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PMPRB NEWS - The Federal Court finds compelled disclosure and review of third-party rebates are ultra vires the Patent Act

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Intellectual Property Bulletin

On June 29, 2020, Justice Manson issued a decision regarding the recent amendments to the Patented Medicines Regulations (the "Amendments") and the Patented Medicine Prices Review Board (PMPRB). He declared that compelled disclosure of third-party rebates (such as those contained in Product Listing Agreements between provinces and drug manufacturers) was beyond the scope of the PMPRB's regulatory jurisdiction under the Patent Act. At the same time, he also ruled the Patent Act did authorize the introduction of new pharmacoeconomic factors into the PMPRB's price calculations, and that it authorized an update to the basket of comparator countries whose drug prices are used as references by the PMPRB in its domestic price regulation. 

Key Takeaways

  • The Court found that "excessive pricing" is  a form of patent abuse that is distinct from the general patent abuse regime at section 65 of the Patent Act.
  • The Federal Court confirmed that the PMPRB is not empowered to set prices, and that its proper role consists of "protecting consumers from the [patent] abuse of excessive pricing."
  • The Federal Court accepted the dividing line between proper and improper patent legislation is the division between abuse prevention and price control.
  • The Federal Court upheld the introduction of the two new economic factors and the amended basket of countries, since these amendments were reasonably connected to the PMPRB's regulatory mandate.
  • However, compelled disclosure of third-party rebates exceeds the scope of the PMPRB's jurisdiction over the ex-factory price.

This decision takes effect immediately, even if there is an appeal. The federal government could seek a stay pending appeal, but such stays are not frequently granted.

The Impact

The elimination of compelled disclosure of third-party rebates may have a greater practical effect on the PMPRB than what immediately meets the eye, since without this information, a large part of the PMPRB's planned regulatory approach under the amendments would no longer be possible.

According to the PMPRB Draft Guidelines 2020 released on June 19th, the Amendments would allow the PMPRB to move from regulating list prices alone to a dual regulatory approach. Under this two-pronged approach, the PMPRB would set both a "Maximum List Price" and a "Maximum Rebated Price".

The Maximum List Price would apply to all patented drugs and would typically be set at the median price of the basket of 11 comparator countries created by the Amendments.

The Maximum Rebated Price, or MRP, would apply to what the Draft Guidelines call "Category I medicines."  These medicines are defined in the Draft Guidelines as medicines with an annual treatment cost of over 150% of GDP (currently $90,000) or with an annual market size of over $50 million). The PMPRB will set the MRP based on a complex calculation involving the two new economic factors, the pharmacoeconomic profile of the product and the total market size. In general, this formula has been designed to always produce an MRP that is below the maximum list price. In many cases, the MRP will be substantially below the maximum list price. So low in fact that the PMPRB's formula had to include built-in "floors" to the price reduction in order to prevent the results from being absurdly low.

Despite its name, the MRP is not really a maximum "price." Rather, the MRP is defined as the net revenue received by the drug's manufacturer after subtracting third-party rebates from the list price. In reality, the MRP is a mechanism which forces drug manufacturers to offer rebates to public and private insurers in order to lower their net revenue to a level that complies with the MRP.

As counter-intuitive as the above might seem, it was the intended effect of the Draft Guidelines. For example, suppose that a drug's maximum list price is $10 under the Draft Guidelines. Suppose that the PMPRB reviews the pharmacoeconomic profile of the product and determines a Maximum Rebated Price is $7 (30% reduction).

In parallel, the patentee will engage in confidential rebate discussions with third parties (i.e. public and private insurers). These negotiations may or may not lead to signature of Product Listing Agreements under which the patentee agrees to make confidential rebate payments.

According to the 2020 Draft Guidelines, when the patentee reports the average transaction price of its sales, this report will reflect the confidential third-party rebates (if any) paid to insurers. In the hypothetical example above, if this average transaction price is not $7 or below, then the price may be considered excessive.  So for example, if the drug manufacturer had negotiated a $2 rebate, and reported $8 as its average transaction price, then it would be offside the $7 MRP established under the 2020 Draft Guidelines. It is unclear how the PMPRB expects patentees to achieve compliance with the MRP, since in our hypothetical example, the drug's manufacturer would presumably have to renegotiate its Product Listing Agreements in order to offer greater rebates. Compound that with a tendering environment, where the manufacturer loses a tender that was the only thing keeping the price in line with the MRP.

And in some cases, the PMPRB-mandate rebate will be very great indeed. For example, the 2020 Draft Guidelines require a 50% rebate (without exception or variance) for all "Category I" medicines costing more than $90,000 annually, that did not go through an HTA process in Canada. This requirement will have a drastic impact on any medicine launching in the private market (which is typically the only type of medicine that does not receive an HTA in today's market environment). Quite apart from the mandatory 50% rebate, this proposed rule would have required drug companies to sign Product Listing Agreements with private insurance companies. Otherwise it is difficult to see how they could achieve the required 50% rebate imposed by the 2020 Draft Guidelines. And significantly, if that same product sold over $50 million, there would be an additional mandated reduction of up to 35%.

But all of the above has become somewhat academic, since the recent Federal Court ruling struck down the part of the Amendments that would have required patentees to disclose confidential rebates.

This means that in practice, the PMPRB will not have any information allowing it to assess a patentee's compliance with Maximum Rebated Price, because it will only have access to the ex-factory price.

But the impact of the Federal Court's decision goes further, and indirectly affects the new economic factors. This is because based on the current PMPRB Draft Guidelines 2020, the only purpose of these factors is to set the MRP. The new economic factors played no role in setting the maximum list price. As a result, it is unclear what purpose these factors will serve going forward.

As a result, when the Federal Court's decision is considered in the context of both the Amendments and the 2020 Draft Guidelines, two out of three components of the Amendments have been rendered moot. The compelled disclosure of confidential rebates was struck down by the Federal Court, and the economic factors cannot be used in the manner that was contemplated in the 2020 Draft Guidelines. In this context, the only part of the Amendments which remains unaffected at this time is the change to the basket of comparator countries.

Of course, it remains to be seen how the PMPRB will react: will we see yet another version of the guidelines? For example, will the PMPRB simply abandon the use of the economic factors altogether, or will it shift to using these factors to set list prices, to set ex-factory (off-invoice discounting) prices or simply relegate the use of these factors to special situations? Or will the Federal Court's decision be brought to appeal, potentially changing the legal context still further? Only time will tell.

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