Upsetting the Pharmaceutical Patent Bargain Through Stealth Cost Reduction Policy
Contributed by Kieran Moloney
Since 2017, the federal government has been working on passing regulatory changes to how the Patented Medicine Prices Review Board (PMPRB) regulates the excessive pricing of patented medicines in Canada. The latest development in the ongoing drug pricing legal-drama, came in early December with the abrupt resignation of the PMPRB’s Chair. The Board had lacked a permanent chair since November 2021. Its acting occupant resigned from her post as the government concluded public consultations on the latest in a series of controversial reform proposals.
The Federal Court and Quebec Court of Appeal decisions in Innovative Medicines Canada v. Canada (2022) and Merck Canada inc. v Procureur général du Canada (2022) rebuked the federal government’s initially-proposed changes to the PMPRB as ultra vires the Patent Act. Still, political actors and PMPRB technocrats have seemingly remained intent on using the Board to drive cost savings for drug insurers. Ensuring a robust and predictable patent scheme for pharmaceuticals in Canada is not just an economic imperative, it is also a healthcare necessity. Canada is in danger of losing out on the next wave of medical innovation if the government fails to right the regulatory balance between preventing patent abuse and respecting the patent rights of innovators to earn a profit.
The PMPRB is an independent federal quasi-judicial body that was established with the statutory objective of preventing manufacturers of patented medicines from charging “excessive prices.” The Board is established through Section 91 of the Patent Act. Sections 79 through to 103 of the Act set out the mandate, structure, appointment process, and jurisdiction of the Board. To review the price of a patented medicine, the PMPRB has historically employed a series of price tests that incorporate reference pricing against a basket of comparator countries. Therapeutically novel medicines have been required to be priced no higher than the median of the comparator countries. While the PMPRB is framed in statute as preventing patent abuse, the effect the Board has had in bringing about broad-based reductions in medication prices is evident. Within six years of the PMPRB’s launch in 1987, Canadian drug prices fell from an average of 23% above PMPRB comparator countries to an average of 5% – 12% percent below the same basket of comparative countries. Section 85 of the Patent Act sets out the statutory criteria the PMPRB is to adhere to in evaluating whether a patented medicine’s price is excessive. The criteria include:
“(a) the prices at which the medicine has been sold in the relevant market; (b) the prices at which other medicines in the same therapeutic class have been sold in the relevant market; (c) the prices at which the medicine and other medicines in the same therapeutic class have been sold in countries other than Canada; (d) changes in the Consumer Price Index; and (e) such other factors as may be specified in regulations.”
The PMPRB’s authority to investigate is not limited to patented medicines that are explicitly branded and sold as such. The Federal Court has ruled that the Board has the authority to investigate pricing whenever there is a “rational connection or nexus” between a patent and a patented medicine, even if the connection is “of the merest slender thread”. This can capture patents for things such as patented chemical ingredients, manufacturing processes, and dosage forms.
Courts have stressed that the PMPRB’s statutory authority is limited to controlling patent abuse, not pricing regulation, promoting access to pharmaceuticals, or consumer protection. Nevertheless, pharmaceutical litigants have long sought to have the PMPRB stricken as ultra vires the federal government’s constitutional power. Specifically, they have alleged that through the PMPRB, the federal government is attempting to regulate property rights—an area of provincial jurisdiction. It has been argued that an apparent consumer protection objective of the PMPRB deprives the inventor “of the full enjoyment of the monopoly conferred by the patent.” The courts have rejected this argument. The Federal Court of Appeal in Sandoz reiterated that “the control of prices charged for patented medicines comes within the jurisdiction conferred on Parliament over patents under subsection 91(22) of the Constitution Act 1867 when applied to a patent holder or owner.” Lacking from the Sandoz decision was a comprehensive constitutional analysis of the PMPRB and its scope vis-à-vis property rights. Specifically, the constitutional analysis conducted was “peripheral” and did not engage “a pith and substance analysis or a complete and careful division of powers analysis”. Notably, Sandoz has sought leave to appeal the decision to the Supreme Court, which has yet to be ruled on. An eventual Supreme Court review of the matter would provide welcomed clarity surrounding the constitutional scope of the PMPRB’s regulatory mandate. In considering Parliament’s legislative intent while creating the PMPRB, remarks of then-Minister of Consumer Services, Harvie Andre, are telling. Minister Andre stated in Parliament that the PMPRB would exist to “ensure that prices of drugs not yet discovered…will be reasonable” through “enormous checks and balances“. This political foreshadowing that the PMPRB would be used to drive cost savings has seemingly come to roost with the recent PMPRB changes.
RECENT PMPRB REFORMS
The immediate price-cooling effect that Canada saw following the PMPRB’s inception has diminished over time. Today, Canada has relatively high drug prices compared to other OECD countries. Increases in Canadian drug prices over recent decades precipitated the federal government announcing sweeping price-cooling regulatory changes to the PMPRB in 2017. These draft regulations would have: allowed the Board to consider net-prices (after-rebate pricing) in determining excessive pricing, changed the basket of comparator countries used in evaluating excessive pricing (to remove high-price countries and include lower-price countries), compelled the use of pharmacoeconomic value and market size in the Board’s determining excessive pricing, and required pharmaceutical companies to disclose vast proprietary data on R&D expenditures. The draft regulations were met with fierce opposition from the pharmaceutical industry and patient groups who feared the chilling effect the changes would have on bringing innovative medicines to Canada. The government delayed implementation of the regulations at multiple junctures, during which litigation challenging the government’s proposals was heard by the Courts.
Both the Federal Court and the Quebec Court of Appeal took issue with the price-reducing objective of the regulatory changes, and found the measures targeting pricing to be ultra vires the Patent Act and Section 92 of the Constitution (division of powers). The PMPRB has always had regulatory authority to monitor drug prices at the “factory gate”, and has never regulated the prices charged to end-line consumers by pharmacists or clinicians. The Board’s exclusive regulation of list pricing is significant because very few Canadians actually pay the list price, or factory-gate price, of patented medications. This is due to a complex scheme of confidentially-negotiated rebates between pharmaceutical companies and the drug insurance plans which provide an estimated 15-25 percent discount off list prices.
BACKING DOWN: THE 2022 PMPRB REGULATIONS
After judicial rebuke and mounting stakeholder pressure, the federal government acquiesced. The result was a watered-down version of the original proposal proclaimed into force in July 2022. The new regulations proceeded with changing the basket of comparator countries, but dropped most of the other proposed changes, including the proposed consideration of drug rebates in the Board’s pricing reviews. Prior to the new PMPRB regulations coming into force the basket of comparator countries included: France, Germany, Italy, Sweden, Switzerland, United Kingdom and, United States. Therapeutically novel medicines were required by the PMPRB to be priced no higher than the median of the aforementioned list of seven countries. Germany, Switzerland, and the United States have historically been the world’s three most expensive drug price countries. Under the new PMPRB regulations, pricing in the United States and Switzerland are no longer considered. Australia, Belgium, Japan, Netherlands, Norway, and Spain are all new additions to the list.
COST REDUCTION MISSION CREEP: THE 2022 DRAFT GUIDELINES
While the new regulations have been proclaimed into force, without the more contentious proposals, it seems the PMPRB is not done with its bureaucratic mission creep. In October 2022, the PMPRB published a new series of draft guidelines [the guidelines] for public consultation. In addition to regulations passed through Order in Council, the PMPRB has the authority to issue operation guidelines that set out how the Board will exercise its discretion to determine the ‘excessive pricing’ criteria under Section 85 of the Patent Act. Although PMPRB guidelines are non-binding and are not law, courts have affirmed any departure from PMPRB guidelines must be justified against Section 85 of the Patent Act.
The draft guidelines are rich in rhetoric but thin in detail. The scrapped 2017 draft guidelines laid out in writing how the PMPRB proposed to conduct investigations. The detailed guidelines were clearly focused on aggressive price reduction, beyond the scope of the statutory mandate of the Board in preventing patent abuse. It is concerning that the new 2022 guidelines exclude details of how the Board’s regulatory role will be operationalized. Instead, the new guidelines provide broad cover in asserting that a case-by-case approach will be taken in reviewing medicines. The lack of an overt price test means that innovators have no way of knowing when their price will trigger an investigation by the PMPRB or how such an investigation will unfold. This is further complicated by a provision in the guidelines allowing for complaints to be registered against a patented medicine by anyone, which will be grounds for an investigation. This seemingly opens the door to allowing frivolous investigations of pricing at the request of any member of the public, including pharmaceutical business competitors or drug insurance plans with the Board deciding what complaints are meritorious of an investigation.
This new trajectory of the PMPRB undermines patent bargain theory in two ways. Firstly, allowing bureaucrats at the PMPRB to, at any juncture in the life of the patent, investigate and mandate a price reduction of an innovative medicine vitiates the economic certainty afforded to the innovator through the patent’s promise of exclusivity. A regulatory monitor which seeks to prevent patent abuse is conceivably a reasonable proposition. Nevertheless, it is a proposition that is poorly reconciled with the utilitarian theory underpinning Canada’s patent regime. Utilitarianism has a difficult time accounting for general contract abuse or unconscionability due to the fact that it assumes rationality among actors. According to bargain theory, patents are only granted when the wealth-maximizing interests of all parties (innovator, state, and society) are satisfied. Otherwise, parties would not have entered into the patent agreement. If the patent did not promise a wealth-maximizing bargain, the state surely would not have issued it, or the innovator wouldn’t have sought it out. Leaving aside the theoretical gaps that emerge when the PMPRB is reconciled with bargain theory, common law principles of unconscionability and improvident bargains can provide some grounding for a patent abuse watchdog like the PMPRB. However, upsetting freely-negotiated bargains on such grounds have long-existed as high-hurdles to prove as features of contract law.
Secondly, if the premise of patent protection is to deliver innovation to the public for society’s advancement, then a regulatory scheme which disincentivizes the launch of innovative medicines is at odds with such a premise. Put differently: when regulatory price meddling causes an innovator to not launch their medicine in Canada, then the patent scheme does not uphold its end of the bargain with Canadian patients. The patent bargain, wherein pharmaceutical companies receive a period of exclusivity in exchange for disclosure, is supposed to confer a benefit of disclosure unto Canadian society. Strictly interpreted, this means an eventual economic right of other companies to replicate the medicine. Practically though, this bargain means access to healing and life-saving treatments. Overly burdensome regulatory pressures on patented medicines simply means that the drug can not be purchased for any price, and pharmaceutical companies simply choose to prioritize launching the drug in another jurisdiction whose patent scheme offers commercial certainty. When this bargain— pharmaceutical profit in exchange for therapeutic access—is forestalled by regulatory obstacles, the patent bargain becomes improvident for Canadian patients dependent on timely access.
There is already evidence that the PMPRB changes are having a negative impact on new patented medicines launching in Canada. The number of new patented medicines registered in Canada has declined by nearly 30% since 2018 when compared to FDA Novel Drug Approvals, which has remained relatively stable over the same period. A 2022 research study of innovative medicine launches found that regulated decreases in pricing correlate with fewer new medications launching in a jurisdiction. Specifically, the study found that a 25% price decrease in average drug prices would mean up to a 10% decrease in the percentage of new medicines launched in Canada. Beyond preventing drugs from launching in Canada, the study indicated that price-cooling PMPRB regulations would also delay launches as pharmaceutical innovators prioritize jurisdictions where profits are expected to be greatest.
Aiming for reductions in drug costs in a country that prides itself on public and accessible healthcare is a laudable public policy goal. However, it is poorly pursued under the auspices of patent abuse. The PMPRB is allowing the tail to wag the dog in this way. The whole regulatory scheme is seemingly being dictated by this aggressive price-containing folly, and without statutory basis. If policy makers wish to legislate drug pricing, then they have the prerogative to do so. The reason they haven’t, and won’t, is because of the chilling effect it would have on bringing desperately-needed medical innovation to this country. It would decidedly alter the patent bargain on offer, shattering the bedrock on which Canada’s entire patent scheme is built.
Kieran Moloney is a second-year J.D. student at Osgoode Hall Law School and holds a Bachelor of Public Affairs and Policy Management (BPAPM) degree from Carleton University.