Quarterly Financial Report for the Quarter Ended September 30, 2014

Management Statement for the Quarter Ended September 30, 2014

1. Introduction

This quarterly report has been prepared by management as required by section 65.1 of the Financial Administration Act and in the form and manner prescribed by the Treasury Board Accounting Standard (TBAS) 1.3. This quarterly report should be read in conjunction with the Main Estimates and Supplementary Estimates, as well as Canada’s Economic Action Plan 2014 (Budget 2014).

1.1 Authority, Mandate and Program Activities

The Patented Medicine Prices Review Board (PMPRB) is an independent, quasi-judicial body created by Parliament as a result of revisions to the Patent Act (Act) in 1987 (Bill C-22). The Act was further amended in 1993 (Bill C-91). The revisions were intended to balance the extension of patent protection with the need to protect consumers from possible excessive patented drug prices. When the Board finds, following a public hearing, that the price of a patented medicine is excessive it may order the patentee to reduce the price and/or take measures to offset any excess revenues it may have received as a result of excessive prices.^{Footnote 1}

The PMPRB has a dual role:

Regulatory: To ensure that prices charged by patentees for patented medicines sold in Canada are not excessive.

Reporting: To report on pharmaceutical trends of all medicines, and on research and development (R&D) spending by pharmaceutical patentees.

Further details on the PMPRB’s authority, mandate and program activities may be found in the Report on Plans and Priorities and the Main Estimates.

1.2 Basis of Presentation

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes the PMPRB’s spending authorities granted by Parliament and those used by the organization, consistent with the Main Estimates and Supplementary Estimates for the 2014-15 fiscal year. This quarterly report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before moneys can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes.

When Parliament is dissolved for the purposes of a general election, section 30 of the Financial Administration Act authorizes the Governor General, under certain conditions, to issue a special warrant authorizing the Government to withdraw funds from the Consolidated Revenue Fund (CRF). A special warrant is deemed to be an appropriation for the fiscal year in which it is issued.

As part of the departmental performance reporting process, the PMPRB prepares its annual departmental financial statements on a full accrual basis in accordance with Treasury Board accounting policies, which are based on Canadian Generally Accepted Accounting Principles for the public sector. However, the spending authorities voted by Parliament remain on an expenditure basis.

The quarterly report has not been subject to an external audit or review.

2. Highlights of Fiscal Quarter and Fiscal Year to Date (YTD) Results

This quarterly financial report reflects the results of the current fiscal period in relation to the Main Estimates. The PMPRB’s spending for the second quarter of 2014-15 has decreased by $2,954 thousand (62%) over spending for the same quarter in 2013-14 and year-to-date spending has decreased by $2,944 thousand (47%) from $6,265 thousand in 2013-14 to $3,321 thousand in 2014-15.

The decreased spending is mainly due to a Federal Court decision in April 2013 that quashed a Board decision and directed the PMPRB to return to the patentee the sum of $2,801 thousand plus $71 thousand for appropriate interest and costs.

The money reported in the PMPRB’s Annual Financial Statements as non-respendable revenue is a result of payments made by patentees to the Government of Canada through Voluntary Compliance Undertakings (VCUs)^{Footnote 2} or Board Orders to offset excess revenues. The Minister of Health may enter into agreements with any province respecting the distribution to that province of amounts received by the Receiver General, less any costs incurred in relation to the collection and distribution of those amounts.

The amount reported as non-respendable revenue is a function of the VCUs accepted by the Chairperson or a hearing panel as the case may be, and the Board Orders issued as a result of public hearings into the price of a patented medicine.

In the second quarter of 2014-15, the Chairperson accepted 2 VCUs totalling $2,092 thousand in repayment of excess revenues as compared to 2 VCUs and repayment of excess revenues totalling $3,152 thousand in the second quarter of 2013-14. In 2014-15, year-to-date non-respendable revenue from VCUs and payment adjustment for a prior year VCU totalled $2,094 thousand as compared to $10,357 thousand for the same period in 2013-14.

Revenues that are non-respendable are not available to discharge the PMPRB’s liabilities. While the Deputy Head is expected to maintain accounting control, she has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are not therefore presented as a reduction to the entity's total gross budgetary expenditures.

2.1 Significant Changes to Authority

As shown in the Statement of Authorities on page 7 of this document, total authorities available for the year have decreased by $2.5 million (18%) from $13.8 million to $11.3 million. This variance is mainly due to a decrease of $2,872 thousand for a one-time statutory item received in the second quarter of 2013-14 for the refund of amounts credited to revenue in previous years, as explained below, and an increase of $372 thousand for the approval of the operating budget carry-forward received earlier than in the previous year.

In February 2012, the Board found that a patentee had sold two patented medicines in Canada at excessive prices. Consequently, the Board ordered the patentee to pay to the Crown excess revenues in the amount of $2,801 thousand. The patentee complied but applied for judicial review of the Order. On April 30, 2013, the Federal Court quashed the Board Order and directed in its judgment that the sum of $2,801 thousand be returned promptly to the patentee plus $71 thousand for appropriate interest and costs. The PMPRB received statutory funding in the amount of $2,872 thousand to cover this repayment.

2.2 Significant Changes to Budgetary Expenditures by Standard Object

The PMPRB’s second quarter spending, less the repayment of $2,872 thousand returned to the patentee in 2013-14, has decreased by $82 thousand (4%) from second quarter spending in the previous year.

Planned spending for all expenditures have increased as a result of receipt of the operating budget carry-forward in the second quarter of 2014-15 rather than the third quarter as in the previous year.

Year-to-date spending in “Personnel” has decreased by $215 thousand over year-to-date spending for 2013-14. The variance is mainly due to a one-time transition payment of $166 thousand for implementing salary payment in arrears by the Government of Canada, which is offset by “Other subsidies and payments” expenditures.

Year-to-date spending on “Information services” has decreased by $84 thousand over year-to-date spending for 2013-14 and spending for the second quarter of 2014-15 has decreased by $82 thousand over the second quarter of 2013-14, from $89 thousand to $7 thousand. The decrease is mainly due to a timing difference in contract approval for the purchase of new data and databases to be used in the detailed analysis of drug prices and their cost drivers in order to assist public and private health insurers develop better informed drug reimbursement policies.

Spending in “Professional and special services” for the second quarter of 2014-15 has increased by $25 thousand from the second quarter in 2013-14. This increase is the result of additional spending on IT consultants to support the PMPRB’s critical database on-line filing initiative; its move to an electronic document and records management system; and the preparation of its website for conversion to Web 2.0 technologies. 

Spending in “Utilities, materials and supplies” for the second quarter of 2014-15 has increased by $32 thousand over the same period in 2013-14. This is largely due to a timing difference in the payment of invoices for subscriptions for specialized pharmaceutical information.

Year-to-date and second quarter spending in “Other subsidies and payments” have decreased significantly. Year-to-date spending has decreased by $2,705 thousand over year-to-date spending for 2013-14. Spending for the second quarter of 2014-15 has decreased by $2,876 thousand over the second quarter of 2013-14. The variances are due to the repayment of $2,872 thousand returned to the patentee in 2013-14 and an increase of $166 thousand for a one-time transition payment for implementing salary payment in arrears by the Government of Canada, which offsets the decrease in “Personnel” expenditures as previously explained.

3. Risks and Uncertainties

The PMPRB is funded through annual appropriations. As a result, its operations are impacted by any changes in funding approved through Parliament. The PMPRB has no authority to spend revenues received during the year as a result of payments made by patentees to the Government of Canada through VCUs or Board Orders to offset excess revenues. The Minister of Health may enter into agreements with any province respecting the distribution to that province of amounts received by the Receiver General, less any costs incurred in relation to the collection and distribution of those amounts.

The PMPRB’s funding includes a Special Purpose Allotment (SPA) to conduct Public Hearings, in Vote 1 (Program expenditures) of $2,470 thousand. The SPA can only be used to cover the costs of public hearings, such as external legal counsel and expert witnesses, etc. Any unspent amount is returned to the Consolidated Revenue Fund (CRF). The PMPRB’s expenditures are influenced by the number and complexity of investigations into the prices of patented medicines, the number of investigations that result in hearings and the number of hearing decisions that form the basis of judicial review applications, all of which are inherently unpredictable.

On May 27, 2014, the Federal Court issued its decisions in applications for judicial review of two of the Board’s hearing decisions. In both cases, the Federal Court ruled that the company was not a “patentee” within the meaning of Section 79 of the Act and therefore did not fall under the jurisdiction of the Board. While court decisions pose a risk, they also have the potential to clarify key legislative and regulatory provisions and the application of the Board’s related Guidelines. On June 25, 2014, the Attorney General filed notices of appeal in respect of the decisions.

The PMPRB’s most significant expenditure is “Personnel”, representing 61% of its annual planned expenditures. The PMPRB, like other small but highly specialized government agencies, has difficulty attracting and retaining subject-matter experts. As a result, the PMPRB relies on retaining its highly specialized workforce, and contracting with outside experts, to continue to deliver its programs. Given the organization’s small size, the departure or hiring of a handful of employees in one quarter can have a significant impact on the quarter’s expenditures.

4. Significant changes in relation to operations, personnel and programs

Changes to Key Senior Personnel

There have been no major changes to senior personnel this quarter.

Changes to Programs

In the spirit of the Government’s Red Tape Reduction Action Plan, the Board concluded consultations on two initiatives to reduce regulatory burden. First, the Board has approved implementation of the new Lagged CPI-Adjustment Methodology Initiative. Under the new methodology the actual CPI replaces the forecast CPI when calculating the CPI-Adjustment Factor for the forecast period. The new Lagged CPI-Adjustment Methodology will be implemented for 2015. Second, the PMPRB is moving forward with an initiative to reduce the filing requirement on patentees from twice to a yearly filing.

5. Budget 2012 Implementation

This section provides an overview of the savings measures announced in Budget 2012 that will be implemented in order to refocus government and programs; make it easier for Canadians and business to deal with their government; and, modernize and reduce the back office services.

In 2012-13, the PMPRB achieved savings of approximately $0.8 million. Savings increased to $0.9 million in 2013-14 and will result in ongoing annual savings of $1.0 million by 2014-15. These targeted savings will be achieved through efficiency measures; scaling back where appropriate; and by adopting process efficiencies and alternative means of delivering both the regulatory and reporting programs through internal transformation. More specifically, savings have been/will be achieved through the following initiatives:

• A reduction of $630 thousand in the Special Purpose Allotment (SPA) for Hearings. The remaining $2.5 million is considered an adequate amount to carry out fair and timely hearings as required.
• A reduction to the Pharmaceutical Trends Program of $144 thousand in 2012-13. This reduction increased to $312 thousand in 2013-14 and to $374 thousand in 2014-15 and beyond. There have been a number of changes in the Canadian environment surrounding non-patented (generic) drug prices since the 2005 Ministerial direction was received; as a result there would appear to be a less urgent need for the PMPRB to continue directed work in this area. It is expected that sufficient capacity will still remain to conduct work regarding non-patented medicines on an as needed basis.

Approval by Senior Officials
Approved by:

_____________________     _____________________
Mary Catherine Lindberg,       Douglas Clark,
Chairperson                              Chief Financial Officer

Ottawa, Canada
November 14, 2014

Statement of Authorities (unaudited)

* Includes only Authorities available for use and granted by Parliament at quarter end

(S) Statutory vote

Table 1: Departmental budgetary expenditures by Standard Object (unaudited)

* Includes only Authorities available for use and granted by Parliament at quarter end