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Australian Journal of Pharmacy : February 2005
news news Generic price cut signals alarm for future of PBS by Matthew Eton I Nwhat industry observers regard as an astounding policy blunder, the Federal Government will press on with a plan to cut generic prices by up to 50 per cent or more from 1 April. The Minister for Health, Tony Abbott, announced a plan to cut generic prices by 12.5 per cent in his health election mani- festo, and it has been backed by the Prime Minister, John Howard as a basis to fund $830m worth of benefits promised to self- funded retirees as part of the Federal Gov- ernment’s re-election commitments. Both Medicines Australia and the Generic Manufacturing Industry Associ- ation (GMiA), while not commenting pub- licly during what many consider to be a tokenistic ‘consultation period’, are united in the view—shared by the Pharmacy Guild of Australia—that if implemented, it signals the doom of the PBS as well as a large sector of the generics industry. The initiative, which Mr Abbott origi- nally announced would operate from 1 January this year, was stalled after critics slammed the plan as being ill-considered and unworkable. Once negotiations have been completed, the policy is due to be legislated in a February sitting of Parlia- ment, in which the Coalition now has a majority in the House of Representatives and the Senate after 30 June. What’s more, while the Government has not released any document that explains how it made its calculations on the financial worth of the policy, the Labor Party will be largely impotent in opposition to any such legislation because it blithely accepted the savings figures reported by the Government during elec- tioneering in order to include them in their own campaign. Senior industry observers say that the price cut is flawed because it fails to recog- nise the inevitable cascading effect on PBS prices. ‘Instead of 12.5 per cent, Mr Abbott is actually delivering cuts of up to, and in some cases, more than 50 per cent over time,’ one industry source told the AJP. ‘As an example, the following sequence of events could occur within a therapeu- tic group of pharmaceuticals that has four different chemical entities,’ he said. This initiative will result in precisely the opposite outcome from the one intended by government ‘At the outset all products—A, B, C and D are listed at the same price. When A comes off patent a generic is launched with a 12.5 per cent price reduction, and what follows is that the subsidised price of all products A, B, C and D reduces by 12.5 per cent. ‘When a generic to B is launched, all products in the group have prices reduced by a further 12.5 per cent. The same process occurs when generics to products C and D are launched.’ In other words, the bigger the category, the more the 12.5 per cent is going to bite. ‘And that means there’s no money in generics—for anybody. All the govern- ment has succeeded in doing is signifi- cantly reducing the incentives for the generics industry in one fell swoop and the R&D industry that gave it birth,’ he said. Using the example outlined, and it becomes more complex for larger drug categories, both generics and originators need to question whether they will enter or remain in the market. For products C and D, it is unlikely that these products will remain after facing two rounds of 12.5 per cent price reductions. The price may be below the interna- tional floor price of the parent company. If manufacturers choose to delist, the departure has the effect of denying patients access to some drugs and signifi- cantly reduces competition. A GMiA member, who asked not to be named, said that the proposal meant that a similar situation applied to generics. ‘A manufacturer would be crazy to enter the market with brands C and D, knowing full well if they do, they have to reduce the price of their brands to prod- ucts A and B. It is highly questionable whether the new brand would compen- sate for loss of revenue in existing brands,’ he said. ‘As a general observation, the govern- ment has got this badly wrong and, in anybody’s view, it has to go back to the drawing board and formulate something that’s a better policy construct. This ini- tiative will result in precisely the opposite outcome from the one intended by gov- ernment.’ The policy will also create consider- able concern throughout pharmacy, especially considering that it will be up to pharmacists to explain the complex pol- icy to the public—their customers. It will also provide pharmacy’s negotiating team with some headaches, because this measure was developed outside the Community Pharmacy Agreement framework, and yet will significantly impact the PBS and the way in which pharmacists operate. See Capital Hill, p76, for more commentary. ¦ THE AUSTRALIAN JOURNAL OF PHARMACY VOL 86 FEBRUARY 2005 ? 67