The FTA & the PBS

Peter Drahos, Thomas Faunce, Martyn Goddard & David Henry


Executive summary

Higher drug prices

In a number of statements, government ministers have claimed that the US-Australia Free Trade Agreement will not have the effect of increasing drug prices and will not contribute to the long-term financial sustainability pressures on the Pharmaceutical Benefits Scheme. A close look at the FTA indicates that this is not the most likely outcome. The text of the Agreement is unbalanced and most of the measures increase the pricing power of US drug companies operating in Australia. It is inconceivable, based on past practice, that they will not make use of that new pricing power.

How much will this cost? American consumers, insurers and health programs pay two to three times as much for many important drugs as their Australian counterparts. Because most of the measures in the FTA apply to new drugs rather than existing ones, and because legislation will need to be enacted, regulations changed and new procedures put in place, there will be a substantial time-lag between the signing of the FTA and its full effect on prices. The full effect of the FTA on the pharmaceutical market is therefore unlikely to be felt for about five years.

By that time, however, it is plausible that the gap between US and Australian drug prices could be cut in half. We estimate, very conservatively, that Australia's PBS will have to pay at least one third more for its drugs with the FTA than without it. If the likely FTA effects are applied to 2003 figures, the extra cost to of the PBS to the government last year would have been around $1.5 billion for the same drugs at the same levels of use and with no increase in the health benefit to Australian patients. Similar pressures would be felt by other buyers of prescription pharmaceuticals, particularly hospitals.

Intellectual property measures

Under the FTA, Australia is required to go much further in extending intellectual property rights than is required by our obligations under the existing rules of international trade. In a substantial number of measures, the previously accepted boundaries of the World Trade Organisation's Trade Related Aspects of Intellectual Property treaty have been pushed forward, greatly strengthening the power of the seller in the pharmaceutical marketplace.

The FTA concedes to the US standards on intellectual property rights (IPRs) that it would not have been able to obtain in the WTO or would have had to make considerable concessions to obtain.

The FTA throws away IPRs as a bargaining tool in the WTO with respect to other countries, most notably Europe and Japan. In other words, Japanese and European IPR owners also benefit from the IPR chapter.

This agreement aids the US strategy of using FTAs to divide and conquer countries that are interested in agricultural trade liberalisation. Both Cairns Group members and G-20 members are agreeing to FTAs (in the latter case the price of the FTA is departure from the group) thereby undermining their effectiveness as collective entities in multilateral bargaining over agriculture.

A number of other countries have rejected US trade pressure to redefine intellectual property laws as they affect the American pharmaceutical industry. They have, instead, sought to protect competition and their own export industries. Canada, for instance, has legislation before its Parliament to offer generic drug companies export potential for medicines used in HIV/AIDS. By complying with US-developed standards rather than the accepted norms of global trade, Australia is throwing away substantial export opportunities.

Effects on generic competitors

The major trans-national originator drug makers do not compete on price. Even where several interchangeable drugs exist in a therapeutic field, prices stay the same or rise when alternative patented products are marketed. The only real price competition in the pharmaceutical market comes from generics manufacturers - those companies, usually much smaller, that make their own version of a medicine once it comes out of patent. When generic versions of a drug become available, prices usually fall dramatically.

Measures extending the large originator companies' rights in data protection will, in many cases, force generics makers to repeat clinical studies that have already been conducted. It is unlikely that ethics committees would approve such studies: to put patients at risk to provide data that are already well known would contravene basic international standards of human research ethics.

Other measures will also have the effect of delaying the development and approval of generic versions of drugs. The major companies will, therefore, have a longer period free of competition, during which they can enjoy much higher prices than they could achieve in a competitive environment.

A recent study by the Australia Institute found these measures were likely to delay the development of generic drugs in Australia by around three years. It estimated the cost of this to the PBS for the five drugs examined by the study was more than $1.1 billion for the period 2006-2009.

The PBAC appeals procedure

Under the FTA, Australia has undertaken to "make available an independent review process" by which a manufacturer can challenge PBS listing decisions made by the key committee, the Pharmaceutical Benefits Pricing Authority.

The government has repeatedly promised that this would not be able to set aside or overturn PBAC decisions. However, the realities of the FTA are that Australia is likely to face very large sanctions under the dispute resolution and enforcement sections of the FTA if it does not provide an appeals process that the US and its drug makers find acceptable. Any process that does not have the power to reverse decisions, and which merely returns a submission to the committee for further consideration, will not represent any advance for the American side or the US companies. According to several statements from the industry and the American side, an appeals process without power is not what they think they have secured.

Such a process will seriously compromise the negotiating position of the PBAC. At present, the committee commissions sophisticated economic evaluations of each new drug and decides whether the price requested by the company represents fair value in terms of the health benefits the drug is likely to provide. If the answer is no, companies must reduce their price or find new data to justify the price they want. Often, the price comes down.

If, rather than re-submitting to the PBAC, sponsor companies could go to an alternative forum to have the PBAC's decision overturned or changed, the committee would find it far more difficult to enforce price discipline on major drug makers.

Dispute resolution and enforcement

Often, when trade negotiators cannot finalise contentious points of detail, they produce a text that is deliberately unclear on these matters and that can be sorted out later. These "constructive ambiguities" abound in those elements of the FTA that affect the pharmaceutical market and the PBS. These ambiguous clauses allow each side to claim a "win" and to secure endorsement from each nation's legislatures. But further consultation and dispute resolution processes will be put in place to sort these matters out later, outside of public and parliamentary scrutiny.

Two such processes are included in this FTA: a consultative Medicines Working Group, and the overall disputes resolution processes.

The Medicines Working Group will comprise federal officials from each country. Decisions will effectively be binding on Australia unless the draconian provisions of the FTA's enforcement processes are to be risked. The Australian parliament is being asked to endorse an agreement that does not specify what will happen to key elements of one of its central national health programs, the PBS; and that gives immense power to a non-Australian group meeting behind closed doors, with no published agenda and no accountability to the Australian people, parliament or press.

Matters likely to be discussed by the Medicines Working Group include the PBAC appeals procedure, crucial technical aspects of PBAC economic evaluations, involvement of companies in PBAC decision-making, whether the Australian government will still be able to remove drugs from the PBS and demands about speed of listing. Most of these matters would potentially diminish the negotiating position of the PBS in dealing with overseas drug companies and would lead to higher drug prices.

If Australia does not comply with US demands, or does not change its laws, regulations and processes to put into effect the FTA and the judgements of the Medicines Working Group, the disputes resolution and enforcementprocesses will come into force. These involve the establishment of committees and working groups that "seek the advice of non-governmental persons or groups" - a measure that brings the industry and its lobbyists directly into the processes of administering and enforcing the FTA.

If Australia is found to be in breach, a fine can be set of up to 50 percent of the value of the benefit Australia is calculated to have gained by its breach. As some single drugs cost the PBS more than $100 million a year, these fines are likely to be very large indeed. Ongoing penalties of up to $US15 million may also be imposed for each instance of each breach.

And "benefits under the agreement" may be suspended. This means the US could deny Australia any or all of the access achieved under the FTA to its market for any Australian product, including primary products such as beef and lamb.

Pressures on the PBAC

As discussed above, the PBS listing process is a combination of valuation followed by negotiation, built on objective economic and clinical evaluation of their products. The PBS does not attempt to gain the lowest possible price: rather, it attempts to pay what it believes, based on the evidence of clinical safety and efficacy, is fair and consistent with what is paid for other medicines. It is a sophisticated and very successful program that has been copied by other countries. The PBS has provided Australia with very competitive drug prices. Local branch offices of global drug companies are under immense power from their overseas head offices to achieve prices closer to those ruling in the US; therefore, anything that weakens the power of the PBAC to reject unsatisfactory prices, and to hold out for better value, will inevitably cause costs to rise and add to the long-term problems of financial sustainability facing the PBS.

Australia's ban on direct-to-consumer advertising of prescription medicines will become easier for companies to circumvent. This will add to the pressure on the PBAC to make new drugs available whatever the cost. It will also increase total cost as patients are induced to switch to new, expensive drugs from older, cheaper ones or from no drug at all.

Company representatives will become involved in the actual meetings of the PBAC and its technical sub-committees, and will be able to make personal sales pitches to the meetings deciding on the value of their products. The FTA will reinforce companies' ability to seek higher prices for already-listed drugs, but there will be no capacity for the PBS to review prices downwards if (as often happens) drugs perform less well in the "real world" of actual clinical use than they did in the original clinical trials.

The combined pressures of all these measures on the PBAC and its members will be enormous and extraordinarily difficult to resist. The committee will effectively be under siege: the number of interests attacking any negative decision will have multiplied both in number and in strength. Despite its present powers under the National Health Act, it is difficult to see how the committee will be able to continue serving the public's interest properly under such conditions.

Introduction

Main points

§ The FTA will substantially increase the cost of the PBS. We will be paying more for the same drugs.

§ It is plausible that the cost to government of the PBS is likely to rise by around 30 percent as a result of the FTA. For calendar 2003, this would have meant an extra cost of around $1.5 billion with no increase in the health benefit to Australian patients. We believe this to be a conservative estimate.

§ Other drug buyers, including public and private hospitals, will also have to pay more.

§ To compensate for this drain on their budgets, public hospitals are likely to cut back on drug availability and on non-drug services such as elective surgery.

§ Private hospitals will pass costs onto patients and insurance funds.

§ Private health insurance premiums will rise.

Costing the FTA

The US-Australia Free Trade Agreement contains a large number of measures that effectively extend the intellectual property rights of US pharmaceutical companies, and that put them in a far more favourable position when negotiating with Australian government authorities for inclusion on the Pharmaceutical Benefits Scheme. These measures will have the inevitable result of substantially increasing the price paid for new drugs, not only by the PBS but also by hospitals, clinics and the general public. In turn, unless significantly greater funding is found from Commonwealth, state and private sources, this will cause distortions throughout the health system as money is taken out of non-pharmaceutical services to pay the higher drug bills Australia will face.

This effect will not be felt immediately. Many of the measures that will boost drug prices will not apply to items already listed, but the effect on the cost of the PBS will steadily increase as legislation, regulations and procedures are amended, and as new drugs are introduced and manufacturers are able to secure prices closer to those in their US home market. Because the bulk of PBS spending is always on relatively new drugs, the full effects can be expected within five to ten years.

It is beyond the scope of this submission to estimate accurately what that cost will be. However, a clue can be found in the difference in drug prices between the United States and Australia. A comprehensive study of international comparative drug prices was conducted by the Productivity Commission in 2001. This study examined 150 drugs accounting for 83% of PBS expenditure. According to the study's weighted average, prices for prescription drugs in the US are around three times (range 2.6 and 3.5 times) as high as in Australia. US prices are the highest of any of the eight countries examined; Australia's are in line with those in France, Spain and New Zealand but below those of Canada, Britain and Sweden.1 These figures were accepted by the industry as accurate. Similar results were found last year in a more narrowly focussed study by the Australia Institute. 2

It is plausible that, as a result of measures in the Free Trade Agreement, the difference in prices paid by the PBS and by US buyers could halve within five to ten years. In calendar 2003, the total cost to government of the PBS and the Repatriation Prescription Benefits Scheme (not including patient copayments) was almost $5.2 billion. 3 Since exchange rates have changed since 2001, it would be wise to base any calculations on the lower of the Productivity Commission's range of estimates.

On the basis of these assumptions, it is plausible that if the full effects of the FTA were in place in 2003, the PBS cost-to-government would have been around 1.3 times as high as it actually was: $6.76 billion. In other words, the Australian government would have had to pay around $1.56 billion more for the same drugs at the same levels of use and with no additional benefit to the nation's health.

There would be strong budgetary pressure on the government to transfer some of these costs to the individual consumer, either through higher PBS copayments, deleting drugs from the list, or both.

Because the PBS provides a powerful price benchmark in the Australian market, other purchasers - such as public and private hospitals, some clinics, and the private buyer - would experience similar percentage increases.

These increased prices would significantly reduce the amount of money available for treating patients, both with and without drugs. Unless public hospital funding was increased to compensate fully for the rise in drug prices, general services would have to be reduced. It is also probable that the number of items available on hospital drug formularies would fall: hospitals would no longer be able to afford their drug bills. But other services, such as elective surgery, would also be likely to be reduced. Hospitals would find it more difficult to buy and replace equipment, and to meet salary increases.

Private hospitals would also be affected, and would have to pass on these costs to individual patients and to private health insurance funds, whose premiums would rise. Many consumers would pay these increases, though others would not. But because private hospitals and insurers find it relatively easier than their public counterparts to pass on increased costs, the gap in service standards between public and private hospitals would widen.

Finally, because rising pharmaceutical prices already provide significant upward pressure on the cost price index, the measures in the FTA affecting drug prices would contribute to the national inflation rate.

Intellectual property and the PBS

Main points

This section focuses on the intellectual property chapter of the FTA, including its implications for the PBS. There are four types of costs that are created by this chapter:

§ Bargaining and strategic costs;

§ Regulatory sovereignty costs;

§ Competition costs;

§ Dynamic efficiency costs>/p>

Depending on the quality of economic modelling, some of these costs may be picked up in a conventional modelling exercise. However, not all will be because they are costs that relate to dynamic processes. This submission provides examples of each of these types of cost, but it does not, for reasons of length, cover all cases in each category.

Assumptions of the submission

The arguments in this submission are underpinned by the assumption that intellectual property rights (IPRs) are not natural rights or primary human rights. 4 Rather they are instrumental tools that governments use to regulate free markets, because without that regulation markets would not allocate an optimal level of resources to invention and creation. The assumption that IPRs are essentially regulatory in character has been part of English and Australian law for a long time. As the High Court pointed out in Victoria Park Racing v. Taylor, IPRs are "special heads of protected interests" that form an exception to general principles and values of market competition. 5

One of the fundamental things that the US is attempting to accomplish with this and other FTAs is to turn IPRs into a natural right of investment. Essentially the US is creating a new paradigm in which the granting of monopoly rights is no longer seen as something that is special or exceptional, but rather something that is a permanent feature of the regulation of global knowledge markets. In this new paradigm, it will be US multinationals that will be the private regulators of global knowledge markets. 6

Bargaining and strategic costs

Historically, Australia's strategy on international standards of intellectual property has been based on the fact that it has to participate in the international IPR regime, but its interests in that regime are those of a net intellectual property importer. Summarizing a history of indigenous policy development that goes back to the 1980s and the reports of the Industrial Property Advisory Committee of that time7, the position that Australia developed was to abide by but not argue for an extension of multilaterally agreed standards of IPRs, or, if necessary, agree to an extension of such standards if there were gains to it in other sectors (for example, agriculture). This strategy was based on a commitment to multilateralism. In the Uruguay Round of trade negotiations (1986 -1993) Australia supported the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) while forcefully pushing its interests in agricultural trade liberalization through its leadership of the Cairns Group.

By signing the FTA with the US, Australia has signalled a fundamental change in the strategy that it has developed over the last few decades. In specific terms, the FTA has the following bargaining or strategic costs:

§ The FTA gives the US standards on IPRs that it would not have been able to obtain in the WTO or would have had to make considerable concessions to obtain. 8

§ The FTA throws away IPRs as a bargaining tool in the WTO with respect to other countries, most notably Europe and Japan, because the TRIPS MFN clause picks up the Australia - US FTA. 9 In other words, Japanese and European IPR owners also benefit from the IPR chapter.

§ The FTA aids the US strategy of using FTAs to divide and conquer countries that are interested in agricultural trade liberalization. The table below shows that both Cairns Group members and G-20 members are agreeing to FTAs (in the latter case the price of the FTA is departure from the group), thereby undermining their effectiveness as collective entities in multilateral bargaining over agriculture.

Dividing and conquering

The use of FTAs by the United States to break up developing country groups

Regulatory sovereignty costs

In the past states have maintained very close control over their sovereignty over IPRs. For example, a survey of national intellectual property laws of more than 100 countries by the World Intellectual Property Organization in the 1980s revealed a huge diversity amongst states on fundamental matters such as pharmaceutical patenting, patenting of software, plants and animals and so on. 10

The effect of the IPR chapter in the FTA is to reduce the capacity of the Australian government to define standards of intellectual property regulation that suit Australia's industrial and public policy needs. Below are three of many possible examples. Utility is a requirement of patentability. The idea behind the requirement is that the invention should have some practical use. Utility has proved difficult to apply in the context of the biotechnology industry where often patent applicants claim information the effects and application of which are not really known by them. The FTA obliges Australia to provide that an invention is useful if it has "specific, substantial and credible utility" (See Article 17.9.13). This wording picks up the Utility Guidelines that were issued by the US Patent and Trademark Office in January of 2001. 11 In effect, Australia has tied itself into a US standard of utility and its interpretation. Whether or not this suits Australian industry, especially the biotechnology industry, is an open question.

Compulsory licensing is an important regulatory tool that allows governments to bargain effectively with multinational companies in key sectors such as the pharmaceutical sector. 12 It is important to note that the US has over the years issued compulsory licences affecting many thousands of patents with no visible effects on investment. 13 The FTA severely restricts the capacity of government to issue a compulsory licence compared to the TRIPS standard.

The compulsory licence provision also illustrates another point about the FTA. Almost certainly the US will not comply with this more restrictive standard in its own domestic law. There is a good argument that it does not comply with even the TRIPS standard of compulsory licensing. No smaller country, however, will take the US to dispute resolution in the WTO over this matter. In short, domestically the US will run an IPR regime that is more liberal in terms of access while insisting that its trading partners run an IPR regime that is more restrictive of access than its domestic one.

Parallel importation proved highly controversial in TRIPS and so for that reason TRIPS does not set a standard of parallel importation. Article 17.9.4 of the FTA allows for the possibility that in the case of patents, the patent owner may contractually restrict the importation of patented products that it has placed on the market. This is essentially the current Australian position. However, if Australia wished to change this position it would find itself in a trade dispute with the US. It is worth noting that the Ergas Committee observed that in the context of copyright consumers would be better off without restrictions on parallel importation. 14 The World Health Organization expressly recommends that countries not place restrictions on parallel importation. 15 This may also be an area where the US domestic position does not square with the standards it is seeking to impose on other states. 16

Competition costs

In practice, competition routinely and usually fails in the pharmaceutical market. This market failure was analysed in a 1999 report commissioned by the pharmaceutical industry itself and written by a firm of Sydney pharmacoeconomic consultants who do most of their work for major drug companies.17 The report pointed to a number of reasons why the normal operation of a free market does not work in pharmaceuticals. These include restricted competition as a result of high entry and development costs facing new manufacturers; the consumer's lack of information; the failure of existing sellers to compete in a market-oriented way and the centrality of patented medicines as a cost driver; the growth of a powerful oligopoly of large corporations formed by takeovers and mergers; and various technical problems with applying free-market theory to health care. Suppliers have immense market power and use this power by acting as a pricing cartel; individual buyers have very little, so the cartel flourishes.

A basic tension arises between the competitive process, which depends on the diffusion of information, and intellectual property, which enables the private appropriation of information.18 IPRs function as a form of private tax on other competitors in the market place. They allow the holders of those rights to collect royalties and fees from competitors and consumers. The only justification for allowing these private taxes is if there are clear dynamic efficiency gains. In the case of IPRs in the FTA there are clear losses in terms of the interference with competitive markets, but with either no corresponding gains or uncertain gains. There are many examples of this in the FTA including the following:

Application to existing subject matter. The FTA applies to all IPRs in existence upon the date that the FTA comes into operation (See Article 17.1.9). Extending the benefits of the FTA to owners of existing IPRs carries with it only social welfare losses. In the case of Australia, Gruen et al estimated the social welfare losses of a similar provision in TRIPS and only for patents. 19 They concluded that the welfare losses might be as high as $3.8 billion.

Since that study patenting and the use of copyright by US, European and Japanese companies have gone up dramatically. 20 It follows that the costs of extending the benefits of the FTA to IPRS in existence in 2004 is likely to be much higher than the estimates in the Gruen study of 1996. It is also worth asking whether the losses in the IPR Chapter alone throw the overall result of this FTA into the debit column for Australia.

Barriers to entry. IPRs form one of the most important barriers to entry in markets. 21 By increasing barriers to entry the price effects of competition may be delayed or, depending on the industry structure, may never arrive. IPRs act as a barrier to entry in many industries (for example, computer software, semi-conductor chips, publishing). The IPR chapter of the FTA contains US style standards of copyright, trade mark and patent protection that will over time affect a number of Australian industries. An example in the next chapter of this submission relates to makers of generic pharmaceuticals.

Throwing away export opportunities. Other states such as India and Argentina are resisting US trade pressure to comply with rules that favour US industries at the expense of their domestic industries. Argentina and Brazil have at different times both rejected demands by the US to change aspects of their domestic intellectual property systems. India has taken full advantage of the transition rules in TRIPS in order to avoid disadvantaging its pharmaceutical and chemical industries. It is also a reasonable assumption that the Indian pharmaceutical and chemical industries, which have strong export interests, along with the Indian government will take full advantage of the flexibilities available to them under the current IPR regime. Canada also has draft legislation before its Parliament (Bill C-9) that implements the Decision on the Implementation of Paragraph 6 of the Doha Declaration. This legislation offers Canadian generic companies export potential for medicines related to the HIV/AIDS crisis. These states are keeping a weather eye on US attempts to set the rules of game and doing their best to preserve export opportunities for their industries. In Australia the acceptance of this FTA suggests that the Australian attitude amounts to one of meek compliance with the wishes of US multinationals.

Dynamic effeciency costs

Australia's concessions in the IPR chapter come at a time when there is an emerging view within the US that IPR protection has gone too far. This debate has been triggered by various abuses of IPRs (witness the antitrust litigation brought against Microsoft or the many class actions being brought against US pharmaceutical companies alleging abuses of the patent system). 22 The Federal Trade Commission in recent hearings found widespread concern in the US that the patent system is failing. 23 Industry figures from the computer software, hardware and internet business have all expressed frustration at the diversion of time and resources to the patent system in the form of litigation and establishing defensive portfolios.

Australia has signed onto a set of US standards in the FTA at a time when there is considerable doubt in the US about the suitability of those standards for a truly dynamic and effective knowledge economy.

IPRS & dispute resolution

One of the neglected aspects in the public discussion surrounding the FTA has been the arrangements for dispute resolution to be found in Chapter 21 of the FTA. There are six crucial points to make concerning this Chapter:

§ Australia as a medium size trading entity should be supporting a multilateral approach to dispute resolution and in particular seeking to influence the evolution of WTO law. It should not be participating in the proliferation of non-transparent bilateral fora that FTAs such as this one represent. FTAs create forum shifting opportunities for the US.

§ At a practical level it has to be asked where Australia's chances of success in trade litigation are likely to be the best - in bilateral or multilateral fora? The US has a highly sophisticated public-private partnership system for trade litigation that depends on, amongst other things, the resources of more than 80,000 US trade associations.24 Australia best chances against this system of litigation are in the WTO rather than in a one-on-one contest.

§ The remedies in Chapter 21 include the possibility of cross-retaliation and this obviously favours the Party with the larger market.

§ The Chapter allows for submissions from "nongovernmental persons". In practical terms this may do more to enhance the participation of large corporations in disputes than any other actor. Similar kinds of proposals by the US in the WTO have been resisted by many countries because of fears about the practical effects of the proposal.25

§ Chapter 21 expressly allows the possibility of a non-violation nullification and impairment complaint for IPRs. In other words, a US intellectual property owner could instruct the US to bring an action against Australia where Australia had taken an action that resulted in a lessening of the economic value of the relevant IPR (for example, by issuing warnings about a patented biotechnological product).

§ Chapter 21 offers the US an opportunity to influence the development of Australian domestic law, including intellectual property. It can argue that particular decisions of our courts represent a systemic failure to protect or enforce intellectual property rights and therefore this warrants a dispute resolution action. This FTA creates the real possibility that the US rather than Australian courts will have the final say on vital areas of domestic law.

Patents and generics

Main points

§ Price competition in prescription drugs depends on the ability of generic drug makers to compete. Originator companies do not compete on price.

§ Australia has already granted patent extensions that give major drug companies a more favourable situation in Australia than in most other countries, including the US.

§ Under existing circumstances, patents on many high-cost, high-volume drugs will soon expire.

§ Measures in the FTA will delay development of generic versions of drugs, probably by about three years or more.

§ This will cost the PBS hundreds of millions of dollars a year.

Competition and generics

Because price competition between originator companies is almost unknown, the position in the marketplace of generics manufacturers - which compete aggressively on price - is of the greatest importance and should be safeguarded.

For a number of years, US-based drug makers have aggressively and successfully sought extensions to their intellectual property rights in Australia and around the world. A principal argument has been that the time taken for regulatory approval eats into patent life, and that patents should be extended to compensate for this.

The Australian government complied with the US demands with the Intellectual Property Laws Amendment Act 1998, which amended the Patents Act 1990 to extend pharmaceutical patents for up to five years, allowing a maximum patent life of 15 years from the date of first regulatory approval. This applied only to those patents covering the pharmaceutical substance itself, not those covering such aspects as the manufacturing processes. Typically, a single drug may be protected by as many as 50 to 100 patents.

A quid pro quo for this major concession by Australia was to permit generics drug manufacturers, when a patented drug enters this new patent extension period, to begin the work needed to bring its own version eventually to market.26This is known as "springboarding" and has become an important stimulant of price competition in the Australian pharmaceutical market. It takes an average of three to five years for a generics competitor to perform the work needed to produce its own version of a drug; so, without springboarding, the 1998 measure would have had the effect of extending patent life not by up to five years but by up to ten.

The FTA will give the major US manufacturers an even more favourable position in the Australian market than they currently enjoy - one which already gives them considerably longer patent periods than those enjoyed in comparable countries, including Britain and the United States itself. 27

The patent extensions of 1998 were not required under TRIPS. Argentina, which was also the subject of trade pressure on data exclusivity, refused to bow to US pressure on the issue.28 The FTA goes much further than TRIPS in the area of pharmaceuticals. The TRIPS, plus concessions that Australia made in 1998, have simply resulted in the US and its pharmaceutical industry asking for and gaining more concessions. Examples of this include:

§ Article 17.9.8 provides for the possibility of further extension of the patent term, including for pharmaceutical patents. This extension would be in addition to any extension that Australia already provides under section 70 of the Patents Act for pharmaceutical patents.

§ The restrictive provision on compulsory licensing (see the earlier discussion) has more serious long-term implications for access in the pharmaceutical sector than in other sectors. Brazil's use of its compulsory licensing laws to meet its HIV/AIDS crisis has been a crucial factor in its successful management of this particular public health crisis.

§ The provisions on data exclusivity have been extended to apply to agricultural products for ten years (not required by TRIPS) and include new uses of existing products (not required by TRIPS).

§ The trend of the IPR Chapter to foreclose future regulatory options for Australia is illustrated by Article 17.10.1(c). The aim of this provision (not required by TRIPS) is to stop third persons (eg generic companies) from using marketing approvals in other countries as the basis for seeking marketing approvals in Australia.

§ Article 17.10(5) links data exclusivity and marketing approval to the term of the patent. In effect, Australian authorities will be required to track and interpret patent product and use claims of patent owners (these claims need not necessarily be valid, that being a matter for the courts) and take steps to prevent the marketing of those patented products and uses.

At present, if a generics maker can come up with a new use for a drug, or a new formulation, it can legally use the original trial data without having to repeat the research that has already been performed. That capacity will be being seriously eroded by the FTA. Generics makers will, in many cases, have to repeat studies that have already been done, and the results of which have in many cases, been published in the medical press. It is doubtful that ethics committees either in Australia or overseas would be prepared to approve such trials. All clinical drug trials involve some risk to the participant; to require people to undergo this risk when the scientific questions have already been answered would contravene basic international charters of human research ethics.

The effect of these provisions will be to keep competition from generics drug makers out of the marketplace for longer. It will also add substantially to the cost of bringing a generic version of a drug to market.

Medical authorities will almost certainly not have the expertise to deal with problems such as overly broad patent claims. This kind of provision creates enormous advantages for large pharmaceutical companies and provides an incentive for broad claiming. The principle that it is better to have a weak patent in strong hands rather than a strong patent in weak hands applies here.

Another crucial issue is the relationship between this provision and compulsory licensing. If this provision continues to operate in those cases where a compulsory licence has been issued there will be no point in applying for one because marketing approval will still be a matter for the patent owner's consent. This would also seem to preclude Australian generic manufacturers from taking advantage of the WTO Doha Declaration and Decision on Implementation of Paragraph 6. The WTO scheme relies on the issue of compulsory licences and is intended to allow states with pharmaceutical manufacturing capabilities to help address the needs for medicines by developing countries.

Impact on the PBS

Of those drugs soon to run out of their principal patents, 12 appear in the list of 100 highest-cost drugs on Australia's Pharmaceutical Benefits Scheme.


Even though the PBS pricing system does not take maximum benefit of generic competition - and needs reform for that reason - a recent study by the Australia Institute of high-cost drugs that had recently become subject to competition found the PBS made savings of around 35% by the fourth year after the entry of generic competition. On the basis of the estimate that the measures contained in the FTA would delay generic competitors entering the marketplace for an average of around three years, the study calculated that the cost of delays, for five drugs that are soon to be subject to competition, would add more than $1.1 billion to the cost of the PBS for the period 2006-2009. 29 Clearly, this amount would be multiplied many times as these delays applied to more and more drugs.

Effects on industry policy

Because price competition depends on the health of generic manufacturers, any measures that might drive any of these companies out of business in Australia, or seriously restrict their activities, should be viewed with concern. Intellectual property concessions that favour the large originator drug makers have already undermined the financial stability of several of these companies, reduced their capacity to compete and threatened their long-term viability. Already, several makers of generic prescription drugs are believed to be losing money on their Australian operations.

Some generic makers have responded to this situation by seeking strategic alliances with originator companies. Competition has already suffered as a result. Some manufacture product under contract from major companies, with whom they would previously have been in full competition. Another growing strategy by which originator companies meet the challenge of expiring patents is to grant a marketing and manufacturing licence to a generic "competitor" several months before patent expiry, allowing this "authorised" generic version to become established in the marketplace ahead of rivals. Details of any financial deal between the two companies are seldom revealed, but they have the effect of maintaining higher prices for longer and holding full competition at bay.

This agreement will make matters worse. By keeping generic makers out of the market for longer, and increasing their costs, the incentive for them to seek alliances with the majors will increase. Some may go out of business in Australia altogether. The independence of the generics industry, and its capacity to compete, is already in retreat. The FTA could turn the retreat into a rout.

The appeals procedure

Main points

§ Details of a process to give drug companies the right of appeal against unfavourable PBS listing decisions have been left vague in the text.

§ The outcome will be subject to a bilateral working party of bureaucrats which will effectively commit Australia to its decisions.

§ The likely end result is an appeals process that can overturn or set aside listing decisions.

§ If Australia fails to amend its laws in this way, very large fines and trade sanctions are likely.

§ The negotiating position of the PBS, in its dealings with drug companies over price, will be seriously undermined.

Background

Major pharmaceutical drug companies have for a number of years proposed that there should be a procedure to give them an alternative forum to appeal against, and overturn, unfavourable listing decisions by the Pharmaceutical Benefits Advisory Committee. Successive Commonwealth government have rejected these proposals whenever they have been put.

An appeals process would substantially weaken the position of the PBAC in securing favourable prices for Australia, and would inevitably damage the long-term sustainability of the PBS. The PBS listing process is a mix of objective, evidence-based clinical and economic evaluation and hard-nosed negotiation. Anyone dealing with US-based global drug companies knows they are the toughest of opponents. They do not easily accept lower prices than they might achieve in the United States home market and are aggressively hostile towards government purchasing programs that use market power, clinical evidence and regulatory capacity to secure lower prices and other concessions, such as price-volume agreements, targeted use of drugs and restrictions on promotion. Australia's PBS has been a world pioneer in demonstrating how the health authorities of a small nation can use economic evidence, combined with their market power to balance the immense power of global corporations that, in the absence of government intervention, act as a pricing cartel. Such schemes have now been implemented in many nations, and while they have been of immense importance in bringing important medicines to people who would otherwise have been unable to afford them, there has undoubtedly been an impact on corporate profits.

The PBAC is part of a negotiating process. It conducts intensive economic evaluation of the value of each new drug and, by comparing it with existing therapies, decides whether the Australian health system's money would be wisely spent on it or whether that money would be better spent on something else. These decisions are never easy, but they are absolutely necessary if we are to maintain a health system that uses limited dollars in ways that do the most good.

Sponsor companies understandably try to obtain the highest price they can. If the committee rejects a submission on grounds of inadequate cost-effectiveness (in other words, if the drug is not worth the money in terms of health outcomes) it is usual for the company to re-submit, either with improved data or, more usually, with a lower price. This is how the system works: like any good negotiator, the PBAC has to be able to walk away from a deal. An appeals process would remove that capacity to walk away from a deal that is bad for Australia.

Until the Australia-US free trade negotiations, the most recent rejection of a PBAC appeals process came from a review of the committee's procedures conducted in 2000 by Senator Grant Tambling, then the Parliamentary Secretary for Health. The members of that review were Senator Tambling, as chair; Mr Dudley Schleier, chairman of the Australian Pharmaceutical Manufacturers' Association (now Medicines Australia) and CEO of Pfizer; Mr Will Delaat, deputy chair of the APMA and CEO of Merck Sharp & Dohme; Professor Don Birkett, then chair of the PBAC; Professor Lloyd Sansom, then chair of the Australian Pharmaceutical Advisory Council; Mr Martyn Goddard, a consumer representative and consumer member of the PBAC; and Mr David Borthwick from the Department of Health and Aged Care.

The final report of the review rejected the idea. During the discussion, it was made clear that one of several objections by the government was that the procedure would involve a loss of control over its own budget:

Providing a mechanism for allowing appeals against the merits of PBAC decisions would provide a sponsoring company with an alternative avenue in which to put its case in the event that it had significant concerns with the merits of a PBAC decision. This could provide a more complete assurance that all relevant aspects of listing submissions will, at the end of the day, have been fully considered.

Industry has observed that the scope for appeals under PBAC arrangements is narrower than that provided for in relation to applications for the registration of drugs. Several years ago the Therapeutic Goods Act 1989 was amended to allow negative drug registration decisions by the Therapeutic Goods Administration (following advice of the Australian Drug Evaluation Committee) to be subject to appeal to the Administrative Appeals Tribunal (AAT).

On the other hand, there are a number of factors which can be raised as militating, to a greater or lesser extent, against such an appeals mechanism:

PBAC recommendations to list a particular drug or indication are not final. Once a recommendation has been made the Parliamentary Secretary (as delegate for the Minister for Health and Aged Care) retains a discretion to reject it. In the case of r