Quarterly Financial Report for the quarter ended September 30, 2013

Management Statement for the Quarter Ended September 30, 2013

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 2013 (Budget 2013).

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, 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.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 2013-14 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 2013-14 has increased by $2,860 thousand over spending for the same quarter in 2012-13 and year-to-date spending has increased by $2,735 thousand (77.5%) from $3,530 in 2012-13 to $6,265 thousand in 2013-14.

The increased spending is solely 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 as non-respendable revenue is a result of payments made by patentees to the Government of Canada through Voluntary Compliance Undertakings (VCUs)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 submitted by patentees and accepted by the Chairperson, and the Board Orders issued as a result of public hearings into the price of a patented medicine. In the second quarter of 2013-14, the Chairperson accepted 2 VCUs totalling $3,152.2 thousand in repayment of excess revenues as compared to 3 VCUs and repayments of excess revenues totalling $2,806.6 thousand in the second quarter of 2012-13. In 2013-14, year-to-date (i.e., as at September 30, 2013) non-respendable revenue from VCUs and Board Orders totalled $ 9,937.4 thousand as compared to $3,837.6 thousand for the same period in 2012-13.

2.1 Significant Changes to Authority

As shown in the Statement of Authorities on page 8 of this document, total authorities available for the year have increased by $1.6 million (13%) from $12.216 million to $13.816 million. This net increase is the result of a statutory funding increase for the refund of amounts credited to revenues in previous years, as explained below.

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 $2,801 thousand collected from a patentee and the $71 thousand paid as interest and costs, is down slightly from second quarter spending in the previous year. However, there have been some significant changes in planned and actual spending by standard object.

Planned spending in Personnel has decreased by $114 thousand in fiscal year 2013-14 from the previous fiscal year and spending in the second quarter of 2013-14 has decreased by $86 thousand from the second quarter in 2012-13. This variance is the result of the elimination of two FTEs from the PMPRB's total FTE count. This was made possible by gains made through operational efficiencies and streamlining processes.

The PMPRB's spending on Information services, both year-to-date and for the second quarter of 2013-14, have increased significantly. Year-to-date spending has increased by $96 thousand over year-to-date spending for 2012-13. Spending for the second quarter of 2013-14 has increased by $81 thousand over the second quarter of 2012-13, from $8 thousand to $89 thousand. The increase is due to 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.

Planned spending on Professional and special services in 2013-14 has decreased substantially, from $3,986 thousand in 2012-13 to $3,280 thousand ($706 thousand or 17.7%). This is mainly due to the completion of the new mission-critical database which has resulted in lower IT consultant costs. Year-to-date spending on Professional and special services has decreased by $87 thousand from $291 thousand in 2012-13 to $204 thousand. This decrease is a result of lower expenditures on health science and IT consultants.

Planned spending on Rentals has increased from $40 thousand for 2012-13 to $147 thousand for 2013-14. This is attributable to a change in the coding of software licenses; in 2012-13, software licenses were coded to Repair and maintenance. As a result of this coding change, spending for the second quarter of 2013-14 has increased by $4 thousand over the second quarter of 2012-13 and year-to-date spending for 2013-14 has increased by $50 thousand over 2012-13.

Conversely, as a result of the coding change, planned spending on Repairs and maintenance in 2013-14 has decreased significantly from planned spending in 2012-13.

Planned spending on Utilities, materials and supplies has increased by $19 thousand, from $269 thousand in 2012-13, to $288 thousand in 2013-14. In addition, actual spending for the second quarter of 2013-14 increased by $19 thousand over the second quarter in 2012-13. This increase is the result of a change in the timing of subscription payments from last fiscal year to this fiscal year..

Planned spending on the Acquisition of machinery and equipment has decreased significantly, from $215 thousand for 2012-13, to $20 thousand for 2013-14. This change is the result of a coding change for some software license expenditures. This coding change also resulted in a $34 thousand decrease in year-to-date spending from $37 thousand in 2012-13 to $3 thousand in 2013-14.

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 40 (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 CRF. The PMPRB's expenditures are influenced by the number and complexity of investigations into the prices of patented medicines and the number of investigations that result in hearings. While the past two years, have seen a decrease in Board hearings, there have been several judicial review applications of Board decisions. It is expected that patentees will continue to seek judicial review of unfavourable Board decision, as many aspects of its legislative scheme have yet to be tested before the Federal Court or the Federal Court of Appeal.

The PMPRB's most significant expenditure is Personnel. The PMPRB, much 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 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

Michelle Boudreau, Executive Director of the PMPRB for the past three years, resigned on September 26, 2013.

Douglas Clark, will assume the position of Executive Director effective October 28, 2013.

Changes to Programs

In alignment with the Government´s Red Tape Reduction Plan and the Economic Action Plan, the PMPRB committed to examine its price review process to identify possible ways to reduce the regulatory burden on patentees and increase efficiency without adversely affecting its mandate to protect consumers.

The Board approved moving forward on two initiatives intended to reduce the regulatory burden of patentees:

• the Consumer Price Index (CPI) – Adjustment Methodology, namely replacing the use of the forecast CPI with actual CPI in calculating the CPI – Adjustment Factor for the forecast period; and
• the Regulations, namely moving from two to one annual filing of price and sales information for existing patented medicines by patentees, and modifying the requirement for patentees to submit information for the first day of sales of new patented medicines.

Options on how the lagged CPI would be determined and greater clarity on the operational and transitional plan are being developed. Further consultation will be undertaken on the proposed text in the Compendium of Policies, Guidelines and Procedures.

The proposed amendments to the Regulations will be subject to formal consultation (Federal Regulatory Development Process) through Cabinet and publication in the Canada Gazette. Stakeholders will have an opportunity to comment on that proposal. Comments received on the matter will be taken into account as part of this formal process, prior to final adoption and implementation.

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 will increase 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 will be achieved through the following initiatives:

• A reduction in the Special Purpose Allotment (SPA) for Hearings. This proposal would eliminate $630 thousand in funding for the SPA, but 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 will be increased to $312 thousand in 2013-14 and $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 leading to an efficiency gain. It is expected that sufficient capacity will still remain to conduct work regarding non-patented medicines on an as needed basis.

There are no financial risks or uncertainties related to these savings.

Expenditures in the second quarter of 2013-14, after adjusting for the repayment of non-respendable revenues of $2,801 thousand and interest and costs of $71 thousand, are 0.6% less than expenditures for the same period in 2012-13.

Approval by Senior Officials
Approved by:

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

Ottawa, Canada
November 13, 2013

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

(S) Statutory vote

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

(S) Statutory vote

¹ “Board” refers to the Board members and their adjudicative functions within the organization as a whole; the organization is referred to as the Patented Medicine Prices Review Board (PMPRB), which includes both Board members and staff.

² In accordance with Part C, sub-section C.15.4 of the PMPRB's Compendium of Policies, Guidelines and Procedures, it is the policy of the Board that only the Chairperson (or if the VCU is submitted after the issuance of a Notice of Hearing, the Board Hearing Panel) may approve the VCU.