Quarterly Financial Report for the quarter ended June 2012

Management Statement for the Quarter Ending June 30, 2012

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.

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.

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 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

As part of the Parliamentary business of supply, the Main Estimates must be tabled in Parliament on or before March 1 preceding the new fiscal year. Budget 2012 was tabled in Parliament on March 29, after the tabling of the Main Estimates on February 28, 2012. As a result the measures announced in the Budget 2012 could not be reflected in the 2012-13 Main Estimates.

In fiscal year 2012-2013, frozen allotments will be established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2012. In future years, the changes to departmental authorities will be implemented through the Annual Reference Level Update, as approved by Treasury Board, and reflected in the subsequent Main Estimates tabled in Parliament.

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 2012-2013 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. 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 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 first quarter of 2012-2013 has decreased $206 thousand (11%) over spending from the same quarter in 2011-2012.

The money reported as non-respendable revenue does not represent revenues generated by the PMPRB. This money is a result of payments made by patentees to the Government of Canada through Voluntary Compliance Undertakings (VCUs) or Board Orders to offset excess revenues. The Minister 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 influenced by the number of VCUs submitted by patentees and accepted by the Chairperson and the number of Board Orders issued as a result of public hearings into the price of a patented medicine. In the first quarter of 2011-2012, the Chairperson accepted 3VCUs which generated non-respendable revenue in the amount of $0.155 thousand. In the first quarter of 2012-2013, the Chairperson accepted 3VCUs which generated non-respendable revenue in the amount of $1.031 thousand.

2.1 Significant Changes to Authority

As at June 30, 2012, total authorities available for the year have decreased by $22 thousand (0.19%) compared to the same quarter of the prior year, from $11.854 million to $11.832 million. This net decrease is a result of a decrease in Vote 35 – Operating expenditures due to implementation of Budget 2010 costs containment measures, efficiencies gained in the operations of the organization, and lower annual planned spending on Personnel.

2.2 Significant Changes to Budgetary Expenditures by Standard Object

The PMPRB's first quarter spending is 11% lower than the first quarter spending in the previous year. Additionally, there have been significant changes in planned and actual spending by standard object.

Actual expenditures in Personnel for the quarter ended June 30, 2012 have decreased by $78.1 thousand (6.7%) from the same quarter of the previous year. This variance is largely a result of a decision to manage the risk of increasing salary costs by not staffing some positions as vacancies arise due to retirements and departures.

Actual expenditures in Professional and special services have decreased $93.2 thousand from $175.6 thousand in the first quarter of 2011-2012 to $82.4 thousand for the same quarter of 2012-2013. This decrease (68%) is largely a result of lower expenditures related to IT consultants due to the completion of the development and testing phase of the replacement of the mission-critical database containing drug pricing information.

As per the table of Departmental budgetary expenditures by Standard Object, expenditures for Materials and supplies have decreased by 95% from $42 thousand in the first quarter of 2011-2012 to $2 thousand for the same quarter of 2012-2013. This change is a result of the timing of invoicing for existing data purchase contract renewals.

As per the table of Departmental budgetary expenditures by Standard Object, expenditures for Acquisitions of machinery, equipment and tool have increased from $1 thousand in the first quarter of 2011-2012 to $33 thousand for the same quarter of 2012-2013. This change is a result of increases in the number of software licence purchases and the timing of invoicing for software license renewals.

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 Voluntary Compliance Undertakings (VCUs) or Board orders to offset excess patented revenues. The Minister 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.

Budget 2010 announced that departments would not be funded for the 2010-2011 to 2012-2013 wage and salary increases resulting from collective agreements. As departments must pay the salary increases to employees, organizations are expected to find efficiencies within their operating vote to fund these increases. The PMPRB has estimated the impact of this government-wide initiative to be $50,000 in 2012-2013, resulting in a cumulative impact of $227,937. The PMPRB will accommodate this reduction in funding for 2012-2013 by adopting process efficiencies and alternative means of delivering both the regulatory and reporting programs. This action will not impact operations.

The PMPRB's funding includes a Special Purpose Allotment (SPA) to conduct Public Hearings, in Vote 35 (Program expenditures) of $3.1 million. The SPA can only be used to cover the costs of public hearings such as, external legal counsel, 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 and the number of investigations that result in hearings. In recent years more Board proceedings seem to be resulting in judicial review applications before the Federal Court and the Federal Court of Appeal. As a result of the inherent complexity of the Board's jurisdiction, it is expected that patentees will continue to make applications to the Federal Court and the Federal Court of Appeal in areas where the Board's jurisdiction is not clearly defined in legislation and/or precedents.

The PMPRB's most significant expenditure is Personnel representing 68% of its planned expenditures, an 8% increase over the same period in 2011-2012 due to the increased costs associated with funding collective agreement wage increases internally pursuant to the implementation of Budget 2010. The PMPRB, much like other small organizations, has difficulty attracting and retaining highly specialized subject-matter experts and engaging new staff in a timely manner. As a result, the PMPRB relies on maintaining its highly specialized workforce to continue to deliver its programs. Given the department'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

In June 2012, a new Board Member was appointed.

Changes to Programs

In June 2012, The PMPRB released its annual updated version of the Compendium of Policies, Guidelines and Procedures for 2012.

The proposed Patented Medicine Prices Review Board Rules of Practice and Procedure, Part I were published and included in the June 16, 2012 issue of the Canada Gazette.

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.

The PMPRB will achieve Budget 2012 savings of $1 million by fiscal year 2014-15 through efficiency measures; scaling back where the need is reduced; and by transforming how it works internally by adopting process efficiencies and alternative means of delivering both the regulatory and reporting programs.

In the first year of implementation, the PMPRB will achieve savings of approximately $0.8 million. Savings will increase to $0.9 million in 2013-14 and will result in ongoing saving of $1.0 million by 2014-15.

There is a variance of $0.8 million in the PMPRB's authorities between fiscal year 2011-12 and 2012-13 related to Budget 2012 initiatives. Specifically savings are achieved in 2012-13 by reducing funding to 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 is considered an adequate amount to carry out fair and timely hearings as required.
• The elimination of $144 thousand in funding for the Non-Patented Prescription Drug Prices Initiative. 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 Board 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.

Expenditures in the first quarter of 2012-13 are 11% less than the same period from last fiscal year.

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

Approval by Senior Officials
Approved by:

_____________________ _____________________
Mary Catherine Lindberg, Michelle Boudreau,
Chairperson Chief Financial Officer

Ottawa, Canada
August 28, 2012

STATEMENT OF AUTHORITIES (unaudited)

1. *Includes only Authorities available for use and granted by Parliament at quarter end.
2. ** Total available for use does not reflect measures announced in Budget 2012.

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

1. * Includes only Authorities available for use and granted by Parliament at quarter end.
2. ** Total available for use does not reflect measures announced in Budget 2012.