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STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 10, 2000

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call the meeting to order. I welcome everyone here this afternoon. Everyone knows the order of the day for the committee today is the study on cost recovery.

We have the pleasure to have with us the following witnesses from Health Canada: Dann Michols, director general, therapeutic products program, Health Protection Branch; from Canada's Research-Based Pharmaceutical Companies, John Stewart, executive vice-president and general manager, Purdue Pharma; Marc Desmarais, vice-president, federal government affairs, Rx&D; Arvind Mani, director, regulatory affairs; and from the Canadian Drug Manufacturers Association, Jim Keon, president; John Hems, director, regulatory affairs, Apotex; and Kent Major, director regulatory affairs and clinical research, Technilab.

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As you know, you have approximately five minutes to make your introductory remarks. Thereafter we will engage in a question and answer session, and today we'll have a ten-minute round.

We will begin with Mr. Michols. Welcome.

Mr. Dann Michols (Director General, Therapeutic Products Program, Health Protection Branch, Health Canada): Thank you, sir. I have some opening comments to make, and I believe copies of the comments have been distributed. I don't intend to make all of the comments in the document that has been tabled, but I will address a number of issues.

The purpose of this presentation is to provide an introduction to the health portfolio's work in implementing cost recovery. We're using the term “health portfolio” because the programs that we will discuss are not only those that are within Health Canada, but they are also an agency that reports to the Minister of Health but is not per se in Health Canada. So we're using the term “health portfolio”.

The presentation that has been put together from the health portfolio is designed to give you some background into the introduction of cost recovery into the health portfolio, some brief comments on some of the challenges that we as managers have faced over the last five years within that introduction, and then an overview of some of the steps that Health Canada has taken to respond to some of these challenges.

Charging fees for services, or cost recovery, has become a feature of many of the programs within the health portfolio during the last five years. Cost recovery was introduced within the health portfolio as a means to shift the mindset of our programs into a service mode, to increase the efficient use and management of scarce government resources, and to supplement program budgets reduced to meet the deficit reduction goals of the federal government by shifting some of the load to those who cause the program expenditures.

Health Canada commends the finance committee's decision to review cost-recovery policies and operations within the federal government and appreciates the opportunity to present its experiences and conclusions.

Health Canada acknowledges that there have been some major challenges in delivering our cost-recovery programs, but by and large they have been met through a process of consultation with the stakeholders affected. I should say that when we say “stakeholders affected”, we mean more than just the industry that ultimately will pay the fees; we mean the health care system, patients, practitioners, hospitals, etc., that are affected by the cost-recovery process.

Today I will be outlining the steps we have taken to solve these problems and to improve the service of all cost-recovery programs within Health Canada. Cost-recovery initiatives within Health Canada have developed, and are in the process of developing, procedures and processes to support the efficient management and effective delivery of cost-recovery services.

Each health portfolio cost-recovery initiative is unique. As this committee has already heard, the authority for charging fees for services varies from program to program. Some are governed by regulation. Some are governed by ministerial authority. For almost all of these programs within Health Canada, or the health portfolio, the fees charged only partially recover the costs of delivering the activities. The range is from 20% to 60% of the total of any given program, the balance of the program funding coming from appropriations.

Currently there are cost-recovery initiatives in the following programs: the therapeutic products program, which is my responsibility; environmental health program; pest management regulatory program; occupational health and safety program; medical services program; food safety program; and the hazardous materials information review program.

Considering some of the challenges that we have faced, the past five years have been difficult for program managers within the federal public service generally. We have not only responded to the changes effected by program review in terms of deficit reduction, but we have also responded to new policy and operational demands arising from the introduction of new products, legislative and regulatory requirements, and from public concerns that have arisen over the period. Throughout this period, however, the primary responsibility of the health portfolio remains to help the people of Canada maintain and improve their health. This has been met. Health and safety standards have not been compromised through this difficult period. To this end, cost recovery has been an important strategy in maintaining the resources of the programs involved.

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However, introducing cost recovery into established programs has presented many management and administrative challenges not normally encountered in a public service operation. Some of these have been working within the ambit of a broad Treasury Board policy but without detailed guidelines and little direction on how the various initiatives should be introduced.

The challenges have included meeting service delivery requirements, in other words setting targets of service or operations for programs; working with changing expectations of clients and stakeholders; and generally having to manage a revenue-dependent operation within the constraints of the public service, which is oriented towards an appropriations-based operation.

Introducing cost recovery into a regulatory framework has also been a challenge. The “regulatory service” offered is often not voluntary and the regulator is a monopoly. That said, the concepts introduced by cost recovery are germane to the field of regulation, principally the efficiency of the operation involved and the requirement to be oriented towards the needs and demands of the various stakeholder groups.

As well, a definite benefit is provided to a regulated industry by an efficient, highly qualified regulator. In our opinion, there is no philosophical contradiction presented by the fact that the industry making a profit from the sale of its products should pay for some of the costs of the apparatus that society has to put into place to ensure that these products are safe, effective, and of high quality.

As well, forcing the regulated industries to realize that regulation is not a free good and to improve quality of information and regulatory interaction is also a useful outcome of the cost-recovery process.

As part of the context, I'd like to note that in the industrialized countries we relate to, and that have systems equivalent to ours, including the United States, the United Kingdom, the European Union, Australia, and New Zealand, all of them have some form of user-fee policy in place, and in some cases their regulatory programs are funded 100% by revenue as opposed to government appropriation.

The paper I have tabled goes on to explain our experience with those broad challenges that I mentioned working within Treasury Board policy requirements that are not as clearly articulated perhaps as we are used to as program managers. In regard to meeting the service delivery requirements, during negotiations with stakeholders and clients some portfolio programs made specific service delivery commitments based on assumptions about demands for and on the programs and the adequacy of available resources, both appropriations and anticipated fees. It is clear now that in many cases the information that supported many of these assumptions was not sufficient. For example, many of the studies about the impact on businesses yielded information that was of an uncertain quality, mostly anecdotal. Departments and agencies typically have no legal authority to request sales data, rendering it difficult to assess economic impacts of proposed fees on one company much less on an entire industry.

Demands for the available resources were also underestimated. For example, the expense of introducing cost recovery, working with clients and stakeholders, and negotiation and public consultation as additional program elements were underestimated. In my program's experience, it has cost us over $500,000 to consult stakeholders when we implemented our major cost-recovery initiative. The approximate cost of administering the cost-recovery program within my operation is $1.5 million, and we anticipate that the evaluation process we have put into place will cost an additional $1 million.

The third challenge is working with the changing expectations of clients and stakeholders. I would like to quote from a document written by Richard Bird and Thomas Tsiopoulos, which was input into the Treasury Board's policy development process in 1997. I think it states quite succinctly one of the problems that we have encountered:

    The first, and in some ways the most basic challenge to user charges arises from a simple fact of political economy: when charges are imposed on a service previously provided for free, no matter how rationally they may be designed, the charges will almost inevitably be seen by previous beneficiaries as amounting to just another tax, especially since there is most unlikely to be any offset in reducing the general taxes such beneficiaries have to pay. Overcoming such opposition is likely to prove particularly difficult when any or all of three conditions holds: (1) Client groups are strongly organized; (2) they can utilize such general “public policy” arguments as the alleged adverse effects of charges on income distribution to support their case; and (3) there appear to be no compensating benefits that offset the new charges.

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The delivery of services on a cost-recovery basis introduces significant challenges for and to client and stakeholder relations. Where fees are introduced, clients often develop new and often greater expectations about service delivery. Sometimes clients expect to be more involved in the management of the service delivered, and that can be problematic in the case of a regulatory operation. This expectation is also an area of concern for other stakeholders than those that are considered to be the payers. Other stakeholders may express concern about the integrity of the services delivered, that concern being that whether drug evaluation and review services are potentially influenced on the basis of “he who pays the piper calls the tune”. That is a very real concern within the regulatory regime.

It has also become clear that, in many cases, expectations are not reasonable because clients and stakeholders are confused about the nature of services supported by fees. For example, in my program, establishment licensing fees, the misconception is that fees are paid to inspect a specific site as opposed to providing funds in general to inspect, analyse products, and investigate within the system as a whole. The funds from fees for establishment licensing and the authority to sell drugs enable the program to inspect and investigate as required. A key benefit, often overlooked by industry, is that any competitor within the industry may be investigated and inspected. All are required to play by the same rules. In short, it provides a level playing field.

It should be noted that the establishment licensing fees are promulgated under the rights or privileges power of the Financial Administration Act, not the services provision, and as a result, specific services are not required to be associated with the fees.

The fourth major challenge has been to develop and operate a cost-recovery-oriented program within a federal government system that is oriented primarily towards appropriation-based funding. I won't go into detail. The comments are there in that regard.

Over the past five years, managers of each cost-recovery initiative have had to determine how to work most effectively within the existing constraints and identify required changes. While the mindset of program managers may change, becoming performance-driven and service-oriented, the mindset of the departments and government often remains control-oriented. Getting the necessary changes made has not been accomplished easily or quickly. Extensive negotiations with departmental services and central government agencies and the development of funding proposals, agreements, and in some cases regulatory support or legislative amendments have been required.

Now I'd like to give you some background on activities that have taken place within Health Canada to support the various programs that are involved in a cost-recovery initiative.

Over the past five years it has become clear that many of the challenges of implementing cost recovery are difficult for individual programs to resolve satisfactorily within the limited resources available. Accordingly, management within the health portfolio has undertaken over the past year a number of horizontal, coordinated initiatives to assist programs in improving the management of cost-recovery programs. This additional corporate support has been directed towards building and enhancing management and administrative capacity, and includes: a departmental policy concerning cost recovery; an action-oriented management committee across the department to coordinate cost-recovery activities; internal operational reviews and assessments; a departmental centre for cost-recovery coordination; mechanisms to share information and to build networks among the programs; and activities to expand the skill sets of the program managers and staff involved in a cost-recovery program.

First, departmental policy concerning cost recovery is currently being developed. With the benefit of the experience of the past five years, working with differing requirements of individual health portfolio programs, management has been better able to identify how the Treasury Board policy has to be supplemented in order to best meet the requirements of the health portfolio.

Second is a senior management committee within the department. The health portfolio cost-recovery committee is a group of action-oriented program managers established to address the remaining horizontal issues and challenges within the health portfolio. This committee provides a coordinating mechanism for information sharing and a forum for discussion and decision-making about cost-recovery initiatives within the health portfolio.

The committee maintains a link with the departmental executive committee and with the deputy ministers, and members on the committee, as senior managers, are in a position to support more effective and efficient communications within the management of the health portfolio.

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The third is internal operations review. In this case I'd like to draw to your attention a major initiative that is underway within my program, which we are hoping will influence and inform the other operations within Health Canada and the federal government.

We launched what we refer to as the therapeutic products program phase IV review. The objective of the phase IV evaluation of this program is to evaluate the cost-recovery initiatives' impact on large, medium-sized, and small businesses in the therapeutic products industries, including related distribution, wholesale, and retail sectors; consumers, including the Canadian public at large as well as provincial ministries and other health payers within the health care system; and the regulator itself and its operations. The results of the evaluation will assist Health Canada in making informed decisions regarding any alternatives and/or modifications that might be required to its cost-recovery initiative, including but not limited to fee levels, structure, and other related program parameters.

The key deliverables of the initiative include an assessment of the TPP cost-recovery initiative as it relates to the Treasury Board cost-recovery policy, and the public and private benefits that have derived from it; a thorough assessment of the current cost-recovery initiative costing model used by the TPP, including a comparison of other regulatory regimes and justifications, identification of any gaps in the current cost-recovery initiative, and the contribution of fees to the delivery of an efficient service; an evaluation of whether the cost-recovery initiative has had an impact on the TPP's performance, taking into consideration previous performance commitments, other jurisdictions' experience, options for improving feedback and/or communication mechanisms for stakeholders to foster transparency and accountability, and constraints that might limit my program's ability to manage the cost-recovery initiative and thereby the efficient operations of its programs; an assessment of the direct, indirect, and cumulative impacts of the cost-recovery initiative on therapeutic products industries, on consumers and the health care system, and on the TPP itself, and the development of a rigorous methodology and relevant data sources for a follow-up assessment of the impact of planned fees on the medical devices regulation area; and finally, a systematic review of lessons learned from other jurisdictions and options for operational and/or organizational alternatives and/or modifications to improve the management of the TPP cost recovery initiative.

This was a commitment we made when we introduced cost recovery five years ago, that once it was introduced, once there was hard data on the impact, we would undertake a comprehensive evaluation that would serve to benefit the government as well as the program.

We have contracted out the review to a third party, KPMG, we have set up a steering committee of some 30 representatives of stakeholders within the program, we have introduced a high degree of intra- and interdepartmental participation into this exercise, and we anticipate that the report will be available during the month of June and ought to answer many of the questions your committee is indeed asking at this point.

We have also commissioned a study by RIAS Inc., entitled An Assessment of Challenges and Issues Facing Health Canada's Cost Recovery Initiatives. This has recently been tabled with the cost-recovery committee within Health Canada.

In approaching the assessment, the consultants argued that:

    There is not much sense in dwelling on history. The issue now is to ensure that the programs are equipped properly to deal with the challenges of the future, to take advantage of all flexibility arrangements that exist to enhance efficiency and effectiveness, and that the department participates in the TB review to the extent that the review offers the possibility of useful, pragmatic change.

We go on to explain what a number of the options are that are presented in that paper, and that paper can be made available to you if you are interested.

We have also set up a department centre for cost recovery. The office of revenue and costing was established to provide quality, cost-effective services to health portfolio programs, specifically to provide corporate support to the cost-recovery initiatives.

The office is currently planning a number of initiatives to support improved cost-recovery management: researching and analysing various funding authorities; analysing the impact of change that the concept of accrual accounting will bring to the delivery of cost-recovery initiatives; researching and analysing revenue and expenditure targets; but mainly developing a template or protocol to support annual reviews by the programs of cost-recovered operations with a view to improving services and lowering costs.

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As mentioned, we have set up information-sharing and -building networks amongst the cost-recovery programs across the department, and that's explained further within the paper.

Finally, the health portfolio has been working to assist staff in taking on the new responsibilities associated with managing cost-recovery initiatives efficiently and effectively. Given the limited resources available, a strategic approach has been taken to develop training opportunities. For example, in this past year a pilot project was undertaken to assess staff requirements for and interests and approaches to activity-based costing. Future training opportunities will address a range of issues. These include how to work with stakeholders more effectively to develop client profiles, undertaking comprehensive analysis of the impacts on all stakeholders, addressing small business interests, and conducting effective public consultations and negotiations.

In conclusion, over the past five years the health portfolio has introduced cost recovery and implemented the Treasury Board's policy in many of its programs. Introducing cost recovery has proved a challenge for programs in many ways, particularly in managing the stakeholder expectations involved.

Health Canada continues to recognize that there are still challenges in delivering some of our cost-recovery programs. As you have heard today, the process to solve these problems in a timely fashion has begun. However, one can recognize that progress is being made in a number of programs, and portfolio-wide initiatives have been launched to support and develop management and administrative capacity in the others.

Cost recovery, in our opinion, is a useful government policy, but programs must be given the resources and the infrastructure they require to ensure the benefits are fully available to Canadians and to clients.

Thank you.

The Chair: Thank you very much, Mr. Michols.

We'll now hear from Canada's Research-Based Pharmaceutical Companies, represented by Mr. John Stewart.

Welcome.

Mr. John Stewart (Executive Vice-President and General Manager, Purdue Pharma; Canada's Research-Based Pharmaceutical Companies): Thank you, Mr. Chairman and members of the committee, for inviting us to present on the impact of cost-recovery programs on Canada's Research-Based Pharmaceutical Companies.

I'm John Stewart. I'm executive vice-president and general manager of Purdue Pharma, a research-based pharmaceutical company located in Toronto. I'm also chair of Canada's Research-Based Pharmaceutical Companies' committee on the drugs program. With me today from Canada's Research-Based Pharmaceutical Companies are Marc Desmarais, vice-president of federal affairs, and Arvind Mani, director of regulatory activities.

Canada's Research-Based Pharmaceutical Companies is the national organization representing the 20,000 Canadians employed in the research-based pharmaceutical manufacturers in Canada. All member companies of Canada's Research-Based Pharmaceutical Companies share one primary objective: to research and develop new medications to improve the health care system and to improve the quality of life of Canadians.

On behalf of the association, let me state that we welcome the committee's review of the federal government's cost-recovery program and appreciate the opportunity to assist you in your evaluation of its benefits. A copy of my presentation is with you, and indeed some of the background papers for facts and figures that I will refer to are attached as references.

Let me state at the outset that Rx&D is not opposed in any way to the principle of cost recovery. In fact our association has been supportive of paying fees for the evaluation of drug submissions since this issue was first tabled by government back in May 1986. The problem, if we can call it a problem, is that industry supported cost recovery on the promise of improved performance and the promise of improved timeliness of the drug review and approval process—promises that have not been delivered.

As a result of these promises not being delivered, Canadian patients have had to wait substantially longer for new drug therapies than patients in many other countries, and Canada as a country and research-based pharmaceutical companies in particular have certainly missed out on major investments they could otherwise have gained.

I'd like to provide a brief background on the pharmaceutical industry's recent experience with cost recovery.

In 1984, as Mr. Michols has indicated, as part of the federal government's program review, the TPP began a consultation process that resulted in the implementation of annual fees for the renewal of drug identification numbers and manufacturing establishment licences. They also implemented fees for the evaluation of drug submissions.

An integral part of this initiative, which was very consistent with Treasury Board policy as articulated at the time, was the introduction of performance standards for the submission review process. The TPP committed to meeting those performance standards—performance standards that were internationally competitive with leading drug regulatory agencies such as the U.S. FDA and the U.K.'s MCA. As such, cost recovery was to result in Canadian patients receiving more timely access to needed new therapies, while the pharmaceutical industry would benefit through earlier product introductions and increased overall revenue streams.

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Although there was some skepticism at the time that the TPP could actually meet those performance standards, the majority of the companies did not oppose the introduction of the fees, since the TPP repeatedly stated that their implementation would indeed result in improved timeliness of its review and approval performance. In fact the TPP established some very favourable performance targets compared to what was then being achieved. They actually looked for completion of the scientific review and evaluation process in 300 days, less than half the time it was at that time taking.

There was even a statement from then Minister of Health Diane Marleau that the fee schedule would be struck in such a way that the fees would be reduced if the TPP failed to meet its performance targets. They were that committed to meeting these. There truly seemed to be a commitment from government to deliver on its promise of improved performance.

Today the unfortunate reality is that the TPP's performance has failed to meet its targets.

I've had an overhead placed here just to explain this in a little bit greater detail. That is a bar chart showing the number of days required for review and approval of new drug submissions in Canada. It goes back to 1983. We can see a steady increase in the number of days required for review and approval up to 1994, when some significant changes occurred within the TPP to make some dramatic reductions in the time to review and approve—a drop from 1,142 days to 682 days, or just under two years.

In 1995 cost recovery first was implemented and fees began being charged for the evaluation of drug submissions. As you can see from that chart, there has been no substantial change in the review and approval performance since that time, and the current time, 591 days for 1999, is almost twice the target of 355 days that exists within the TPP for the average review and approval time.

Over the same period that we see this, drug regulatory agencies in countries such as the U.K., the U.S., and Sweden have indeed vastly improved their performance, leaving Canada and Canadians far behind in access to new drugs. According to Rx&D's annual NOC survey, which you just saw there, the average time taken to approve new drugs in 1999 was 591 days, 21 days longer than it took in 1998, and the second time in the last five years, during which cost recovery has been fully in place, that the time required to approve these drugs has actually increased. In contrast, that mean time of 591 days, or 19.4 months if you like, is nearly seven months longer than the time taken by the U.S. FDA to approve its new drugs in 1999.

The failure of government and the TPP to achieve their promised performance improvements has had multiple negative impacts on Canada. First, the timeliness of that review and approval process is directly linked to the time at which new drugs become available to Canadian patients and is also directly linked to when industry can begin earning a return for its substantial investment in research and development. It's also indirectly linked to a host of investment opportunities, manufacturing opportunities, and employment opportunities—opportunities that our country is currently losing to other countries because of the delays in our review and approval process.

One prominent example of difficulties within the review and approval process is a new asthma medication, Singulair. This revolutionary treatment, first of a new class of treatments for asthma, was discovered and developed in Montreal. Although Canada did a substantial majority of the research and submitted the application for approval for Singulair to the TPP at exactly the same time it was submitted to many other countries, that medication was in fact approved in 35 other countries before it was approved in Canada.

I have a chart here just to explain in a little more detail that 355-day target I spoke about, and then an example—the Singulair example in fact—to show what's happening within TPP.

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You can see on the black line at the top that the numbers 10, 45, and 300 are the target days for completion of various steps of the review process. The first part, from receipt to acknowledgement, is 10 days. There's a 45-day period for the TPP to ensure that the submission is indeed complete and contains all the data that a full drug submission should have. Then you see a 300-day target. That's for them to actually perform the scientific evaluation of whether there's enough evidence in there that this drug is sufficiently safe and effective to be put on the market.

If we get down to the bottom, the red line shows the overall time consumed for the review and approval of singular 473 days. On the second line below that, we can actually see that the safety and effectiveness evaluation began 73 days after it was received and was completed within 170 days after receipt.

Another part of the review process is the chemistry and manufacturing quality assurance. Is the product stable? Does it demonstrate appropriate potency and purity in the tablets or inhalers? It didn't start until 335 days after the submission had been received. Then it was completed 132 days later. So in this case, while the safety and efficacy review was completed within the target time, the dossier was not picked up for a substantial period of time after being received. Another important component of the review process didn't even start for 335 days after being received. So this is illustrative of what we see inside.

On the other hand, it does bode well for the future because it demonstrates that the safety and efficacy review can indeed be completed within a relatively short period of time. If we could just get these things overlapped, we would have a very competitive review and approval process.

Under the current situation, where cost-recovery fees are being collected, yet performance is not being delivered, industry sees this primarily and fundamentally as a tax, as opposed to payments for the provision of meaningful levels of service. It doesn't have to be this way. In the United States, cost recovery was implemented for evaluation of drug submissions and resulted in a substantial reduction in the time required for review and approval. There's a paper in your package that indicates that directly.

I would submit to you that Rx&D has no objection to the principle of cost recovery. Industry is willing to pay reasonable fees for reasonable performance associated with the review and approval process—reasonable performance that will overcome the negative impact on the health care of Canadians and reasonable performance that will allow industry to begin receiving a return for its investment in an earlier time.

Just to highlight the personal nature of this issue, earlier this week I attended a two-day conference on Canada's drug review and approval process. That conference was organized by patient groups that are extremely concerned that their members have to wait much longer for new drugs in Canada after they're approved in the United States and available there. Unfortunately, the diseases these patients suffer from don't wait while they're waiting for these drugs to be approved. For these individuals, this issue is truly an issue of life.

I thank you for your attention, and I will be delighted to answer any questions you may have.

The Chair: Thank you very much, Mr. Stewart.

We'll now hear from the Canadian Drug Manufacturers Association president, Mr. Jim Keon.

Mr. Jim Keon (President, Canadian Drug Manufacturers Association): Thank you, Mr. Chairman. I am Jim Keon, the president of the Canadian Drug Manufacturers Association. With me today is John Hems, the director of regulatory affairs of Apotex, located in Toronto; and Kent Major, director of regulatory affairs and clinical research for Technilab Pharma, located in Mirabel, just outside Montreal in Quebec.

We thank you for the opportunity to be here. Like previous speakers, we're very pleased that the finance committee has agreed to look at these issues, and we're very hopeful that the finance committee will be able to effect some real change.

I'm in the rather unfamiliar position today before a House of Commons committee of actually agreeing with much of what the brand industry has said. I would echo some of the comments, that the generic industry is not, in principle, opposed to cost-recovery fees. In fact, we agreed to them and negotiated performance standards for them.

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What was most important for us five years ago—and what is most important for us today—was the service delivery commitments, the performance and the ability to get our products to the market. I'll get into that in a minute, but the lack of performance has an impact not only on the industry and the companies, but also on the health care system.

As you may know, the Canadian Drug Manufacturers represent the generic drug industry. In Canada we're the national body. Our members are involved in researching, developing, manufacturing, and distributing generic pharmaceuticals. Some of our member companies have also expanded into biotechnology and some new product development.

Generic drugs are a crucial component of Canada's health care system. In 1999, generic drug sales totalled $1.2 billion. That represents 14% of the prescription drug market; however, out of the 269 million prescriptions filled in Canada in 1999, over 40% were filled with generics. Generics are on average 50% less expensive than the equivalent brand-name product, and we calculate that saves the health care system more than $1 billion a year.

We employ over 5,000 Canadians and spend more than $170 million per year on research and development, which represents about 14% of our sales.

We are also a member of the Business Coalition on Cost Recovery, which was here yesterday and made a presentation to your committee. We will use today's opportunity to highlight the cost-recovery program at the therapeutic products program and the implications it has had for us.

Beginning in 1995, Health Canada has charged five different fees to the generic drug industry. There's the authority to sell drugs fees, which came in 1995; drug evaluation fees, also in 1995; drug master file fees, in 1996; drug export certificate fees, which also started in 1996; and drug establishment licensing fees, which began in 1998. To date, our industry has paid more than $14 million in cost-recovery fees.

As I said earlier, despite the size of these fees, and in some cases their complexity, the most pressing issue for us is not the fees themselves but the lack of performance efficiency in generic drug reviews.

Since 1995, with the introduction of the fees for submission reviews, TPP's lack of review efficiency has translated into slower approvals for generic medicines, and we calculate that as representing $250 million in lost sales opportunities for our member companies. Probably more importantly for the committee and the health care system, it calculates to between $100 million and $140 million in lost savings to consumers and payers of medicines, because the lower-cost generics are not available on the market until later than they otherwise could be.

With the introduction of submission fees in 1995, TPP and the Government of Canada made very specific commitments to our industry that performance targets would be developed and achieved. I would like to quote from some of the statements at that time.

In April 1995, the Canada Gazette, part II, in the regulatory impact analysis statement stated:

    While fees will obviously have an impact on the industry in terms of increased business costs, the reward will be a more efficient, streamlined and effective drug review process. This will result in the pharmaceutical industry having timelier access to market, greatly improved planning capability and increased overall revenue potential....

A further quote is:

    The drugs program is committed to meet the standards...and to develop and fully meet future performance standards over the next three years which are internationally competitive with the best in the world, while maintaining its high quality standards.

One final quote is:

    Once future standards have been developed priority will be given to link them to the fee schedule in the regulations, in such a way that fees payable will be reduced for submissions which are not processed within times defined by the standards.

Of course, that's never happened.

The generic drug industry relied on these commitments from the government. We agreed to the fees to be paid because we were assured there would be a real effort from TPP to improve the time it took to review generic drug submissions, ensuring faster notices of compliance and timelier access to the market. This was to be done—and we fully supported this—while guaranteeing that resources were adequate to ensure that all generic medicines met the stringent health and safety standards of TPP. Our sector's performance standards were developed in conjunction with TPP and Health Canada.

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The first review of a generic drug submission was to have taken no more than 225 calendar days. If the submission needed to go to a second review because of some deficiency, TPP was to complete that review in a further 195 days. The actual performance, as reported in TPP's annual report on performance in 1999, was 458 days on average for first reviews for generic submissions, which is more than twice the performance target. We understand that the actual time for reviewing a generic submission is approximately 30 days, and yet it takes 458 days to have them reviewed. The rest of the time is spent in the queue or in downtime.

After 1995, initially there was an improvement in TPP performance, following the introduction of the cost-recovery program in 1995 and 1996. However, performance for the generic drug industry has declined since 1997, and agreed upon performance targets have never been achieved.

CDMA's analysis shows that TPP's failure to review generic drug submissions within the performance target times represents a loss of $250 million in extra sales for our companies since 1995. The loss of $250 million between 1995 and 1999 has led to $57 million in lost investment in research and development, as well as about 140 fewer jobs created. In addition, approximately 73 fewer generic drug submissions were generated.

These lost opportunities for the generic drug industry have had an effect on the Canadian health care system. As I said at the beginning, we sell our products at approximately 50% less cost than the brand-name equivalents, and that brings savings to the health care system, which can be used elsewhere. We have calculated that the approximately 73 additional generics could have saved between $100 million and $140 million for the health care system. Of course, this is significant in a time when the health care system is struggling to pay its drug bills.

Generic drugs are a fundamental solution that Canadians have to alleviate the pain of high and rising drug costs. Greater use of generics means that the dollars can be used for other health care spending. The provincial governments that maintain large drug plans all have, to one extent or another, mandatory generic drug plans in place. Many employers, including the federal government, also try to maximize the use of generics. But this is only possible where they are available.

CDMA believes that TPP has failed to achieve the performance commitments made at the implementation of the cost-recovery initiative. These failures have had significant negative impact on our industry and on the Canadian health care system. Resources must be devoted to complete generic submission reviews within the targets agreed on in TPP. We hope the finance committee can play a role in urging the government to meet these commitments and to improve the performance of generic drug reviews. Thank you.

The Chair: Thank you very much, Mr. Keon.

We will now proceed to the question and answer session. It's a ten-minute round.

Mr. Epp.

Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you, Mr. Chairman, and thank you all for coming here.

I want to begin with Health Canada. I'm going to ask you a very personal question: do you wish it would never have happened? Do you wish we would have just stayed away from cost-recovery fees?

Mr. Dann Michols: Speaking as the head of the program, no, I do not. I think if you take a look at the chart that was shown here in terms of the performance of the program, you'll see that too many of the points being made about the performance of the regulator are being laid on the doorstep of cost recovery.

Over that period of 1994 to 1996, where you saw a reduction of 50% of the time—so it's basically a 100% increase in productivity—the appropriations assigned to the program were being decreased by 50%. So what you really need is two charts to indicate what could have happened. As the appropriations were reduced, that time would have gone up considerably. That we accomplished that reduction in processing time, or an increase in productivity, at the same time as appropriations were being cut is an indication that the productivity of the program really has increased. Part of that was made possible by the revenue from fees. So there was no way that we would have been able to achieve the reductions had cost recovery not been introduced.

• 1620

Cost recovery certainly produces revenue, and that's useful. But it also, I think, had a major impact on the mindset of the scientists and the regulators within the program in that it forced them into thinking about the regulatory process as being a managed process and as there being clients at the end of the process who had legitimate needs. That also was an incentive to increase the productivity. So I don't at all wish that it had not happened.

Mr. Ken Epp: How long have you been working in this industry for government?

Mr. Dann Michols: I have been head of this regulatory program for seven years. I was basically brought in to undertake this increase in productivity and to introduce cost recovery.

Mr. Ken Epp: The drugs are more complex, and the consequences of giving approval to something that in fact is not safe are greater. Has this slowed down the process?

Mr. Dann Michols: That is definitely a consideration that has to be taken into effect.

Maybe I could ask Rx&D to put up the second chart on the singular example.

Several of the comments that have been made by the other witnesses have been criticizing the efficiency by which the regulator reviews submissions, and I think this chart is an indication that that is not in fact true. We have targets, as shown on the top line. The two bottom lines indicate the actual amount of time it takes us to review a submission. The safety and efficacy data are shown on the first line with the two dots, and the chemistry and manufacturing data are shown on the second line. You will see that in actual fact the efficiency of the regulatory process is very good. The actual review, when the regulatory scientist could sit down and deal with the submission, interact with industry, and make a decision, is shorter than our target period.

The problem, as is presented by that chart and several others—and that's our data, so it stands—is that we do not have the resources for the regulatory scientist to get to the submissions in the first place. It isn't a case of the efficiency of the regulatory process. It is the resources we have available to address the issue.

To come to your point on complexity, even complex products can be reviewed within the targets we set once we can get at the submissions.

The Chair: If I can, just for a second—

Mr. Ken Epp: Sure.

The Chair: Do you have to do the chemistry and manufacturing, C and M, after that, or could they be done concurrently?

Mr. Dann Michols: The policy is that they are done concurrently, and the system is set up so that they are done concurrently. One is not dependent on the other. The problem in this particular instance, as in most, is that the resources available to do the chemistry and manufacturing review are not available until later on in the process. So both of those delays are caused by the holding time within an aspect of the review. Am I making myself clear?

The Chair: No.

Mr. Dann Michols: The chemistry and manufacturing process is separate from the safety and efficacy process. It is indicated for both of them as to the amount of time they each take. The problem is picking up that part of the submission. If we had more resources on the chemistry and manufacturing side, we would pick up that submission earlier and they would be brought back more in line.

The Chair: So it's not a very efficient system you have.

Mr. Dann Michols: No. What I'm trying to say is that the system is very efficient. It is a matter of the resources that are available to us. It is the number of review scientists, not the work they do, that is the problem.

Mr. Ken Epp: What is the source of your financial restraint, since you now have income from cost recovery that you didn't have before, and you have government money available as well?

Mr. Dann Michols: Contrary to the example that was given about the American system, when the Canadian government decided to bring in cost recovery....

• 1625

Sorry, let me put this a different way. The Canadian government decided to bring in cost recovery at the same time it went through the program review process. So at the same time we were introducing cost recovery and getting fee revenue, the appropriations were being decreased. In the United States, when they introduced cost recovery into the same process, the fees were additives to the appropriations that were available. Consequently, millions more dollars are available to the FDA in the United States than to us in Canada.

Mr. Ken Epp: In other words, your estimates were cut. That's what you're saying.

Mr. Dann Michols: In other words, our estimates were cut.

Mr. Ken Epp: Mr. Stewart, you said that you considered these cost-recovery fees just a tax. Now, in view of what Mr. Michols has just said, that obviously the tax dollar input has been decreased in here and you're now paying a fee for service, how can you say it's just a tax?

I'm playing the devil's advocate here, just so you don't misunderstand me.

Mr. John Stewart: Sure.

As Mr. Michols said in his opening remarks, when cost-recovery fees are introduced in various sectors, there is not ever seen by the group a reduction in tax to offset those cost-recovery fees. Said differently, Purdue Pharma continued to pay the same rate of income tax. John Stewart continued to pay the same rate of income tax, as did everyone in this room. Cost recovery was simply an additional charge that was levied on us, in three different ways—annual fees for drug identification numbers, annual fees for establishment licences, and, in the largest amount, these fees for the evaluation of drug submissions. They are substantial; $250,000 for a drug submission is the amount that industry pays.

In association with that, if we can get improved performance through a timelier release of these drugs, then industry will earn its income earlier and patient benefits will accrue earlier on. But in the absence of any performance increase, we view it as simply money being spent with no return.

Mr. Ken Epp: Now, let me ask you about that. You said—

The Chair: Excuse me, Mr. Epp, but Mr. Michols wanted to answer.

Mr. Ken Epp: Oh, I'm sorry.

Mr. Dann Michols: I was simply going to ask for the other chart to be put up and to indicate that if a cut in review times from 1,200 days to 600 days is not an increase in performance, I don't know what is.

Mr. Ken Epp: That was exactly my question. The chart here showed a reduction in the total number of days, and rather markedly after 1995.

Mr. John Stewart: Actually, it occurred in 1995, and that was before cost-recovery revenues contributed.

Mr. Ken Epp: But you said—and I have a quotation here—that timelines are longer.

Mr. John Stewart: They are.

Mr. Ken Epp: Well, when I look at the graph, and I look at 1995-1999, they're back to where they were in 1983. Were you dissatisfied with them in 1983 as well?

Mr. John Stewart: Absolutely. The target then was 180 days.

Mr. Ken Epp: Oh, okay. So we just haven't been meeting the targets.

Mr. John Stewart: That's right.

Mr. Ken Epp: But to say that the timelines are longer is stretching it a bit. They're still too long, but they're not longer than they were, because they used to be 1,163 days, as at the top there.

Mr. John Stewart: Correct, but there was no cost recovery at that time. The change from 1,142 days to 682 days did not come about as a result of the fees; it came about as a result of performance improvements that had been undertaken separate from cost recovery.

When cost recovery came in, that was the time at which a serious commitment was made to reach these international competitive timelines, which were about 365 days. So that's what I was really referring to, that specific targets, 365 days, were established—promised, if you like—by government, even by the then Minister of Health, and they haven't been achieved. It's actually moving slightly in the wrong direction.

I don't mean to be critical of the TPP, although it probably sounds it. They have not, in fact, received the revenue, if you like, from this cost recovery—or while they may have received it, their appropriations base was reduced substantially.

Mr. Ken Epp: I have one last question before my time is up.

I'd like to ask you whether you feel you benefit from the service the government provides. That's just a very general question there. I think your answer will be yes, but is it?

Mr. John Stewart: My answer is that certainly I, as an individual—Canadians as a whole—and the pharmaceutical industry do benefit from the assurance of safe and effective drug products on this market.

Mr. Ken Epp: Okay.

Thank you, Mr. Chairman. According to my watch, I'm pretty well out of time, including the time you used.

• 1630

The Chair: It was a minute.

Mr. Ken Epp: Yes, I timed it.

The Chair: Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman, and thank you, presenters.

I think we've all heard that in principle people are in favour of, or support, cost recovery. The companies in my riding that I hear from are saying what these gentlemen here are saying today, that with cost recovery they'd like to see an increase in the performance against international standards.

Mr. Michols, I'm a little confused. You said that cost recovery was launched around the same time as program review. In looking at costs and recovering costs, was there any contemplation at all that the department or that branch might have their allocations reduced, or was that simply not factored into your equations at the time?

Mr. Dann Michols: No, when we were developing the fee structure we took a look at the activities undertaken and the cost. We set the fee structure based on a number of variables, and total resources available to the program was obviously one of those variables.

We were not looking to cost-recover 100% of the cost of the activities of the regulator. The fees were set accordingly. Unfortunately, the government “contribution”, if you like, to that calculation decreased, and consequently we were not in a position to meet the targets.

Mr. Roy Cullen: Of the revenues from cost recovery, then, is it a vote-netted thing? Do they go directly to the branch or division or whatever?

Mr. Dann Michols: We are in a vote-netting situation. The revenues collected go to the consolidated revenue fund, but then Parliament votes back those resources to us.

Mr. Roy Cullen: Is it 100% of...?

Mr. Dann Michols: Yes.

Mr. Roy Cullen: Okay. So the net result is that those additional revenues have gone to support other programs?

Mr. Dann Michols: No, those revenues have come back in to our program specifically for the purposes for which they were raised, but the resources that we felt we needed in order to augment those from the public purse were no longer available.

Mr. Roy Cullen: Okay, but I'm still having problems. When you launched cost recovery, I mean, surely there must have been some thinking—and you confirm there was—that program review might lead to some cost-cutting. Why was that not built into your scenario in terms of cost recovery?

Mr. Dann Michols: Because at that point in time we did not know the full impact of program review. That's a process that has gone on over time.

Mr. Roy Cullen: Mr. Stewart, in your presentation with regard to comparisons with the U.S., certainly I hear from companies in my riding that the turnaround time is quicker, for sure, but what about the fees? Are they higher or lower?

Mr. John Stewart: They are roughly the same, but they're in U.S. dollars.

Mr. Roy Cullen: So they're slightly higher.

Mr. John Stewart: Slightly higher.

Mr. Roy Cullen: It wouldn't compensate for the increased performance.

Mr. John Stewart: No.

Mr. Roy Cullen: In the earlier slide, Mr. Michols, you have one part on safety and efficacy, and then the other part was on chemistry and manufacturing. It just so happened that in that chart....

You talked about resources. The same people are not used in those different processes, are they?

Mr. Dann Michols: That's right.

Mr. Roy Cullen: Feasibly, then, they could have been done at the same time. You say it was a resourcing issue. So in this particular case, they just happened to follow the other. Is that a standard protocol within your branch or does it just so happen that with this particular case one happened to follow the other?

Mr. Dann Michols: No, that is an example of what has happened in most cases. The resource difficulty within the chemistry and manufacturing review area is greater than in clinical and efficacy.

Mr. Roy Cullen: Coming back to my colleague opposite's earlier question, if you're on a cost-recovery basis now—and I think it skirts the issue of performance standards, in a sense—wouldn't you have a sound business case, if it was supported by the industry, to put more resources into the process and recover them through the fees?

• 1635

Mr. Dann Michols: There are only two sources of funds available to a program manager: fee revenue and appropriations voted by Parliament. To obtain more resources, either I would need to increase the fees or we would need an increased appropriation. Increasing the appropriation doesn't increase the fees.

Mr. Roy Cullen: This may be the chicken and egg here. If you needed more resources and you could cost-recover those resources and meet the performance standard the industry was looking for, I still don't understand why that's not achievable.

Mr. Dann Michols: It may very well be achievable. When we set the fee structure in place in the first place, it was following a very intense consultation process with all of the stakeholders: industry obviously as a payer, but the health care system as well.

We could go back through that negotiation process and put forward the proposition of raised fees in order to continue to meet the target. I suspect—and my colleagues here will undoubtedly comment—that this would meet with some resistance because there is a belief on their part that the commitment of the government for resourcing the process was not met and consequently they aren't making their targets. Why should they pay more for the targets that were promised in the first place? There's some legitimacy to that.

Mr. Roy Cullen: We'll come back in a moment, and I'd like Mr. Stewart and Mr. Keon to comment on whether they would support such a move.

I'm also trying to wrestle with the question of where those resources went to. You're saying that during program review you didn't know what shoes would fall and where, so you didn't really build any of that scenario into your cost-recovery formula. I'd like to know, at some point, how you define costs. Is it a fully costed...?

Mr. Dann Michols: It's fully costed, including the overhead of the program and the department.

Mr. Roy Cullen: Yes.

You're saying then that the resources that were cut for the.... Was that the department as a whole that you're talking about? Then there was some allocation that came into your area that you are responsible for finding the resources to meet a certain budget-cutting exercise.

Mr. Dann Michols: That's correct.

Mr. Roy Cullen: Who made those decisions?

Mr. Dann Michols: The decisions were made by the departmental management and then ultimately the government.

Mr. Roy Cullen: How would the departmental executive committee have decided in what areas to cut? Did you have any knowledge of how that was established?

Mr. Dann Michols: Health Canada went through a process undoubtedly similar to what all of the departments within the government went through. They took a look at their priorities and the demands that were being made on the various programs and determined where the resources could best be cut for minimum damage.

Mr. Roy Cullen: Did that discussion at that time include...? Presumably your area and of course every department or division or branch would put forward a case that the world would fall apart. I can understand that. Was the deputy minister, for example, apprised at that time that these cuts in your area would result in a serious decline in performance standards?

Mr. Dann Michols: I think I would epitomize it differently. It is not going to be a serious cut in performance standard. It is going to be not attaining the performance standard in the same period of time as we had planned.

Mr. Roy Cullen: That may be rephrasing it, but basically they're not living up to performance standards that were made in that sense.

Mr. Dann Michols: To commitments that had been made, yes.

Mr. Roy Cullen: So the deputy minister and all those who work with him or her were aware of that fact?

Mr. Dann Michols: Yes, they were.

Mr. Roy Cullen: Maybe we could come back to Mr. Stewart and Mr. Keon. If you follow through the logic, if it's cost-recovered, we put in more resources, it's charged to the industry, and we meet the performance spec you're looking for. I'd like to hear whether that would work for you or not.

Mr. John Stewart: The process we went through originally was to look at the cost in terms of human time, reviewer time, and overheads fully costed, as Mr. Michols said, for reviewing and approving a drug submission. We came up with the $250,000 fees that are there now. That number was really generated by TPP and adjusted somewhat in response to industry comments.

• 1640

The TPP does many things in addition to reviewing and approving drug submissions. The amount of money that industry is putting in for the review and approval of drug submissions is about $25 million a year. It's a substantial amount of money. At one time it was more than the amount they received from appropriations.

It's rather our belief that as appropriations have gone down and none of the responsibilities have been taken away from the TPP, in fact probably some of the money that's there for the evaluation of drug submissions is being used, albeit indirectly, for services that are very unrelated to the review and approval of drug submission. From that perspective, we think we're paying a fair amount now.

Mr. Roy Cullen: Just to follow through that logic, to be cynical for a moment, one might say that if you were the head of the department, you could say that we're going to cut resources, the proprietary or the private goods, but we want to make sure we buttress the public goods area, the area where we have a responsibility generically in terms of our overall mandate. Maybe we can skimp a little more in those services where we do private goods. I'm being the devil's advocate; I don't know what exactly happened. I'm troubled in terms of understanding where these resources went to and how they were allocated or reallocated.

If you were an ultimate cynic, would you say that maybe that's partially what happened? Some of the resources moved to the areas where public services, within the overall general mandate of the department, would need buttressing, at the expense of those services that were providing services on a cost-recovery basis. What actually happened? What's your take on it?

Mr. John Stewart: We can go back to the slide that shows very little change in performance in the last five years, since 1995. It's been around 550 to 600 days. There certainly hasn't been a dramatic increase in resources placed behind the review and approval of the brand-name new drug submissions. Mr. Keon will talk about the generic side.

It is a complex department. It does have a lot of activities, which Mr. Michols could talk about better than I, that are unrelated to the review and approval of drug submissions but are very important. I believe some of those areas have in fact increased. I do not believe their appropriations level or their budget, their overall funding, have increased in a commensurate fashion.

The Chair: Mr. Keon.

Mr. Jim Keon: At the time the fees were introduced, there were extensive and quite heated negotiations about the fees. In our industry, there was an acceptance of the fees only because there were what we thought very clear and firm commitments about performance. I would just comment that in the United States, for instance, the generic drug industry does not pay fees for the review of its medicines. So already there's a bit of a competitive imbalance there.

The appropriations were to be 50% of the costs of running the TPP. After a review of the types of functions, that was seen to be fair. They have this broader role of public policy and policy development, regulatory development. Perhaps half of that should come from appropriations and half from fees. Now it's up to about 65% coming from fees from the industry.

Would the industry agree to pay more on the basis of getting better performance? Well, yes. People are skeptical because what they negotiated five years ago was better performance for fees and it didn't happen. Then the one party that doesn't meet the target says, “Well, if you just pay us a little more, then we'll really improve.” I guess there's just total skepticism.

Being part of the Business Coalition on Cost Recovery that was here yesterday, I would also say that when we sit at those meetings, we understand that this isn't unique to Health Canada. There seems to be a Treasury Board problem. There was the introduction of these fees, seemingly without a firm commitment to meet the performance levels that were implied.

• 1645

These were negotiated in 1995, and then we saw a year or 18 months later the performance start to get worse rather than better. There's just total skepticism. So for the government to come back now and say that if you pay higher fees, they'll give you better performance.... Maybe after the fact, but certainly not going in, no.

Mr. Roy Cullen: May I have one more quick one?

The Chair: Sure.

Mr. Roy Cullen: Mr. Michols, coming back to the question of what you charge fees for—the services—in regard to the user fees you've brought in—I think Mr. Keon mentioned five for the generic industry—were there none before at all, or was it a matter of updating the fees in line with costs?

Mr. Dann Michols: No, it was an operation of designing the whole cost-recovery initiative from scratch in close consultation with the stakeholders.

Basically, as we put it to them, the issue of whether or not there would be fees was beyond our control. That was a government decision. How those fees would be calculated, how they would be assessed and in what ways—whether it was an annual licence, a particular submission review fee, or whatever—was completely open for discussion, and there was agreement across the stakeholders that this was the way we should go. But all of those were new.

Mr. Roy Cullen: And those categories haven't changed? It's the same five? Is it the same for the research-based—

Mr. Dann Michols: The fee structure is the same regardless of the industry.

We brought in this particular fee structure. We have not adjusted it because we are waiting for the results of the major evaluation that we have underway at this time. From that we will have far more information than we had at the outset as to the impact of the cost-recovery initiative on the payee, on the health care system in general, and on us. Then we can begin to make adjustments.

Mr. Roy Cullen: But in terms of determining what you were going to charge fees for—and I grant that you got the stakeholders together—I don't know if you gave them a lump sum and said that was the number you had to carve up or.... How did you define what was a public good versus a private good? I imagine you wrestled with it.

Mr. Dann Michols: Well, we wrestled with it, but it was very difficult, obviously, to get our hands on because, as I said, of the generality of the Treasury Board guidelines in the first place. So we had to develop our own theory to a large extent.

But let me give you an example. We decided to charge an annual fee for an establishment licence, the revenue of which would go toward the inspection of the establishments based on GMP standards. But we discussed with industry whether they would rather have a fee per inspection; a system whereby those that were not in compliance would end up paying a penalty, as opposed to those who were in compliance; or an annual fee that went toward those general costs.

For all sorts of reasons, both efficiency within the regulator and effectiveness within the system and so on, we came to agreement on what type of mechanism would best serve.

It was a negotiated process—as Mr. Keon says—a process negotiated in full consultation with the industry affected. But the fact that—

Mr. Roy Cullen: Negotiated starting from a set number, the kind of number—

Mr. Dann Michols: That's right. We were starting from the premise that if we were loosing 50% of our appropriations through the program review, then we needed to attempt to raise at least that much through cost recovery if we were going to maintain the current level of productivity. And as I've indicated, we've actually doubled the productivity in the same period of time.

Mr. Roy Cullen: But now you've just indicated that you did cost-recovery scenarios in contemplation of the program review cutting by 50%. I thought you said earlier that you didn't know—

Mr. Dann Michols: The program review exercise was going on at the same time as the cost...we had to phase in cost recovery. Cost recovery did not just start July 1, 1994. We ran it through three phases—one set of fees in the first year, a second set in the second year, a third set in the third year—as we worked through it.

The environment we were in was changing as we were going through this process.

The Chair: When you speak about efficiency, you don't factor in time, do you?

• 1650

Mr. Dann Michols: Well, we do, but for a regulator who is attempting to ensure the drugs and medical devices available to Canadians are safe, effective, and of high quality, there are really only two variables. One is the length of time it takes us to undertake a review of often voluminous information. The other is the quality of the review. If we start taking shortcuts on the quality of the review, then we're not doing our job. So the quality is a given.

The Chair: Let me ask about shortcuts that may not be so dangerous.

I figure a person, an American patient or a patient from a country like Great Britain, is more or less the same type of patient, right? I mean, if you have an illness, they find a cure, and it gets approved in the United States, the U.K., Italy, France, and Germany, the likelihood is that it probably gets approved in Canada. Is that correct?

Mr. Dann Michols: The likelihood is that it probably gets approved, but it may be approved with different conditions based on the particularities of the Canadian health care system. In some cases it would not be approved necessarily for the same indications. So there may very well be differences in the approval, but yes, it will be on the Canadian market more than likely.

The Chair: Should the time, the duration of your study and the approval process, shrink, or does it stay the same? In other words, if a drug is coming into the Canadian market, it goes through this drug approval process. But if you know already that it was approved in the United States, the U.K., Italy, and France, would it take just as long anyway?

Mr. Dann Michols: We won't necessarily know that it was, because industry is pushing harder to submit the application to all of those various agencies at the same time. So we're all confronted with the submission and the data. The American system is a little different; it may have received it earlier. But we're confronted with the same data and we're going through the same process, and our responsibility is to ensure that it's safe, effective, and of high quality for Canadians. We interrelate with our sister and brother agencies to exchange information, findings, and so on, but we are going through that review at the same time.

The Chair: But by the time you finish your process, the Americans have already completed theirs.

Mr. Dann Michols: That is true by, I think, an average of about 200 days. That means the product is on the market potentially 200 days earlier. That, in some instances, is problematic in and of itself, because it means the product is being used by Americans. There may be adverse drug reactions or problems that develop, and then as part of our review process, before we can release the marketing authorization, we have to investigate those activities as well. So unfortunately—or fortunately, depending on how you look at it—it complicates the Canadian review.

The Chair: Or we could be missing 200 days of helping people. It depends on which way you look at it, right?

Mr. Dann Michols: That's true. It's very rare that a product is not available to Canadians through clinical trials, compassionate programs, or special access, but yes.

The Chair: Okay.

Are there any questions?

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): I have a question on the lag times between our approval times in Canada and say the U.S.

To what extent does that create a competitive disadvantage, for instance, for our emerging biotech industry in Canada, or big pharma? In either case, I'd be interested in knowing that.

I mean, we recognize our tax system is a disadvantage. We recognize the regulatory burden as a disadvantage in a general sense. But to what extent would our drug approval time lags be a disadvantage, for the biotech sector particularly?

Mr. John Stewart: Sure. Let me attempt to answer your question.

Let me talk about big pharma. I'll talk about Purdue Pharma, which is actually medium pharma as a company.

In fact, the delays do have significant impact in terms of what I'll call product manufacturing mandates, research mandates. As I've explained to Mr. Michols many times before on these issues, countries that are first in terms of getting products approved, countries that continually do this and are continually in leadership of research programs that are sometimes augmented by speedy review and approval of clinical trials, become leaders. They become the focus of the activity.

• 1655

We figure out how to manufacture here. We do some of the early research here. More questions, more business, flow to this organization. My company exports one of our products to Japan, because we had it approved here in Canada in fact substantially before it was in the United States. The Japanese wanted this product. They were looking for a new drug submission on which to base their submission. They used the Canadian submission. We have a fairly substantial manufacturing export to Japan because of that. Unfortunately that just isn't the case for most of the submissions.

Also, to be balanced, a lot of reorganization is going on within the pharmaceutical industry, so not every company could benefit from that particular example, but there are many like it.

On biotechnology, although we are not a biotechnology company, we have investments in them. These companies are under severe economic restraint at all times. The common way one evaluates a biotechnology company is on their burn rate, which means how much money do you have and how quickly are you going through it? You are going to run out and you are going to have to go back into the marketplace, and at some point you may not own your company any more, because your stock value goes down.

So for these groups, when they get close to the marketplace and they have a biological product, a rapid review and approval system is very important to them along that line.

Mr. Scott Brison: Recognizing the degree to which biotechnology companies are evaluated in terms of their ability to raise capital, the stage of research they're in, and their burn rate, wouldn't it almost make sense, if there were a lag time, that a Canadian biotechnology company with limited resources would be more likely to seek, say, FDA approval and focus on that, as opposed to even bothering with Canadian approval? Why would a Canadian company, if you look at the size of the market and if you're dealing with limited resources, seek Canadian approval?

Is that a factor? Is that happening? Are Canadian companies effectively leapfrogging or ignoring the Canadian approval, or focusing more on the FDA approval?

Mr. John Stewart: I can't comment. I only know in our company, they are filed in all of the countries at the same time. Certainly with many of the biotechnology companies, you hear of their products emerging in the United States earlier on, but that may simply be a function of the review and approval process as opposed to some selection of the United States or some other country in preference to Canada. And I suspect that is in fact the case.

Mr. Scott Brison: Probably the applications are occurring simultaneously.

Mr. John Stewart: Yes. But certainly no one would ignore the United States market with a biotechnological product.

Mr. Scott Brison: No.

Mr. Michols, are competitiveness issues considered, when you're looking at approvals, in the quest to reduce the approval times? Certainly the safety and efficacy issues are paramount, but beyond that, are you considering the impact of the quest to reduce lag time on the competitiveness of our biotechnology or pharmaceutical industries?

Mr. Dann Michols: Yes. The situation, the environment in which Canadian industry and Canadian-based industry must operate, is a very real factor in our environment. That said, our mission is to protect the health and safety of Canadians. It's to ensure that the drugs available to Canadians are safe, effective, and of high quality. That's job one. If we can design a regulatory process or a regulatory system that does that and at the same time has a lighter impact on Canadian industry or enhances the competitiveness of Canadian industry, we would be delighted to do that. But job one has to be the protection of the health and safety of Canadians.

Mr. Scott Brison: Let me play devil's advocate for a moment. At least within free trade zones, say within NAFTA, doesn't it make an awful lot of sense for countries with free trade agreements to actually pursue some type of communal regulatory approval process, as opposed to individual approval processes that create, I would expect, an immense amount of redundancy and duplication, and in fact impede the ability of some of these companies? Again, the area with which I worked the most closely was the biotechnology area.

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Wouldn't it make an awful lot of sense to pursue some type of joint regulatory approval?

Mr. Dann Michols: It does make an awful lot of sense, and in the re-engineering process we've been engaged in in the last five to six years, the concept of international harmonization and international cooperation is very much a key piece of our strategy. As industry globalizes, it makes no sense at all that regulators don't globalize at the same time.

The problem is, or the challenge is, particularly in this sector, there are a large number of companies based in Europe and there are a large number of companies based in the United States. The European system and the American system of regulation are somewhat different. Canada has been instrumental in attempting to bring those two large blocks together to try to get all of them to agree on a common approach, which would make it much easier—certainly it would make it a lot easier for us—than to operate in that process. But we are a very small player in a very large game, and we can herd them along, but we can't force them into anything.

Mr. John Stewart: I'd like to respond to your question and to a question the chairman asked earlier on.

What you're proposing makes a lot of sense. It's what in fact happens in the European Union right now, where there are thirteen countries, all with independent regulatory agencies. What in fact transpires is that one or two of the agencies give a full review to the product, and then the output documents from those reviews are transferred to the other countries, and they use those as the basis for approval along that line. Those other countries approve in a much shorter time. I think they have ninety days.

So there's a lot to be gained by sharing resources internationally, and it's something we should pursue.

Mr. Scott Brison: We could even consider the notion of grouping scientists who focus, say, on cancer research in a particular cluster, and scientists who focus on heart disease in another area, and something like that. Or even further, with the death of distance as a determinant, because of telecommunications, they wouldn't necessarily have to be geographically clustered. That would make a lot of sense.

I expect, though, with the concern people have over the decline of the role of the nation-state, fear of globalization, and all these sorts of things, this could emerge as a very politically charged issue. Although it may make sense, I expect people such as Maude Barlow may not share my enthusiasm for this kind of movement. But at least as a committee, we should take a serious look at how much we could achieve by reducing these lag times by some type of joint regulatory approval in some of these areas. It would make a lot of sense.

Mr. Jim Keon: I just wanted to say that in a lot of developing countries that don't have the infrastructure to do regulatory approval, they will accept products from Canada based on approval from the therapeutic products program. In fact the export certificate fees and licences we talked about earlier will often suffice to get your product sold in those countries. So it does come back to the issue of competitiveness, if we can get our products approved here.

Canada is seen as having a very strong, good generic industry. In a lot of developing countries, they badly want our products. They're high-quality products at reasonably good prices. All we need is a certificate, a notice of compliance and approval from Health Canada, and we can sell in those countries without having to go through a separate regulatory system there. So that's a very valuable piece of paper we need from Health Canada, and it directly affects competition and the competitiveness of our industry.

Mr. Scott Brison: Thank you very much.

The Chair: Thank you, Mr. Brison.

Mr. Szabo, followed by Mr. Solberg.

Mr. Paul Szabo (Mississauga South, Lib.): Mr. Michols, the committee heard from Treasury Board and others in the last meeting we had on this subject. I was interested in the consensus position of the witnesses that the principles of cost recovery are fundamentally sound and accepted, but the implementation, or how it gets down and into the departmental level, is not as effective or consistent with those principles. It was really the implementation side.

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Is that your experience? You are part of the Health Protection Branch. I'm not sure whether you can speak on behalf of Health Canada generally, but is there a problem of accountability and transparency because of the segregation of responsibilities between the Treasury Board and the departments that have to implement a policy?

Mr. Dann Michols: I'm not sure that's the conclusion I would draw. Certainly, as you say, the principles of cost recovery, the drive to make the programs more efficient, to make them receptive to stakeholders and such, are to be lauded, and we appreciate that.

Implementation has been a problem. As I mentioned in my opening comments, much of that problem has been that in setting those principles and in expecting program managers to develop targets and to measure performance, the infrastructure within the government to support the managers who are undertaking that has not been there. It has remained the control structure around the appropriations.

In many cases, for example, it will take me longer to hire a review scientist to undertake an evaluation through the government's staffing processes than the target time I have to undertake that evaluation. In other words, the government's mindset in adopting those policies is not carried through to make the job of the program manager, attempting to implement cost recovery, that much easier.

The information systems aren't there to provide the data my managers need to control our operations. We talked earlier about the full cost basis of activities, and so on. Those sorts of systems and processes that one assumes are commonplace in the private sector in order to make their pricing decisions and so on are not available to us within the public sector.

I think those are growing pains. With the basic change to accrual, as it stands now, I have a process where it takes longer than a year to review a submission. We don't have a process where I can carry over funds from one year to the next. It's just that the appropriations-based system is out of sync with the cost-recovery-based system, and for the manager who's caught in the middle of both systems, there are some serious pressures.

Mr. Paul Szabo: We have heard the same kind of concerns about availability of data, and actually, the responsibility. Even the Treasury Board officials are saying, on the one hand you want it to be efficient and productive and so on, and on the other hand you're asking for all kinds of studies, reports, and analyses.

Somehow you have to rationalize that. Knowing what's going on and having the data should in fact be consistent with efficient and productive management, and it doesn't seem to be there.

My final question is just for an opinion from the two representatives from the pharmaceutical industry.

One of the principles is basically that the fees would be commensurate with the value received, as it were. Are you satisfied that the fees that are being set, for instance, in terms of reviewing drugs, are in fact reflective of the value that is being provided?

Mr. John Stewart: Were the performance targets being met, then we would feel the fees were commensurate with the value being received. We talked earlier on that it's really at the time the drug is approved for marketing that a company begins to receive revenues for it.

As a matter of fact, in the original discussions, it was recognized that the service would be of less value, from that perspective, if the performance target was not met. Diane Marleau said we were going to establish a program wherein the fees would be modestly reduced, but reduced nonetheless, if the performance target was exceeded, recognizing the fact that the value wouldn't be the same.

Unfortunately, that never came to pass. But in answer to your question, currently we do not believe we're receiving the value for the service that we would be if performance targets were being met.

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It's not that they can't be met. We saw that the safety and efficacy review was in fact completed in 180 days. It's just that the submission sat around for several months before being picked up, and then it waited for several more months before the chemistry and manufacturing review was undergone.

So maybe it's a bit of semantics to say whether it's efficient or not, but to me, a system that takes six months to pick something up, reviews it for a while and puts it back down, then it sits for a while, and then picks it up and completes a review is not inherently an efficient one. If you could slide all the things together, the processes internally are in fact efficient.

Mr. Jim Keon: I think the industry, certainly the generic industry, wants a thorough review, wants Health Canada, through the TPP, to ensure that our products are safe and efficacious. We want the public to have confidence. So we accept that we get a benefit from that, and we accept that we're willing to pay for that.

We haven't seen charts on generics, but as well, I don't think it is adding to the safety of a medicine to take 458 days to review it if for 428 days of that it's sitting in a box on the sideline and then it's picked up and reviewed in 30 days. We also believe, if the backlog could be eliminated with sufficient resources, the timeframes could be met, and could be met on an ongoing basis. So a lot of what is needed is to take a chunk out of the backlog.

We're not complaining about the fee size, but currently we are complaining because one of the issues as well in the phase IV review that Mr. Michols mentioned is, what impact have the fees had on your operation? That's a funny question. It's like a car salesman asking you, what impact did paying $20,000 for this car have on your family budget? That's not really the question. The question is, did you get value for your $20,000? Is this a good car? Is this a good performance review? That's what we're really unhappy with. It's not the level of the fees; it's what we didn't get with that fee structure.

Mr. Paul Szabo: Thank you, Mr. Chairman.

The Chair: Thank you.

Mr. Solberg, and then we'll go to Ms. Guarnieri.

Mr. Monte Solberg (Medicine Hat, Canadian Alliance): Thank you very much, Mr. Chairman.

Implied in the idea of cost recovery is that when you pay a fee, you get a service for it. Obviously there's a fundamental disconnect here, not only in the Health Protection Branch, but it seems to be throughout the government when it comes to cost recovery.

I want to get away from some of what we've talked about so far and ask a question about attitudes that you encounter.

First of all, I'm interested in knowing, have any of you had a chance to talk to the minister about this issue? Is it on the minister's radar screen? The next question is, as members of the cost-recovery coalition, have you had a chance to talk to the Treasury Board president to underline how important this is?

I think what has happened is that some people see this as an issue of cost, but clearly that's not the case for you. This is about getting approval in a reasonable amount of time. I wonder if you could respond to that.

Mr. Jim Keon: Well, I can start.

For the generic companies, yes, we have met with Mr. Rock on this issue. We have written to Mr. Rock. We met with the minister last year specifically to talk about performance. He expressed concern about it. He said it was not acceptable to him, and he guaranteed to us that he would be looking at this and taking steps to improve the situation.

We have not seen those improvements yet. We're hopeful that there may have been some extra appropriations in the last budget, and we're hopeful that there will be extra resources and a much improved system in the very near future.

So yes, the minister has met with us and he is aware of our concerns, but no, we have not seen the improvement yet.

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Mr. Monte Solberg: I want to go back to something you just said. You said if there were further appropriations, maybe targets could be met. I apologize, I wasn't here for all of the presentations, but Mr. Michols, maybe you can help me out with this. The idea behind cost recovery, I thought, was that the money that was paid, to the Health Protection Branch in this case, would be used specifically for the purpose of getting these approvals, doing the testing, and that sort of thing. In a case like that, we have to remember that cost recovery was added on top of the taxes people already paid in the past to provide the basic services of the Health Protection Branch. If that's the case, I'm wondering why extra appropriations would be needed, if these fees were already being paid, to give you the resources to do the sort of testing these other gentlemen require.

Mr. Dann Michols: There are a couple of factors. First of all, the fees collected under each one of the regimes go toward the activities for which they are collected. There is no siphoning of the dollars off to some other purpose. The situation, though, is that the activity they go toward is not 100% covered by the fees charged, so there is the requirement for those activities to be supported by additional public dollars, appropriations.

The variable in the equation is the timeliness, as we discussed earlier. The quality cannot be reduced, so timeliness is the factor that has to vary. If dollars are not available for the activity, it then gets extended in terms of time.

Mr. Monte Solberg: What percentage of the cost would come from fees that are paid by these companies?

Mr. Dann Michols: It varies over the various activities because some of the fees are obviously much larger than others. It varies between 20% and 80%, depending on the activity and the fees.

Mr. Monte Solberg: Okay.

Thank you, Mr. Chairman.

The Chair: Thank you.

Ms. Guarnieri.

Ms. Albina Guarnieri (Mississauga East, Lib.): Thank you.

I understand the bells are going to go soon. I hear we have votes today.

The Chair: In ten minutes.

Ms. Albina Guarnieri: I'll try to be very brief to afford you more time for answers.

My question is for Mr. Michols. You often hear allegations that changes to the drug patent legislation have resulted in costing—I see smiles; you would have been disappointed not to hear this question—Canadian consumers hundreds of millions of dollars. Is Health Canada tracking the impact of those changes, in terms of additional cost to consumers and to provincial health budgets?

Mr. Dann Michols: Health Canada obviously has a general interest in the health of the health care system. There are branches within Health Canada that analyse the cost to the system and such. The drug patent legislation per se is not a responsibility of mine, except for the administration of certain regulations that link the issuance of a notice of compliance to the patent status. It's not within my realm of competence to be able to comment.

Ms. Albina Guarnieri: Mr. Stewart alluded to the fact that your department has very many complex activities. But you would have access to those studies that track the cost of impact to Canadians.

Mr. Dann Michols: Yes, I would, to the extent that they exist, but I don't know the information myself.

Ms. Albina Guarnieri: Would you be willing to make a commitment to make those studies available to us?

Mr. Dann Michols: Again, I'm not aware there are studies, but certainly any studies that are available in that area we would be prepared to make available.

Ms. Albina Guarnieri: Thank you.

We often hear from governments that one of the key strategies for a strong public health system is to minimize cost for services. Would you like to venture whether or not generic drugs are a key essential part of an affordable health system, or is that beyond the realm of your scope today?

Mr. Dann Michols: You're asking this question of me?

Ms. Albina Guarnieri: Yes.

Mr. Dann Michols: I suspect it might be better directed to the generic industry. That is not the function of the regulator.

Mr. Jim Keon: The answer is yes.

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Ms. Albina Guarnieri: It's no surprise, but it has long been the position of the CDMA that Canadians are direct beneficiaries of your success, through lower drug prices. From an historical perspective, can you give us an idea of the total amount of money Canadians have saved because of the activities of generic drug companies?

Mr. Jim Keon: We calculate that on average the generic medicines in Canada—and there are some 3,900 different products on the market—are sold at about 50% less than their equivalent brand-name products. We also calculate that saves the health care system in excess of $1 billion a year, which is about 15% of the total drug spending in Canada. That's each and every year under the current regime.

Of course, there are studies, and I'd be happy to make some available to you, on the costs of changing patent legislation and the costs of the patent medicine regulations Mr. Michols mentioned he administers. There are studies we have done that I'd be happy to share with the committee, if that's useful.

Ms. Albina Guarnieri: Thank you. Since we often hear that one of the key government strategies for a strong public health system—and Monte alluded to it—is to minimize costs for services, we'd be very happy to look at those studies.

I have a final quick question. Do the patent medicine regulations delay generics from getting to market even more than TPP performance? How would you rate that, or which one impedes you in performance?

Mr. Jim Keon: That's a very good question. The patent medicine regulations clearly delay generics from getting to market. One of the pieces of data TPP publish every quarter is called “NOCs held”. These are generic notices of compliance, generic approvals that are ready and done in the review process that is being held because of legal issues relating to the patent medicine regulations. Over the last four or five years, there have been dozens and dozens of these, again at very high costs.

To the extent that we can improve the TPP performance, not all of the generic medicines are caught up in these regulations, so there clearly are some that go forward independent of them. In terms of reducing costs, we would like to see improvements in TPP performance. Independently, we would like to see some major changes to the patent medicine regulations that would make them fairer and would not result in these “NOCs held”, as we're now seeing every quarter.

Ms. Albina Guarnieri: Thank you.

The Chair: I have a question for both the generic and name-brand drug companies. You come to the market from different angles and different interests. The system of user fees can affect your position vis-à-vis the other. Do you think the system of user fees treats the two groups fairly, and how do you come to that conclusion?

Mr. John Stewart: I think the system of user fees and performance standards is designed to treat the two groups fairly. The review and approval time of new brand-name medicines is more complex. The timeframe for the review and completion of approval is longer—355 days currently. I'm not sure exactly what it is for the generics, but it's less than that. I think the performance standards are designed to reasonably equate to the time it should take to perform an efficient review, with no waiting times. So from that perspective I'd say they are balanced. They are not in favour of one sector of the industry over another.

The Chair: Mr. Keon.

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Mr. Jim Keon: On the fees, I think we said earlier if we were getting performance times, the cost-recovery fees would be reasonable, in relation to the performance targets.

We support very strongly an efficient review and approval time for the new medicines, for a couple of reasons. One, where the new medicine represents improved therapy, it is important to get it on the market. More practically, from a business perspective, if the brand medicines get on the market sooner, it takes some of the lobbying pressure off to keep extending the patents at the back end. We think protection and market value of a medicine should be at the front end. We don't like to see patents being extended further and further. At some point you want to get the generics on the market with competitive pricing and ease some of the cost pressures on the system.

So there are benefits, and we certainly support and think that the performance standards for both generics and brands should be improved. That would be fair to both sides and would also be a net improvement for the health care system.

The Chair: Thank you.

Before you leave, I just want to bring to your attention that members of the Bloc Québécois would have loved to have been here. Unfortunately they could not. They express their apologies for their lack of presence here today.

I want to express to you, on behalf of the committee members, our sincerest gratitude. I think this round table has been very interesting. It's going to serve us well as we begin to think about this issue. Hopefully, by the end of this process we'll come up with a report that will improve the present situation.

One thing I'm certain of is that this study was absolutely necessary, given the challenges you face.

Thank you. The meeting is adjourned.