1. . Tanya Potashnik: A/Director, Policy and Economic Analysis October, 2013 Patented Medicine Prices Review Board CPI Initiative

2. CPI-Initiative - Background  The Consumer Price Index methodology was introduced as part of the Board´s Guidelines on Excessive Prices in 1989, in application of the CPI pricing factor listed in the now sub- section 85(1)(d) of the Patent Act.  The CPI is one of four pricing factors the Board must take into consideration when determining whether the price of a patented drug product is excessive.  The CPI Adjustment Methodology was last amended in 1994 and applies to ‘existing’ patented drug products in accordance with the Board´s Guidelines. 2

3. CPI-Initiative  To allow patentees to set prices reflective of current CPI rates, the Board´s CPI methodology provides for the calculation of the CPI Adjustment factors based on forecast changes in the CPI.  These forecasted CPI Adjustment factors are published each year in the April NEWSletter.  Patentees are able to use these published forecasted factors to increase their prices up to the allowable maximum. The actual CPI values are obtained in January of the following calendar year, which are used by Board Staff in accordance with the Guidelines, to calculate the National Non-Excessive Average Price (N-NEAP) for the year. 3

4. CPI-Initiative  Using an actual CPI rather than forecast CPI may provide for:  better aligning the PMPRB´s processes  improving internal operations  reduction of uncertainty that could affecting patentees´ pricing models and business planning for subsequent years  predictability and certainty for patentees when they consider price increases  An impact analysis conducted by Board Staff shows that over the last twelve years, forecasted CPI values tended to be lower than actual CPI.  The average difference between forecast and actual CPI has been relatively small. On average, the forecasted CPI has been 2.03% and actual CPI has been 2.07%. 4

5. Regulatory Burden Reduction  In alignment with the Government’s Red Tape Reduction Plan and Economic Action Plan, the PMPRB has committed to examining its price review process to identify possible ways to reduce the regulatory burden on patentees and increase efficiency without adversely affecting its mandate to protect consumer interests.  The Board consulted stakeholders in a Notice and Comment issued May 2013 on the two priority initiatives to amend the CPI-Adjustment Methodology and the filing requirements.  12 stakeholders provided submissions.  Feedback on both proposals was generally supportive. 5

6. CPI-Initiative: Summary of Stakeholder Feedback  Stakeholders were overall supportive of the CPI initiative. 3 Broad Areas of Concern:  Details on how actual lagged CPI would be determined and when it would be communicated to stakeholders.  Assurance that the use of actual lagged CPI was in line with provincial drug plan policies on price changes.  Patentees did not want to be in a position where the ability to raise prices was curtailed during transition period. 6

7. CPI Initiative—Next Steps  Notice and Comment (May 2013): Maintain the current CPI- Adjustment Methodology for existing drug products, except replace the use of the forecast CPI with actual CPI in calculating the CPI-Adjustment Factor for the forecast period.  Notice and Comment (October 2013): Provide further clarity on the proposal with the Side by Side Changes to the Guidelines. 7

8. CPI Initiative – Proposal Detail  The current methodology will be maintained and the CPI used will be the actual lagged CPI that is available in the 3 rd week of January  The new CPI initiative is proposed for 2015 implementation  The January 2014 NEWSletter will announce the actual CPI for the 2013 year, a 12-month period ending in December 2013. This actual lagged 2013 CPI will be used to calculate the CPI-Adjustment Factors for 2015  In the April 2013 NEWsletter, patentees were provided with the 2014 forecast CPI-Adjustment Factors. For 2014, the existing CPI- Adjustment Methodology will be applied  The CPI initiative is proposed for implementation for 2015, as a result transitional measures are not being contemplated 8

9. CPI-Adjustment Factors that will Influence the Price if Initiative is Implemented for 2015 201420152016 CPI-Adjustment Factors that Influence Price April 2013: Forecast CPI was released. This will be used in calculating the adjustment factors for the forecast period of 2014. Actual CPI that is available January 2015 (for 2014 year). No release of forecast CPI in April 2014 (for 2015). Actual CPI that is available January 2014 (for 2013 year)  This number will be used to calculate the adjustment factors for the forecast period of 2015.  We are committing to this actual CPI number to set the price ceiling for 2015. No release of forecast CPI in April 2015 (for 2016). Actual CPI that is available January 2015 (for 2014 year)  This number will be used to calculate the adjustment factors for the forecast period of 2016.  We are committing to this actual CPI number to set the price ceiling for 2016. 9

10. Side by Side Changes to Guidelines (Changes in Red) Schedule 9—CPI Adjustment Methodology 1.2 The CPI-Adjustment Methodology involves the following calculations: Adjusting the benchmark prices of the drug product for the cumulative change in the CPI from the benchmark year to the year under review (CPI- Adjusted Price); and Applying a cap on the maximum price increase in any one year, equal to 1.5 times the forecast change in the annual CPI. In periods of high inflation (over 10%), the limit will be five percentage points more than the forecast change in the CPI. Schedule 9—CPI Adjustment Methodology 1.2 The CPI-Adjustment Methodology involves the following calculations: Adjusting the benchmark prices of the drug product for the cumulative change in the CPI from the benchmark year to the year under review (CPI- Adjusted Price); and Applying a cap on the maximum price increase in any one year, equal to 1.5 times the change in the latest actual lagged CPI. In periods of high inflation (over 10%), the limit will be five percentage points more than the latest actual lagged change in the CPI. 10

11. Side by Side Changes to Guidelines (Changes in Red) 2.6 Forecast CPI: The forecast CPI for the forecast year is based on the previous year´s actual CPI published by Statistics Canada adjusted for the latest annual inflation projections by the federal Department of Finance. The forecast CPI is also published annually in the PMPRB´s April NEWSletter. 2.6 Actual Lagged CPI: The actual lagged CPI used for the forecast year is based on the latest actual CPI published by Statistics Canada adjusted for the latest annual actual inflation also published by Statistics Canada. The actual lagged CPI is also published annually in the PMPRB´s January NEWSletter. There is a 2 year lag between the year of the actual CPI used and the year it is applied to. For example, the actual lagged CPI used for the forecast year of 2015 is the actual 2013 CPI published by Statistics Canada in January 2014. 11

12. Side by Side Changes to Guidelines (Changes in Red) 2.7 CPI-Adjustment Factor: The forecast CPI divided by the base CPI, rounded to three decimal places. 2.7 CPI-Adjustment Factor The actual CPI divided by the base CPI, rounded to three decimal places. 2.9 Cap In any year, the price increase of a patented drug product may not exceed 1.5 times the forecast change in the annual CPI. In times of high inflation (greater than 10%), the limit will be 5 percentage points more than the forecast change in the CPI. 2.9 Cap In any year, the price increase of a patented drug product may not exceed 1.5 times the latest change in the actual lagged CPI. In times of high inflation (greater than 10%), the limit will be 5 percentage points more than the actual change in the CPI. 12

13. Example (Changes in Red) 13 2.10 Example of the application of the CPI-Adjustment Methodology at the national level: Forecast Year: Jan – Dec 2015 First sale: 1998 Benchmark Year: 2012 National Average Transaction Price in Benchmark Year: $10.00 National Average Transaction Price in 2013: $10.39 CPI-adjusted price: 1.054 (assuming this is the CPI-adjustment factor for 2012) x $10.0000 (National ATP in Benchmark Yr.) = $10.5400 Cap: 1.020 (1.5 x actual lagged CPI for 2013 assumed to be 1.3%) x $10.3900 = $10.5978 The 2015 National Non-Excessive Average Price for the patented drug product is the lower of the CPI-adjusted price and Cap: $10.5400.

14. Side by Side Changes to the Guidelines (Changes in Red) Removal of C.12.3 Review of Prices of Existing Patented Drug Products as it no longer applies.  C.12.3 In the event that the actual change in the CPI is less than the forecast CPI and an apparent excessive price arises solely due to the patentee´s reliance on the forecast CPI, the price will not be presumed to be excessive. The patentee is expected to comply with the actual CPI in all subsequent reporting periods, and the application of the CPI-Adjustment Methodology for the forecasted year will be based on the actual change in the CPI for that year. The result for patentees that took price increases based on the forecast inflation will be that the actual change in the CPI for the forecasted year will be used to calculate the next year´s National and Market-Specific Non-Excessive Average Prices. 14

15. CPI Initiative  Questions?  Comments? Thank you. tanya.potashnik@pmprb-cepmb.gc.ca www.pmprb-cepmb.gc.ca Twitter: @PMPRB_CEPMB 15