Evaluation of the pharmaceuticals industry investment program
Research report
Research report (PDF 988.9 KB)
Research report (ZIP 1.0 MB)Key Points
The Australian pharmaceutical industry is a major and innovative contributor to the economy, with a high R&D intensity, a skilled workforce and high wages. However, pharmaceutical firms perceive the low prices they receive under the Pharmaceutical Benefits Scheme as a deterrent to activity in Australia.
The Pharmaceutical Industry Investment Program (PIIP) is intended to induce domestic activity lost as a result of such price suppression.
The PIIP has been effective in stimulating R&D and, to a lesser extent, value added in production. It has also had broader benefits for the capabilities of the industry, for example, by shifting R&D to more complex areas.
Despite this effectiveness, the program is not likely to make Australia better off overall.
- Its major rationale - to help counter the effects of low PBS prices on pharmaceutical activity - is, by itself, insufficiently strong to justify a tax-funded program, with the costs that this entails.
- Notwithstanding some benefits, particularly from spillovers associated with R&D activity, it is likely that the program generates net costs for Australians. This mainly reflects the distorting costs of raising taxes and the difficulties in targeting the program that lead to significant transfers abroad.
- It has some inflexibilities in its design that reduce its benefits.
There are, nevertheless, some policy impediments to the industry - particularly the inability of many pharmaceutical firms to effectively access the R&D Tax Concession, as well as the persistence of some PBS-related effects - which provide grounds for policy action. A replacement program - significantly modified from the current PIIP - is warranted. Given the prospects of high additionality and significant spillover benefits, a modified program, re-oriented to only R&D, is likely to generate net benefits for Australia as a whole.
Other design changes would also produce dividends, such as providing more scope for high calibre applications after program commencement.
There are grounds for changing patent law to permit Australian producers of generic drugs to export to countries where patents have expired during the period of the Australian patent extension.
