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Executive Summary

Canada's drug price review board is moving toward a revised target price for new patented product introductions. The Canadian board is beginning to use the median international price for a product as the new benchmark, according to a Government Accounting Office report on the effectiveness of the Canadian price board. The GAO report was released Feb. 22 by Sen. Pryor (D-Ark.). The Patented Medicine Prices Review Board has proposed a modification of its pricing guidelines that would limit the introductory price of most new pharmaceuticals under its jurisdiction to the median international price being charged for the products, according to GAO. The proposal would further restrict price increases on existing drugs to the annual change in the Canadian Consumer Price Index. The PMPRB's current guidelines find a price increase "excessive" if the cumulative change in a drug's price since its introduction (or since the inception of the board in 1987, whichever is more recent) is greater than the cumulative change in the Canadian CPI during that same period. To evaluate introductory prices, the guidelines classify new drugs as line extensions, substantial improvements, and other new drug products, such as new chemical entities or new dosage forms. The proposed changes to the guidelines would apply to drugs falling in the third category. Under the current guidelines, the price of an "other new drug product" is excessive if it tops the prices of other drug products in the same therapeutic class in Canada. The board proposes to amend the guideline to tie the price to the lower of prices in the class or median international price, which is computed from prices in France, Germany, Italy, Sweden, Switzerland, the U.K. and U.S. International prices are already considered in the evaluation of drugs that represent substantial improvements; a product in this class is considered excessively priced if its introductory price is greater than the prices of all other drugs in its therapeutic category and the median international price of the drug. Line extensions are compared to other products of the same medicine or the same therapeutic class. The GAO report maintains that "prices on patented drug products have risen slower since 1987 than both the Canadian CPI and prices on nonpatented drug products." Furthermore, a statistical analysis of 120 of the top 200 drugs prescribed in the U.S. suggested that drug price differentials between Canada and the U.S. are, on average, one-third higher for drugs subject to the Board's guidelines than for those outside its jurisdiction. GAO concludes that PMPRB's actions "appear to have held down price increases on patented drugs." The effect of the board on introductory prices for new drugs is less clear, the report notes, but GAO's statistical analysis did suggest that introductory prices of drugs are lower in Canada due to the board's regulations, at least for the small number of new patented drugs in the sample. Sen. Pryor highlighted this conclusion in his statement regarding the GAO report. Pryor said the GAO report reinforces his belief that "a drug price review board in this country is an idea that is seriously worth considering," but he also noted that the report reveals the importance of applying cost containment approaches in the U.S. comprehensively to all classes of drugs -- "patented drugs, drugs whose patents have expired, and new drug products." Canada's PMPRB only has authority over patented products, and GAO concludes that its "effect on the average price of all drugs is less than it would be if its jurisdiction covered unpatented as well as patented products." PMPRB's compliance policy has rested upon its power to remove a drug's market exclusivity. Recently enacted legislation abolished compulsory licensing, however, and instead gave the board "authority it did not have previously to order price reductions or penalties that could compensate for past excessive prices," the GAO report explains. Canada's Bill C-91, enacted Feb. 4, provides for market protection for patented products for 20 years from the date the original patent is filed ("The Pink Sheet" Feb. 22, T&G-4). Most drugs that have been introduced in Canada within the last few years have fallen within PMPRB's pricing guidelines, GAO found. Only 30% of the 142 new drugs introduced in 1991 and through mid-November of 1992 which had their prices reviewed by the board had initial prices which fell outside the guidelines. The prices of those drugs found to be excessive have been brought into compliance in more than 75% of the cases. Among the new drug products that have undergone price reductions have been Bristol-Myers Squibb's Capoten (captopril) and Desyrel (trazodone). In 1992 Glaxo announced that it had lowered the price of Imitrex (sumatriptan) by 12.5% to assure that it would comply with the board's guidelines. GAO also found that only about 15% of price increases on existing drugs from 1991 through six months of 1992 initially fell outside the guidelines. Fewer than one-third of these increases were considered to be significantly outside the guidelines and identified by the board as priority review cases. Virtually all of the drugs were within the board's guidelines by the next pricing period. "The Patented Medicine Prices Review Board has been effective at restraining prices of patented drugs," GAO concluded, "particularly price increases on existing drugs." Compliance with the guidelines for new drug prices "has usually been achieved within 90 days of product introduction," the report notes, and compliance for drug price increases "has been almost universal." Manufacturers have complied with the board's guidelines largely without any punitive action being taken. In his statement on the report, Sen. Pryor advocates a similar approach for the U.S. -- particularly a comparative assessment of prices in the U.S. versus other industrialized countries. The Pharmaceutical Manufacturers Association maintains that "it would be a grave mistake to assume that even the limited effectiveness the report attributes to the review board could be transplanted in U.S. soil." In a Feb. 22 statement, the association argued that fundamental differences between Canada and the U.S. make an extrapolation of the results of the PMPRB to the U.S. impossible. In addition to the stronger role government is given in Canadian life, PMA contends, the Canadian pharmaceutical industry differs as well: "It is smaller than ours, and much less devoted to research." The association points out the "virtually no drugs have been developed in Canada since the 1960s." The research intensive sector recently has committed substantial resources to Canada as part of negotiations surrounding the compulsory patent repeal. Pointing out that the ratio of drug R&D investment to sales in Canada nearly doubled from 1988 through 1991, GAO noted that this was probably due to the increased patent protection enacted by the federal government when it established the board. GAO attributes the lack of innovative drug development in Canada to the tendency of multinational pharmaceutical firms "to centralize their basic research activities in their home countries or in major market locations." GAO added that "drug company representatives told us that their firms were reluctant to undertake basic research...given their uncertainty about whether Canada's limits on compulsory licensing would be made permanent." The legislation that created the board and limited the use of compulsory licensing called for a review in 1996; however, the recent abolition of compulsory licensing should remove this disincentive to R&D. Pryor has not yet put his support for a price board into proposed legislation. Rep. Stark (D-Calif.), House Ways and Means/Health Subcommittee chairman, introduced legislation to establish a national commission to regulate drug prices Feb. 16 ("The Pink Sheet" Feb. 15, p. 10). Rep. Durbin (D-Ill.), chairman of the Agriculture Subcommittee of the House Appropriations Committee, is reported to be considering introducing drug price review board legislation as well. Durbin cosponsored the House version of Pryor's S 2000 price control legislation last year ("The Pink Sheet" March 23, 1992, T&G-1).

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