Interim Government Response to the Industry Commission Report No. 51 The Pharmaceutical Industry

Recommendation: The Commission recommends that under the current arrangements companies should have the option of taking their remaining Factor (f) payments as actual rather than notional price increases.

The Government is examining the merit and feasibility of implementing an option for payment of actual as well as notional price increases under the current Factor (f) Scheme. It will consult industry and other stakeholders in arriving at a response to the recommendation. A final announcement on this matter will be made in November 1996.

Recommendation: The Commission recommends that companies should have the option of delaying cost effectiveness analysis for two years to allow for the collection of costing data based on actual use.

The Government, while recognising that implementing economic requirements has placed extra burdens on the industry, does not accept the recommendation that companies should have the option of delaying cost effectiveness analysis for two years to allow for the collection of costing data based on actual use for the following reasons:

• economic analysis increasingly is accepted by the industry and governments internationally as an appropriate means of selecting drugs for subsidisation;
• cost effectiveness analysis in the new listing of a pharmaceutical benefit provides the Government with an effective basis for price negotiations with industry and in selecting uses appropriate for subsidising. If cost effectiveness was delayed for two years the Government's ability to negotiate a price (suitable to both Government and industry) would be undermined;
• there are ethical concerns relating to lack of subsidised access if drugs are subsequently found not to be cost effective and where a satisfactory price cannot be negotiated, leading to delisting.

The Government will, however, continue to consult with the industry on cost effectiveness issues. In particular, the Government will ensure that the cost effectiveness issues raised by the Commission are addressed through the existing consultative arrangements with the Australian Pharmaceutical Manufacturers Association. [final response]

Recommendation: The Commission recommends that a data base of Australian and international pharmaceutical prices, volumes and market shares be established.

The Government does not accept the recommendation that a data base of Australian and international pharmaceutical prices, volumes and market shares be established. The benefits that such a database would present over the current pricing arrangements as an analytical tool in pricing decisions would be outweighed by the administrative costs to Government in establishing and maintaining such a database. There could also be additional costs and regulation for industry through having to provide the required information. [final response]

Recommendation: The Commission recommends that, as a matter of urgency, the Pharmaceutical Benefits Scheme listing process be subject to a review.

The Government notes that the administrative aspects of the PBS process has been reviewed recently and certain measures implemented. The Government also notes that an efficiency audit of the PBS is scheduled for 1996/97. In view of the Commission's recommendation, the Government will ask the Auditor-General to place a high priority on the audit and, where possible, to take into account PBS administrative process issues arising from the Commission's inquiry. [final response]

Recommendation: The Commission recommends that all States and Territories pass complementary legislation to broaden the application of the Therapeutic Goods Act 1989 by adopting its provisions and future amendments by reference.

To date, two States, Victoria and New South Wales, have passed complementary legislation. The tardiness of the other States and Territories in passing complementary legislation has inhibited the national system of controls envisaged under the Therapeutic Goods Act 1989. Work has been done already through the National Coordinating Committee on Therapeutic Goods and will continue to be pursued in this Forum and through the Australian Health Ministers' Conference. An update on progress will be presented for the final response in November 1996.

• continues to pursue harmonisation of standards and data requirements;
• pursues further agreements to exchange evaluation reports and to undertake joint evaluations;
• while reserving the option of conducting its own evaluations, on a case by case basis places greater weight on overseas approvals by regulators with comparable standards and known expertise in a particular area; and
• in the longer term, pursues mutual recognition of drug approvals with countries with comparable regulatory standards while maintaining an independent capacity to conduct evaluations where required by unique Australian conditions or where requested by suppliers.

While there is no doubt that trade in pharmaceuticals is facilitated through harmonisation and mutual recognition, in the event, the implications for public health arising out of these arrangements must be carefully weighed by the Government. Nonetheless, in view of the potential benefits, harmonisation of Australia's standards and data requirements with international requirements will continue to be pursued.

Pharmaceuticals have been granted a special exemption under the Trans-Tasman Mutual Recognition Arrangement with New Zealand which, subject to a cooperation program to identify obvious differences in regulation with a view to harmonisation or mutual recognition, will provide an opportunity to review these issues in a regional context.

The Government notes the recommendations that the TGA pursue further agreements to exchange evaluation reports and to undertake joint evaluations, and that, on a case by case basis, the TGA place greater weight on overseas approvals by comparable regulatory bodies. These issues are the subject of an independent review process. The review, which has been established by Senator Bob Woods, Parliamentary Secretary to the Minister for Health and Family Services, will be completed by the end of 1996.

Recommendation: The Commission recommends that the TGA be established as a Commonwealth statutory authority.

The Government notes the recommendation to establish the TGA as a Commonwealth statutory authority and will examine this model as one of a range of possible options to achieve greater independence and flexibility for the TGA. Following consultation with stakeholders, a decision on this issue will be announced no later than November 1996.

Recommendation: The Commission recommends that both schedule 2 'pharmacy only' and schedule 3 'pharmacist only' be retained, pending further research into the role of pharmacist counselling in ensuring improved health outcomes and the monitoring of the extent of such counselling.

The Government will continue the existing range of scheduling options. It notes that the role of pharmacist counselling in ensuring improved health outcomes is principally a matter for peer review/self regulation by individual Pharmacy Boards and the Pharmaceutical Society of Australia. Nonetheless, it will monitor the extent of pharmacist counselling through the Pharmaceutical Benefits Branch of the Department of Health and Family Services. [final response]

Recommendation: The Commission recommends that, where it can be demonstrated that brand advertising of particular schedule 3 'pharmacist only' products will lead to improved health outcomes, such advertising should be permitted on a case by case basis, subject to appropriate industry self-regulation.

The Government will address the issue of brand advertising of schedule 3 products in consultation with industry. A final response will be announced in November 1996.

Recommendation: The Commission recommends that the scheduling of therapeutic goods become the responsibility of the Commonwealth Government under the TGA.

The Government will pursue the cooperative approach to scheduling of therapeutic goods recommended by the Commission with the States and Territories. [final response]

Suggestion: The Commission has suggested that the Government undertake a review of PBS policy in order to strike a better balance between the interests of taxpayers, consumers and the industry.

The Government notes the suggestion to undertake a review of PBS policy in order to strike a better balance between the interests of taxpayers, consumers and the industry. The Government considers that, in view of the deliberations of the Council of Australian Governments and the National Commission of Audit, the Government will not undertake a separate policy review of the PBS at this time. [final response]

Suggestion: If the Government decides that reform of PBS processes is either not a current priority or likely to take considerable time to implement, it could choose to introduce a Factor (f) type scheme as an interim measure.

While the Government has decided not to undertake a fundamental review of PBS policy or processes in the terms proposed by the Commission at this time, it is examining the need for industry policy measures post-1999 and, if appropriate, options for these measures. Following industry consultation, a final announcement on this matter will be made in November 1996.

Suggestion: The Commission believes the Australian Taxation Office (ATO) needs to clarify its interpretation of the law relating to transfer pricing sufficiently to reduce uncertainty for taxpayers. Based on the evidence, the Commission considers that the existing lack of clarity could be having a negative effect on decisions for pharmaceutical investment in Australia and could impede development of the industry.

It is the clear responsibility of the ATO to ensure that taxpayers comply with transfer pricing legislation. This will involve an appropriate balance of service and enforcement activities.

The Government is satisfied with the steps the ATO is taking to provide taxpayers with sufficient guidance on the transfer pricing legislation. It notes that the ATO has:

• been consulting widely in Australia with industry groups and interested parties and with OECD member countries;
• been heavily involved in the international arena with the OECD's revision of its transfer pricing guidelines; issued a number of detailed taxation rulings (some still subject to consultation) which outline its interpretation of the transfer pricing provisions in the domestic law and Double Taxation Agreements;
• introduced procedures whereby taxpayers can seek advance pricing arrangements to obtain business certainty and avoid audits, penalties and the possibility of double taxation.

Steps by the ATO to refine its approach to case selection and case management to focus on non-complying taxpayers, keep information requirements to the minimum necessary to ensure a reasonable assessment of compliance with the arm's length principle and to reduce the time taken on audits-acknowledging though that this will be affected by the ATO's ability to obtain the relevant information-should effectively address remaining industry concerns.

The Government further notes the positive industry reaction to the re-establishment of an Industry/ATO Working Party with an initial focus on transfer pricing matters generally. [final response]

Suggestion: The Commission considers that the ATO needs to clarify its interpretation of sales tax legislation sufficiently to enable effective self assessment and reduction of uncertainty for taxpayers with respect to Wholesale Sales Tax (WST) exemptions.

The ATO has issued a draft ruling on its interpretation of the sales tax exemption for drugs and medicines. The ATO's final ruling on the WST classification process as it applies to pharmaceutical products will take account of the Commission's comments and industry views. [final response]

Findings: The Commission finds that:

• the [former] Government's commitment to a 15 year effective patent life for pharmaceuticals is more in line with the European Union approach and as such goes further than compensating patent holders for the time lost in regulatory delay;
• the delay in implementing this commitment is causing concern and uncertainty; and
• the [former] Government's foreshadowed approach to providing 15 years of effective patent life provides scope to allow generic springboarding.

The Government will examine the Commission's findings in relation to the issue of providing effective patent life for pharmaceuticals. It notes that extensive consultation has already taken place with industry and interested parties on this issue and that it will consult further in the light of any new options identified by this examination. A final response will be announced no later than November 1996.

Finding: The Commission finds that there is potential for the availability of some important new drugs to be jeopardised in the event that Australia's current practice relating to the protection of confidential information does not meet its international obligations.

Consistent with the finding of the Commission, the Government will review Australia's obligations under the World Trade Organisation Agreement on Trade-Related Aspects of Intellectual Property Rights in relation to protection of test data. On the basis of that review, it will consult with industry and other interested groups and announce a final decision no later than November 1996. The issue of the protection of test data for agricultural chemical products will also be included in the review.