HIV/AIDS and Pharmaceutical Pricing - aidslaw.caPricing... · cines,both for individual people living with HIV/AIDS and for overall spending on health care.It also provides a short

BackgroundThe cost of medicines is of obvious concern to peo-ple living with HIV/AIDS. Prices charged by phar-maceutical manufacturers are a significant compo-nent of the final cost to the purchaser. Globally, theprice of medicines is receiving considerable atten-tion amid efforts to increase access to treatment formillions of people living with HIV/AIDS or otherhealth problems. In Canada, public and privatespending on pharmaceuticals continues to rise dra-matically, while a national debate on the future ofthe country’s health-care system is ongoing.Canadians, including people living withHIV/AIDS, have a right to access affordable healthcare. This requires proper regulation of pharmaceu-tical prices.

Drug pricing and HIV/AIDSThe cost of treatment has increased significantlysince the introduction of highly active antiretroviraltherapy (HAART), due to the rising cost of thedrugs, increased use of therapy, and the use of mul-tiple drugs in combination. Treatment with HAARTremains cost-effective overall, but the increase inspending is still cause for concern, for public andprivate insurance plans and for patients themselves,who incur greater out-of-pocket expenses.

In the absence of universal, public insurance cov-erage for pharmaceuticals across Canada, peopleliving with HIV/AIDS rely upon a patchwork ofprivate and public plans to pay for their prescrip-tion drugs. For many, these plans provide only par-tial coverage of the total cost of medicines. A 1999Ontario study found that at least one in four peopleliving with HIV/AIDS were carrying a substantialfinancial drug-cost burden. The study found thataverage out-of-pocket expenditure for a patientreceiving ART in the province was $1629 a year,but that this could vary widely depending on whowas paying for the drugs. High out-of-pocketexpenses may occur for those whose insuranceplan requires them to pay high deductibles, thosewho do not qualify for benefit programs, or thoseusing drugs not approved by the programs.

Pharmaceutical spending in CanadaThe price of pharmaceuticals is also a concern forCanadians more broadly. For the last two decades,spending on pharmaceutical products has been thefastest-growing component of total spending onhealth care in Canada. Since 1990, Canadian phar-maceutical spending per capita has doubled, from$191 annually in 1990 to $386 annually in 2000.

At least three major factors explain the increasedspending on pharmaceuticals:

Health Spendingand the

PharmaceuticalIndustry

This info sheet explains the importance of regulating prices of medi-cines, both for individual people living with HIV/AIDS and for overall

spending on health care. It also provides a short overview of thepharmaceutical industry and market in Canada.

This info sheet is one in a series of seven info sheets on the federal

regulation of pharmaceutical prices in Canada.

1. Health Spending and the Pharmaceutical Industry

2. Controlling Medicine Prices: Evolution of Canadian Law

3. Patented Medicine Prices Review Board

4. Preventing Excessive Pricing of Patented Medicines

5. Jurisdiction of the PMPRB

6. Pricing of HIV/AIDS Drugs

7.Trends in Pharmaceutical Prices, Sales, and R&D Spending in Canada

HIV/AIDS and

Pharmaceutical

Pricing

1

• the increased use of drugs on a per capita basis;• the use of more expensive, new drugs rather than

older, less expensive drugs; and• the rising prices of existing drugs.

The Canadian Institute for Health Information(CIHI) estimates that spending on drugs outside hos-pitals (prescription and non-prescription) is the sec-ond largest component of health-care spending afterhospitals. For 2002, spending on drugs is estimatedto be $18.1 billion, or 16.2 percent of total healthspending.

The most important component of this increase isspending on prescription medicines, which current-ly accounts for about three-quarters of total spend-ing on pharmaceuticals. Furthermore, since the early1990s, the share of spending on prescription drugsfrom private sources (private insurance companies,and patients themselves) has been over 50 percent.CIHI estimates that the figure is approximately 55percent in 2002.

Pharmaceutical industry and sales in CanadaThe pharmaceutical industry in Canada is composedof approximately 130 manufacturers of prescriptionmedicines, including both firms that produce brand-name drugs and firms that produce generic copies ofmedications after brand-name patents expire. To alarge extent, the brand-name drug industry in Canadais made up of foreign, multinational companies thathave Canadian subsidiaries.

Concerns have been raised about the pharmaceuti-cal industry in Canada, including the fact that overthe last two decades Canada has quickly becomeheavily dependent on importing drugs to supply ourpharmaceutical needs. In 1983, imports amounted to18 percent of the Canadian market; by 2000, over 75percent of the market was comprised of imports.

In the global picture, the smaller size of Canada’spopulation and market means that, in 2002, sales inCanada represented only 2.6 percent of total world-wide sales by pharmaceutical manufacturers.However, sales of pharmaceuticals have been grow-ing steadily in Canada, up to $13.1 billion in 2002.Sales of patented drugs now account for over two-thirds of total pharmaceutical sales in Canada, andthe patented pharmaceutical sector has been amongthe most profitable in the country for many years.

The information in this series of info sheets is based on Controlling Drug Costs for People Living with HIV/AIDS: Federal Regulation of Pharmaceutical Prices in Canada,

a report prepared by the Canadian HIV/AIDS Legal Network. Copies of the report and the info sheets are available on the Network website at www.aidslaw.ca or

through the Canadian HIV/AIDS Information Centre (email: [email protected]). Reproduction is encouraged, but copies may not be sold, and the Canadian HIV/AIDS

Legal Network must be cited as the source of this information. For further information, contact the Network at [email protected]. Ce feuillet d’information est également disponible en français.

Funded by Health Canada under the Canadian Strategy on HIV/AIDS.The views expressed are those of the author and do not necessarily reflectthe views or policies of the Minister of Health. © Canadian HIV/AIDS Legal Network, 2002-2004.

HEALTH SPENDING AND THE PHARMACEUTICAL INDUSTRY

HIV/AIDS and

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Pricing

2Pharmaceutical price controls are commonLike most developed countries, Canada has imple-mented public regulation of drug prices. But insome respects, Canada’s approach to regulating theprice of pharmaceuticals is unique. Canadian lawregulating the price of pharmaceuticals has consis-tently, throughout its evolution over the past centu-ry, been tied to Canadian law and policy on patentprotection for pharmaceutical inventions. This isstill the case today, and policies regarding bothpharmaceutical patents and prices are controversial.This is particularly so due to the overwhelminglyvalue Canadians place on equitable, universalaccess to health care.

Two approaches to regulating drugprices in CanadaHistorically, Canada has adopted two principalapproaches in its efforts to regulate the prices ofpatented medicines:

• compulsory licensing of pharmaceutical inven-tions; and

• direct regulation of pharmaceutical prices.

As is explained in more detail below, the approachhas shifted over time from compulsory licensing todirect price regulation.

Compulsory licensingA patent on an invention gives the patent holder theexclusive legal right to make use of, and to sell, theproduct that is patented (or the patented process formaking a product) during the term of the patent. Inother words, a patent is a temporary monopoly.From the 1920s to the 1980s, the federal govern-ment limited market monopolies – and the highprices that a company with a monopoly can charge– by limiting the scope and extent of patent rights inmedicines. In other words, the law fostered marketconditions that would limit prices of pharmaceuti-cals.

For several decades, Canadian law allowed for“compulsory licensing” in relation to medicines,allowing someone other than the company holdingthe patent to compete with lower-priced versions.Following legal amendments in 1969 that expand-ed the possibilities for compulsory licensing, therewas a dramatic increase in the number of licencesissued, which spurred the growth of a significantgeneric pharmaceutical industry in Canada.

In 1985, a federal Commission of Inquiry con-cluded that liberal use of compulsory licensing hadsaved Canadians hundreds of millions of dollars,had not adversely affected the Canadian researchpharmaceutical industry, and had had little effect

ControllingMedicine Prices:

Evolution ofCanadian Law

This info sheet gives a brief historical overview of how Canada hasapproached the question of regulating prices of pharmaceuticalproducts, and the origins of Canada’s current laws and policies.










on the decisions of multinational pharmaceuticalcompanies regarding investment in research anddevelopment.

Price regulationHowever, as described below, in the mid-1980s thefederal government changed course. Rather than useits patent laws to promote market competition as away of controlling the prices of pharmaceuticals, thegovernment introduced a system for directly regulat-ing the prices charged by manufacturers of patentedmedicines, to prevent them from abusing their patentrights by charging excessive prices. This is the sys-tem that remains in place today, and is administeredby the Patented Medicine Prices Review Board(PMPRB). (See other info sheets in this series formore detail about the PMPRB and the pricing rules itenforces.)

Evolution of Canadian law: shifting theapproach to pharmaceutical pricesIn the 1980s, Canada began to change its approach tocontrolling the prices of medicines. One reason waspressure from the US during the course of negotiat-ing the 1988 Canada/US Free Trade Agreement(FTA), to give greater patent protection to pharma-ceutical companies. Given public concern about theimpact this would have on the price of patented med-icines, some alternative was politically necessary toprevent companies from using their monopolies tocharge excessive prices. Therefore, the governmentmoved to the current approach of imposing somecontrols on the prices of patented medicines. Thechanges to Canada’s law happened in two stages: BillC-22 in 1987 and Bill C-91 in 1992.Bill C-22In 1987, under pressure from the US during negotia-tions over the Canada-US Free Trade Agreement, thefederal government passed Bill C-22 to amendCanada’s Patent Act. The effect was to extend andstrengthen the rights of patent holders, and to weak-en and limit options for compulsory licensing. BillC-22 made four major changes:

• First, the bill recognized patents on pharmaceuti-cal productsthemselves, independent of a patent-ed process for creating them. Previously, onlyprocessesfor producing a medicine could bepatented.

• Second, the bill extended the term of patent pro-tection. Previously, the law gave patent protectionfor 17 years from the date the patent office grant-ed the patent. Bill C-22 changed the patent term

to 20 years from the date of filing the applicationfor the patent. This change came into effect in1989.

• Third, the bill introduced staggered periods ofprotection for a patent holder against the possibil-ity of compulsory licensing for new medicines.Generic drug manufacturers could still obtaincompulsory licences during the patent term, butthese could not be used until a specified period ofmarket monopoly for the original, patented medi-cine had expired. A compulsory licence could beused earlier if the generic medicine was made inCanada rather than imported.

• Finally, the bill created the Patented MedicinePrices Review Board (PMPRB), an independentbody with the mandate to monitor drug prices andimpose penalties in cases of excessive pricing bypatent holders. This is now the principal way thefederal government attempts to control pharma-ceutical prices. (See other info sheets in this seriesfor more detail about the PMPRB.)

Bill C-91In the early 1990s, this time under pressure from theUnited States during the negotiations for the NorthAmerican Free Trade Agreement (NAFTA), the fed-eral government again amended Canada’s patentlaws. The amendments went well beyond the require-ments of NAFTA. Bill C-91 was passed in 1992 andcame into force in 1993. It made three major changes:

• It completely abolished the special rules on com-pulsory licensing of patented pharmaceuticals thathad fostered the development of Canada’s genericdrug manufacturing sector in the 1970s and early1980s. This means that pharmaceutical patentholders are now entitled to monopolies until theirpatents expire after a 20-year period. Canadianlaw still has some general rules about compulsorylicensing (which can be done under some limitedcircumstances). These rules could be used forpharmaceutical inventions just as with other tech-nologies. But there are no longer any special rulesfor dealing with medicines, which were intendedto balance the interests of pharmaceutical compa-nies with the rights of patients/consumers toaffordable medicines.

• Bill C-91 also strengthened benefits for pharma-ceutical companies holding patents on medicinesin another way. The bill introduced regulationsthat link approval of a generic drug for sale inCanada to the patent status of the original drug.In order to legally sell a drug in Canada, the

CONTROLLING MEDICINE PRICES: EVOLUTION OF CANADIAN LAW






CONTROLLING MEDICINE PRICES: EVOLUTION OF CANADIAN LAW

manufacturer requires a “notice of compliance”(NOC). Under the “NOC regulations” passedunder Bill C-91, if a pharmaceutical companysimply alleges that a generic drug will infringe itspatent on the original medicine, this automatical-ly blocks the government from approving thegeneric drug for sale in Canada for up to 24months. These regulations are open to manipula-tion by patent-holding companies in order to keepwould-be competing drugs off the market. This is

an exceptional rule that does not exist in any othercircumstance in Canadian law, and has been criti-cized by the Supreme Court of Canada as “dra-conian” in its effect on generic manufacturers.

• Bill C-91 also reformed the powers of the PMPRBto monitor drug prices and prevent “excessive”pricing. It removed the PMPRB’s power to exposea medicine to compulsory licensing if a companycharged excessive prices, but gave it greater powerto impose fines for failure to comply with orders.

HIV/AIDS and

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3What is the PMPRB?The Patented Medicine Prices Review Board(PMPRB) is a quasi-judicial body created by thefederal Parliament in 1987. It is independent ofgovernment, but reports annually to Parliamentthrough the Minister of Health. The Board con-sists of five members appointed by the Cabinet,based upon recommendations from the Ministerof Health and an advisory panel consisting of rep-resentatives of provincial health ministers, con-sumer groups, the pharmaceutical industry, andothers appointed by the Minister. Board membersserve on a part-time basis for five-year terms.

Mandate and functions of the PMPRBThe PMPRB “protects consumer interests andcontributes to Canadian health care by ensuringthat prices charged by manufacturers of patentedmedicines are not excessive.” In fulfilling thismandate, the PMPRB carries out both regulatoryand reportingfunctions:

• it monitors, and reports on, drug pricing, phar-maceutical sales, and the expenditure ofpatent-holding pharmaceutical companies onresearch and development (R&D) in Canada;and

• it regulates the prices charged by manufactur-ers of patented medicines to ensure they arenot “excessive.”

The Board’s reporting function is importantbecause it provides useful information for govern-ment and civil society organizations to monitorthe pharmaceutical industry and to inform policydecisions and law reform. The obligation of phar-maceutical manufacturers to report annually to thePMPRB on their revenues and expenditures(including their spending on R&D) provides use-ful data. It also provides a mechanism for holdingthe pharmaceutical industry politically account-able to its commitments to increase spending inCanada on R&D.

Even more significant is the Board’s regulatoryfunction. In order to regulate medicine prices, thePMPRB collects data from drug manufacturersand applies a set of criteria in determiningwhether prices are “excessive.” The PMPRBmonitors and regulates both:

• the introductory prices of new patented medi-cines; and

• increases in the price of patented medicinesafter they enter the market.

Patented MedicinePrices Review

Board

This info sheet provides basic information about the PatentedMedicine Prices Review Board, its mandate and functions, and thepowers it has to enforce rules to control the prices manufacturers

charge for patented medicines.










Compliance and enforcementUnder the Board’s Compliance and EnforcementPolicy, Board staff investigate concerns about possi-ble excessive pricing of a patented medicine. Theseconcerns can be raised by the Board itself, or bycomplaints or information sent to the Board (eg, by aconsumer advocacy group). If a price appears toexceed the Board’s Excessive Price Guidelines, themanufacturer is given an opportunity to make aVoluntary Compliance Undertaking (VCU), in whichthe manufacturer undertakes to take steps to fix theproblem, such as reducing the price. If the manufac-turer does not make an undertaking, or its undertak-ing is not approved by the PMPRB Chairperson, thenthe Board may start formal proceedings and convenea hearing. If the Board finds that a company is sell-ing the medicine at an excessive price, the Boardmay order the company to reduce its maximum price.The Board also has the authority to address pastexcessive pricing.

For more detail about the statutory criteria and theguidelines that the PMPRB uses in determiningwhether a manufacturer’s price on a medicine isexcessive, see info sheet 4 in this series.

Should the PMPRB’s enforcement powers be strengthened?When it was first created in 1987, the PMPRB coulddeal with excessive pricing or a manufacturer’s failureto comply with its legal obligations or a PMPRBorder by removing its protection against compulsorylicensing of its patented medicine. Bill C-91 removedthis enforcement power. (See info sheet 2,“Controlling Medicine Prices: Evolution of CanadianLaw,” for more detail about the history of thesechanges to Canada’s laws on pharmaceutical patentsand price controls.)

But Canada’s obligations under internationaltreaties (such as NAFTA or the WTO treaties) do notprevent it from integrating compulsory licensing intoCanadian law. As long as Canada complies with thevarious conditions attaching to compulsory licensingrequired under those treaties, it is entitled to allow forcompulsory licensing of pharmaceutical patents.This could be re-inserted into the Patent Act bygranting the PMPRB the authority to issue a compul-sory licence as a remedy for excessive pricing bypatentees.

RecommendationParliament should amend the Patent Act to authorizethe Patented Medicine Prices Review Board to issue acompulsory licence as a remedy for excessive pricingby a manufacturer of a possible patented medicine.






PATENTED MEDICINE PRICES REVIEW BOARD

HIV/AIDS and

Pharmaceutical

Pricing

4Assessing pharmaceutical prices:the Patent ActThe Patented Medicine Prices Review Board(PMPRB) has the authority, under the Patent Actand the Patented Medicines Regulations, to monitorand regulate the prices charged by manufacturers ofpatented medicines in Canada to ensure that theseprices are not “excessive.” The PMPRB is requiredby the Patent Act and by regulations to consider thefollowing factors:

• the prices at which the medicine has been soldin Canada;

• the prices at which other medicines in the same“therapeutic class” have been sold in Canada;

• the prices at which the medicine and other med-icines in the same therapeutic class have beensold in seven other countries (France, Germany,Italy, Sweden, Switzerland, the UnitedKingdom, and the United States); and

• changes in the Consumer Price Index (ie, infla-tion).

Assessing pharmaceutical prices:PMPRB guidelinesBased on these factors, the PMPRB has adopted“Excessive Price Guidelines.” The Guidelines areapplied in reviewing the introductory prices ofevery new patented medicine entering the Canadianmarket, as well as in reviewing price increases bymanufacturers on existing medicines. A reviewincludes a comprehensive scientific analysis, andcomparisons of the price of the drug against othertherapies and prices in other countries. The basicrules on pricing for both new drugs and existingdrugs are explained below.

Regulating the introductory prices of new drugsThe PMPRB’s Guidelines classify each new druginto one of three categories, and then apply varioustests to assess whether the price being charged bythe manufacturer in Canada is excessive. The threecategories are:

• Category 1: a new formulation of an existingmedicine. The usual rule is that the price mustbear a “reasonable relationship” to the averageprice in Canada of other versions of the samemedicine (reasonable relationship test.)

• Category 2: a new product that represent a ther-apeutic “breakthrough” or “substantial improve-ment” over existing drugs. For Category 2drugs, the price can be as high as either one ofthe following, whichever is higher: (a) the high-est price in Canada among all comparable drug

PreventingExcessive Pricing

of PatentedMedicines

This info sheet provides an overview of the rules applied by thePatented Medicine Prices Review Board to prevent manufacturers

from charging “excessive” prices for patented medicines.










products (therapeutic class comparison test), or(b) the median of the prices charged for the samedrug in the seven countries used for comparisons(international price comparison test).

• Category 3: a new drug, or new dosage form of anexisting drug, providing moderate, little, or noimprovement over existing drugs. For a drug inthis category, the price is capped at the highestprice in Canada of all comparable products in thesame therapeutic class (therapeutic class compar-ison test). If this test cannot or should not be usedfor some reason, the PMPRB will usually limitthe price to the median of the prices of that prod-uct in the seven other countries used for compar-isons (international price comparison test).

Most “new” drugs offer moderate, little,or no therapeutic advantage (Category 3)PMPRB data show that most “new” drugs do notoffer any significant improvement over existing med-icines. Out of 455 new patented drugs introduced intoCanada from 1996 to 2000, only 25 of them (about 5percent) were considered major improvements or“breakthrough” drugs. Over the last five years, over75 percent of new products were deemed Category 3drugs by the PMPRB, offering moderate, little or noimprovement over existing drugs. These have beencalled “me too” drugs.

Category 3 drugs also account for the greatest pro-portion of pharmaceutical sales in Canada. Andalmost one-quarter of them are priced above themedian international price level, according to a 1999study by a joint committee of federal and provin-cial/territorial governments. The PMPRB is lookingat how to give more weight, in its pricing guidelines,to the relative “value” of a new drug.

Regulating the prices of existing drugsThe PMPRB regulates the prices of drugs for the timethey are under patent. Under the Board’s Guidelines,the increase in the price of a patented drug is pre-sumed to be excessive if it exceeds the rate of infla-tion as measured by the Consumer Price Index (CPI).

Prices of all patented drugs are cappedusing international price comparisonsIn addition to any other tests for determining whethera price is “excessive,” there is an overall cap on themanufacturer’s price of any patented medicine sold inCanada. The manufacturer’s Canadian price cannotexceed the price of the same drug sold in seven othercountries: Germany, Italy, Switzerland, United States,France, Sweden, and the United Kingdom. In con-ducting international price comparisons, the PMPRB

will compare the manufacturer’s Canadian price forthe drug with the simple average of the prices themanufacturer is charging for the same strength anddosage form in each of these seven other countries.

However, the approach could be improved bychanging the countries that are used for internationalprice comparisons:

• Canada lags behind many of these seven countriesin the average time it takes to approve a new drugfor marketing. This means prices are often set incomparator countries before they are in Canada –this includes countries that generally have higherpharmaceutical prices, such as the US andGermany, which do not have their own price con-trols. This pushes maximum allowable prices inCanada upward.

• These seven countries are not representative ofcountries belonging to the Organization forEconomic Cooperation and Development(OECD) as a whole. They tend to have higherdrug prices than several other developed coun-tries. Choosing a different set of countries couldsignificantly affect the maximum allowable pricefor a medicine in Canada. Some other countriesthat are more similar to Canada should be includ-ed in this set of countries used for internationalprice comparisons.

• Patent-holding pharmaceutical companies spendless on research and development (R&D) inCanada than in most other industrialized coun-tries, including most of the seven used for interna-tional price comparisons. This is the case eventhough the Conference Board of Canada reportsthat Canada offers “one of the most competitivetax systems for R&D in the world.” According tothe PMPRB, Canada accounts for a share of totalpharmaceutical R&D spending worldwide that isonly about half its share of total worldwide phar-maceutical sales. In other words, Canada is bene-fiting from only about half as much R&D spend-ing by industry as the industry is benefiting fromCanadian purchases of its products. Canadians arepaying more than their fair share of global phar-maceutical R&D. So pricing rules that keepCanadian prices around the median of internation-al pharmaceutical prices need to be re-examined.

Summary of PMPRB GuidelinesThe overall effect of the PMPRB’s Guidelines is that:

• prices for most new patented drugs are limitedsuch that the cost of therapy for the new drug doesnot exceed the highest cost of therapy for existing

PREVENTING EXCESSIVE PRICING OF PATENTED MEDICINES

drugs used to treat the same disease in Canada;• prices of new “breakthrough” patented drugs and

those that bring substantial improvement are gen-erally limited to the median of the prices chargedfor the same drug in other industrialized countrieslisted in the regulations (France, Germany, Italy,Sweden, Switzerland, the United Kingdom, andthe United States);

• price increases for existing patented medicines arelimited to changes in inflation; and

• for all drugs, the price of a patented drug inCanada may never exceed the highest price for thesame drug in those seven foreign countries.






Recommendations

• The PMPRB should review whether the set ofcountries currently used for the purposes of inter-national price comparisons is appropriate. Thefederal government should consider revising thelist of countries used for these comparisons.

• The PMPRB, Health Canada, and Industry Canadashould identify and assess options that would pro-duce a closer correlation between overallCanadian price levels for patented medicines andlevels of spending in Canada by pharmaceuticalcompanies on research and development.

PREVENTING EXCESSIVE PRICING OF PATENTED MEDICINES

HIV/AIDS and

Pharmaceutical

Pricing

5PMPRB jurisdiction: manufacturers’prices on patented drugsUnder the Patent Act, the PMPRB has jurisdictionto regulate prices charged by manufacturers of allpatented medicines sold in Canada, both prescrip-tion and non-prescription. This includes regulatingthe price of each dosage form. If the company hold-ing the Canadian patent on a medicine licenses thatmedicine, during the patent term, to another manu-facturer for distribution in Canada (including ageneric drug company), the PMPRB still has juris-diction to regulate the price of the medicine whileit is still under patent in Canada. The PMPRB onlyhas jurisdiction during the term of the patent on amedicine. Once the patent expires, the PMPRB nolonger has jurisdiction.

The price charged by the manufacturer is oftenreferred to as the “factory-gate” or “ex-factory”price. This is the price set by the manufacturer forthe first sale of the product to distributors, whole-salers, hospitals, and pharmacies. This priceexcludes sales taxes and markups by wholesalersor retailers along the marketing chain, which cansignificantly increase the final price paid by thepurchaser. However, the PMPRB estimates that themanufacturer’s factory-gate price still accounts forabout 65 percent of the final price paid by con-sumers. This is why it is important to regulate theprice at this stage.

The PMPRB has no jurisdiction over:

• the prices of non-patented drugs;• price markups by drug wholesalers or retailers;

or• pharmacists’ dispensing fees.

Challenges to the PMPRB’s jurisdictionCompanies holding patents on medicines haveattempted to avoid the jurisdiction of the PMPRBover their prices in several ways. These attemptshave been largely unsuccessful. The Board itselfhas been assertive in staking out its jurisdiction,guided by the goal of consumer protection.Canadian courts have generally approved of thisapproach, on those occasions where they have beencalled upon to decide challenges to the PMPRB.

Regulating the prices of non-patented drugsUnlike most developed countries that regulate drugprices, Canada only regulates the prices of patenteddrugs. Regulation has kept the prices of patentedmedicines in Canada at or slightly below the medi-an of foreign prices in the seven countries thePMPRB uses for international price comparisons.

Jurisdiction of the PMPRB

This info sheet explains the scope and limits of the jurisdiction ofthe Patented Medicine Prices Review Board to regulate prices ofpatented medicines in Canada, and makes recommendations for

strengthening that jurisdiction in the public interest.










But with no regulation, the prices of non-patenteddrugs are significantly above the median of foreignprices.

There is good reason to regulate the prices of non-patented drugs in Canada as well. The higher pricesof non-patented drugs have a significant impact onpurchasers. In 1999, a joint committee of the feder-al and provincial/territorial governments reportedthat non-patented drugs represented about half thespending in provincial drug plans over the 1990-97period. The Commission on the Future of HealthCare in Canada (Romanow Commssion) has recom-mended regulating prices of all prescription drugs,whether patented or non-patented.

Non-patented drugs include all drugs for which thepatent has expired, those drugs that are not yetpatented or never will be, and generic drugs. Non-patented drugs may be “single-source” or “multiple-source”:

• In the case of single-source drugs, the companyholding the patent may still, after the patentexpires, be the only company selling the product.

• In the case of multiple-source drugs, other manu-facturers (such as generic companies) may beproducing the drug after the patent expires. Inaddition, the company that originally held thepatent, and therefore previously had a monopoly,may also still be selling its brand-name product.

Single-source non-patented drugsIn 1999, a joint federal and provincial/territorialcommittee reported that prices of single-source, non-patented drugs continue to be “substantially higher”– almost 30 percent higher – than the median inter-national price among the PMPRB’s seven compara-

tor countries. The PMPRB reported in 2002 that aver-age prices on drugs that are not patented, but wereonly available from one manufacturer, were higher inCanada than in all other countries except the US.

Multiple-source non-patented drugsEven though, in the case of multiple-source drugs,there is competition in the market, prices in Canadacontinue to be high. The PMPRB has analyzed theprices of top-selling multiple-source medicines inCanada and the seven other countries it uses for inter-national price comparisons. It found that theCanadian prices of the brand-name companies’ drugsexceeded the median of foreign prices by 28 to 33percent. This shows that, once the PMPRB can nolonger regulate the price because the patent hasexpired, manufacturers of brand-name drugs havebeen successful in increasing prices even thoughfaced with the legal possibility of competition fromgeneric manufacturers. And while generic drugsaccount for a small portion of total drug sales inCanada (just under 14 percent in 2002), the PMPRBhas reported comparatively high prices for genericdrugs when compared to the median prices in othercountries.

Recommendations

• Parliament should enact a national system for reg-ulating prices of non-patented medicines to pre-vent excessive pricing, complementing the exist-ing system regulating prices of patented medi-cines. Because of jurisdictional questions, differ-ent levels of government should collaborate toimplement a consistent system across the country.






JURISDICTION OF THE PMPRB

HIV/AIDS and

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6Complaints to the PMPRB about excessive pricing of HIV drugsTo date, activists with the Canadian Treatment ActionCouncil (CTAC) have sought to contain the introductoryprice of four antiretroviral drugs. The first two caseshave been unsuccessful. Decisions on the latter twocases were pending at the time of publication.Efavirenz (Sustiva by DuPont Pharma)Efavirenz (brand name Sustiva) is a non-nucleosidereverse transcriptase inhibitor (NNRTI) for the treatmentof HIV-1 infection. NNRTIs such as nevirapine anddelavirdine already existed on the Canadian market at anannual cost of about $3000 per patient. Before efavirenzreceived final approval for marketing in Canada, DuPontPharma advised the PMPRB that it intended to charge anintroductory price of about $5000 a year. Considerablyhigher than the prices of existing NNRTIs, this price wasin the range for protease inhibitors (PIs), another class ofantiretrovirals for treating HIV, which sell at $5000-6000 annually per patient. This represented the first timean HIV drug in Canada was priced substantially outsidethe established range for its own class of drugs.

The PMPRB had provided non-binding advice toDuPont Pharma that its intended introductory price forefavirenz would be acceptable. In July 1999, CTAC fileda formal complaint regarding this advice and the manu-facturer’s intended price. Subsequently, with the patentstill pending, the PMPRB advised DuPont that it shouldprice efavirenz within the range of existing NNRTIs inCanada. DuPont rejected the advice as non-binding andmaintained its original, higher price.

In 2002, the PMPRB concluded its price review ofefavirenz as a Category 3 new drug, one that providesmoderate, little, or no therapeutic advantage over com-parable medicines. DuPont, however, argued thatefavirenz is more effective in combination therapy thaneven protease inhibitors and can be an alternative tothem – therefore, it should be allowed to price it at thehigher level of protease inhibitors, rather than at a lowerprice comparable to other NNRTIs. The PMPRBaccepted DuPont Pharma’s argument that both NNRTIsand protease inhibitors could be used as appropriate“therapeutic class” comparators. Therefore, it decidedthat DuPont should be allowed to compare its efavirenzprice to not just that of other NNRTIs, but also to pro-tease inhibitors. This effectively meant the PMPRB dis-missed CTAC’s complaint.Abacavir (Ziagen by Glaxo)In August 1999, CTAC filed a formal complaint withthe PMPRB alleging that Glaxo Wellcome (nowGlaxoSmithKline) was charging an excessive price onits patented drug abacavir (brand name Ziagen).Abacavir is a nucleoside reverse transcriptase inhibitor

Pricing ofHIV/AIDS DrugsThis info sheet summarizes the experience to date of trying to useCanada’s regulatory scheme to challenge prices charged by manu-facturers for some antiretroviral medicines used by people living

with HIV/AIDS.










(NRTI) that Glaxo chose to price approximately 30percent higher than other NRTIs.

As with efavirenz, the PMPRB classified abacavir asa Category 3 drug, meaning it provides moderate, little,or no therapeutic advantage over comparable medi-cines. And as with efavirenz, the Board concluded thatthe evidence showed that abacavir, although an NRTI,was an alternative to NNRTIs or PIs in combinationtherapy with other NRTIs. Therefore, it concluded thatNNRTIs and PIs could be used as appropriate “thera-peutic class” comparators, and so the price review ofabacavir could take prices for these other classes ofdrugs into account. Again, this determination effective-ly dismissed CTAC’s complaint.Didanosine and lopinavirIn January 2002, CTAC filed formal complaints withthe PMPRB regarding the prices of two other antiretro-viral drugs. Videx EC is an enteric-coated formulationof the pre-existing drug didanosine, or “ddI,” an NTRIpatented by Bristol-Myers Squibb (BMS). Kaletra isthe brand name for lopinavir, a PI patented by AbbottLaboratories. In both cases, CTAC alleges that the priceset by the manufacturer fails the “reasonable relation-ship” test under the PMPRB’s Excessive PriceGuidelines, because the price is considerably higherthan other medicines in the same class of drugs used totreat HIV infection. At the time of publication, deci-sions on both complaints were pending.Revising the Excessive Price Guidelines?Based on its experience to date with the pricing ofSustiva (efavirenz) and Ziagen (abacavir), CTAC haspointed to the dangers of basing drug prices on thecomparative potency of one drug vis-à-vis another,regardless of its therapeutic class or research and devel-opment costs. CTAC is concerned that access to somedrugs will be denied to Canadians. Provincial drug for-mularies will resist adding new drugs in a class wherecheaper, approved drugs already exist, but people livingwith HIV/AIDS need all drug options because a one-size-fits-all approach does not work in treatingHIV/AIDS. CTAC has recommended that drug pricingshould be based on the actual costs of research anddevelopment, manufacturing, and other relevant costs,plus a reasonable profit.

In considering the potential therapeutic benefit of a

new antiretroviral drug and in determining whether themanufacturer should be allowed to charge a higherprice, the PMPRB can only use incomplete data.Therefore, its assessment does not fully reflect all thefactors that should be considered in regulating prices.Data relied upon often comes from clinical trials thatare of short duration and include small numbers of par-ticipants who are not necessarily representative of theactual population that will use the drug. Longer-termdata, which can be applicable to a broader range ofpatients, on the durability and benefits of the drug, andon long-term toxicities, are not available.

In setting maximum allowable prices for new patenteddrugs, Canada’s regulatory system will likely continueto take the therapeutic value of a drug into account tosome degree. The system could be improved by creatinga process for interim or conditional pricing of a newmedicine upon its introduction to the Canadian market,with that price being automatically reviewed at appro-priate periods over the life of the drug as more databecome available to show a more complete picture of thedrug’s merits, and its merit relative to other drugs. ThePMPRB could be given the authority to implement thiskind of review and the authority to adjust the maximumallowable price as warranted by new developments.

Recommendations

• The PMPRB should revise its Excessive PriceGuidelines such that maximum prices allowed tomanufacturers of patented medicines bear a reason-able relationship to the cost of their development andmanufacture, and allow a “reasonable” profit marginbeyond those costs.

• Parliament should amend the Patent Act and/or thePatented Medicines Regulations to provide for amechanism for interim or conditional pricing of anew patented medicine upon its introduction to theCanadian market, and to automatically review thatprice at appropriate periods over the life of the med-icine to take into account new evidence regarding itstherapeutic merits and its merit relative to compara-tor medicines. The PMPRB should be given themandate and powers to conduct such reviews and torevise the maximum “non-excessive” price of a med-icine as warranted by such new evidence.






PRICING OF HIV/AIDS DRUGS

HIV/AIDS and

Pharmaceutical

Pricing

7Price trends: impact of regulation on Canadian medicine pricesPatented medicinesEvidence from Canada and from other countries indicatesthat regulation can contain medicine prices. When thePMPRB was created in 1987, Canadian prices were 23percent higher than the median international prices, sec-ond only to price levels in the US. Since the mid-1990s,prices in Canada have remained consistently at about 10percent below median international prices and in the midrange of European countries used as comparators.

More recently, the PMPRB has reported that:

• Since the mid-1990s, Canadian prices for patenteddrugs have remained between 5 and 12 percent belowthe median of foreign prices. In 2002, the prices ofpatented medicines in Canada were about 1 percenthigher than the median of foreign prices in the sevencountries used for price comparison purposes – lowerthan prices in the UK, Switzerland, and the US, buthigher than those in Italy, France, Sweden, andGermany. As in previous years, US prices appear to besubstantially higher than prices in Europe and Canada.

• Manufacturers’ prices of patented drugs, as measuredby the Patented Medicine Price Index (PMPI), fell by1.2 percent in 2002. This result continues the pattern ofdeclines and near-negligible increases in the PMPI thatbegan in 1993.

Non-patented medicinesBecause prices of non-patented drugs are not regulated inCanada, and the PMPRB has no jurisdiction over them,there is no legally mandated, national system for gatheringsuch data regarding drugs that are non-patented or aboutthe generic pharmaceutical industry in Canada.

In September 2001, federal, provincial, and territorialministers of health announced a project to monitornational expenditures on drugs. The National PrescriptionDrug Utilization Information System (NPDUIS), a jointeffort between the PMPRB and the Canadian Institute forHealth Information (CIHI), will provide more compre-hensive monitoring of trends in price, utilization, andcosts of pharmaceuticals, at least across public drugplans. This will generate some information for bothpatented and non-patented medicines.

However, it would be useful to have some across-the-board mechanism to provide more comprehensive dataabout the entire pharmaceutical industry in Canada,including generic companies, and not just data limited tothe observable end results of price, utilization, and costsof drugs.

Sales and R&D spending by the patentedpharmaceutical industryAmendments to the Patent Act in the 1980s and 1990sgave pharmaceutical companies enhanced, legally

Trends inPharmaceuticalPrices,Sales,andR&D Spending in

CanadaThis info sheet presents basic information about trends in drug

prices in Canada under price regulation. It also provides informationabout pharmaceutical sales, and spending on research and develop-

ment by the patented pharmaceutical industry.










enforceable patent rights regarding their patented medi-cines. In exchange, they gave a collective and non-bind-ing commitment to invest in R&D in Canada. Spendingon R&D in Canada by multinational pharmaceuticalcompanies increased from 1987 to 1997, the yearParliament conducted a review of the enhanced patentprotections that was required by the patent law amend-ments. But since the 1997 review, the patented indus-try’s spending on R&D in Canada, as a percentage oftheir total Canadian sales, has declined almost everyyear and is consistently well behind levels in all othercomparable countries. Spending levels on basic researchis an area of particular concern.

According to the PMPRB, in 2002 the R&D-to-salesratio overall in the pharmaceutical industry remained at9.9 percent in 2002, unchanged from 2001 for allpatent-holding companies. In the case of companiesbelonging to Canada’s Research-based PharmaceuticalCompanies, the industry association for brand-namepharmaceutical companies in Canada, the ratio actuallydeclined from 10.6 percent in 2001 to 10.0 percent in2002.

The PMPRB has compared R&D spending and salesin Canada and the seven countries used for pricecomparisons. It reports that total sales in Canada ofbrand-name drugs accounted for 3.4 percent of totalsales in these eight countries, but brand-name compa-nies’ spending on R&D in Canada amounts to only 1.8percent of the total pharmaceutical R&D spending inthese same countries. In other words, Canada wasbenefiting from only about half as much R&D spendingby the patented pharmaceutical industry as the industrywas benefiting from Canadian purchases of itsproducts.

This suggests that stronger measures are required toensure fair levels of R&D spending in Canada, inexchange for stronger patent protections and enhancedprofits. Canada also has an opportunity to demonstrateits concern for global health, and for those in develop-ing countries, by encouraging increased R&D into“neglected diseases.” These are diseases principallyafflicting poor people and the developing world, wherethe lack of adequate purchasing power means there isinsufficient profit incentive for private pharmaceuticalcompanies to invest in developing treatments for thesediseases.

R&D spending vs marketing and promotionThe costs of R&D are regularly invoked as the primaryjustification for strong patent protections and accompa-nying high prices. But there are serious questions aboutthe extent to which high drug prices are the result of whatcompanies spend on marketing their products, ratherthan reflecting the cost of research and developing thosemedicines.

Canadian patent holders are required to report boththeir sales revenues and their spending on R&D. Theyare required to describe the “types” of R&D done, whodid the R&D, capital expenditures on buildings andequipment, and the source and amount of the fundsspent on R&D. However, there is no statutory require-ment that they report to the PMPRB their spending onmarketing and other promotional activities. This infor-mation would assist in weighing claims about the costsincurred by patentees in doing R&D versus promotingtheir products.

Recommendations• Parliament should amend the Patent Act to require

manufacturers of non-patented medicines to reportannually on the details and sources of their revenuesfrom sales of medicines in Canada. They should alsobe required to report details of their spending inCanada on pharmaceutical R&D.

• Parliament should amend the Patent Act to createlegally binding requirements for R&D spending inCanada by patent-holding pharmaceutical compa-nies. This could take the form of an annual levy on allpatentees that do not meet a specified minimum ratioof R&D to sales. In addition, sales of all patentedmedicines should be subject to a levy, with the rev-enues dedicated to publicly funding basic research inCanada as well as research into “neglected diseases,”in particular those prevalent in developing countries.

• Patent-holding pharmaceutical companies shouldinclude, in their annual reports to the PMPRB, adescription of the type of promotional activities car-ried out and spending on each type of promotionalactivity. The federal government should amend thePatented Medicines Regulations to legally requirereporting of this information.

The information in this series of info sheets is based on Controlling Drug Costs for People Living with HIV/AIDS: Federal Regulation of Pharmaceutical Prices in Canada, a

report prepared by the Canadian HIV/AIDS Legal Network. Copies of the report and the info sheets are available on the Network website at www.aidslaw.ca or through

the Canadian HIV/AIDS Information Centre (email: [email protected]). Reproduction is encouraged, but copies may not be sold, and the Canadian HIV/AIDS Legal Network

must be cited as the source of this information. For further information, contact the Network at [email protected]. Ce feuillet d’information est également disponible en français.

Funded by Health Canada under the Canadian Strategy on HIV/AIDS.The views expressed are those of the author and do not necessarily reflect theviews or policies of the Minister of Health. © Canadian HIV/AIDS Legal Network, 2002-2004.

TRENDS IN PHARMACEUTICAL PRICES, SALES, AND R&D SPENDING IN CANADA

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HIV/AIDS and Pharmaceutical Pricing - aidslaw.caPricing... · cines,both for individual people living with HIV/AIDS and for overall spending on health care.It also provides a short