Evaluation of the pharmaceuticals industry investment program

The Australian pharmaceutical industry is a major and innovative contributor to the economy, with a high R&D intensity, a skilled workforce and high wages. However, pharmaceutical firms perceive the low prices they receive under the Pharmaceutical Benefits Scheme as a deterrent to activity in Australia.

The Pharmaceutical Industry Investment Program (PIIP) is intended to induce domestic activity lost as a result of such price suppression.

The PIIP has been effective in stimulating R&D and, to a lesser extent, value added in production. It has also had broader benefits for the capabilities of the industry, for example, by shifting R&D to more complex areas.

Despite this effectiveness, the program is not likely to make Australia better off overall.

• Its major rationale - to help counter the effects of low PBS prices on pharmaceutical activity - is, by itself, insufficiently strong to justify a tax-funded program, with the costs that this entails.
• Notwithstanding some benefits, particularly from spillovers associated with R&D activity, it is likely that the program generates net costs for Australians. This mainly reflects the distorting costs of raising taxes and the difficulties in targeting the program that lead to significant transfers abroad.
• It has some inflexibilities in its design that reduce its benefits.

There are, nevertheless, some policy impediments to the industry - particularly the inability of many pharmaceutical firms to effectively access the R&D Tax Concession, as well as the persistence of some PBS-related effects - which provide grounds for policy action. A replacement program - significantly modified from the current PIIP - is warranted. Given the prospects of high additionality and significant spillover benefits, a modified program, re-oriented to only R&D, is likely to generate net benefits for Australia as a whole.

• Other design changes would also produce dividends, such as providing more scope for high calibre applications after program commencement.

There are grounds for changing patent law to permit Australian producers of generic drugs to export to countries where patents have expired during the period of the Australian patent extension.

According to a Productivity Commission evaluation, the $300 million Pharmaceutical Industry Investment Program, due to expire in 2004, should be replaced by an R&D subsidy program for the Australian pharmaceutical sector.

The current program has been effective at stimulating R&D and this has produced significant flow on benefits for the economy. However, most spending has been on supporting production with the benefits being outweighed by the costs associated with raising taxes and with transfers to foreign shareholders.

The Commission found that, while low prices paid by Government for drugs listed under the Pharmaceutical Benefits Scheme could restrain pharmaceutical activity in Australia, this effect was not strong enough, by itself, to justify an assistance program.

The main case for action comes from the inability of foreign enterprises to effectively access the R&D Tax Concession. The Commission concluded that changing the concession itself was not a desirable option in the medium term. This, and additional information on the program's effectiveness, led the Commission to modify its draft report judgment that the program should cease altogether after 2004.

'A new program, focussed just on R&D and designed to be more flexible, should produce net benefits for Australians and offset some of the policy impediments limiting the development of the local industry,' said Commissioner Tony Hinton.

The report also discusses a range of other policy-related impediments to the industry stemming from the treatment of generic exports and the listing processes of the PBS.

Preliminaries
Cover, Copyright, Foreword, Contents, Terms of reference, Abbreviations, Glossary, Recommendations and findings

1 Introduction
1.1 Overview of the Pharmaceutical Industry
1.2 Key issues and methodology
1.3 Guide to the report
1.4 Participation

2 The Pharmaceutical Industry Investment Program
2.1 Objectives and guiding principles of the program
2.2 Entry to the PIIP
2.3 Eligible activity
2.4 Entitlements
2.5 Payments
2.6 Administration of the program
2.7 Use of the PIIP

3 Compensating for the Pharmaceutical Benefits Scheme
3.1 Introduction
3.2 The Pharmaceutical Benefits Scheme
3.3 Is there price suppression?
3.4 Does price suppression reduce drug profits?
3.5 Does price suppression reduce domestic activity?
3.6 Are any adverse activity effects inefficient?
3.7 Is there a rationale for assistance based on price suppression and PBS defects?

4 Other rationales
4.1 Spillover effects from pharmaceutical activity
4.2 Inter-governmental competition for investment
4.3 Information failure, 'rules of thumb' and firm location decisions
4.4 Geopolitical considerations
4.5 Conclusion

5 Effectiveness of the PIIP
5.1 General observations on inducement
5.2 Problems in measuring whether the PIIP has made a difference
5.3 Empirical estimates of the effects of the PIIP on value added
5.4 Research and development
5.5 Case studies
5.6 Comparisons with past results
5.7 Conclusions

6 Economic efficiency of the PIIP
6.1 The meaning of efficiency and net benefit
6.2 Net benefit methodology
6.3 Results
6.4 Conclusions regarding efficiency

7 A modified PIIP
7.1 Access to the R&D Tax Concession
7.2 Modifications to improve the effectiveness of the PIIP
7.3 Conclusion

8 Other measures
8.1 Clause (f) of the PBPA guidelines
8.2 PBS processes
8.3 Patent extension and the effect on generic pharmaceutical manufacturers

A Meetings, submissions and survey respondents

B Relationships between price and activity

C Existing assistance measures for R&D

D Explaining international price variations

E Adjustment issues

F A ring-fenced R&D Tax Concession versus a modified PIIP

Glossary

References