Pharmac to Apply Reference Pricing to Aromatase Inhibitors, Aims for US$7.5-mil. Saving over Five Years

New Zealand's drug funding agency Pharmac yesterday announced that from 1 February 2010, reference pricing will be applied to two drugs, namely anastrozole and letrozole, under a new therapeutic subgroup, aromatase inhibitors. The agency noted that it is expecting to realise a saving of some NZ$10.3 million (US$7.5 million) in its public drug funding over five years.

Under the new reference pricing scheme, U.K. drug major AstraZeneca's cancer drug Arimidex will see its reimbursement significantly reduced from the current full funding of NZ$146.46 to NZ$26.55, as a result of reference pricing to local generic maker Douglas Pharmaceutical's generic letrozole. Meanwhile, Douglas also has its generic version of Arimidex listed, which is under subsidy reduction protection till 1 July 2011. Until then, Pharmac will fully reimburse the drug's price of NZ$29.50.

In addition, Douglas's letrozole has been granted sole supply status effective from 1 February 2010 (see New Zealand: 13 October 2009: Pharmac Grants Douglas Sole Supply Status of Generic Breast Cancer Drug Letrozole), and its originator, Swiss drug giant Novartis's breast cancer treatment Femara, will be delisted from New Zealand's drug funding list, the Pharmaceutical Schedule, on 1 July 2010. Femara's reimbursement between 1 April and 1 July will be reduced to the same level as Douglas's letrozole at NZ$26.55.

Another aromatase inhibitor, exemestane, will be exempted from this new reference pricing decision and remain fully reimbursed by Pharmac until further funding changes are made.

Outlook and Implications

With the new reference pricing policy on aromatase inhibitors through the creation of a new therapeutic subgroup on the Pharmaceutical Schedule, Pharmac is once again waving its lethal weapon of cost-controlling mechanisms to realise savings on its funding for drugs. First introduced by Pharmac in 1993, reference pricing requests all drugs in any specific eligible therapeutic sub-category be subsidised at the level of the lowest-priced drug in the same group. The system inevitably puts multinational pharma companies in a less advantageous position as their R&D and investment-intensive innovative drugs have to face the same level of reimbursement as their generic competitors. In order to keep their market share, some often have to lower their innovative drugs' prices to maintain existing consumption volume.

In the case of aromatase inhibitors reference pricing, AstraZeneca may have to drop the price of Arimidex to avoid the decline in consumption due to the substantial patient out-of-pocket payment. Nevertheless, its sales revenue is set to suffer from the reduced funding and competition of generics. Novartis's sales of Femara will face a more significant drop following the application of reference pricing and then the delisting from the Pharmaceutical Schedule. The decision has therefore again reflected the harsh marketing environment for multinational drug majors, whose innovative drugs often see their funding seriously delayed and limited as a result of the government's cost containment policy. By contrast, generic makers like Douglas are to benefit from such decisions to bolster the sales of their products with full funding or sole supply.

On the other hand, Pharmac has been facing the pressure of containing its drug funding within its pre-set annual budget together with the criticism for its restricted funding of new drugs. In fiscal year (FY) 2008/09 ended 30 June 2009, the agency spent NZ$653 million (US$464.8 million) on drug funding with a meagre 2.8% year-on-year increase. IHS Global Insight is expecting the multinational drug makers to continue feeling the pinch of Pharmac's cost controlling policies in the coming years.