DRUG INDUSTRY SEES POSSIBLE SALVE TO ITS PAIN IN

C O N F I D E N T I A L WELLINGTON 000040

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR EAP/ANP-DRICCI AND EB/TPP/BTA/ANA-MBGOODMAN
STATE PASS TO USTR FOR BWEISEL
COMMERCE FOR 4530/ITA/MAC/AP/OSAO/ABENAISSA

E.O. 12958: DECL: 01/12/2016
TAGS: ECON ETRD NZ
SUBJECT: DRUG INDUSTRY SEES POSSIBLE SALVE TO ITS PAIN IN
NEW ZEALAND

REF: A. 05 WELLINGTON 577


B. 05 WELLINGTON 119

C. 04 WELLINGTON 1037

(U) Classified by Charge d'Affaires David R. Burnett.
Reason: 1.4 (b) and (d).

Summary
--------------

1. (SBU) The pharmaceutical industry in New Zealand is
enjoying a dose of optimism about the prospect of changes to
the government's drug-purchasing system, which has crimped
the industry for the past 12 years. The government has
promised a review of the system that controls the range and
price of most prescription medicines in New Zealand, at a
time when patient and doctors' attacks on its drug-purchasing
agency have escalated. Nonetheless, most drug companies
continue to believe that only the lure of a free-trade
agreement between New Zealand and the United States would
prompt the New Zealand government to make the changes the
industry contends are needed to assure its long-term
viability in the country.

Pressuring PHARMAC
--------------

2. (U) Since 1993, the Pharmaceutical Management Agency
(PHARMAC) has decided which medicines will be subsidized by
the government and how much reimbursement will be paid.
PHARMAC controls the purchase of about 80 percent of
prescription pharmaceuticals in New Zealand. The agency's
aim is to contain pharmaceutical spending, and it has largely
succeeded. While the total number of prescriptions written
for most drugs has risen since 1997, the average price of
prescriptions has decreased, mainly as a result of price
reductions negotiated by PHARMAC with drug manufacturers.
The focus on holding down costs has meant that many
cutting-edge drugs are not subsidized or that manufacturers
withhold certain unsubsidized drugs from the New Zealand
market because their negligible sales discourage efforts to
secure regulatory approval (ref C).


3. (U) Over the past year, PHARMAC has come under increased
political criticism, greater scrutiny by the media and
sharper questioning by the public. First, it mishandled the
supply of the nation's influenza vaccine before last winter's
flu season. To secure the best deal, PHARMAC placed its
entire vaccine order with Sanofi Pasteur, which then
encountered a manufacturing problem in late February 2005
that left New Zealand 150,000 doses short. Alternate
suppliers eventually were found, and PHARMAC now insists on
dual sources for vaccines. But the incident highlighted the
agency's common practice of maximizing discounts by
negotiating with a single supplier.


4. (U) Patient groups, doctors and the public have become
increasingly vocal about PHARMAC's shortcomings -- a contrast
from past years in which consumers generally believed that if
PHARMAC did not fund a drug, it was not worth having (ref C).
Uppermost in the public's mind is the agency's failure to
fund modern medicines for a range of illnesses including
early stage breast cancer, heart disease, HIV/AIDS and
Alzheimer's. PHARMAC last year backed down from several
decisions that sparked outrage among doctors and patients.
For instance, the agency had hoped to save NZ $1 million (US
$697,300) by halting subsidies for the asthma drug Ventolin
in favor of Salamol, a cheaper substitute. After a public
outcry, PHARMAC announced it would allow patients to choose
either product for a two-year period. In perhaps the most
significant expression of public unhappiness with PHARMAC, 25
non-government health organizations on November 24 launched
the Access to Medicines NGO Coalition, calling for a review
of PHARMAC.


5. (U) The past year also has seen a surge in newspaper
articles describing the plight of patients with
life-threatening diseases who were unable to afford
unsubsidized medicines. Professional criticism is also on
the rise. Several cancer specialists told reporters that New
Zealand lagged other Western countries in providing publicly
funded access to the latest cancer drugs. A cardiologist
said doctors increasingly were being forced to treat patients
with outmoded medications. The New Zealand Medical Journal
published a series of case studies criticizing PHARMAC's
practices, including its sole-supply agreements, the
asthma-drug decision and the failure to subsidize certain

medicines.


6. (C) These developments provide mounting evidence of eroded
public confidence in PHARMAC, according to Lesley Clarke,
chief executive officer of Researched Medicines Industry
Association of New Zealand (RMI),the industry's trade
association. She also noted that, after the flu-vaccine
debacle, then Minister of Health Annette King acknowledged
for the first time that PHARMAC needed improvement.

Reviewing Pharmac
--------------

7. (U) The Labour government has promised to develop "a
long-term medicines strategy relating to quality
pharmaceutical usage in the health sector including the role
PHARMAC should play in implementing that strategy." Labour
made that commitment as part of its agreement with the United
Future party to form a government after the September 17
elections. The opposition National Party, which created
PHARMAC while in government in 1993, also supports an agency
review.


8. (SBU) PHARMAC says it welcomes such a review, which it
hopes will bring about an increase in the budget for drug
purchases. According to Stuart Bruce, the agency's
communications and external relations manager, PHARMAC last
year ordered a review of its decision-making process for
high-cost drugs and expects to consider proposed changes this
year. Bruce said PHARMAC has found it increasingly difficult
to choose between funding expensive drugs for less common
diseases and funding cheaper medicines that help larger
numbers of patients.


9. (C) A new health minister, Pete Hodgson, also may portend
a more hospitable environment for the pharmaceutical
industry. According to Clarke of RMI, Hodgson, a former
veterinarian and science teacher, acknowledges a link between
a strong biotechnology sector -- one of the government's top
economic goals -- and research and development funded by the
pharmaceutical industry. Faced with a restrictive business
environment, the industry over the last decade has slashed
its research spending in New Zealand. Hodgson's predecessor,
Annette King, took a different view of the pharmaceutical
industry, telling its representatives that if the industry
disappeared from New Zealand, the country would simply source
its medicines elsewhere.

Industry in flux
--------------

10. (C) These potential changes come at a moment when many of
the pharmaceutical firms are reporting that, for the first
time in years, they are not cutting staff. A couple company
chief executives also noted that, for the first time in three
to four years, they have succeeded in getting a new drug
funded -- albeit, at the cost of accepting further reductions
in the subsidized prices of other products. On the other
hand, GlaxoSmithKline (GSK) last year reduced its staff in
New Zealand by 73 percent, to fewer than 15 positions. It
lost to competitor companies in trying to win subsidies for
several of its leading drugs, and a couple of its competitors
say that GSK is paying a price for publicly and aggressively
challenging PHARMAC a couple years ago.


11. (C) Many of the pharmaceutical companies believe that
only a U.S. offer of free-trade negotiations would induce the
New Zealand government to consider significant policy changes
that would affect the industry's competitive position. One
company representative cited the government's suspension of a
study on extending the effective patent life for
pharmaceuticals as evidence of the government's decision to
forgo any changes to pharmaceutical policies that might be
used as trade-offs in negotiating a free-trade agreement
(FTA). The industry wants many of the same concessions that
were provided in the Australia-U.S. FTA, particularly
requiring greater transparency in the drug-purchasing
agency's decision-making and the right to appeal its
decisions. In addition, the industry wants a longer
effective patent life for pharmaceuticals and a change in
PHARMAC's reference-pricing practice, or subsidizing a
pharmaceutical at the level of the lowest-priced medicine in
a therapeutic subgroup. The industry wants a commitment to
greater funding of pharmaceutical purchases.


12. (C) Meanwhile, a local area working group (LAWG) was
formed last year by eight pharmaceutical companies that are

based in the United States or do business there. The group
includes two companies -- Pfizer and GSK -- that withdrew
from RMI over the past two years in disagreement over RMI's
priorities. The LAWG's professed aim is to work on issues
that might be raised in FTA negotiations and address concerns
beyond just pharmaceuticals, such as investment in research
and development. However, RMI -- which LAWG members said
would continue to serve as the industry's public spokesperson
-- worries that there may not be room for both groups. The
formation of another industry group may give the government
(and PHARMAC) more leverage in playing one company off
another. However, the LAWG's formation also may foreshadow a
more aggressive approach by the industry toward the
government.

Comment
--------------

13. (C) Notwithstanding U.S. government views on a possible
FTA with New Zealand, post believes that the formation of a
new coalition government provides a timely opportunity to
foster dialogue between the pharmaceutical industry and the
government. Post is working with the British High Commission
to co-host informal meetings between the industry and
government that would aim to reduce the animosity that has
characterized their relations. (The British are assisting us
to prevent the appearance of a U.S.-only initiative.) This
ideally would allow each side to gain a better understanding
of each other and to recognize common goals. The intent is
to supplement the efforts of both RMI and the LAWG.
Burnett