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Research Note no. 3 2004–05
The PBS and the Australia–US Free Trade Agreement
Dr Kate Burton
Social Policy Section
Jacob Varghese
Law & Bills Digest Section
22 July 2004
Much of the debate over the Australia–US Free Trade
Agreement (AUSFTA) centres on whether and how it will affect the Pharmaceutical
Benefits Scheme (PBS).
This Research Note examines the parts of AUSFTA that
have caused the most concern and assesses their likely impact on the PBS.
Changes to the PBS
One of the concerns about AUSFTA is that proposed changes
to the PBS could lead to higher drug prices in Australia—a cost that would
be borne by the government, at least initially, but perhaps also by consumers.
PBS costs, already high, are still growing. Since the
early 1990s, the PBS has been growing at an average annual rate of 12.7
per cent(1). According to the 2004–05 Budget, average annual
growth will fall to about 4 per cent over the next few years, but even
at this rate the PBS is the fastest-growing area of Commonwealth health
expenditure.(2)
So what aspects of AUSFTA could lead to further pressure
on PBS costs? Before answering this question it is helpful to consider
how the PBS currently works.
Listing new drugs
The current arrangements for listing a drug in the
PBS are as follows (see figure 1):
- registration with the Therapeutic Goods Administration (TGA), which
assesses drugs for quality, safety and efficacy
- assessment by the Pharmaceutical Benefits Advisory Committee (PBAC)
for listing on the PBS.(3) The Committee evaluates whether
a drug is more therapeutically effective and/or cost-effective than
existing treatments. The evaluations are based partly on submissions
by the drug’s manufacturers, which include the price they would like
to be paid
- once approved for PBS listing, the Pharmaceutical Benefits Pricing
Authority recommends to the Department of Health what price to offer
the drug’s manufacturer. In doing so it relies on the Committee’s advice
- if the drug’s sponsor agrees on the government’s price, the drug is
added to the PBS. If not, the sponsor can return to the Committee or
the Authority with further information, or introduce/keep the drug on
the market without PBS listing.(4)
PBS listing and AUSFTA
AUSFTA introduces procedural changes to this system
that give drug manufacturers more opportunities to press for their drugs
to be listed on the PBS (see figure 1). The most controversial of
these changes has been the review mechanism for decisions not to list
a drug.(5)
Some fear the review process will reduce or remove
Australia’s control over the PBS listing process by overturning decisions
made by the Committee.(6)
However, the text of AUSFTA only dictates that Australia
institutes a review process; it does not specify that the review process
be binding. In addition, AUSFTA does not change the Committee’s legislative
requirement to make decisions on the basis of therapeutic effectiveness
and cost-effectiveness. So whatever form the review process takes, the
Committee remains bound to these criteria. If new drugs are listed
on the PBS as a result, it could be argued that consumers will be better
off because they will pay less for these medicines and have access to
more effective drugs.(7)
Another concern is that, in addition to the review
process, the increased advocacy opportunities AUSFTA affords drug companies—for
example, through ‘more frequent revisions’ of the PBS ‘where possible’(8)—will
result in pressure on the Committee to list drugs, sometimes inappropriately.
A decision not to list a drug already places the Committee
under pressure from a range of interests, including drug companies, medical
specialists, patient support groups and the media.(9) In the
case of Celebrex, an arthritis drug, even the Health Minister entered
the debate.(10) Peter Drahos and colleagues, two of whom are
former Committee members, argue that AUSFTA will make it more difficult
for the Committee to resist these pressures and to continue to make decisions
in the public’s interest:
The PBAC members, although unable to publicly defend themselves, have
had the advantage that they are the only independent authority that
has fully examined the data. Now it will have another authority (the
review panel) that has power (officially appointed) but no responsibility
(it cannot legally list a drug on the PBS), which presumably will be
unfettered in terms of the secrecy of its considerations and advice
… when its advice differs from the committee, this will be seized on
by all of the vested interests, who will use the media to undermine
integrity of the committee. The confidentiality provisions of the National
Health Act will effectively prevent the committee from defending
itself …(11)
There are transparency provisions in AUSFTA, but these are unlikely to assist
the Committee to defend its decisions.(12) These provisions indicate
that commercial-in-confidence considerations will continue to limit what
the public is entitled to know about a decision, while the Committee is
expected to continue providing applicants with ‘detailed’ information regarding
its decisions.
A radical change?
AUSFTA does not directly undermine the rationale of
the PBS, which is to ensure access to drugs based on their clinical effectiveness,
safety and cost-effectiveness compared with other treatments. Both countries
agree to recognise the value of innovative pharmaceuticals either
through competitive markets or through procedures that value
their therapeutic significance.(13)
This second option affirms the current principles guiding
PBS listing in Australia.
AUSFTA does give drug companies more opportunities
to exert influence at different points in the PBS listing process. It
is not clear whether this will result in more drugs being listed on the
PBS, or drugs being listed at a higher price, than would otherwise be
the case.(14)
In Addition, it is not the case that either of these
would result in a direct flow-on to prices for consumers—though
increasing PBS costs are often used to justify increased co-payments.(15)
It could be argued that the danger in AUSFTA is the
Committee’s independence and integrity could be undermined through the
increased pressure to which it is likely to be subjected. The result might
be poor policy decisions that further undermine the body and leave the
government, taxpayers and, ultimately, consumers worse off.
 Intellectual
property changes and the PBS
Some commentators have been concerned that aspects
of the intellectual property (IP) chapter of AUSFTA would lead to increased
PBS costs.(16) The concern is that provisions relating to patent
law, principally Articles 17.9 and 17.10, would delay the entry of generic
drugs: those drugs made without the approval of the patent holder once
the patent has reached its expiry date.
In a paper, produced before the text of AUSFTA had
been agreed, the Australia Institute claimed that even a small delay in
the entry of generic drugs to market would create significant cost increases
to the PBS.(17) This is because the entry of a generic version
of a drug significantly lowers the price the patent holder can demand
for their version of the drug.
‘Springboarding’
AUSFTA requires Australia to make two subtle changes
that will affect the practice of ‘springboarding’ generics.
Springboarding is a process that allows a generic drug
to obtain approval from the TGA on the basis of test data proving the
drug’s safety and efficacy already submitted by the patent holder. This
allows the generic drug manufacturer to avoid duplicating much of the
costly and time-consuming process of drug testing, resulting in a faster
entry to market and cheaper drug prices. Under current rules, generics
may not springboard during the first five years that the original drug
has had marketing approval. This is known as the ‘data exclusivity’ period.
Currently, as long as the data exclusivity period has
elapsed, the TGA is not concerned about intellectual property issues.
This means that manufacturers of generic drugs may seek TGA approval even
where a patent is still active. Once the TGA has approved the drug, it
is up to the generic manufacturer to decide whether or not to enter the
market while a patent is still alive. In most circumstances, generic manufacturers
will have obtained TGA approval, organised production and distribution
and be ready to enter the market as soon as the patent expires. In other
circumstances, though, they might intend to dispute the validity of the
patent or argue that theirs is a non-infringing use, in which case they
might release the product and wait until the patent holder takes action.
The ball is then in the patent holder’s court—it is up to them to sue
the generic manufacturer for infringement.
The first change that AUSFTA requires is the introduction
of some measure in the marketing approval process to prevent springboarding
generics from entering the market during the life of a patent.(18)
The second change is that, if generic drug makers are allowed to request
approval to enter the market during the life of the patent, the patent
holder must be notified of this and told the identity of the putative
generic manufacturer (see figure 1).(19)
This requires the TGA to adopt a policing role, vetting
applications on patent grounds rather than purely on safety and efficacy
grounds. The US Free Trade Agreement Implementation Bill 2004 proposes
that this be done through a certification scheme. Under this scheme, generic
manufacturers would be required to certify to the TGA that they do not
propose to market the drug in infringement of a patent or that they have
notified the patent holder of their TGA application.(20)
One difficulty is that ‘infringement’ is not always
clear. For example, a patent may have expired on one use of the drug but
not another, as new patents are filed for newly discovered uses. Similarly
an active patent may not be valid because it does not fulfil one of the
requirements for patentability, such as novelty or inventiveness. These
are complex legal issues that only the courts can resolve.
Under the certification scheme, generic manufacturers
would have three options before applying to springboard. They could:
- certify that they will not infringe, if they believe that to be the
case
- apply for a court declaration to settle the uncertainty before certifying,
or
- notify the patent holder of the application and certify to that effect.
Taking first option would risk a fine if the certification
is later found to be false or misleading. However, it might be a safe
option where the patent clearly has expired, or where other generics are
on the market already.
Where the issue is particularly complex, the last two
may be the only options. The second option involves the commencement of
litigation. The third option allows the patent holder to consider litigation.
In either case, litigation of these matters would happen before rather
than after the generic has entered the market. Currently, generic manufactures
have much more control over when any litigation takes place, with the
option to enter the market first.
It is not clear that this shift, on its own, would
make a significant difference in practice. A reduction in control over
timing may have adverse consequences for generic manufacturers’ litigation
and business tactics. It may also increase the likelihood of early injunctions
being ordered against generic manufacturers that delay their initial entry
to market. The complexity of the scheme, costs of litigation and risk
of penalties for false and misleading certification might theoretically
deter generic manufacturers from entering a generic drug on the market.
On the other hand, the regulatory and IP environment for generics is already
complex, so the new scheme might be accepted as a relatively small technical
change in an uncertain business. Overall, the effect of these subtle
technical changes on the time it takes for generics to enter the market
are difficult to predict.
‘Evergreening’
A related concern is that these processes might encourage
‘evergreening’ as a tactic to delay generic entry.(21) Evergreening
involves filing ‘new use’ patents toward the end of the patent. When this
happens, the patent on the old use expires as usual, but the patent for
the new use arises and continues until its own expiry. This creates a
complex situation in which generics may be sold for some uses of a drug
but not for others.
Evergreening is already available under Australian
law. But, given that new use patents can make determining infringement
more difficult, thereby reducing the options available to generic manufactures
under the certification scheme, evergreening might become a more common
practice used to deter generics from entering even the ‘old use’ market.
Whether this occurs, and whether it is successful, will depend on whether
the certification scheme significantly affects or constrains generic manufacturers
in practice.
‘Locking in’ current law
A feature of the IP chapter that has not been much
discussed in the debate on AUSFTA is the extent to which it confirms current
law. As far as pharmaceutical patents are concerned, the IP chapter would,
among other things, require Australia to keep its current laws regarding
the data exclusivity period of five years, patent extensions to compensate
for delays in TGA approval and the right to restrict parallel importing.
In effect, AUSFTA ‘locks in’ these laws.
Thus, even where the chapter requires no changes to
current law, it does constrain the ability of parliament to make changes
in the future. Given the increasing operating costs of the PBS, these
areas might have been reform options for future legislators.
The requirement to provide a right to restrict parallel
importing is probably the most significant of these constraints.(22)
These rights allow patent holders to prevent products they have sold
in one country being exported to another. For example, if parallel importing
is allowed and drugs are sold wholesale cheaper in, say, China than in
Australia, importers are able to import (legitimately purchased) drugs
to Australia from China, resulting in a lower price of the drug for the
PBS. Restrictions on parallel importing, on the other hand, allow drug
companies and other IP holders to divide the world into several markets
and sell their product at the most favourable price in each. As David
Richardson of the Parliamentary Library has noted, effectively this is
privatised protectionism.(23)
Globally, parallel importing has developed into a significant
issue. Least-developed countries have argued that restrictions on parallel
importing make life-saving drugs too expensive for public health authorities
to afford.(24) In the US itself, where drugs are sold at higher
prices than in Canada, consumers in northern states are reported to be
crossing the border in significant numbers to purchase drugs, performing
their own small scale and illegal parallel importing.(25) There
have been increasing calls in the US to reduce the exclusive rights of
patent holders so that this can be done legally and in commercial quantities.(26)
AUSFTA requires that Australia maintain either:
- a system of ‘national exhaustion’, in which exclusive importation
rights of the patent holder continue even after the product has been
sold abroad, or
- (at least) the current system in which the patent holder may impose
restrictions on the exportation of the product to Australia when it
is sold in foreign countries.
Over the last two decades, parliament has been progressively
allowing parallel importing of other forms of IP, such as copyright over
music, books and computer software. Similarly, Australian patent law
now provides that patent holders cannot place certain anti-competitive
restrictions on the sale of products.(27)
Given these trends, as well as escalating PBS costs
and the competitive advantages that parallel importing may provide, it
is reasonable to assume that future parliaments would consider changes
to patent law that would void restrictions on parallel importing. AUSFTA
would remove this as an option for pharmaceutical reform.
- M. Rickard, ‘How much will
the PBS cost?’, Research Note no. 29, Parliamentary Library,
Canberra, 2003–04. This figure takes into account only prescription
drug costs.
- Budget Strategy and Outlook 2004–05,
6–11. For the reasons behind this likely growth see M. Rickard, ‘The
Pharmaceutical Benefits Scheme: options for cost control’, Current
Issues Brief, no. 2, Department of the Parliamentary Library, Canberra,
2001–02.
- The Committee is appointed by the Minister for Health, its members
are medical practitioners, pharmacists and health economists. Membership
details can be found on the Department’s web site.
- It is in most sponsors’ interests to successfully negotiate a price
with the PBPA. That is because without government subsidy the drug will
cost a lot more than its listed counterparts. While this means higher
profits to the manufacturer for each sale, it also probably means a
lower volume of sales.
- Department of Foreign Affairs and Trade, Australia–United States
FreeTtrade agreement, Final text of the Australia–United States
free trade agreement signed in 2004, Department of Foreign Affairs and
Trade, Canberra, 2004, Annex 2-C.2(f).
- P. Drahos, T. Faunce, M. Goddard and D. Henry, ‘The
FTA and the PBS: a submission to the Senate Select Committee on the
US-Australia Free Trade Agreement’, 2004.
- Unless this results in such high PBS costs that it is unsustainable.
See below for further qualification.
- ‘Exchange of letters on the PBS’ 3(b),
Australia–United States FreeTtrade agreement; see also Annex
2-C.2(c) for another provision aimed at securing more access.
- See R. Moynihan et. al, ‘Selling sickness’, British Medical Journal,
vol. 324, April 2002, pp. 886–891.
- ‘Drug’s listing cost taxpayers millions’, The Age, 2 February
2001.
- Drahos et al., op. cit., p. 42.
- See Annex 2-C.2 (d) and (e), AUSFTA.
- Annex 2-C.1(d), AUSFTA.
- As noted above, this is not necessarily a bad thing, at least for
consumers.
- A 28 per cent co-payment rise was proposed in the 2002–03 Federal
Budget. On 25 June 2004 a rise of about 21 per cent was passed in the
Senate.
- For example, Drahos et al., op. cit.
- B. Lokuge, T. Faunce, R. Dennis, A backdoor to higher medicine
prices: Intellectual property and the Australia–US Free Trade Agreement,
Australia Institute, Canberra, 2003.
- Article 17.10.4(a), AUSFTA.
- Article 17.10.4(b), AUSFTA.
- US Free Trade Agreement Implementation Bill 2004, Schedule 7, Item 6.
- See D. Ford, ‘Submission to Joint Standing Committee on Treaties’
Generic Medicines Industry Association Pty Ltd, 8 April 2004 http://www.aph.gov.au/house/committee/jsct/usafta/subs/SUB83.pdf.
- Article 17.9.4, AUSFTA and s. 13 definition of ‘exploit’ in
Schedule 1, Patent Act 1990.
- D. Richardson, ‘Intellectual Property and the Australia—US Free Trade
Agreement’, Research Paper, no. 14, Parliamentary Library, Canberra,
2003–2004, p. 12. http://www.aph.gov.au/library/pubs/rp/2003-04/04rp14.pdf.
- See Surya Subedi, ‘The Road from Doha: the Issues for the Development
Round of the WTO and the Future of International Trade’, International
and Comparative Law Quarterly, vol. 52, no. 2, 2003, p. 436.
- ‘Canada, Ho!’, The Economist, 16 October 2003.
- For example the Pharmaceutical Market Access Act of 2003, which was
passed by the US House of Representatives and is now before the US Senate,
would relax current restrictions on parallel importing of pharmaceuticals.
In fact, according to newspaper reports from the United States, restrictions
on parallel importing of drugs required by AUSFTA were cited as a key
problem by members and senators who voted against the agreement in the
US Congress: see E. Becker and R. Pear ‘Trade Pact May Undercut Inexpensive
Drug Imports’ New York Times, 11 July 2004.
- Section 144, Patents Act.
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