[Ip-health] PhRMA 301 Submission to USTR - Appendix C on Price Controls

[Mike Palmedo]

 From PhRMA's 2005 Submission to the USTR for the 301 List.

http://www.phrma.org/international/Appendix_C_Market_Access.pdf

PhRMA "Special 301" Submission
Appendix C

U.S. Government Needs To Take Action To Address Foreign Price Controls

Government-imposed price and access controls on pharmaceuticals are
pervasive in foreign markets and undermine innovation, delay and deny
effective market access, and undercut intellectual property rights
(IPR). As a 2004 Commerce Department Report ("The Commerce Report"),
Pharmaceutical Price Controls in OECD Countries: Implications for U.S.
Consumers, Pricing, Research and Development, and Innovation, stated,
"To encourage the continued development of new drugs, economic
incentives are essential=85 without such incentives, private corporations,
which bring to market the vast majority of new drugs, would be less able
to assume the risks and costs necessary to continue their research and
development (R&D)."

Yet, government-imposed price and market access controls serve as a
barrier to trade that diminish or eliminate the very incentives that
lead to the continued development of innovative and safe pharmaceutical
products, while inhibiting or preventing patient access to the latest
pharmaceutical innovations. Moreover, those controls deny American firms
and workers the ability to compete on fair and equitable terms in
foreign markets and undercut the value of intellectual property rights.

The Commerce Report delineates these concerns and documents the many
adverse effects government-imposed price controls have on international
trade and the U.S. market. Specifically, it explains that foreign price
controls suppress revenues, in turn reducing worldwide private R&D
investment by 11 to 16 percent (i.e., $5-8 billion) annually. This
reduction in global R&D means that three to four fewer new drugs are
launched each year, reducing worldwide patient access to innovative
medicines. This is a significant number given that the FDA approved 30
new drugs from 2000 to 2003. The Report also points out that U.S.
consumers could benefit over time from the elimination of price controls
abroad through the potential enhancement of price competition.

In addition, the Commerce Report addresses the serious detrimental
effects of price controls and related measures in the countries using
them. In particular, these measures suppress the use of generic
medicines and generic prices are on average much higher than those in
the United States. According to the Report, altering these policies
could result in a savings of $5-30 billion annually depending on the
country, which could significantly or fully offset the effects of
allowing market-based pricing for innovative medicines. The Report also
states that government price controls and related measures impede
in-country R&D and patient access to the most effective medicines.

The Special 301 statute requires USTR to address in its review foreign
country practices that "deny fair and equitable market access to U.S.
persons that rely upon intellectual property protection." For many
years, PhRMA has provided USTR with extensive data on foreign price and
access controls, and this appendix continues to build on that evidence.
In 2004, PhRMA submitted an Annex to its Special 301 submission to point
out that price controls have a major restrictive and distortive impact
on international trade. That Annex noted that, "The effects of these
measures not only depress and distort international trade in
pharmaceuticals, they also have negative ramifications for patients and
workers in the United States and around the world."

In response, USTR's 2004 Special 301 annual report acknowledged the
impact of foreign drug pricing practices:

The [Medicare Modernization Act] conference report reflects a concern
that the regulatory practices of many countries may be slowing the
development of the next generation of life saving drugs. Implicit in
this proposition is a concern that, by adopting such mechanisms, foreign
countries have chosen to rely excessively on U.S. research and
development for new life saving mechanisms.

PhRMA welcomes this acknowledgement by the Administration of the
potentially adverse effects of foreign price controls, and now looks to
USTR and the Administration to take action, as called for by the
Medicare Modernization Act and the Trade Promotion Authority Act, by
developing a strategy to address such practices.

The conference report accompanying the Medicare Modernization Act of
2003 recognized the negative impact of price controls and related
government policies, and stated that "[t]he United States Trade
Representative, the Secretary of Commerce, and the Secretary of Health
and Human Services shall analyze whether bilateral or multilateral trade
or other negotiations present an opportunity to address these price
controls and other such practices and shall develop a strategy to
address such issues in appropriate negotiations." Similarly, in the
Trade Promotion Authority Act of 2002, Congress directed USTR to seek
"the elimination of government measures such as price controls and
referencing pricing which deny full market access for United States
products."

In response to these calls for action, the Administration should use the
Special 301 process to advance a multi-pronged strategy to achieve these
goals. First, USTR and other agencies need to make the priority foreign
countries, particularly Germany, Canada and Poland, a key focus and open
a structured, bilateral dialogue with those countries to address
government-imposed price controls and other trade distorting measures.
Such an approach could be modeled on the U.S. government dialogue with
Japan on pharmaceuticals, which has had a number of notable successes
over the years.

The Administration should also use bilateral and multilateral
negotiations, where applicable, with trading partners to pursue a
positive agenda. For instance, the negotiation of the US - Australia FTA
benefited from open discussion between the two sides on Australia's
complex and discriminatory listing system. The outcome was an agreement
in the FTA that included provisions on pharmaceuticals and specific
steps to improve the transparency and accountability of the
Pharmaceutical Benefit Scheme process. The Australian Government agreed
to an independent review of listing decisions, which will enhance the
accountability of the process.

In addition, the Administration should ensure our trading partners are
abiding by their national and international commitments in this area. In
particular, it is essential that WTO members strictly adhere to Article
III of the GATT 1994 as well as the TRIPs and TBT Agreements. USTR has
recognized the WTO concerns presented by government-imposed price
controls in the WTO Trade Policy Review process. In that context, USTR
requested that the EU identify the steps being taken by the EU and its
member states to ensure price control regimes "avoid to the fullest
practicable extent effects prejudicial to the United States" within the
meaning of Article III. USTR and other agencies should remain vigilant
in pressing the EU and its member states for full compliance with WTO
rules and the EU transparency directive, which is not being followed in
many key EU markets (e.g., Germany, Italy, and Poland).

Foreign Price and Access Controls on Pharmaceuticals Distort and Inhibit
International Trade

Price and market access control mechanisms deny PhRMA companies the
ability to market or sell their products in many countries. Those
control mechanisms do so by delaying and denying the availability of new
products. Given that national health insurance schemes typically
dominate country markets for pharmaceuticals, a product effectively
cannot be marketed in a country until the national authorities have
determined its reimbursement price.

The price control bureaucracy in almost every country is a highly opaque
one and the process of obtaining a government-approved price can be
lengthy. Sometimes these delays become so lengthy that they become
effective denials of market access. Governments often delay adding new
products to national reimbursement lists merely to avoid the cost of
providing those treatment options to patients. It is not uncommon for
some foreign governments to make a policy decision to close
reimbursement lists altogether to innovative pharmaceuticals. Poland is
a good example of such actions, as it has not added any new products to
government reimbursements lists since 1998.

These processes operate to delay market access (and to diminish the
effective patent term) for many U.S. medicines. The Commerce Department
Report evaluated 11 OECD countries and determined that bureaucratic
obstacles prevent companies from "charging a market-based price" for
pharmaceuticals. The Report also noted that these price and market
access control methods "tend to be nontransparent, as the criteria and
rationale for certain pharmaceutical prices or reimbursement amounts are
not fully disclosed even to the pharmaceutical companies seeking to
market their drugs."

Foreign Price Controls Undermine Intellectual Property Rights

The Special 301 statute is designed to identify and address intellectual
property rights practices and enforcement measures that injure American
companies and workers, including those that impede market access for
IP-intensive products. A country cannot be said to adequately and
effectively protect intellectual property rights within the meaning of
the trade statutes if that country puts in place regulations that
effectively nullify the value of the patent rights granted. A patent
that gives the patent holder the exclusive right to sell his invention
in a market, but that is limited by a requirement that the product be
sold at marginal cost, is of little commercial value to the right
holder. For that reason, it is important that the Special 301 report
highlight countries that engage in policies that effectively deny or
delay the rights of companies and workers to benefit from their
intellectual property.

The United States routinely treats weak foreign intellectual property
laws as a major trade issue. It is commonly accepted that widespread
piracy and counterfeiting of products like sound or movie recordings,
software or pharmaceuticals undermines the longevity and economic
strength of those American industries. Foreign laws that allow
free-riding through other means - i.e., price and volume controls -
equally diminish the value of U.S. intellectual property rights and hurt
U.S. exporters that rely on intellectual property protection.

One of the most egregious measures used by foreign governments is
"reference pricing," which is the indexing of new drug prices to older,
related medicines that are often off-patent. These systems are designed
to pay the same price for innovative products, usually developed by
foreign companies, as generic products that are often produced by
domestic companies. The effect of such practices is to undermine the
value of pharmaceutical patents in that market.

Foreign Price Controls Often Discriminate Against Imports

Foreign government price and access controls often favor local producers
of noninnovative pharmaceuticals and other local players in the health
care system. Countries without a domestic innovative industry tend to
rely particularly heavily on price controls on innovative
pharmaceuticals to balance their health care budgets. Local interests -
such as generic producers, wholesalers and pharmacists - generally
occupy a favored position within these systems. Ironically, price and
access controls result in market distortion that makes reimbursed prices
for generic pharmaceuticals - often produced primarily by domestic
companies - quite high (70 percent - 90 percent of the value of the
innovative product is not unusual). In the United States, generic prices
of pharmaceuticals tend to be much lower. In their cover letter to
Congress conveying the Commerce Study, Commerce Secretary Evans and HHS
Secretary Thompson stated that "[i]n fact, U.S. Consumers would pay, on
average, 50 percent more for their generic medications if they bought
them abroad.

Examples of Discriminatory Price Controls:

Canada: The Patented Medicines Price Review Board, as its name suggests,
monitors the prices of only patented medicines, which are far more
likely to be imported than generic products. Generic producers are
exempt, and not coincidentally, the domestic Canadian pharmaceutical
industry is largely a generic one.

France: Health care reform adopted by Parliament in August 2004 focused
on controlling health care costs. Under that plan, companies are limited
to increasing prices to extremely low levels, with a 1 percent cap in
2005. Moreover, the French government forces companies, either through
agreement or statutory "safeguards," to pay rebates on pharmaceutical
sales back to the government. Forcing companies to pay back a proportion
of their margins indirectly limits access to the market. This rebate
scheme constitutes a particularly onerous burden for research-based
pharmaceutical companies with innovative products.

Germany: In 2003, Germany adopted legislation that reintroduced
reference pricing for new, innovative, patented pharmaceuticals. The new
Fixed Reference Price System (FRP) constitutes a major threat and
barrier to biomedical innovation in Germany. The Government has imposed
mandatory rebates on research-based pharmaceutical companies, whereby
research-based companies rebate to the Government a fixed percent of
their sales. In 2004, this amount was fixed at 16 percent. In 2005, this
amount will decrease to 6 percent. Although the decrease is welcome,
even a 6 percent rebate discriminates against innovative pharmaceutical
companies, which are located primarily in the United States, and
benefits domestic generic drug companies. Significantly, Germany has
also announced the formation of jumbo groups that will link the prices
of innovative, patented medicines and older generic medicines, without
providing any justification for such a linkage.

Italy: In June 2004, the Government adopted a Law establishing a ceiling
for pharmaceutical spending. Pharmaceutical spending at the pharmacy
level cannot exceed 13 percent of 2004 health care expenditures (and/or
16 percent including hospital sales). If these ceilings are exceeded,
the "excess" amount that the government spent on pharmaceutical
purchases for Italian patients must be paid by the pharmaceutical
industry (60 percent) and the Regions (40 percent). These "payback"
provisions are a significant concern for the industry. Notably, local
Italian interests, such as pharmacists and wholesalers or distributors,
are not subject to the payback requirements under the new Law.

Poland: The Government of Poland is violating the trade and market
access rights of our innovation-based industry by seeking to reinterpret
its regulations and retroactively fine companies large sums of money for
engaging in previously accepted import practices. The Polish
Government's basis for the audits and fines is a former pricing law that
discriminates against importing pharmaceutical companies by not
recognizing the status of "importer" and assimilating the separate
activities of importers and wholesalers. Under this law, importers and
wholesalers were attributed the same maximum wholesale margin of 11
percent, out of which importers had to cover not only their wholesale
expenses, but also the additional costs of importation. The potential
financial damage to the multinational R&D industry is assessed at $1.3
billion, a sum provided by Polish officials as their "goal" for
realizing fines.

Americans Pay the Price for Foreign Price Controls

The effect of foreign price and access controls on the pharmaceutical
industry is to depress its investment in R&D which means fewer
lifesaving and life-enhancing medicines are brought to market, both
abroad and in the United States. Additionally, economic literature
explains that U.S. prices may be higher because of the absence of these
new drugs that would help increase market competition thereby driving
down prices in many therapeutic classes of medicines. That means that
Americans effectively subsidize other countries' health systems, because
US prices would likely be lower if greater competition existed, as
explained by the basic economic theories of supply and demand.

Beyond these effects on patients, however, foreign price and access
controls have a significant and negative impact on the U.S. economy
through reduced exports, reduced jobs and direct harm to the U.S.
pharmaceutical industry and its American stakeholders. The
pharmaceutical industry is a key component of America's high tech
economy. PhRMA members invested an estimated $38.8 billion in
discovering and developing new medicines in 2004 alone, marking the 33rd
consecutive year the industry has increased its investment in R&D. In
fact, pharmaceutical companies are the most research-intensive industry
in the U.S., with domestic R&D representing 18.8 percent of PhRMA member
U.S. sales in 2004 - more than any other sector of the American economy.[1]

In 2003, the biopharmaceutical industry directly employed 406,689 people
in the U.S. For each job directly created by biopharmaceutical
companies, an additional 5.7 jobs were created in the overall economy -
substantially above the average for all industries. So, when the full
multiplicative impact is captured, the biopharmaceutical industry was
responsible for creating over 2.7 million jobs in the U.S., which
represents 2.1 percent of total employment in the U.S. Jobs in the
biopharmaceutical industry are high quality, paying an average annual
wage of $72,600 in 2003. The biopharmaceutical industry was directly
responsible for $63.9 billion in real output in 2003 and a total output
of over $172 billion when its ripple effect across other sectors was
figured in.[2] The value of medicinal and pharmaceutical product exports
from the U.S. exceeded $16 billion in 2002. Biopharmaceutical exports
increased almost four and a half times from $3.7 billion in 1989 to
approximately $16.2 billion in 2002.[3]

Each year that foreign price controls are permitted to continue,
Americans bear a greater cost in the form of fewer jobs, fewer
innovative drugs and higher pharmaceutical prices. It is critical,
therefore, that USTR use the tools provided by Congress through the
Special 301 statute to address the trade distorting aspects of these
foreign government price controls.

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FOOTNOTES

1 National Science Foundation, U.S. Corporate R&D Volume 1: Top 500
Firms in R&D by Industry Category, U.S. Department of Commerce,
September 1999.

2 "Biopharmaceutical Industry Contributions to State and U.S.
Economies," The Milken Institute, October 2004, available at:
www.milkeninstitute.org.

3 Bureau of the Census: HS-Based Schedule B, Annual Historical U.S.
Domestic Trade Data.

--
Mike Palmedo
Research and Web
Consumer Project on Technology
T =96 202-332-2670
F =96 202-332-2673
mpalmedo@cptech.org