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Cablegate: New Zealand's Pharmaceutical Market: No Quick Fix

This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 04 WELLINGTON 001037

SIPDIS

DEPARTMENT FOR EAP/ANP-TRAMSEY AND EB/TPP/BTA/ANA-RARMSTRONG
STATE PASS TO USTR FOR BWEISEL AND DKATZ
COMMERCE FOR 4530/ITA/MAC/AP/OSAO/GPAINE

E.O. 12958: DECL: 12/14/2014
TAGS: ETRD ECON KIPR NZ
SUBJECT: NEW ZEALAND'S PHARMACEUTICAL MARKET: NO QUICK FIX

REF: A. WELLINGTON 900

B. AUCKLAND 302
C. AUCKLAND 118

Classified by: DCM David R. Burnett. Reasons: 1.4 (b) and
(d).

1. (SBU) Summary: After trying in vain for years to persuade
the New Zealand government to change its restrictive pricing
policies on pharmaceuticals, the drug industry is taking
another tack: reaching out to patient groups with information
designed to bolster their demands for cutting-edge drugs not
already covered by government subsidy. Several U.S. drug
companies also hold out hope that a New Zealand-U.S.
free-trade agreement could be a lever for improving their
access to New Zealand's pharmaceutical market.

2. (C) The government contends it already is increasing drug
availability by boosting the budget for pharmaceutical
purchases over the next three years. In actuality, its
spending on drugs in real terms is declining. U.S.
pharmaceutical companies continue to struggle in what they
view as one of the most restricted free-world markets. They
are cutting local staff, and they are slashing investment in
New Zealand-based research and development. Attempting to
make inroads against a government mindset that is hostile to
the drug industry, post is working with the industry to
identify speakers and engage in other public diplomacy
efforts that could help educate New Zealanders on the
benefits of gaining access to a wider range of effective
pharmaceuticals. End summary.

Limited prices, limited access
==============================
3. (U) Spending in New Zealand on government-subsidized
pharmaceuticals has risen by less than three percent per year
on average during the last decade, compared to 14 percent per
year in Australia. Only six new drugs a year were approved
on average over the last three years for reimbursement in New
Zealand, compared to about 30 drugs in Australia. The New
Zealand government nevertheless asserts that it now is
increasing the budget for pharmaceuticals sufficiently to
subsidize more new medicines.

4. (U) In fact, the pharmaceutical budget rose this fiscal
year (ending June 30) by 4.4 percent, to NZ $541 million (US
$380 million), with planned increases in the following two
years of .5 percent and 1.9 percent. The smaller increases
in the 2006-2007 and 2007-2008 budget years were based on the
expectation that a number of expensive drugs will go off
patent, according to Stuart Bruce, manager of communications
and external relations for the Pharmaceutical Management
Agency (Pharmac), a stand-alone Crown entity.

5. (U) Exempt from New Zealand's competition law, Pharmac
acts as a single buyer, or monopsony, that decides which
medicines will be subsidized by the government and how much
reimbursement will be paid for each pharmaceutical. In some
cases, the supplier is not allowed to set a drug price higher
than the subsidy as determined by Pharmac. The agency also
puts a cap on the amount of a drug to be purchased at a
certain price. Its decisions effectively allocate about 73
percent of New Zealand's spending on prescription drugs.
Pharmac does not directly handle funding for the government's
drug subsidy. Those funds are dispersed by the national
health care systems' 21 district health boards to the
pharmaceutical suppliers after a prescribed drug is dispensed
to the consumer.

6. (SBU) Bruce noted that Pharmac always under-spends its
budget because government policy prohibits exceeding it.
That means that actual public spending on pharmaceuticals is
likely to remain relatively flat or even decline in real
terms over the next three years. Further explaining why
Pharmac spends less than planned, Bruce said that some
patients do not pick up their prescriptions because of
co-payment delays. Spending projections also are based on
the assumption that patients will consume their entire
prescription. Since pharmacists receive a fee each time they
dispense a medication, they usually break a prescription into
installments, and some patients do not purchase an entire
prescription.
7. (C) Pharmac designated 15 new products for reimbursement
the past fiscal year, up from three new drugs in 2002-2003.
U.S. pharmaceutical firms we talked to, however, point out
that only one of those new medicines is freely available.
Access to the other medicines is available only after doctors
make special application or when patients meet specific
criteria. For example, only specialists can prescribe a new
treatment for diabetes. The drug's manufacturer believes
2,000 to 3,000 of the more than 100,000 diabetics in New
Zealand could benefit from the medicine. But with just 50
specialists nationwide, most patients are under the care of
general practitioners, and obtaining the drug is difficult.
Another company reported that six out of 10 applications by
doctors for reimbursement for its schizophrenia drug are
rejected.

8. (C) The industry also criticizes Pharmac for a lack of
transparency in its funding decisions. One U.S. company
spent more than three years negotiating with Pharmac to gain
public funding for a schizophrenia treatment. Without
explanation (none is required), Pharmac broke off those
discussions this year.

9. (U) The New Zealand industry group Researched Medicines
Industry (RMI) said in a statement that Pharmac is using
"smoke and mirrors" to portray itself as widening New
Zealanders' access to pharmaceuticals. Since leading-edge
medicines generally are not subsidized, they are available
only to those who can pay the full cost, RMI said.

10. (SBU) Publicly, Pharmac contends that it delivers the
best health-care outcomes possible within the funding
available, citing the fact that the volume of subsidized
pharmaceuticals has increased while prices in general have
declined. Pharmac highlights the savings it reaps -- NZ $25
million (US $17.5 million) the past fiscal year -- that would
have been spent on the drug subsidy without its intervention
to lower prices. Privately, Wayne McNee, Pharmac's chief
executive officer, acknowledged that the principal obstacle
to funding more medicines is the government's reluctance to
increase the pharmaceutical budget. On that, both he and the
industry agree.

IPR and advertising under threat
================================
11. (U) U.S. pharmaceutical companies consider New Zealand's
patent protection to be inadequate. Pharmac controls
pharmaceutical prices partly through "reference pricing" --
determining the level of subsidy based on the lowest-priced
product in a therapeutic subgroup. The subgroup includes
medicines that are similarly effective in treating the same
or similar conditions. This policy often pits patented
products against lower-priced generics and does not reward
innovation. Pharmac's general practice is to designate for
subsidy only one drug per therapeutic class.

12. (U) The New Zealand government also has refused to extend
the effective patent life of drugs, which now stands at seven
years on average (ref A). One U.S. company views the issue
as irrelevant, since Pharmac's reference pricing undermines
its patents' commercial value anyway. Most companies see the
government's position on effective patent life as further
evidence of its disregard for the pharmaceutical industry.
Further eroding their patents' worth is the so-called
springboarding provision in New Zealand's patent law, which
allows generic competitors to start the process of seeking
market approval while a proprietary drug is still under
patent.

13. (C) In addition, U.S. pharmaceutical companies continue
to worry that the government will ban direct-to-consumer
advertising, one of the industry's few pathways around
Pharmac's controls (ref C). Several companies, especially
those marketing so-called lifestyle drugs for such conditions
as hair loss and erectile dysfunction, have built sales
through advertising. Unsubsidized drugs accounted for 30
percent of sales for Merck Sharp & Dohme, 25 percent for
Pfizer, 20 to 25 percent for Pfizer, 20 percent for Johnson &
Johnson, 15 percent for Eli Lilly and less than 6 percent for
GlaxoSmithKline this year in New Zealand. Health Minister
Annette King and Pharmac oppose direct-to-consumer
advertising (DTCA) partly because they believe it tends to
increase expenditures on pharmaceuticals. DTCA also
pressures Pharmac to explain why it does not fund certain
advertised drugs. Companies are wary of the New Zealand
government using a joint regulatory agency it is establishing
with Australia as a vehicle for banning DTCA, which is not
allowed in Australia. However, the Australian High
Commission told post that such a decision is for the New
Zealand government alone to make.

A big hit on industry
=====================
14. (U) From Pharmac's pricing policies to the government's
positions on intellectual property and direct-to-consumer
advertising, U.S. pharmaceutical companies consider New
Zealand to be hostile ground. Unable to meet their sales and
profit targets, they say it is becoming increasingly
difficult to persuade their home offices to keep investments
or even a presence in the country.

15. (C) As a result, almost all U.S. companies in New Zealand
have scaled back their staffs and their
research-and-development investments since Pharmac was formed
in 1993. During the past year, Eli Lilly cut 20 percent of
its staff to 27 people, from a peak of 70 employees in the
mid-1990s. GlaxoSmithKline has reduced its staff by 65
percent, down to about 50 people. Pfizer downsized its
pharmaceutical division by 15 percent, to 60 people. Johnson
& Johnson two years ago cut its staff by 10 percent, and Jan
Trotman, its general manager in New Zealand, said that if
conditions do not improve in 2005, the company could leave
the country in three to five years. (Some staff cuts are due
to the shifting of regulatory oversight from New Zealand to
Australia with the scheduled launch of the trans-Tasman
agency in July 2005.) The exception is Merck, where
employment has remained stable and sales have increased,
partly because of its higher sales of vaccines.

16. (C) Because of the difficult environment, all the
companies have reduced -- and, in some cases, ceased --
investment in research and development in New Zealand (ref
B). Eli Lilly is completing two clinical trials, but
otherwise has transferred all its research and development.
Ten years ago, every U.S. drug company in New Zealand
employed a medical director. Now, only Merck has one.
Ironically, New Zealand presents a small but optimal
environment for clinical trials of pharmaceuticals because of
its population's lack of exposure to newer medicines.
Minister King had threatened to end clinical trials unless
patients participating in a trial had free, lifetime access
to the medicine once the trial ended. Other cabinet
ministers told her to stop making that threat.

17. (SBU) Nearly every company said it was holding out some
of its newer medicines from New Zealand because of the
expectation that prices and sales volumes would be too low.
For the New Zealand consumer, the result is less access to
modern medicines.

Times they are a-changin'?
==========================
18. (SBU) Pharmaceutical companies see ideological opposition
to their industry in comments by Prime Minister Clark, Health
Minister King and other cabinet members. One pharmaceutical
executive recalled how, upon simply introducing himself at a
public forum, the Prime Minister said the drug industry
needed to be "stopped" from making excessive profits. (The
industry may be paying a price for its unsuccessful effort in
1990 to unseat Clark, who at the time was health minister.)
Health Minister King has publicly equated the pharmaceutical
industry with the tobacco industry. When several companies
warned her that her government's policies would force the
industry out of New Zealand, she responded that she was not
concerned because New Zealand could always shop overseas for
its drugs.

19. (SBU) Amid such perceived hostility, there have been
subtle changes. In the past couple years, RMI and Pharmac
have worked to maintain dialogue, although RMI in recent
months under a new chairman -- a general practitioner -- has
more aggressively promoted the industry's views in the media.
While drug companies remain unhappy with Pharmac's
practices, they see capped government funding, rather than
Pharmac itself, as their primary problem. Several companies
noted an emerging public debate over access to medicines, a
discussion that was nonexistent even a couple years ago.
Public attitudes are changing slowly. As Alister Brown,
Merck New Zealand's chief executive, noted, consumers five
years ago assumed that if Pharmac did not fund a drug, it was
not worth having. An increasing number of consumers are now
willing to pay for non-subsidized drugs.

20. (C) Finding that its direct pressure failed to alter the
government mindset, the industry is now firing up pressure
from below. For the last six months, RMI has been working
with patient groups to make them aware of cutting-edge
pharmaceuticals that are not being subsidized in New Zealand.
Lesley Clarke, RMI's chief executive officer, hopes this
effort will result in increased pressure on the government to
hike funding for drugs. Although Clarke said it would be too
early to see results of RMI's efforts, New Zealand newspapers
in recent months have reported complaints by patient groups
over the lack of funding for drugs to treat breast cancer,
Alzheimer's disease, and growth hormone problems.

21. (SBU) New Zealand's doctors would appear to be likely
cheerleaders for greater access to pharmaceuticals. However,
industry market research shows that fewer than 20 percent of
New Zealand's doctors would tell their patients of non-funded
alternatives to subsidized medications. The drug companies
contend that doctors are reluctant to publicly call for
change.

22. (C) A possible U.S.-New Zealand free-trade agreement
(FTA) offers one last avenue for changing government policies
that limit access to pharmaceuticals, several U.S. companies
said. Meanwhile, Geoff Dangerfield, chief executive of the
New Zealand Ministry of Economic Development, told a U.S.
drug company that his government terminated its study of
patent term extension for pharmaceuticals to keep the issue
as a bargaining chip in the event of FTA negotiations. If
FTA talks go forward, most of the drug companies will be
looking to the U.S. government to win serious concessions
from New Zealand on pharmaceutical issues. Pfizer, which
withdrew from RMI early this year, will oppose free-trade
negotiations until the New Zealand government alters some of
its policies, especially its patent law and reference pricing.

Post's strategy
===============
23. (SBU) The challenge is compounded by New Zealand's
escalating health-care costs and an aging population.
Overall health-care spending has risen faster than any
government budget category since 1994 and now comprises about
20 percent of the government budget. In the meantime, the
government's effort to reduce the cost of seeing a doctor has
led to more patient visits, more prescriptions, and more
purchased pharmaceuticals. As a result, Bruce of Pharmac
said his agency would face more pressure to ration its budget
or seek a larger portion of the already stressed health
budget.

24. (C) To complement the industry's efforts, post will work
with companies to identify U.S. speakers to be brought to New
Zealand and possible International Visitor Program
participants, with the goal of educating New Zealand's health
practitioners, policymakers and consumers on pharmaceuticals'
role in health care. These programs will emphasize the
advantages of expanded access to medicines and treatment
options and the link between pharmaceutical research and
development and the biotechnology industry, which the New
Zealand government prominently supports as a means to
economic growth. By keeping drug expenses artificially low,
the New Zealand government is denying consumers access to
many modern medicines and failing to bear an equitable
portion of the cost of developing drugs. Over the long term,
post hopes its efforts will help New Zealand strike a balance
between providing affordable medicines and supporting an
industry that creates cures for disease.
Swindells

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