This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 04 WELLINGTON 001037 
 
SIPDIS 
 
DEPARTMENT FOR EAP/ANP-TRAMSEY AND EB/TPP/BTA/ANA-RARMSTRONG 
STATE PASS TO USTR FOR BWEISEL AND DKATZ 
COMMERCE FOR 4530/ITA/MAC/AP/OSAO/GPAINE 
 
E.O. 12958: DECL: 12/14/2014 
TAGS: ETRD ECON KIPR NZ
SUBJECT: NEW ZEALAND'S PHARMACEUTICAL MARKET: NO QUICK FIX 
 
REF: A. WELLINGTON 900 
 
     ¶B. AUCKLAND 302 
     ¶C. AUCKLAND 118 
 
Classified by: DCM David R. Burnett.  Reasons: 1.4 (b) and 
(d). 
 
¶1. (SBU) Summary:  After trying in vain for years to persuade 
the New Zealand government to change its restrictive pricing 
policies on pharmaceuticals, the drug industry is taking 
another tack: reaching out to patient groups with information 
designed to bolster their demands for cutting-edge drugs not 
already covered by government subsidy.  Several U.S. drug 
companies also hold out hope that a New Zealand-U.S. 
free-trade agreement could be a lever for improving their 
access to New Zealand's pharmaceutical market. 
 
¶2. (C) The government contends it already is increasing drug 
availability by boosting the budget for pharmaceutical 
purchases over the next three years.  In actuality, its 
spending on drugs in real terms is declining.  U.S. 
pharmaceutical companies continue to struggle in what they 
view as one of the most restricted free-world markets.  They 
are cutting local staff, and they are slashing investment in 
New Zealand-based research and development.  Attempting to 
make inroads against a government mindset that is hostile to 
the drug industry, post is working with the industry to 
identify speakers and engage in other public diplomacy 
efforts that could help educate New Zealanders on the 
benefits of gaining access to a wider range of effective 
pharmaceuticals.  End summary. 
 
Limited prices, limited access 
============================== 
¶3. (U) Spending in New Zealand on government-subsidized 
pharmaceuticals has risen by less than three percent per year 
on average during the last decade, compared to 14 percent per 
year in Australia.  Only six new drugs a year were approved 
on average over the last three years for reimbursement in New 
Zealand, compared to about 30 drugs in Australia.  The New 
Zealand government nevertheless asserts that it now is 
increasing the budget for pharmaceuticals sufficiently to 
subsidize more new medicines. 
 
¶4. (U) In fact, the pharmaceutical budget rose this fiscal 
year (ending June 30) by 4.4 percent, to NZ $541 million (US 
$380 million), with planned increases in the following two 
years of .5 percent and 1.9 percent.  The smaller increases 
in the 2006-2007 and 2007-2008 budget years were based on the 
expectation that a number of expensive drugs will go off 
patent, according to Stuart Bruce, manager of communications 
and external relations for the Pharmaceutical Management 
Agency (Pharmac), a stand-alone Crown entity. 
 
¶5. (U) Exempt from New Zealand's competition law, Pharmac 
acts as a single buyer, or monopsony, that decides which 
medicines will be subsidized by the government and how much 
reimbursement will be paid for each pharmaceutical.  In some 
cases, the supplier is not allowed to set a drug price higher 
than the subsidy as determined by Pharmac.  The agency also 
puts a cap on the amount of a drug to be purchased at a 
certain price.  Its decisions effectively allocate about 73 
percent of New Zealand's spending on prescription drugs. 
Pharmac does not directly handle funding for the government's 
drug subsidy.  Those funds are dispersed by the national 
health care systems' 21 district health boards to the 
pharmaceutical suppliers after a prescribed drug is dispensed 
to the consumer. 
 
¶6. (SBU) Bruce noted that Pharmac always under-spends its 
budget because government policy prohibits exceeding it. 
That means that actual public spending on pharmaceuticals is 
likely to remain relatively flat or even decline in real 
terms over the next three years.  Further explaining why 
Pharmac spends less than planned, Bruce said that some 
patients do not pick up their prescriptions because of 
co-payment delays.  Spending projections also are based on 
the assumption that patients will consume their entire 
prescription.  Since pharmacists receive a fee each time they 
dispense a medication, they usually break a prescription into 
installments, and some patients do not purchase an entire 
prescription. 
¶7. (C) Pharmac designated 15 new products for reimbursement 
the past fiscal year, up from three new drugs in 2002-2003. 
U.S. pharmaceutical firms we talked to, however, point out 
that only one of those new medicines is freely available. 
Access to the other medicines is available only after doctors 
make special application or when patients meet specific 
criteria.  For example, only specialists can prescribe a new 
treatment for diabetes.  The drug's manufacturer believes 
2,000 to 3,000 of the more than 100,000 diabetics in New 
Zealand could benefit from the medicine.  But with just 50 
specialists nationwide, most patients are under the care of 
general practitioners, and obtaining the drug is difficult. 
Another company reported that six out of 10 applications by 
doctors for reimbursement for its schizophrenia drug are 
rejected. 
 
¶8. (C) The industry also criticizes Pharmac for a lack of 
transparency in its funding decisions.  One U.S. company 
spent more than three years negotiating with Pharmac to gain 
public funding for a schizophrenia treatment.  Without 
explanation (none is required), Pharmac broke off those 
discussions this year. 
 
¶9. (U) The New Zealand industry group Researched Medicines 
Industry (RMI) said in a statement that Pharmac is using 
"smoke and mirrors" to portray itself as widening New 
Zealanders' access to pharmaceuticals.  Since leading-edge 
medicines generally are not subsidized, they are available 
only to those who can pay the full cost, RMI said. 
 
¶10. (SBU) Publicly, Pharmac contends that it delivers the 
best health-care outcomes possible within the funding 
available, citing the fact that the volume of subsidized 
pharmaceuticals has increased while prices in general have 
declined.  Pharmac highlights the savings it reaps -- NZ $25 
million (US $17.5 million) the past fiscal year -- that would 
have been spent on the drug subsidy without its intervention 
to lower prices.  Privately, Wayne McNee, Pharmac's chief 
executive officer, acknowledged that the principal obstacle 
to funding more medicines is the government's reluctance to 
increase the pharmaceutical budget.  On that, both he and the 
industry agree. 
 
IPR and advertising under threat 
================================ 
¶11. (U) U.S. pharmaceutical companies consider New Zealand's 
patent protection to be inadequate.  Pharmac controls 
pharmaceutical prices partly through "reference pricing" -- 
determining the level of subsidy based on the lowest-priced 
product in a therapeutic subgroup.  The subgroup includes 
medicines that are similarly effective in treating the same 
or similar conditions.  This policy often pits patented 
products against lower-priced generics and does not reward 
innovation.  Pharmac's general practice is to designate for 
subsidy only one drug per therapeutic class. 
 
¶12. (U) The New Zealand government also has refused to extend 
the effective patent life of drugs, which now stands at seven 
years on average (ref A).  One U.S. company views the issue 
as irrelevant, since Pharmac's reference pricing undermines 
its patents' commercial value anyway.  Most companies see the 
government's position on effective patent life as further 
evidence of its disregard for the pharmaceutical industry. 
Further eroding their patents' worth is the so-called 
springboarding provision in New Zealand's patent law, which 
allows generic competitors to start the process of seeking 
market approval while a proprietary drug is still under 
patent. 
 
¶13. (C) In addition, U.S. pharmaceutical companies continue 
to worry that the government will ban direct-to-consumer 
advertising, one of the industry's few pathways around 
Pharmac's controls (ref C).  Several companies, especially 
those marketing so-called lifestyle drugs for such conditions 
as hair loss and erectile dysfunction, have built sales 
through advertising.  Unsubsidized drugs accounted for 30 
percent of sales for Merck Sharp & Dohme, 25 percent for 
Pfizer, 20 to 25 percent for Pfizer, 20 percent for Johnson & 
Johnson, 15 percent for Eli Lilly and less than 6 percent for 
GlaxoSmithKline this year in New Zealand.  Health Minister 
Annette King and Pharmac oppose direct-to-consumer 
advertising (DTCA) partly because they believe it tends to 
increase expenditures on pharmaceuticals.  DTCA also 
pressures Pharmac to explain why it does not fund certain 
advertised drugs.  Companies are wary of the New Zealand 
government using a joint regulatory agency it is establishing 
with Australia as a vehicle for banning DTCA, which is not 
allowed in Australia.  However, the Australian High 
Commission told post that such a decision is for the New 
Zealand government alone to make. 
 
A big hit on industry 
===================== 
¶14.  (U) From Pharmac's pricing policies to the government's 
positions on intellectual property and direct-to-consumer 
advertising, U.S. pharmaceutical companies consider New 
Zealand to be hostile ground.  Unable to meet their sales and 
profit targets, they say it is becoming increasingly 
difficult to persuade their home offices to keep investments 
or even a presence in the country. 
 
¶15. (C) As a result, almost all U.S. companies in New Zealand 
have scaled back their staffs and their 
research-and-development investments since Pharmac was formed 
in 1993.  During the past year, Eli Lilly cut 20 percent of 
its staff to 27 people, from a peak of 70 employees in the 
mid-1990s.  GlaxoSmithKline has reduced its staff by 65 
percent, down to about 50 people.  Pfizer downsized its 
pharmaceutical division by 15 percent, to 60 people.  Johnson 
& Johnson two years ago cut its staff by 10 percent, and Jan 
Trotman, its general manager in New Zealand, said that if 
conditions do not improve in 2005, the company could leave 
the country in three to five years.  (Some staff cuts are due 
to the shifting of regulatory oversight from New Zealand to 
Australia with the scheduled launch of the trans-Tasman 
agency in July 2005.)  The exception is Merck, where 
employment has remained stable and sales have increased, 
partly because of its higher sales of vaccines. 
 
¶16. (C) Because of the difficult environment, all the 
companies have reduced -- and, in some cases, ceased -- 
investment in research and development in New Zealand (ref 
B).  Eli Lilly is completing two clinical trials, but 
otherwise has transferred all its research and development. 
Ten years ago, every U.S. drug company in New Zealand 
employed a medical director.  Now, only Merck has one. 
Ironically, New Zealand presents a small but optimal 
environment for clinical trials of pharmaceuticals because of 
its population's lack of exposure to newer medicines. 
Minister King had threatened to end clinical trials unless 
patients participating in a trial had free, lifetime access 
to the medicine once the trial ended.  Other cabinet 
ministers told her to stop making that threat. 
 
¶17. (SBU) Nearly every company said it was holding out some 
of its newer medicines from New Zealand because of the 
expectation that prices and sales volumes would be too low. 
For the New Zealand consumer, the result is less access to 
modern medicines. 
 
Times they are a-changin'? 
========================== 
¶18. (SBU) Pharmaceutical companies see ideological opposition 
to their industry in comments by Prime Minister Clark, Health 
Minister King and other cabinet members.  One pharmaceutical 
executive recalled how, upon simply introducing himself at a 
public forum, the Prime Minister said the drug industry 
needed to be "stopped" from making excessive profits.  (The 
industry may be paying a price for its unsuccessful effort in 
1990 to unseat Clark, who at the time was health minister.) 
Health Minister King has publicly equated the pharmaceutical 
industry with the tobacco industry.  When several companies 
warned her that her government's policies would force the 
industry out of New Zealand, she responded that she was not 
concerned because New Zealand could always shop overseas for 
its drugs. 
 
¶19. (SBU) Amid such perceived hostility, there have been 
subtle changes.  In the past couple years, RMI and Pharmac 
have worked to maintain dialogue, although RMI in recent 
months under a new chairman -- a general practitioner -- has 
more aggressively promoted the industry's views in the media. 
 While drug companies remain unhappy with Pharmac's 
practices, they see capped government funding, rather than 
Pharmac itself, as their primary problem.  Several companies 
noted an emerging public debate over access to medicines, a 
discussion that was nonexistent even a couple years ago. 
Public attitudes are changing slowly.  As Alister Brown, 
Merck New Zealand's chief executive, noted, consumers five 
years ago assumed that if Pharmac did not fund a drug, it was 
not worth having.  An increasing number of consumers are now 
willing to pay for non-subsidized drugs. 
 
¶20. (C) Finding that its direct pressure failed to alter the 
government mindset, the industry is now firing up pressure 
from below.  For the last six months, RMI has been working 
with patient groups to make them aware of cutting-edge 
pharmaceuticals that are not being subsidized in New Zealand. 
 Lesley Clarke, RMI's chief executive officer, hopes this 
effort will result in increased pressure on the government to 
hike funding for drugs.  Although Clarke said it would be too 
early to see results of RMI's efforts, New Zealand newspapers 
in recent months have reported complaints by patient groups 
over the lack of funding for drugs to treat breast cancer, 
Alzheimer's disease, and growth hormone problems. 
 
¶21. (SBU) New Zealand's doctors would appear to be likely 
cheerleaders for greater access to pharmaceuticals.  However, 
industry market research shows that fewer than 20 percent of 
New Zealand's doctors would tell their patients of non-funded 
alternatives to subsidized medications.  The drug companies 
contend that doctors are reluctant to publicly call for 
change. 
 
¶22. (C) A possible U.S.-New Zealand free-trade agreement 
(FTA) offers one last avenue for changing government policies 
that limit access to pharmaceuticals, several U.S. companies 
said.  Meanwhile, Geoff Dangerfield, chief executive of the 
New Zealand Ministry of Economic Development, told a U.S. 
drug company that his government terminated its study of 
patent term extension for pharmaceuticals to keep the issue 
as a bargaining chip in the event of FTA negotiations.  If 
FTA talks go forward, most of the drug companies will be 
looking to the U.S. government to win serious concessions 
from New Zealand on pharmaceutical issues.  Pfizer, which 
withdrew from RMI early this year, will oppose free-trade 
negotiations until the New Zealand government alters some of 
its policies, especially its patent law and reference pricing. 
 
Post's strategy 
=============== 
¶23. (SBU) The challenge is compounded by New Zealand's 
escalating health-care costs and an aging population. 
Overall health-care spending has risen faster than any 
government budget category since 1994 and now comprises about 
20 percent of the government budget.  In the meantime, the 
government's effort to reduce the cost of seeing a doctor has 
led to more patient visits, more prescriptions, and more 
purchased pharmaceuticals.  As a result, Bruce of Pharmac 
said his agency would face more pressure to ration its budget 
or seek a larger portion of the already stressed health 
budget. 
 
¶24. (C) To complement the industry's efforts, post will work 
with companies to identify U.S. speakers to be brought to New 
Zealand and possible International Visitor Program 
participants, with the goal of educating New Zealand's health 
practitioners, policymakers and consumers on pharmaceuticals' 
role in health care.  These programs will emphasize the 
advantages of expanded access to medicines and treatment 
options and the link between pharmaceutical research and 
development and the biotechnology industry, which the New 
Zealand government prominently supports as a means to 
economic growth.  By keeping drug expenses artificially low, 
the New Zealand government is denying consumers access to 
many modern medicines and failing to bear an equitable 
portion of the cost of developing drugs.  Over the long term, 
post hopes its efforts will help New Zealand strike a balance 
between providing affordable medicines and supporting an 
industry that creates cures for disease. 
Swindells