PHARMAC ruffles feathers
‘Drug companies join forces against Pharmac’ was the ominous headline in the Independent business weekly in July 1995.
PHARMAC was barely two years old, but already facing litigation from pharmaceutical companies and industry associations who were putting their differences aside to challenge the drug-buying agency.
At issue were the strategies PHARMAC was employing to manage its expenditure and seek better value for New Zealanders when it came to buying pharmaceuticals for their use.
Reference pricing was a particular bone of contention. Used by PHARMAC as part of its Operating Policies and Procedures, it saw pharmaceuticals that provided the same or similar effect being clustered into therapeutic groups and subgroups in a bid to reduce the excessive segmentation of drugs based largely on brand marketing.
All pharmaceuticals in a given subgroup were then subsidised at the level of the lowest-priced pharmaceutical in that subgroup.
“The chemistry of a drug determined where it fitted in,” explains PHARMAC founding staff member Reinhard Pauls.
“If two drugs belonged to the same pharmacological group, say H2 Antagonists and anti-ulcer medicines, then we paid the same price for it.”
This was a new and frustrating regime for the pharmaceutical companies that had the potential to significantly impact their bottom line as they faced true price competition for the first time.
It was coupled with PHARMAC’s policy of seeking out aggressively-priced generic drugs. By the end of 1994 this policy had enable it to obtain a 30 percent price reduction on all H2 antagonists, which are commonly prescribed to reduce the amount of acid produced by the cells in the lining of the stomach.
Similarly, the entry of generic inhaled steroids for asthma achieved savings of $5 million in 1994.
The use of competitive sole-supply tendering, therapeutic group reviews, bundling deals to secure numerous drugs in one purchase, and more extensive use of contracts with pharmaceutical companies were also part of PHARMAC’s strategy.
It was also willing to challenge pharmaceutical companies’ efforts to have patents on their drugs extended, in a bid to avoid competition from lower-priced generics.
“Glaxo asked for an extension on the patent for Zantac (ranitidine), which at that stage was the world’s biggest-selling drug. They were selling a billion dollars of the stuff a year,” Pauls remembers.
“They wanted an extension of the patent term, which you could get if you’d made inadequate remuneration. So we opposed that, which went on for three years.”
There were threats, and in two cases concrete action, to cut pharmaceutical research and activity in New Zealand, in response to PHARMAC’s way of doing business.
It wasn’t just the pharmaceutical companies that were unhappy.
“There was an amazing amount of angst from the medical profession because they’d been wound up by the pharmaceutical companies,” says Peter Moodie, who served as PHARMAC’s medical director from 2000 to 2013.
There was a perception, even among doctors, that generic drugs were inferior.
“They were very angry, very nervous and worried about what PHARMAC was doing.”
PHARMAC had to invest significant resource in engaging with health professionals to explain and justify its decision making. Here, the Pharmacology and Therapeutics Advisory Committee (PTAC) had a big role to play, says Moodie.
The grievances of the pharmaceutical companies spilled over into the public domain as PHARMAC’s savings on drug purchases started to stack up.
“The media was being fed stories from the companies,” says Moodie.
“There were patient advocacy groups that were really lobby groups [for pharmaceutical companies] who made headlines. The media attacks were pretty impressive.”
PHARMAC’s small team were often confronted directly with the discontent stemming from their decisions.
“You got patients ringing you; they’d be afraid they’d die because of a decision you made.” - Reinhard Pauls
“It gets quite intense at that level.”
But acceptance of the new regime started to grow, particularly as PHARMAC dealt with a number of high-profile legal challenges that would define future relationships with the pharmaceutical companies.
Last updated: 13 September 2018