Canada: Federal Court Finds Certain Third Party Payments Are Not Reportable To The Patented Medicines Prices Review Board (PMPRB)

On July 10, 2009, the Federal Court of Canada released its decision in Pfizer Canada Inc. v.Canada (AG), 2009 FC 719. The court found that payments made by manufacturers to "third parties," such as the provinces under "expenditure limitation agreements" or "negotiated price agreements," do not need to be reported to the PMPRB as they do not relate to the "sale" of the medicine. The court also determined that the jurisdiction of the PMPRB only extends to regulating excessive pricing in the ex-factory price to "customers" of the manufacturer.

The applicants sought to challenge a PMPRB decision requiring patentees to report rebates (including rebates to third parties), in calculating the average price of patented medicines. They argued that the PMPRB only had jurisdiction to require such reporting on sales at the factory gate.

In its decision, the court examined sections 4(1)(f)(i) and 4(4)(a) of the Patented Medicines Regulations. Section 4(1)(f)(i) requires manufacturers to provide certain information to the PMPRB, including "the average price per package or the net revenue from sales in respect of each dosage form, strength and package size in which the medicine was sold by the patentee or former patentee to each class of customer in each province and territory." Section 4(4)(a) of the Regulations requires the manufacturers to factor any rebates, discounts and refunds into that pricing calculation.

The court interpreted "customer" as the first purchaser of the medicine, for example, primarily wholesalers, pharmacies (i.e., wholesale druggists and registered pharmacists), drug manufacturers, hospitals or practitioners. The court noted that these are the only entities to whom a manufacturer can sell a prescription drug without a prescription absent a written order as prescribed by section C.01.043 of the Food and Drug Regulations. In the present case, there was no such written order.

With regard to the definition of "sale," the court accepted that it involves the "transfer of a physical product to an entity that actually takes title to and possession of the patented medicine in question in exchange of valuable consideration that is, a sale in the conventional sense."

Based on these interpretations of "customer" and "sale," the court held that provinces are not customers as contemplated by the patented medicines price control provisions of the Patent Act and the associated regulations as they never take "title" of the medicine and are not parties to the sales transaction. The court equated the provinces' role in such transactions to "that of public insurers who reimburse eligible patients for the cost of their drugs," and further stated:

The fact that the payments made by patentees under expenditure limitation agreements may, in some cases, be calculated as a percentage of the sales of the patented medicine in question does not make the province a customer of the patentee. By way of analogy, the rent paid by a restaurant business under the terms of a commercial lease may be calculated, in part, as a percentage of the restaurant sales. Such a contractual term does not turn the landlord into a customer of the restaurant.

With respect to the PMPRB's jurisdiction, the court stated:

Quite apart from the constitutional issues that would arise if the Board were able to go beyond an examination of the factory-gate prices charged for patented medicines, it is also clear from subsections 4(5) and 4(6) of the Regulations that the Board is only empowered to inquire into prices charged beyond the factory-gate where the factory-gate sale by the patentee is a non-arm's length transaction.

The court dismissed the notion that the manufacturer's payments to the provinces under these agreements were "rebates" as per the reporting requirements of the regulations. The court determined that a rebate involved the "return of a portion of money actually paid." Thus, it could not be paid to a stranger to the sale transaction. The court went on to state that:

... even if the monies paid to the provinces by patentees could be considered to be a refund, a discount or any other benefit of a like nature, for the purposes of paragraph 4(4)(a) of the Patented Medicines Regulations, such payments still do not relate to patented medicines "sold" to a "customer" as contemplated by subparagraph 4(1)(f)(i).

As a result of the decision, manufacturers do not need to report payments made to third parties to a sales transaction (e.g., to those who never take title of the drug) and to those with whom they do not deal at arm's length.

It is important to note that the court in Pfizer did not overturn the prior decision of Leo Pharma Inc. v. Canada (AG), [2007] F.C.J. No. 425, wherein the court found that the PMPRB should have taken into account the manufacturer's provision of free goods under a compassionate use program to calculate the average transaction price (ATP) for the drug. The court's decision in Leo Pharma resulted in the calculation of an effectively lowered ATP for the drug, thus negating a previous excessive price order.

In commenting on the decision in Leo Pharma, the court in Pfizer stated:

While Justice Blais held that the determination of the average price for a medicine must take into account any reduction given as a promotion or in the form of rebates, discounts, refunds, free goods, free services, gifts or any other benefits of a like nature, he did not consider whether this obligation extends to "rebates or payments to third parties."

As a result, for manufacturers who have implemented compassionate use or patient financial assistance programs, reporting obligations would still likely apply depending on how they are organized. Such manufacturers should also keep detailed records to demonstrate that any price fluctuations that may be beyond the permissible limit are due to the reduction or termination of such benefits.

The ability to rebound to the highest Non-Excessive Average Price of another market is contingent on evidence demonstrating that benefits are no longer offered in the market employing the DIP Methodology. In markets where some benefits are ongoing, the DIP Methodology limits the rebound in price to a price commensurate with the remaining benefit. Markets are defined as hospital, wholesaler and pharmacy markets within the class of customer markets and each province and territory within the provincial/territorial markets. For an outline of the requirements relating to this issue, please refer to Schedule 10 ("DIP Methodology") of the new PMPRB guidelines "Compendium of Policies, Guidelines and Procedures, June 2009" that are to take effect January 1, 2010.

Practical Tips

  1. The jurisdiction of the PMPRB is limited to regulating excessive pricing in a manufacturer's factory-gate price of a patented drug to its customers.
  2. Payments made by manufacturers to third parties, such as the provinces under "expenditure limitation and negotiated price agreements," do not need to be reported to the PMPRB.
  3. The Pfizer decision does not appear to affect the prior decision in Leo Pharma regarding the PMPRB taking into account benefits provided under a compassionate use program, in its ATP calculation.
  4. Proper documentation regarding any benefits (e.g., rebates, discounts, free goods) and payments should still be maintained.
  5. The deadline for filing an appeal to the Pfizer decision has not yet expired. As such, we will need to wait and see if this decision will stand unchallenged.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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