Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Pharmac vulnerable in trade talks

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Govt drug buyer could be a casualty of those who want to conclude summit by target date of next October.

Pharmac has a limited budget - $777 million last year - to spend on subsidising drugs. Photo / Thinkstock
Pharmac has a limited budget - $777 million last year - to spend on subsidising drugs. Photo / Thinkstock

Pharmac reckons it has saved the taxpayer a cumulative $5 billion since 2000.

"This estimate is based on pharmaceutical prices in 1999 mapped on to actual prescribing activity and compares actual spending with what would have happened if Pharmac had taken no action," its most recent annual report says.

In the year to June 2012 the gap had widened to $1.5 billion.

No surprise then to hear Prime Minister John Key say on Monday, when discussing the Trans Pacific Partnership trade negotiations which resume in Auckland next week: "If we had to give away Pharmac, that wouldn't work for New Zealand."

Unfortunately there are a couple of reasons not to take too much heart from that comment.

It is not a binary question - will Pharmac survive or not? - but rather how might the rules it operates under change, in ways that would enrich foreign drug companies at the expense of New Zealand taxpayers and patients.

The second reason relates to the negotiating process itself.

The dominant player is, of course, the United States, in whose political processes - let's be frank - money talks, and seldom more loudly than when the interests of Big Pharma are at stake.

Given that, and given that TPP is a "single undertaking" negotiation where nothing is agreed until everything is agreed, the risk is that Pharmac's effectiveness will end up as a traded-off casualty of some do-or-die, peer-pressured summit meeting to conclude a deal by the 11 partners' target date of October next year.

The anti-Pharmac agenda has two strands. One relates to intellectual property.

Proposed changes would prevent the makers of generic alternatives, or any other interested parties, from challenging the granting of patents in advance, and leave them with the much more arduous task of persuading the Intellectual Property Office to change its mind after granting a patent.

This is particularly relevant in the case of "me too" drugs which represent a very modest advance on those whose patent protection is nearing its end.

Another change would tangle up Medsafe's role in approving drugs as safe for use with the enforcement of intellectual property rights, by requiring those seeking regulatory approval for the use of a medicine to prove that it infringes no patents.

It is always difficult to draw the line where a legitimate return on innovative research and development ends and monopoly rents begin. But the onus is on those seeking change to the existing regulatory arrangements to show that the status quo represents systematic free-riding. A secretive trade negotiation is not the appropriate forum to do that.

The other more insidious threat to Pharmac's effectiveness arises from changes sought, in the name of "transparency", to Pharmac's decision-making processes.

Pharmac has a limited budget - $777 million last year - to spend on subsidising drugs. Within that it has some hard choices to make, based on expert clinical advice. The more public and subject to challenge and appeal that process is, the more scope the drug companies will have to play divide and conquer games.

In any commercial negotiation the ability to do that to the other side is advantageous.

We can safely assume that the enthusiasm of the pharmaceutical companies for such changes is directly proportional to the commercial upside they see for themselves.

The foregoing is based on the text, leaked last year, of what the US was seeking in this area. It has subsequently withdrawn and replaced it.

However, Lori Wallach says that the new text on transparency, submitted to the negotiating parties in September, was apparently so modestly tweaked that they struggled to tell the difference.

Wallach heads the Global Trade Watch division of Public Citizen, a US watchdog organisation founded by Ralph Nader 40 years ago.

As she briefed journalists in Wellington this week, it soon became clear that when we use a phrase like "what the US is seeking" that glosses over a complicated situation.

The US negotiators do not have any kind of negotiating authority from Congress, which will ultimately need to ratify any TPP agreement.

Indeed US legislators have been, in a departure from previous practice, resolutely "kept in the dark" about the substance of the negotiations.

That at least is the view of Senator Ron Wyden, chairman of the Senate finance committee's sub-committee on trade.

Wyden is evidently unimpressed, especially in light of the wide-ranging scope of the potential agreement: "If successful, the agreement will set norms for the trade in goods and services, and includes disciplines related to intellectual property, access to medicines, internet governance, investment, government procurement, worker rights and environmental standards."

He has contrasted the exclusion of US lawmakers with the position of those corporations and industry groups, including representatives of Big Pharma and Hollywood, who are being consulted and made privy to the details of the agreement.

Even before the negotiations began, US trade representative Ron Kirk received letters from 30 senators and 47 members of the House of Representatives opposing any moves to open US dairy markets to New Zealand.

Wallach also points to public opposition by some members of Congress to allowing greater access to US sugar markets or to any provisions to preclude the use of capital controls.

Tea Party types oppose investor-state dispute resolution provisions which would, as they see it, cede sovereignty to international tribunals.

On top of that there is the risk that if Big Pharma, a particularly liberal user of US campaign finance laws, is not satisfied it will oppose TPP as well.

The US drug companies have been very effective at ensuring that in their home market the Government cannot use its bulk purchasing power to negotiate lower prices.

But when the US Government is borrowing one dollar in every three that it spends and when the cost of Medicare - taxpayer-funded health care for the elderly - is a major part of its long-term fiscal challenge, surely the drug companies' privileged position would be on the table.

"You would think so," Wallach says. "But no."

Key says his sense is that President Barack Obama is determined to get a TPP agreement over the line. By the sound of it he has his work cut out for him.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

Brian Fallow is the New Zealand Herald's economics editor. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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