Pharmac trade row heralds wider threat

Updated at 3:46 pm on 8 June 2011

Pharmac is being targeted by US drug companies as trade negotiations continue with the United States.

The New Zealand Government says the drugs-buying agency won't be fundamentally changed as a result of any deal.

But, as Radio New Zealand's economics correspondent Nigel Stirling explains, there are wider threats to the way New Zealand buys medicines, and what it pays for them.

Talking to journalists, Trade Minister Tim Groser often points out that what he is reported as saying is carefully sifted by foreign governments, looking for clues to New Zealand's strategy in trade negotiations.

Trade Minister Tim Groser.

Trade Minister Tim Groser.

Photo: NZ GOVERNMENT

A case in point is the Pharmac debate, most recently re-ignited by a letter from a quarter of US senators to President Barack Obama, complaining its pharmaceutical companies have little to gain from a free trade deal with Asia-Pacific countries if national drug buying agencies are able to continue "arbitrary and non-transparent" practices.

The letter, aimed squarely at New Zealand, provoked a backlash across the political spectrum as well as among medical groups, and newspaper editorial writers.

Trade sources say that response played into the hands of New Zealand's trade negotiators, deep in negotiations with the eight other countries involved in the TransPacific Partnership, who can now readily point to evidence that Pharmac is political dynamite in this country and is not easily tampered with.

So what does Big PhRMA - as the multi-billion dollar US pharmaceutical industry is colloquially known - care about a drugs-buying agency in a country with a total population less than the size of Boston?

At the APEC meeting in Lima, Peru, in 2008, the US announced it would enter talks to join minnow trade pact P4 already comprising New Zealand, Chile, Brunei and Singapore.

At the time, commentators asked what the world's largest economy had to gain from entering negotiations for a trade deal with countries having a combined size of economies smaller than Belgium.

It quickly became apparent. At the same meeting, Australia and Peru pledged to join negotiations for the TransPacific Partnership (TPP), to which Vietnam and Malaysia were later added. More are expected to join, including Japan, and potentially China, further down the line.

American pharmaceutical interests are not particularly worried about the dent to their bottom line from the way Pharmac goes about its business, which must be miniscule.

What really worries the industry is the precedent it sets if other countries adopt a drugs-buying model similar to Pharmac and the TPP does nothing to stop it. The threat is magnified if the TPP is expanded to include more countries and becomes the template for the hoped-for Free Trade Area of the Pacific, including all 21 APEC countries.

US industry demands

So what is it at Pharmac that US pharmaceutical industry wants to stop in its tracks? What are the non-transparent and arbitrary practices that irk it so much?

Medicines New Zealand, the drug industry's local representative, says it is disadvantaged by not being able to present its case directly to the independent committee of experts that advises Pharmac on which new drugs to subsidise.

The allegation is that Pharmac puts its own slant on the drugs companies' applications, while the assessments of whether or not a new drug will be subsidised are behind closed doors and not open to scrutiny.

That is not the way it is done in the United Kingdom or Australia, where the big drugs companies are able to present to advisory committees directly and wheel in their own experts.

Pharmac defenders rubbish the criticisms. They say the Pharmacology and Therapeutics Advisory Committee in New Zealand takes advice from experts from around the world on new drugs, rather than that of the 'guns for hire' used by the drugs companies. And, it adds, minutes from all of the committee's deliberations are published online for anyone who cares to look.

What the industry really doesn't like, Pharmac's defenders say, is the hard bargains it drives.

Unlike drugs-buying agencies in the UK and Australia, Pharmac's budget does not increase in line with population growth or inflation, forcing it to go looking for good deals to maintain existing purchases and fund new ones. That approach is expected to save the taxpayer $1 billion this year.

No fundamental changes

A trade source has recently told Radio New Zealand that a "hikoi of dairy farmers, marching on the grounds of Parliament" would not be enough to convince the Government to make major changes to Pharmac. That's because, the source says, the improvement in market access for New Zealand's farm exports the Americans could offer in return in the TPP are likely to be pitifully small.

In return for a poor deal on dairy and sugar, Australia, in its trade deal with the US in 2004, made changes to its drug-buying scheme, the Pharmaceutical Benefits Scheme. While they were not major changes, they are thought to have watered down the scheme's effectiveness by excluding some drugs from the reference pricing that helps it drive better deals from the pharmaceutical industry.

Will New Zealand consider similar changes to make some small gains for Fonterra's access to heavily-protected American markets from the TPP? Because of the secrecy of the negotiations, New Zealanders won't know what the Government has agreed to until a deal between the TPP countries is signed and sealed, possibly as early as the APEC meeting in Hawaii in November. By then it would be a fait accompli, and unlikely to be renegotiated.

In the meantime, Tim Groser, a former top-ranking official at the World Trade Organisation in Geneva, fends off such questions with answers approximating to: "Trust me; I know what I'm doing."

An even bigger target for the US pharmaceutical industry in the TPP is patent reform. The issue is likely to have flown under the radar of most New Zealanders because politicians here haven't been asked about it; the drug-buying policies of Pharmac hogging the limelight instead. But change in this area is potentially just as damaging for Pharmac.

Patents due to expire

The Economist magazine has reported that patents for $US50 billion worth of products are due to expire in the next three years. The drugs then face competition from generics and sell at a fraction of their previous price, ending the cash bonanza for the companies that pour vast quantities of cash into their development.

The pharmaceutical companies are furiously pushing in the TPP for ways to extend the life of patents.

Because Pharmac is a big buyer of generic drugs, that would have either the effect of pushing up its drug-buying costs, or, more likely given its cost-conscious approach, keep patent-protected drugs off their shopping list for longer.

The Government hasn't made much comment so far on this particular campaign from Big PhRMA. But a leaked paper from New Zealand's negotiating team before the TPP talks held in Auckland last year, made it clear it is being resisted.

That paper argued countries like New Zealand with less invested in intellectual property, whether it be patents for drugs or new software, or copyright for movies and music, have less to gain from strict intellectual property laws, which tend to favour countries with industries that have invested heavily in these areas in the past, like the US.

However, the debate in America is not cut-and-dried either. Companies like Google are fighting back, arguing strict intellectual property laws make it difficult for industry newcomers to build on existing ideas, and are stifling innovation and export earnings.

While it may sound esoteric to the ears of most New Zealanders, the intellectual property (IP) debate is of high importance in the US right now, as it wrestles with how to steer its economy away from the precipice, and meet President Obama's goal of doubling exports within five years. America's IP-based industries are more important now than ever.

The settlement of that debate will have a large bearing on what New Zealand pays in the future for drugs, along with a whole lot else.

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