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COMMUNITY AFFAIRS REFERENCES COMMITTEE
07/05/2010
Consumer access to pharmaceutical benefits

CHAIR —Welcome. Is there anything you want to say about your appearance here today?

Ms Lynch —I am also known as Katharine Watson.

CHAIR —I want to check that you have in fact been given information on parliamentary privilege and the protection of witnesses and evidence.

Ms Lynch —Yes.

CHAIR —We have your statement, so now you can go for it making an opening statement, and then we will ask you some questions.

Ms Lynch —Many thanks for the opportunity to make a statement this morning. The Generic Medicines Industry Association is a national association representing companies that manufacture, supply and export generic medicines, being those medicines that are not protected by valid patents applied by those sponsors who have not originally held the patent for that medicine. The members of GMIA supply more than 90 per cent of total prescriptions supplied by generic sponsors in Australia, making the association highly representative of the sector. The members of GMIA sold more than 50 million services, or 33 per cent of all services by volume, on the PBS over 2008-09. The members of GMIA sold 100 million packs in total in Australia over 2008-09. The members of GMIA employ 5,000 Australians, with almost half these roles being in manufacturing or research and development roles, functions that generate strong economic multiplier benefits. Members of GMIA export $470 million worth of product, which represents approximately 12 per cent of the current pharmaceuticals export market.

The generic medicines sector is strategically an important industry sector. The sector contributes to economic growth through the creation of high skill jobs and exports. A sound medicines-manufacturing base brings important public health benefits in times of pandemic or other urgent need. Generic medicines provide patients access to effective, high-quality medicines at more affordable prices by introducing competition after the monopoly period enjoyed by the originator sponsor has expired. The presence of competition from generic medicines provides a stimulant to further drug discovery and innovation more generally. Extended or permanent monopolies on pharmaceutical products remove the incentives to discover new medicines.

I would now like to turn to the terms of reference before this committee and handle each term of reference in turn, starting with reference term (a). The impact of therapeutic groups to consumer access will be negligible. In many instances there will be no change to the price faced by the consumer. In the small number of instances where a patient premium is imposed, many patients can be successfully switched or obtain an exemption from the premium on medical grounds. Therapeutic groups policy is consistent with evidence-based funding of medicines, a philosophy that is central to the PBS and enshrined in the National Health Act. Innovation is rewarded in an evidence-based system by awarding price premiums to products that can demonstrate the delivery of improved health outcomes. Therapeutic groups only apply to medicines that have a similar therapeutic significance, that is, medicines that cannot demonstrate the delivery of an improved health outcome. Therapeutic groups are a policy tool that allows the government to ensure that products of similar therapeutic significance are priced at the same level. Responsible price setting of patented medicines is crucial to the sustainability of the PBS. The share of PBS receipts to the F1 formulary has increased by 35 per cent over the last four financial years. It is the patented products that will continue to drive future growth of PBS expenditure. Any suggestion that Australia’s public budget should be accommodating increasing costs of research and development are ill-founded. The restraint of costs on patented medicines that do not demonstrate a therapeutic significance is responsible policy-making.

Turning to reference term (b), substitution of a different brand of the same medicine by the pharmacist with consent by the patient was introduced in Australia on 1 December 1994. To make that clear, this refers to the generic medicines, not to the therapeutic groups instance. This policy of substitution of generic brands has provided significant benefits to the Australian public by making medicines more affordable and has shown that substitution of different brands of medicines can be rolled out successfully in Australia.

The existing market mechanisms currently overseeing the introduction of therapeutic groups can be achieved successfully in Australia with the oversight of patients by expert and tailored medical care delivered by physicians, with the ability to obtain exemptions to the patient premium on medical grounds and, thirdly, with appropriate expert advice in defining the medicines that should sit within the therapeutic groups. With these three factors in place, patient health outcomes can be such that they would not be jeopardised and the important policy benefits that come with therapeutic groups would be achieved.

Turning to reference term (c), varying the size of patient contributions can be important, contributing strongly to good medicines policy. Consumers should be rewarded financially, encouraged and empowered to make fully informed and wise medicine choices. Variable patient contributions provide a market mechanism to financially reward consumers who make wise medicine choices. The Generic Medicines Industry Association requests that the committee recommend the introduction of a lower patient co-payment for those patients who choose a generic medicine, so that patients who choose generic medicines are rewarded directly for that wise choice.

Reference term (d): the GMIA supports the concept of therapeutic groups and is confident that the development of new therapeutic groups can be made successfully in the context of appropriate expert advice in defining the therapeutic groups, with appropriate understanding being given to physicians so they can appropriately advise their patients, and with appropriately defined medical exemptions where patients for whom it is not suitable to switch a medicine may be exempted from the therapeutic group premium, if one is so imposed.

Reference term (e): the Australian government has traditionally and appropriately stated that the government pays for health outcomes delivered by the medicines listed on the PBS. This is important, as it ensures that funding of a socially subsidised scheme such as the PBS is targeted to health outcomes and ensures that sponsors of medicines are incentivised to develop and commercialise medicines that deliver improved health outcomes. The classification of medicines into the F1 and F2 formularies weakens the government’s ability to ensure that prices on the PBS reflect the same health outcomes delivered.

Reference term (f): the delay to price reductions associated with the price disclosure provisions reflects the fact that the price disclosure policy is poor policy. Price disclosure is incompatible with the principle of equal government subsidy for equal health outcome. The price disclosure policy process itself places considerable administrative burden on both sponsors and the government. Cost and time resources associated with the collection and analysis of data to support price disclosure policy are significant. To date, the policy only affects 19 molecules. If contemplated proposals by government role out, the number of molecules captured by price disclosure will increase in number, making it even more administratively burdensome.

Price disclosure policy is conceptually complex. The risk of inadvertent error by both sponsor and government is high and there is limited capacity in the system to identify these errors. Further, the weighted average disclosed price calculations are complex and, due to the commercial-in-confidence nature of the input data, weighted average disclosed price calculations are necessarily non-transparent. The process creates uncertainty for the government and also for the sponsor, on the cost to the PBS overall and future price levels. Results to date emphasise the unpredictability and variability of price reductions, where two-thirds of the 19 products that have to date been subject to price disclosure have resulted in no price adjustment and, of the remaining one-third of products that were subject to a price reduction, these varied considerably, ranging from 15 per cent to 71 per cent. Price disclosure fails basic tests of efficient regulation, creating high compliance costs and uncertain and unpredictable market conditions. GMIA requests that the committee recommends that the price disclosure policy be abandoned.

Reference term (g): GMIA supports timely market access of new medicines to the PBS and requests that the committee recommends the introduction of monthly entry of new generic medicines onto the PBS to realise important savings to the PBS and to replace the current situation where a new generic medicine can be delayed for up to four months before being able to enter the PBS.

Reference term (h)—any other related matters: GMIA notes that one of the key consequences of PBS reform is the reduction of prices of generic medicines. Generic medicines play a crucial role in the delivery of affordable medicines to the Australian public after the market exclusivity of medicines has expired. The PBS underwent major reform in 2007, which was forecasted at the time to save the government an estimated $3 billion over 10 years. Just two years into these reforms, three independent analyses have projected that the savings would be around double this—in the vicinity of $6 billion. The 2007 reforms have already begun to have a deleterious impact on the pharmaceutical industry in Australia, with significant job losses. Manufacturing and R&D facility closures will come next. Any further reform before the major 2007 reforms have played out will severely damage Australia’s leading export industry in transformed goods.

GMIA requests that the committee recommends that there be no further reforms to the PPS as reforms from 2007 have yet to play out and will deliver significant savings to the government. GMIA requests that the committee recommends that the government put in place a floor price of $5 for low priced pharmaceuticals to ensure the ongoing supply of essential medicines that have a low ex-manufacture price. GMIA requests that the committee recommends that the government amends the Patents Act to allow the manufacture of generic medicines for export, which is currently prohibited under domestic legislation, and recommends that the committee recommends that the government expressly authorises sponsors of generic products to copy the product information and other related documents from the originator’s regulatory documents by means of amendment to the Copyright Act for the purpose of obtaining market approval from the Therapeutic Goods Administration and for the purpose of sale and marketing of the product in the Australian market. This will ensure that sponsors of generic medicines can continue to supply generic medicines to the Australian public.

Senator FIERRAVANTI-WELLS —I get the distinct impression from looking at your submission that this is really about your concerns with the PBS reforms rather than specifically dealing with the matter at hand, which is the benefit or otherwise of therapeutic groups. Was the generic medicines industry in favour of the PBS reforms?

Ms Lynch —The generic medicines industry has not been consulted on the PBS reforms.

Senator FIERRAVANTI-WELLS —Was your association in existence then?

Ms Lynch —Yes, our association has been in existence since 2001.

Senator FIERRAVANTI-WELLS —Obviously you believe that there are some concerns with the PBS system as it currently operates.

Ms Lynch —Our association has serious concerns about the PBS reforms. The consideration of the therapeutic groups is pivotal to the sustainability of the PBS. It is important to consider the entire sustainability of the PBS when considering one aspect—the therapeutic goods policy.

Senator FIERRAVANTI-WELLS —So, potentially, you see the use of therapeutic goods as a way of effectively not dismantling but eroding some of the PBS reforms?

Ms Lynch —The therapeutic groups build on the fundamental principles of the PBS, which is about rewarding health outcomes. Taking it from that basic principle, we therefore support the therapeutic groups. Patented medicines will be the key driver of PBS growth in the future and therapeutic groups provide the government with one policy tool to ensure that the patented medicines on the PBS that do not offer therapeutic significance in terms of better health outcomes are not inappropriately rewarded with an overly high price.

Senator FIERRAVANTI-WELLS —In your recommendations, you propose that the originator brands have an additional $5 out-of-pocket cost to the patient. What are the patient health benefits of your proposed pricing?

Ms Lynch —The ongoing viability of a sustainable generic medicines sector is reliant upon the use of generic medicines. By definition, at day zero of market entry of a generic medicine, there is zero market share for that medicine. Entire market share is with the originator brand. It is critical to the sustainability of the generic medicines sector that there be some incentive to encourage patients to move from the originator brand to the generic medicine. International studies have shown that the most effective trigger to switch patients from an originator brand to a generic brand is a clear financial price signal.

Senator FIERRAVANTI-WELLS —It is clear from some of the submissions that not all patients can switch to a generic medicine. Does your proposal allow for such a patient to be exempt from paying the extra $5?

Ms Lynch —Let me answer that in two ways. In the first instance, the term ‘therapeutic groups’ applies to medicines that are therapeutically similar. The proposal that we are discussing currently applies to medicines that have been shown to be bioequivalent and since 1994 they have been accepted by the Australian community to be substituted by the pharmacist. The decision to switch to the therapeutic groups would be made at the physician level. For generic medicine, the decision is made at the pharmacy level.

Senator FIERRAVANTI-WELLS —What you are really saying is that generic medicines should be given an artificial floor price below which they cannot fall. At the same time, it is also suggested that your competitors have an additional $5 over and above your products so that you can enjoy an ongoing competitive advantage. That is the gist of what you are saying. It is to financially benefit the generic medicines industry and to give them an ongoing competitive advantage solely to support the generic medicines industry.

Ms Lynch —The two policy proposals—the $5 patient copayment and the $5 floor price—seek to meet very different policy objectives. The patient premium seeks to provide the patient incentive to move from the originator brand. By definition, at market entry of the generic medicine, the originator brand will have 100 per cent of the market. There is no incentive for the patient to switch brands, and without a switch there is no generic medicines sector. There is not a level playing field between a generic brand and an originator brand because they already have market share. So there needs to be a policy incentive to ‘level up’ the playing field so that the generic medicines can have an objective to—

Senator FIERRAVANTI-WELLS —Assuming that your plan to give you a $5 advantage goes ahead, what is that worth to your member companies? You are really asking to be subsidised and to effectively price out competitors and give you a $5 advantage.

Ms Lynch —The concept of sending a price signal to the patient is well established in other jurisdictions. The sponsor of the originator medicine is also able to compete on a generic market level footing as they are also able to register a new brand under a different brand name. So the objective of the policy would be to achieve a full switch from the originator brand, which has had many, many years to develop brand loyalty to its brand name, and ensure that all patients are on a genericised or new brand of that particular molecule. The originator sponsor is able to participate in that market by means of launching a new brand, and they typically do that already in some instances by launching a new brand.

Senator FIERRAVANTI-WELLS —So what do you say is the additional cost to the PBS? Have you done any economic modelling on that? You can take that on notice, if you have, and—

Ms Lynch —I can answer it in principle. We would recommend that the additional patient co-payment be set such that it is budget neutral. We would expect that very few patients would pay that additional premium. We would then have a situation where all patients are on a generic brand including any potential brand that an originator sponsor may wish to launch, and all sponsors are then playing on a level playing field.

Senator FIERRAVANTI-WELLS —I understand that under the previous government about $20 million was allocated to assist the generic medicines industry and I understand that that budget allocation under this government has been cut to $4.3 million. Is that the case?

Ms Lynch —That is correct.

Senator FIERRAVANTI-WELLS —In other words now the viability of the generic medicines industry is well and truly in question and this is perhaps a suggested way that the generic medicine industry could continue with some degree of viability?

Ms Lynch —Further education and market knowledge of the benefits, quality, safety and effectiveness of generic medicines is always welcomed. When we look at the experience in other international markets of encouraging switch to generic medicine our members would suggest that that is one of the less effective ways.

Senator RYAN —From your submission I take it that you would like to see higher generic utilisation where there are generics and originator medicines in the market.

Ms Lynch —Correct.

Senator RYAN —Do you also want to see lower prices for generics?

Ms Lynch —Absolutely. The presence of a generic medicine and a viable generic medicine sector and the entry of generic medicines into the market are about making medicines more affordable. As the volumes and usage of generic medicines increase, the ability to make medicines more affordable increases.

Senator RYAN —I appreciate that and I understand the view that there is substantial room to bring Australian generic prices down to international levels, because for a number of areas we still pay more than other nations with national insurance schemes or the like. But do I take also from your submission and from your verbal comments that you do not support the PBS reforms with the F1 and the F2 formularies, essentially because they break down the old reference pricing system between genericised molecules and patent protected molecules. Do you want to see a reinstatement of the old reference pricing system? You have not said so but that is what I am gathering from your submission and from what you have said in your presentation.

Ms Lynch —Yes. We think that the delinking of the F1 and F2 formularies is erroneous because it moves away from something that has long been enshrined in the PBS, that the reward of health outcomes is reflected in the price.

If I may pick up on an assumption that you made, that the prices of generics are high in Australia by international standards, we disagree with that. I think that international price comparison across any commodity is fraught with difficulties and this is no more so than with pharmaceuticals. For every medicine that we can see there are just as many medicines that are priced more highly in generic sectors versus other markets. There will be just as many priced lower.

Senator RYAN —Isn’t it true—and I am happy to be corrected as my knowledge might be a few months out of date and I know the gap has been narrowing—that on substantial volume medicines such as simvastatin, which I understand is now off patent in most parts of the world, Australians were paying through the PBS a higher price than that that was available through the British NHS or through Walmart in the US if I walked in there with a prescription?

Ms Lynch —Simvastatin is an often cited molecule in terms of international price comparisons. I reiterate a very clear warning about honing in on single molecules. It is important to look at the whole formulary.

Senator RYAN —But it is a pretty big molecule.

Ms Lynch —I would also add that in the UK simvastatin is used on the first line. Any patient that has elevated cholesterol—

Senator RYAN —We are pressed for time, Ms Lynch.

Ms Lynch —We need to look at the entire market dynamic there.

Senator RYAN —Okay.

Ms Lynch —As for the clinical use of simvastatin, it is very different in Australia from that in the UK.

Senator RYAN —Okay, but it is a product with a similar scale in a lot of markets. It was a popular cholesterol-lowering medication.

Ms Lynch —It was. It no longer has the volumes in Australia as it does—

Senator RYAN —It no longer has its market-leading position. I appreciate that. I strikes me though that I am not quite on top of the argument as to why your organisation is opposed to the price disclosure regime.

Senator MOORE —That was my question, Senator Ryan, so, yes, if we could get some more information about that. Ms Lynch, you spend a lot of time in your submission and in your opening statement on that issue, which no-one else has raised to that extent—so if we could get more information.

Senator RYAN —I will ask and you can chime in if you wish.

Senator MOORE —No, that is it. That is the question about your focus on the price reduction.

CHAIR —I was going to ask it too. Maybe we could spend the remaining couple of minutes on that.

Senator RYAN —Sure. If I may, I will ask a couple of very brief questions before I get to that.

CHAIR —Very brief!

Senator MOORE —We all liked the last one.

Senator RYAN —Ms Lynch, the point of a patent is that there is a monopoly for a period of time on producing it. That is the whole point, that we have a patent system that applies—

Ms Lynch —The point of the patent is to give the market exclusivity. No other supplier can provide that molecule.

Senator RYAN —That is true where we have patents everywhere.

Ms Lynch —Yes. There is not attached to that a right to command a particular price.

Senator RYAN —The right to command a price is in the hands of the buyer.

Ms Lynch —The technology must deliver a better outcome.

Senator RYAN —I appreciate that. But it is basically a patent, so only I can produce it until my patent expires, whether that be over intellectual property in other areas or over a medicine or over something else. So of course I have a monopoly position until that patent expires. This is where I want to go into the disclosure regime. One of the things that you mentioned is the administrative burden. I appreciate the administrative burden and I think that everyone accepts that with regard to the PBS it is not administratively easy for a lot of people, so I accept that point. You refer to ‘uncertainty for the sponsor over future price levels’ and ‘the unpredictability and variability of price reductions’. Isn’t that the point of actual genericised competition, that we have uncertainty because it has become a commodity: you can produce it, I can produce it and other companies can produce it. Isn’t that the point of not having a limitless patent on a medicine, so that there is competition? One of the ways by which we could have a price signal to consumers—and I know this has happened in the past—is by a generic company saying, ‘We’re going to offer a price cut to put pricing pressure on a competitor,’ whether that be another generic company or an originator company with its original brand. So I suppose there are two questions. Firstly, it seems to me that uncertainty is intrinsic to the idea of a genericised molecule. Secondly, we could have price signals and price pressure could be put on by competition in the marketplace.

Ms Lynch —What was the second part?

Senator RYAN —The second one was that we have got multiple generic companies that manufacture molecules, especially the larger molecules, or market them once they come off patent. Couldn’t we have a price signal to consumers—and indeed to the government through the PBS—by some of these companies actually competing with one another and offering price reductions? To me that is the point of a commoditised molecule.

Ms Lynch —The basic assumption of price disclosure is that we have a fully functioning competitive market. Through the PBS and the pharmacist acting as the agent we do not have a properly functioning competitive market. The generic medicines market in Australia pretty much breaches all the basic assumptions that must be in place to have a fully functioning economic—

Senator RYAN —I appreciate that it is not a fully functioning market, but one company could offer a price cut.

Ms Lynch —All those outcomes that you are suggesting should be happening in a fully competitive market do not necessarily happen for a generic medicine.

Senator RYAN —A company that said, ‘I want to get into this market for an expired molecule in a big way’—it was a large product, and I appreciate that it will happen on larger products more than on small ones—could actually say, ‘We are going to offer more than the 12.5 per cent reduction,’ which would then bring down the whole price that is paid for that molecule on every competitor. The price signal would happen that way, wouldn’t it, through a brand price premium? That has happened before, I understand: some companies have offered price cuts in an attempt to get market share.

Ms Lynch —What we have seen since the introduction of PBS reforms in 2007 is very few manufacturers passing on the price reductions through brand price premiums and, instead, more fierce competition in the marketplace.

Senator RYAN —Surely, if the government is getting the benefit of the price cuts, that means to a certain extent the system is working. If I offer a price cut, you offer a price cut and a third or fourth company then matches it, doesn’t the PBS and its long-term sustainability benefit from the fact that the price has fallen?

Ms Lynch —In the short term, the prices could fall; in the longer term, the commercial incentive to enter the market as a generic medicine is removed. So my prediction is that for some of the larger molecules that are coming off patent in the next few years we will see generic market entry of these medicines. In the worst-case scenario, they will come from international operations, with perhaps five Australian staff sending these medicines out with no patient support. They will be white-boxed, basic medicines sent out through a base of five Australian jobs. For the large number of molecules—

Senator RYAN —The PBS is not a job scheme; it is a health scheme, as you have said yourself. I am not particularly worried by where the medicines come from if they meet—

Ms Lynch —I think it is very narrow sighted not to consider where the medicines come from. I think there are other benefits, which I have talked about, in having a sound pharmaceutical manufacturing base in Australia, particularly in cases of pandemic or other urgent need. I also think that we will see those packets of very basic white pills come in for the large molecules, but other pieces like patent challenges and the market entry of the less profitable molecules, which in their cumulative cost to the PBS are quite substantial. They are the molecules that will not have generic competition, and substantial lost savings to the PBS will stem from those.

Senator FIERRAVANTI-WELLS —In your evidence you categorically stated that GMI was not consulted as part of the PBS process. I ask you to reflect on that answer. Ms Brown from my office, who was then senior adviser to Mr Abbott, advises me that GMI were part of the process and were consulted through your previous CEO, Di Ford. So perhaps you would like to reflect on your answer and, if you so choose, correct the record.

Ms Lynch —As you correctly point out, I was not personally present during that time. Members of my board who were there advised that there was no thorough consultation prior to the announcement of the PBS reforms. There was some consultation post the announcement in terms of how the detail of the reforms might be implemented, but I am very happy to take that on notice and make a fuller statement from those who were present.

Senator FIERRAVANTI-WELLS —Perhaps you would, because you have made some pretty categorical statements, and I would appreciate it if you could reflect and, if necessary, provide the necessary documentation to this committee as to your assertions.

Ms Lynch —Thank you for that opportunity to make a correct statement there.

CHAIR —It would be appreciated if you would clarify timing for the committee. You are a member of the community that has in the past made claims about being consulted, but there are different kinds of consultation. So perhaps you could outline what you mean so that we are really clear about what you mean by consultation.

Ms Lynch —I think that is a very important point and thank you for the opportunity to make it completely clear.

CHAIR —Thank you very much for your time and your evidence today.

[12.05 pm]