrangements for Generic Medicines on the Pharmaceutical tors may consider to be of little if any therapeutic benefit. Benefits Scheme (PBS). [http://www.health.gov.au/internet/ wcms/publishing.nsf/Content/health-pbs-pricereductions/$FILE/ The pivotal claim by 'big pharma' companies, supported qamar05.pdf]. by the US government in trade negotiations and in other 4. Davey P: Strategic Management: Pharmaceutical generics A Changing Playing Field. 4th Annual Pharma Marketing & Sales Con- contexts, has long been that drug prices in Australia do gress, 3-4 May . not reward 'innovation' adequately [14,15]. Again, it is 5. Genepharm Australasia: Annual Report 2006. [http://www.genep too early to assess the precise implications of the new pol- harm.com.au/investors/news.php]. 6. Pharmaceutical Benefits Pricing Authority: Annual Report for the icy, but the general point to be made in this context is that Year ended 30 June 2006. Canberra, Department of Health and the cost-effectiveness principle – that the costs and incre- Ageing; 2006. mental benefits of making available a new medicinal drug 7. Lopez-Casanovas G, Puig-Junoy J: Review of the Literature on Reference Pricing. Health Policy 2000, 54:87-123. to a patient population should be compared with those of 8. Ioannides-Demos LL, Ibrahim JE, McNeil JJ: Reference-Based Pric- alternative treatments – applies logically across all seg- ing Schemes: Effect on Pharmaceutical Expenditure, Resource Utilisation and Health Outcomes. Pharmacoeconom- ments of the pharmaceutical market, irrespective of how ics 2002, 20:577-591. off-patent drugs are priced. 9. Department of Health and Ageing: Questions and Answers: Price Change of Atorvastin (Lipitor) in the 1 August Issue of the Schedule of Pharmaceutical Benefits. [http:// The new policy has not been welcomed by the GMiA www.health.gov.au/internet/wcms/publishing.nsf/Content/health-pbs- which believes that it will weaken incentives for the use of atorvastinqa#]. 10. Department of Health and Ageing: Strengthening Your PBS: Pre- 'true generics' [16]. The likely business dynamics of the paring for the Future. [http://www.health.gov.au/internet/wcms/ generics sector in the new policy environment is indeed publishing.nsf/Content/Strengthening-your-PBS.htm]. uncertain. Alphapharm and Sigma Pharmaceuticals pres- 11. Hollis A: How Do Brands' "Own Generics" Affect Pharmaceu- tical Prices? Review of Industrial Organization 2005, 27:329-350. ently control in excess of 80% of this market though 12. Probyn A: Some Drugs More Equal Than Others: Pseudo- Genepharm Australasia and other firms anticipate rapid generics and Commercial Practice. Australian Health Review expansion and growing market share on the assumption 2004, 28:207-217. 13. Thomas JR: Authorized Generic Pharmaceuticals: Effects on that present arrangements would not be radically altered. Innovation. [http://digital.library.unt.edu/govdocs/crs//data/200upl- In response to the concerns of the GMiA, the Health Min- meta-crs-9508/RL33605_2006Aug08.pdf?PHPSES SID=66b9668fc6c02942c76df2dfdb8a8968]. ister claims that the new system will provide 'systemic 14. Grattan M, Stafford A: US Drug Companies Eye Australia. In protection' for incumbent suppliers and 'should ensure The Age Melbourne, ; 2006:2. that domestic generic manufacturers are less at risk from 15. Faunce T, Doran E, Henry D, Drahos P, Pekarsky B, Neville W, Searles A: Assessing the Impact of the Australia-United States predatory newcomers such as some of the Indian generic Free Trade Agreement on Australian and Global Medicines drug manufacturers' [2]. The new arrangements are Policy. Globalization and Health 2005, 1:. viewed in an analysis in the Australian Financial Review as 16. Metherell M: Patients to Receive a Sugar-Coated Pill. In Sydney Morning Herald Sydney; 2006:1. 'carefully crafted to protect inefficient pharmacists and the 17. Mitchell A: Chemists Limit PBS Reform. Australian Financial local oligopoly of drug manufacturers'. The only opportu- Review 2006:58. nity for price competition which has been available to new generics entrants – discounts to pharmacists – is now being removed 'and the local manufacturers will be breathing easier' [17]. This points to the unanswered question of what form competition will take in the gener- ics market as price disclosure is phased in. But there is no doubt that international and in particular Indian low cost suppliers such as Ranbaxy, which now has a presence in Australia, in coming years will have a significant impact, in one way or another, on the PBS market. 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Reshaping Australian drug policy: the dilemmas of generic medicines policy

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Medicine & Public Health; Public Health; Social Policy
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Australia and New Zealand Health BioMed Central Policy Open Access Commentary Reshaping Australian drug policy: the dilemmas of generic medicines policy Hans Löfgren* Address: School of International and Political Studies, Deakin University, Melbourne, Australia Email: Hans Löfgren* - hans.lofgren@deakin.edu.au * Corresponding author Published: 1 June 2007 Received: 7 May 2007 Accepted: 1 June 2007 Australia and New Zealand Health Policy 2007, 4:11 doi:10.1186/1743-8462-4-11 This article is available from: http://www.anzhealthpolicy.com/content/4/1/11 © 2007 Löfgren; licensee BioMed Central Ltd. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. With this edition, Australia New Zealand Health Policy pub- ing changes to drug policy in order to extend the use of lishes four articles on the theme of Australian and interna- cheaper generic medicines. They face two central ques- tional generic medicines market dynamics and policy tions: to what extent and in what ways should the pricing dilemmas. Changes soon to be introduced to pricing of patented medicines be linked to the pricing of out-of- arrangements under Australia's Pharmaceutical Benefits patent drugs, and how can the cost of complex and expen- Scheme (PBS) make this focus particularly topical. sive sales and distribution systems be contained? Beecroft presents a community pharmacy perspective on these issues. Faunce and Lexchin explore the vexed issue PBS pricing arrangements have, until now, largely pre- of 'evergreening' in Australia and Canada, with a compar- cluded Australian tax payers from benefiting from the ative emphasis on the implications of bilateral trade ready availability of cheap generics. To address this anom- agreements between these countries and the US. In a sec- aly, the Health Minister, Tony Abbott, announced a policy ond article, Faunce investigates the generics sector from an package in November 2006 intended to ensure 'better industrial renewal perspective, arguing that it would be value' through lower prices in the off-patent market [2]. perilous to fail to develop a systematic approach to the As the number of major drugs facing patent expiry multi- promotion of this industry grounded in public good con- plied, pressures for lower generics prices had become siderations. The present author provides an analysis of increasingly compelling. The proposed reforms are international generics markets which highlights the rise of intended to rein in the interrelated problems of unneces- competitive Indian suppliers. sarily high PBS prices for generics and the large discounts (labelled 'secret kickbacks' in the media) provided to Most medicines do not have to be expensive. Manufactur- pharmacists by generics suppliers. It leaves to one side ing costs are generally low and many off-patent drugs can more difficult questions of transparency and accountabil- be sourced at prices which reflect intense competition in ity in the pricing of 'innovative' brand name pharmaceu- global markets. In September 2006 in Florida, for exam- ticals. ple, Wal-Mart announced that each of 331 generic drugs, covering 143 compounds in more than twenty therapeu- The government is hoping that the new initiatives will cre- tic categories, would be made available for a monthly cost ate a stable medicines policy environment for years to of US$4.00. This scheme has since been extended across come. This follows a period of uncertainty which peaked the US and competitors have introduced similar programs with the stop-gap introduction in 2005 of a mandatory [1]. In Australia and elsewhere, governments are introduc- 12.5% price cut on the launch of the first alternative brand Page 1 of 4 (page number not for citation purposes) Australia and New Zealand Health Policy 2007, 4:11 http://www.anzhealthpolicy.com/content/4/1/11 of an already PBS-listed drug. Following furious brand has hitherto delivered relatively favourable prices for pat- name industry lobbying the government stepped back ented drugs but, as noted by the Pharmaceutical Benefits from mandating, as initially intended, a repeat price cut Pricing Authority (PBPA), 'in general, the prices Australian on the introduction of each subsequent brand [3]. taxpayers pay for generic medicines are high compared to some other OECD countries' [[6], p. 12]. The reference As the number of big-selling out-of-patent drugs pricing system, administered by the PBPA, is at the centre increases, so does the possibility of achieving large PBS of this conundrum. It ensures that price cuts flow through cost savings through lower generics prices. But the realisa- to all other suppliers of the same or similar products, and tion of this potential requires a new pricing model accept- there is thus no incentive for suppliers to compete on able to all the major stakeholders: the manufacturers of price to the PBS. Generics suppliers have instead found an patented drugs and Australia's small group of specialised inroad into the PBS market though discounts or large generics suppliers, pharmacists, wholesalers, prescribers 'trading terms' offered to pharmacists, commonly around and consumers. Through a lengthy period of behind-the- 30% and sometimes in the order of 50% or more. In other scenes discussions, the government appears to have come words, pharmacists have been reimbursed by the govern- up with a reform package which enjoys the support of ment at prices well above the prices actually paid. From a major interest groups, most importantly the suppliers of pharmacy perspective, these 'trading terms' are considered originator brands (through Medicines Australia) and the ordinary business deals which reward efficiencies and Pharmacy Guild of Australia. This required the ditching of scale, and have come to be integrated into overall profita- models for tendering of generics, and for mandatory pre- bility, as explained by Beecroft. These discounts have also scription by generic name, though these had possibly provided incentives for pharmacists to encourage the served as government bargaining chips rather than serious uptake of generics by consumers. In their absence, the proposals. more attractive option would be support for the brand names rather than investing effort in converting patients The off-patent drug market in Australia is already large to generics. But the fact that a large share of the cost ben- and growing, comprising more than half of all PBS items. efits of cheap generics has flowed to pharmacists through Around 40% of listings have generic competitors and a these discounts, while PBS generics prices continued to further 12%, though still patented, are affected through approximate those of the originator brands, has riled the the reference pricing system (explained briefly below) [4]. government. In value terms, patent-expired PBS drugs represent annual sales of about $3 billion, with generics (non-originator Reference pricing, a basic premise of the PBS system, is, as brands) accounting for about $1.3 billion or 43%. This already noted, intended to deliver similar prices for drugs gives non-originator brands a share of total PBS expendi- with identical or similar therapeutic effects. Most OECD ture of around 18%, or about 25–30% of prescriptions countries apply some form of reference pricing, though [5]. Alphapharm, the dominant generics company in Aus- this approach is almost always accompanied by heated tralia, is the leading supplier to the PBS in volume terms, controversy [7,8]. In Australia, prices of alternative brands ahead of Pfizer [6]. But in comparison with the UK and and drugs in the same therapeutic class are key factors the US, where well above 50% of prescriptions are dis- taken account of by the PBPA when considering pricing pensed with generics, and European countries such as the issues. The critical question is: precisely which products Netherlands (around 44%) and Denmark (around 70%), should be considered interchangeable and, on that basis, the proportion of prescriptions dispensed with a generic be assigned the same (reimbursement) price? It is remains small in Australia. Originator products retain the accepted almost universally that, to all intents and pur- lion's share of the off-patent market and, in many cases, poses, alternative generic brands are identical to origina- continue to be the only brand available, particularly tor products. The contrary position used to be pressed where its price is relatively low, with consequent weak strongly by originator companies but cannot be held cred- commercial incentives for entry by new suppliers. Origi- ibly today, more than twenty years after the 1984 US Wax- nator brands continue to do well, even where a generic man-Hatch Act, which created the modern generics alternative is available: in this market segment, almost industry. But where are the lines to be drawn where prod- 40% of prescriptions are still dispensed with a brand pre- ucts have similar therapeutic effects without being chemi- mium. cally identical? Should patented products be referenced against off-patent drugs which deliver similar therapeutic The dominance of brand suppliers is explained by typi- effects? Here opposed perspectives clash: innovator com- cally small PBS price differentials between originator and panies seek premium pricing for all newly patented drugs, generics brands. Pricing incentives are consequently weak irrespective of the extent of their marginal benefits com- for doctors and consumers to choose a generic rather than pared with previously available alternatives. In contrast, the originator brand. The PBS listing and pricing process Page 2 of 4 (page number not for citation purposes) Australia and New Zealand Health Policy 2007, 4:11 http://www.anzhealthpolicy.com/content/4/1/11 the mandate of the PBS and similar insurance systems is It is too early to assess the implications of these changes. to deliver cost-effective outcomes for tax payers. Many aspects of the new arrangements are yet to be final- ised, such as how price disclosures are to be administered. A case in point is the statin group of cholesterol-lowering But a likely effect will be higher prices for newly listed drugs, considered interchangeable for PBS reference pric- (non-breakthrough) patented drugs than would have ing purposes. In August 2005, generic brands of simvasta- been the case under the present model. The details of the tin (principal brand name Zocor) were listed on the PBS legislation, which is expected in the present term of parlia- for the first time, and a reduction in the price paid by the ment, are to be worked through within a small group of government was to affect all statin products (as a conse- individuals from industry and government, apparently quence of the 12.5% mandatory price cut in such circum- excluding consumer representatives. stances), including Pfizer's still-patented Lipitor. A special submission by Pfizer to the Pharmaceutical Benefits Advi- A further reason for Medicines Australia not to be overly sory Committee (PBAC) was required for Lipitor to retain troubled by these changes is that its member companies its price 'on the grounds that Lipitor is more effective than are the suppliers, directly or indirectly, of many generics. simvastatin in lowering cholesterol' [9]. Clearly, the brand When launching the new policy, Minister Abbott asserted industry would rather not have to engage in such battles that '70 percent of the Australian generics market is occu- whenever regulators seek to reference a patented drug pied by companies which are not members of the Gener- against off-patent alternatives. The present system makes ics Medicines industry Association' (GMiA) but members this eventuality increasingly likely, as more patents expire of Medicines Australia [2]. Indeed, in Australia and inter- and the 'innovator industry' continues to 'churn out' nationally, the historical dividing line between the gener- modified versions of existing drugs (with new patents) ics and originator sectors has been much weakened, a and 'me-too' products bringing marginal (if any) thera- development explored in my article on 'The global biop- peutic benefits, rather than break-through products open- harma industry and the rise of Indian drug multination- ing up new 'blockbuster' (billion dollar plus) markets. als'. This has been made evident by, for example, the role of Novartis as the world's second largest generics supplier, The central role of Medicines Australia in the formation of through its subsidiary Sandoz. Sanofi-aventis has a similar the new generics policy may at first glance seem surprising subsidiary, while Alphapharm and other generics compa- since it is likely to result in an accelerated loss of market nies also market patented products. Originator companies share for originator products. But the major gain for its also manipulate markets through the shadowy practice of member companies is a weakening of the reference pric- 'authorised generics', launched to forestall genuine com- ing system, which will impact on the way that cost-assess- petition, common not only in the US but also in Australia. ment analyses are undertaken as part of the PBS listing These are originator products marketed by, or licensed process, through separation of all PBS items into two from, the originator company but sold under a generic groups, F1 and F2, subject to different pricing arrange- name [11-13]. Faunce and Lexchin argue that 'linkage ments. F1 medicines are those for which only a single evergreening' may loom as an increasing threat to a sus- brand is listed, mainly because of a patent, but will pre- tainable generics industry in Australia, and argue for the sumably also include off-patent drugs with only one sup- public health benefits of a regulatory agency to police this plier. F2 medicines have direct competition and are area similar to Canada's Office of Patented Medicines and divided into two groups: one for products 'where price Liaison. competition between brands is low' and one 'where com- petition between brands is high', i.e. those for which large For their part, pharmacists are pleased that they will be discounts have been provided. Prices for products in the largely compensated for the projected loss of income from first group will be cut by 2% over three years from 2008, the winding back of discounts. Changes to pharmacy and those in the latter group will be subject to a one-off remuneration will, according to the Health Minister, price drop of 25% on 1 August 2008. Price disclosure, that 'ensure that the position of pharmacists for the life of the is, a requirement that the actual price paid by pharmacists current [government-PGA] agreement is as it would other- be made known to the government, will be introduced wise have been' [2]. Most consumers will experience no over time for drugs in both groups. Pharmacists will be direct effects though it is possible that 'general consumers' compensated for the impact of these adjustments in the paying the full co-payment ($30.70 in 2007) will pay less period of the current Government-Pharmacy Guild agree- for some off-patent drugs priced below this level. ment (which runs until mid-2010) through increases in the dispensing fee and the mark-up, and some other new The argument pressed by Medicines Australia, and incentive payments [10]. accepted by other stakeholders, is that lower generics prices will free up financial resources for the listing of new patented medicines and allow for PBS prices that better Page 3 of 4 (page number not for citation purposes) Australia and New Zealand Health Policy 2007, 4:11 http://www.anzhealthpolicy.com/content/4/1/11 2. Abbott T: Transcrip Press Conference: PBS Reform. 2006. reflect 'rewards for innovation', including 'incremental 3. Department of Health and Ageing: New Pricing and Listing innovation', that is, marginal improvements that regula- Arrangements for Generic Medicines on the Pharmaceutical tors may consider to be of little if any therapeutic benefit. Benefits Scheme (PBS). [http://www.health.gov.au/internet/ wcms/publishing.nsf/Content/health-pbs-pricereductions/$FILE/ The pivotal claim by 'big pharma' companies, supported qamar05.pdf]. by the US government in trade negotiations and in other 4. Davey P: Strategic Management: Pharmaceutical generics A Changing Playing Field. 4th Annual Pharma Marketing & Sales Con- contexts, has long been that drug prices in Australia do gress, 3-4 May . not reward 'innovation' adequately [14,15]. Again, it is 5. Genepharm Australasia: Annual Report 2006. [http://www.genep too early to assess the precise implications of the new pol- harm.com.au/investors/news.php]. 6. Pharmaceutical Benefits Pricing Authority: Annual Report for the icy, but the general point to be made in this context is that Year ended 30 June 2006. Canberra, Department of Health and the cost-effectiveness principle – that the costs and incre- Ageing; 2006. mental benefits of making available a new medicinal drug 7. Lopez-Casanovas G, Puig-Junoy J: Review of the Literature on Reference Pricing. Health Policy 2000, 54:87-123. to a patient population should be compared with those of 8. Ioannides-Demos LL, Ibrahim JE, McNeil JJ: Reference-Based Pric- alternative treatments – applies logically across all seg- ing Schemes: Effect on Pharmaceutical Expenditure, Resource Utilisation and Health Outcomes. Pharmacoeconom- ments of the pharmaceutical market, irrespective of how ics 2002, 20:577-591. off-patent drugs are priced. 9. Department of Health and Ageing: Questions and Answers: Price Change of Atorvastin (Lipitor) in the 1 August Issue of the Schedule of Pharmaceutical Benefits. [http:// The new policy has not been welcomed by the GMiA www.health.gov.au/internet/wcms/publishing.nsf/Content/health-pbs- which believes that it will weaken incentives for the use of atorvastinqa#]. 10. Department of Health and Ageing: Strengthening Your PBS: Pre- 'true generics' [16]. The likely business dynamics of the paring for the Future. [http://www.health.gov.au/internet/wcms/ generics sector in the new policy environment is indeed publishing.nsf/Content/Strengthening-your-PBS.htm]. uncertain. Alphapharm and Sigma Pharmaceuticals pres- 11. Hollis A: How Do Brands' "Own Generics" Affect Pharmaceu- tical Prices? Review of Industrial Organization 2005, 27:329-350. ently control in excess of 80% of this market though 12. Probyn A: Some Drugs More Equal Than Others: Pseudo- Genepharm Australasia and other firms anticipate rapid generics and Commercial Practice. Australian Health Review expansion and growing market share on the assumption 2004, 28:207-217. 13. Thomas JR: Authorized Generic Pharmaceuticals: Effects on that present arrangements would not be radically altered. Innovation. [http://digital.library.unt.edu/govdocs/crs//data/200upl- In response to the concerns of the GMiA, the Health Min- meta-crs-9508/RL33605_2006Aug08.pdf?PHPSES SID=66b9668fc6c02942c76df2dfdb8a8968]. ister claims that the new system will provide 'systemic 14. Grattan M, Stafford A: US Drug Companies Eye Australia. In protection' for incumbent suppliers and 'should ensure The Age Melbourne, ; 2006:2. that domestic generic manufacturers are less at risk from 15. Faunce T, Doran E, Henry D, Drahos P, Pekarsky B, Neville W, Searles A: Assessing the Impact of the Australia-United States predatory newcomers such as some of the Indian generic Free Trade Agreement on Australian and Global Medicines drug manufacturers' [2]. The new arrangements are Policy. Globalization and Health 2005, 1:. viewed in an analysis in the Australian Financial Review as 16. Metherell M: Patients to Receive a Sugar-Coated Pill. In Sydney Morning Herald Sydney; 2006:1. 'carefully crafted to protect inefficient pharmacists and the 17. Mitchell A: Chemists Limit PBS Reform. Australian Financial local oligopoly of drug manufacturers'. The only opportu- Review 2006:58. nity for price competition which has been available to new generics entrants – discounts to pharmacists – is now being removed 'and the local manufacturers will be breathing easier' [17]. This points to the unanswered question of what form competition will take in the gener- ics market as price disclosure is phased in. But there is no doubt that international and in particular Indian low cost suppliers such as Ranbaxy, which now has a presence in Australia, in coming years will have a significant impact, in one way or another, on the PBS market. Publish with Bio Med Central and every scientist can read your work free of charge Competing interests "BioMed Central will be the most significant development for The author(s) declare that they have no competing inter- disseminating the results of biomedical researc h in our lifetime." ests. Sir Paul Nurse, Cancer Research UK Your research papers will be: Acknowledgements available free of charge to the entire biomedical community The author wishes to acknowledge comments by Tom Faunce and Simon peer reviewed and published immediately upon acceptance Barraclough. cited in PubMed and archived on PubMed Central References yours — you keep the copyright 1. Frederick J: Trading Blows, Target and Wal-mart Roll out $4 BioMedcentral Submit your manuscript here: Generic Offers Nationwide. Drug News Store 2006. http://www.biomedcentral.com/info/publishing_adv.asp Page 4 of 4 (page number not for citation purposes)

Journal

Australia and New Zealand Health PolicySpringer Journals

Published: Jun 1, 2007

References