Federal Court on amended Patented Medicines Regulations: new pricing factors and new basket of comparison countries are in; rebate reporting is out

On June 29, the Federal Court released its much-awaited decision in a judicial review of the Governor in Council’s decision to promulgate regulations amending the Patented Medicines Regulations¹. The amendments significantly alter the previous patented medicines regime by including pharmacoeconomic assessments in the determination of whether a price is “excessive,” changing the basket of comparator countries to “PMPRB11” (which removed the United States), and requiring patentees to report rebates and discounts provided to third parties.

VIDEO: What does this decision mean for the pharmaceutical industry? Watch a 10-minute discussion from our intellectual property litigation practice on this important new ruling.

What you need to know

• The Federal Court ruled that the amendments relating to use of pharmacoeconomic factors in price assessments and the reconstitution of the PMPRB11 basket of countries for international comparison was within the broad regulation-making authority of the Governor in Council as set out in the Patent Act.
• The provision relating to the reporting of rebates was struck out as being beyond the scope of the government’s regulation-making authority.
• The original July 1, 2020 implementation date of the Regulations has now been delayed to January 1, 2021.
• Since, under the Federal Courts Act, July and August do not count in the time for an appeal, parties have until September 29, 2020 to appeal the decision.

Analysis

The Patented Medicines Regulations, made under the Patent Act, are the primary tool by which the federal government regulates the price of pharmaceuticals in Canada. The scheme is regulated by the Patented Medicine Prices Review Board, or PMPRB. In August, 2019, the government proposed amendments to the Regulations, described by the government as being necessary to give the PMPRB “the tools to protect Canadians from excessive prices and make patented medicines more affordable.” The thrust of the amendments was three main components: (1) new mandatory economic factors for the Board to use in determining whether a price is “excessive”; (2) a replacement of the basket of comparator countries (removing the United States from the comparison); and (3) a requirement that the selling price reported to the PMPRB take into account rebates provided by the manufacturer, whether to the purchaser or to third parties.

In 2019, Innovative Medicines Canada (IMC) and 16 industry participants brought an application in Federal Court to judicially review the proposed amendments on the basis that they exceeded the scope of the regulation-making power contained in the Patent Act.

Justice Manson of the Federal Court allowed the application, but only in part. He concluded that the requirement to report rebates exceeded the scope of the regulation-making power in the Act. However, he dismissed the balance of the application. He concluded that both the new mandatory factors and the revised comparator basket of countries were consistent with the objective of curbing excessive prices for patented pharmaceutical products, and that the Patent Act clearly authorized the Governor in Council to do so, as part of the legislative goal of preventing abuse of patent monopolies.

Structure of the Patent Act’s pricing scheme

As the Court explained, the purpose of the patented medicines regime is “to ensure that patentees of medicines do not abuse their patent monopolies by charging consumers excessive prices.”

Section 83 of the Act authorizes the PMPRB to determine whether the price of a medicine sold in Canada is “excessive.” Subsections 85(1) and (2) list the factors that the Board is required to consider in making that determination, which are directed largely to matters such as existing prices of the medicine and comparators in Canada and elsewhere, where the list of comparator countries is set out in a schedule. However, section 85(1)(e) indicates that these factors include “such other factors as may be specified in any regulations made for the purposes of this subsection.” Section 80 of the Act governs information that patentees must provide to the Board to enable it to determine whether prices are “excessive.” Among other things, patentees must provide the “price at which the medicine is being sold in Canada and elsewhere.”

Subsection 101(1) provides the Governor in Council with broad regulation-making authority, both to specify information that must be provided to the Board under section 80 and to specify factors for the purposes of section 85(1) and (2).

New factors to determine if prices are “excessive”

The proposed amendments purported to add a variety of socio-economic matters to the existing list. The applicants argued that the power to add new factors by regulation had to be construed with reference to, and be limited by, the existing factors. The Court disagreed, holding that Parliament had specifically permitted the Governor in Council to make regulations “specifying factors for the purposes of subsection 85(1) or (2), including factors relating to the introductory price of any medicine to which a patented invention pertains.” Justice Manson held that this power is broad, since, “[o]n its face, the language of paragraph 101(1)(d) does not limit the type of factors the Governor in Council may specify by way of regulation.” The Court also held that this amendment is sufficiently connected to and consistent with the purpose of the patented medicines regime: to protect consumers from the abuse of excessive pricing.

New basket of countries

The applicants also argued that the PMPRB11 conflicts with the purpose of subsection 85(1) and is therefore unreasonable. In particular, it argued that excluding countries with free market pricing conflicts with the patent bargain, and that the Governor in Council was improperly using the PMPRB11 as a form of price control. Justice Manson rejected these arguments. He noted that under the Patent Act, patentees do not have an unfettered discretion over pricing. He also rejected the applicants’ arguments that this was an act of price control: “[t]he updated list of countries do not amount to price control any more than the previous list of countries.”

New price calculation

As to the requirement to report rebates, the applicants argued that the requirement “exceeds the Board’s factory-gate jurisdiction under the Patent Act.” This argument is based on a previous decision in Pfizer Canada Inc. v. Canada (Attorney General), 2009 FC 719. In that case, the Federal Court held that the Board’s jurisdiction is limited to the “sale” of the medicine by the patentee, and that the Board has no jurisdiction to look beyond the factory-gate price of patented medicines and to consider the contractual relationships further down the distribution chain.

Justice Manson held that the rationale in the Pfizer case was equally applicable. He concluded that the sale that is contemplated in the statutory scheme is a sale by a patentee to a customer. The Court rejected the respondent’s argument that the term “sale” must be construed more broadly. Rather it held that, as in the Pfizer case, to interpret the term “sale” to encompass the relationship between patentees and third parties who do not purchase or take title from patentees would “do violence to the ordinary meaning of the term.” As a result, the Court concluded that “the requirement for patentees to report price information net of transactions involving third parties unrelated to the factory-gate sale of patented medicines” is inconsistent with the statutory scheme and ultra vires the regulation-making mandate of the Patent Act.

What’s next?

An appeal to the Federal Court of Appeal may be pursued by the applicants or the AG on the issue of rebates. The appeal must be filed within 30 days of this decision. By virtue of the Federal Court rules, days in July or August don’t count, giving the parties until the end of September to appeal.

The Regulations are currently the subject of a second court proceeding, before the Québec Superior Court, launched by six industry participants, challenging the constitutional validity of the Patent Act’s drug-pricing scheme. That case is scheduled to be heard in September 2020.

As we recently reported the PMPRB has announced a delay in the coming-to-force of the amended Patent Medicines Regulations to January 1, 2021. Please refer to our past bulletins, here and here, on the Regulations for more background. We also recently reported that the PMPRB has issued a second set of draft Guidelines, which describe the price tests that would be used by PMPRB Staff to set the ceiling price for patented medicines. The draft Guidelines incorporate the reporting of rebates into the assessment of excessive pricing, and would require that newly approved patented medicines be subject to a maximum rebated price ceiling. Subject to an appeal, it would seem that the draft Guidelines may require updating in order to align with the Court’s decision.

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¹ The Federal Court’s ruling is available here.