The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 34 of 1998

 

(1) Roussel UCLAF Australia Pty. Limited and

(2) Roussel (NZ) Limited Appellants

v.

Pharmaceutical Management Agency Limited Respondent

 

 

FROM

 

THE COURT OF APPEAL OF  NEW ZEALAND

 

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REASONS  FOR  REPORT  OF  THE  LORDS

OF  THE  JUDICIAL  COMMITTEE  OF  THE

PRIVY  COUNCIL  OF  THE   27th  July  1998,

Delivered the   30th July 1998

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Present at the hearing:-

Lord Lloyd of Berwick

Lord Hoffmann

Lord Hope of Craighead

Lord Hutton

Sir John Balcombe

  ·[Delivered by Lord Lloyd of Berwick]

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1. On 27th July 1998 their Lordships indicated that they would humbly advise Her Majesty that the appeal should be dismissed with costs and that they would deliver their reasons later.  Their Lordships now set out the reasons for the decision which they have reached.

 

2. The appellants in these proceedings (“Roussel”) carry on business in the importation and distribution of pharmaceutical products in Australia and New Zealand. The first-named respondent (“Pharmac”) is a company incorporated in New Zealand.  It is responsible for determining the level of subsidies paid out of public funds to the manufacturers of pharmaceuticals.  The second-named respondent (“PTAC”) is an independent committee of experts which advises Pharmac in performing its functions.

 

3. On 1st December 1995, after protracted consultations, the directors of Pharmac resolved to reduce the level of subsidy paid to Roussel in respect of an antibiotic known as “Rulide” from $9.40 per package of ten Rulide 150mg tablets to $4.46 per package.  On 16th December 1995 Pharmac wrote to Roussel enquiring whether Roussel intended to reduce the price of Rulide so as to keep it in line with the new subsidy.  Otherwise there would be a “part charge” payable by the consumer.  By letter dated 15th January 1996 Roussel offered to reduce the price to $7.50 “as a gesture of good will” and “in an attempt to resolve the discord surrounding Rulide reimbursement level”.  After further intensive negotiations during 15th January, Pharmac declined to review its decision, whereupon the applicants commenced these proceedings claiming a declaration on familiar grounds that the decision to reduce the subsidy for Rulide was unlawful, invalid and of no effect.  The reduction would have taken effect on 1st February 1996, but for an interim order granted on 30th January 1996 on Roussel’s cross-undertaking preserving the position until trial.

 

4. The application came before Gallen J. on 19th July 1997.  Many points were taken.  But the judge decided all points in favour of Pharmac, save one.  The point on which Roussel succeeded is pleaded in paragraph 45(b) as follows:-

 

“In the exercise of [its] statutory powers … PHARMAC and PTAC have … acted unreasonably and/or unfairly in the following respects:

…

 

(b)By discriminating between Rulide and other competitive antibiotics by failing to complete the antibiotic group review in its entirety, and in particular a review of clarithromycin, ceflacor and amoxycillin/clavulanic acid antibiotics before proposing the new reference price:”

 

5. The competing antibiotic on which Mr. Fardell relied most heavily was clarithromycin, known as “klacid”, another pharmaceutical in the same group of macrolide antibiotics.  Their Lordships quote two paragraphs to give the flavour of Gallen J.’s decision:-

 

“In his final submissions, Mr. Fardell submitted that a key issue was the failure of the respondent to conclude the review of those antibiotics known as Klacid, Augmentin or Ceclor at the same time as the review of Rulide was carried out and that the failure to do so gave rise to procedural unfairness.

…

 

I  consider Roussel has made out a case for review of the decision on the basis that there has been a lack of even-handedness because for no doubt understandable reasons, only one of two competing pharmaceuticals has been dealt with at this stage.”

 

6. An appeal was brought before a full court of five judges.  The majority, in a judgment delivered by Blanchard J., allowed Pharmac’s appeal, and dismissed Roussel’s cross-appeal.  In a lengthy and detailed dissenting judgment, Thomas J. would have upheld the decision of the court below.  Like Gallen J., Thomas J. considered that there had been a “lack of even-handedness and consistency on Pharmac’s part … not dissimilar in kind to the grounds which have led the Courts to intervene elsewhere in the interests of securing procedural fairness”.

 

7. Before the Board the only issue argued by Mr. Fardell was that on which Roussel had succeeded before Gallen J.  In order to understand the issue it is necessary to explain a little more of the background.

 

8. Rulide and Klacid are both second generation macrolides used for the treatment of specific infections such as infections of the skin, the respiratory tract and so on.  When Rulide was first listed in May 1992 it was recognised that it was superior to the first generation macrolides, known as erythromycins, supplied by Abbott Laboratories NZ Limited.  Accordingly the subsidy for Rulide was fixed at $9.40, which was twice the subsidy for the erythromycins.  In May 1993 Abbott Laboratories introduced Klacid.  It was the only other second generation macrolide to be listed.  It received the same subsidy as Rulide.  But the price was higher than the subsidy, so the consumer had to pay a part charge.  No doubt this was the reason why Klacid did not obtain more than a very small share of the market compared with Rulide.  The subsidy for Rulide alone amounted to 65% of all subsidies paid for macrolides.

 

9. In July 1993 the Health and Disability Services Act 1993 came into force.  One of the objectives of the new legislation was to control escalating costs in health care, including expenditure on pharmaceuticals.  Pharmac took over the management of subsidies from the former Drug Traffic Unit of the Department of Health.  Existing subsidies were continued.  They were published in a document known as the Pharmaceutical Schedule. Pharmac’s role, as described in its Operating Policy and Procedures (“OPP”) published in July 1993 is to consider new applications for listing in the Pharmaceutical Schedule, and to review existing listings.  Section 3 sets out the criteria according to which Pharmac manages the Pharmaceutical Schedule.  These criteria are used by Pharmac to make decisions about proposed amendments to the Schedule, including amendments arising out of reviews carried out by Pharmac.

 

10. Therapeutic groups and sub-groups are defined in section 3.4.  A therapeutic group is defined as a set of pharmaceuticals which are used to treat the same or similar conditions.  A sub-group is defined as a set of pharmaceuticals which produce the same or similar therapeutic effect in treating the same or similar conditions.  By section 3.5.2 it was open to Pharmac to re-define therapeutic groups and sub-groups (including parts of sub-groups) into new groups and sub-groups.

 

“Reference pricing” is defined in section 3.4.  It means that all pharmaceuticals in a given sub-group are subsidised at the level of the lowest priced pharmaceutical in that sub-group.

 

11. At the end of 1993 Pharmac commenced a review of the subsidies for antibiotics, and invited Roussel’s comments. By 24th November 1994 PTAC had formed a provisional view that Rulide should be realigned with the erythromycins.  On 14th February 1995 Roussel asked for further information.  Then on 13th April 1995 Pharmac wrote to Roussel informing them of their current proposals.  Rulide was to receive the same subsidy as the erythromycins, and Klacid tablets were to be aligned with Rulide.  Abbott Laboratories were being consulted.

 

12. In a written submission dated 17th May 1995 Roussel argued that the existing subsidy for Rulide was justified, as it was superior to the erythromycins in at least four respects, and was closer in terms of classification to Klacid than the erythromycins.

 

13. Other pharmaceutical manufacturers also responded to Pharmac’s letter of 13th April 1995, including Abbott Laboratories, Eli Lilly NZ Ltd. and Smith Kline Beecham NZ Limited.  Not surprisingly Abbott Laboratories argued that if Rulide was to be placed in the same sub-group as the erythromycins, Klacid should be placed in a different sub-group.  “There is now overwhelming evidence” they said “to suggest that [Klacid] is a superior agent to [Rulide] in all of the areas detailed earlier in this submission.  In particular it offers improved spectrum, potency and more long term potential in terms of activity against [two specific infections]”.

 

14. At a meeting held on 10th August 1995 PTAC confirmed its recommendation of November 1994 that Rulide should be placed in the same sub-group as the erythromycins.  However the Committee declined to make any decision about Klacid until more information was available.  Accordingly on 22nd September 1995 Pharmac informed Roussel that Klacid would remain at its existing subsidy level for the time being.  Pharmac asked for Roussel’s comments.

 

15. On 8th November Roussel sent a further detailed submission, repeating and expanding its previous arguments, and complaining inter alia that Rulide appeared to have been “singled out” for separate consideration.  It ought to have been considered along with other antibiotics in the macrolide sub-group, especially Augmentin and Ceclor.

 

16. In a paper prepared for the directors of Pharmac dated 24th November 1995 Peter Sharplin, the Therapeutic Group Manager in charge of the antibiotic review, summarised Roussel’s case.  The issues were divided into two groups.  Roussel’s case on the clinical issues is set out very fairly in seven short paragraphs, of which only one is relevant.  Paragraph 5 reads as follows:-

 

“[Rulide] is closer to [Klacid] than erythromycin in terms of classification.  These two agents should be considered as forming a new macrolides therapeutic sub-group, as opposed to erythromycin which forms an old macrolides therapeutic sub-group.”

 

17. Mr. Sharplin’s comment on paragraph 5 is as follows:-

 

“PTAC considers that the therapeutic relationship between erythromycin and [Rulide] is sufficiently clear to enable a decision to be made in respect of [Rulide] and the erythromycins at this time.”

 

18. Roussel’s case on the “procedural fairness” issues is also set out very fairly in ten short paragraphs of which only two are relevant.  They read as follows:-

“7.Pharmac should finish the entire antibiotics review before coming to a decision on the macrolide therapeutic sub-group.

 

8.Pharmac is being inconsistent and unfair in not proposing to decide on [Klacid] at the same time as deciding on [Rulide].”

 

19. Mr. Sharplin’s comments are as follows:-

 

“7.We do not consider the finalisation of all issues relating to antibiotics at this time is necessary before considering any changes to the macrolides therapeutic groups.  In our view the clinical issues involved are sufficiently distinct to enable completion of this part of the overall review of antibiotics independent of other antibiotic groups.

 

8.We believe that it is appropriate for Pharmac’s Board to take a decision on the erythromycins and [Rulide] prior to completion of the review of the issues relating to [Klacid].”

 

20. On 1st December the Board of Pharmac reached a decision.  It resolved to create a new macrolide sub-group consisting of Rulide and erythromycin, reducing the subsidy on Rulide from $9.40 to $4.46.  On 14th December Pharmac wrote to Mr. Dick of Roussel informing him of the decision, and adding that the consideration of Klacid was “on going” and would be reported on in the near future.  In fact it was not until July 1997, when Abbott Laboratories reduced the price of Klacid, and thereby improved its competitive position in the market, that Pharmac made any progress in the review of Klacid.

 

21. As already mentioned the attack on Pharmac’s decision is now on a much narrower front than it was.  The main thrust of the statement of claim, as of Roussel’s voluminous submissions in the course of 1994 and 1995 was that Rulide is superior to the erythromycins, and ought not to be included in the same sub-group. Pharmac’s decision of 1st December 1995 was attacked on the ground that Pharmac had had regard to irrelevant factors, and had disregarded relevant factors.  That aspect of the case is no longer pursued.

 

22. Instead Roussel complain only that Rulide should not have been reviewed before the other second generation macrolides.  They should all have been reviewed together.  But if the correct view be, as Pharmac has decided, that the therapeutic effect of Rulide is the same as or similar to the therapeutic effect of the erythromycins, then the only question is one of timing. Rulide would in the end be placed in the same sub-group as the erythromycins.  The subsidy would in the end be reduced.   No doubt Roussel were anxious to postpone the evil hour.  But their real complaint is that Klacid was not brought down at the same time as Rulide.

 

23. This does not, of course, dispose of the appeal.  Their Lordships accept that if Roussel could show that Pharmac were obliged under their OPP to review Rulide and Klacid together, or if the failure to do so was contrary to some overriding principle of fairness, requiring equals to be treated equally, then there might be grounds for attacking Pharmac’s decision to review one before the other.  Can any such case be made out?

 

24. As for the OPP, their Lordships have already referred to the more important provisions.  There is nothing which prohibits the review of pharmaceuticals within a given group or sub-group on a progressive or piecemeal basis.  On the contrary section 3.5.2., with its reference to parts of sub-groups, seems to contemplate just such a review.  Moreover the impact of Pharmac’s decisions on the pharmaceutical industry as a whole is expressly excluded from the criteria to which Pharmac must have regard when considering proposed amendments to groups and sub-groups.  In other words Pharmac was not obliged to have regard to Rulide’s competitive position vis-a-vis Klacid when deciding to place Rulide in the same sub-group as the erythromycins in advance of any decision about Klacid.

 

25. Mr. Fardell argued that to reduce the subsidy payable on Rulide without reducing the subsidy payable on Klacid was contrary to the principle of reference pricing on which the whole scheme depends.  But that argument begs the question.  The first step must be to define the groups and sub-groups.  It is only when the groups and sub-groups are defined that reference pricing can take effect.  Until the review of Klacid was completed there was no means of knowing whether it was in the same group as the others or not.  So in their Lordships’ view there was no departure from the OPP.

 

26. Their Lordships would give the same answer to the wider argument that it was “unfair” to reduce the subsidy on Rulide without also reducing the subsidy on Klacid.  It was said that Klacid had been “linked” with Rulide since it was first listed in 1993, and in the early stages of the consultation process.  In view of this “linking”, it was unfair to complete the Rulide review without first completing the Klacid review.  At the very least the implementation of the Rulide review should have been postponed until the Klacid review was completed.

 

27. Their Lordships are by no means persuaded that the unfairness of which Roussel now complains is a procedural unfairness of the kind which justifies the courts intervention by way of judicial review.  What is attacked is the decision to review the macrolides one by one, not the way of arriving at that decision.  But putting that on one side, fairness does not require all potential candidates for a sub-group to be reviewed at the same time.  New candidates might be introduced in the course of a review, with the result that Pharmac’s task might never be done.  Until the Klacid review was completed it could not be known whether, as Abbott Laboratories were maintaining, its therapeutic effect was superior to that of Rulide.  It could not be assumed that it was in the same sub-group.  Meanwhile there were sound economic reasons for pressing on with the review of Rulide, and for implementing the decision as soon as it was made. As already mentioned, the cost of subsidising Rulide represented a very large part of the total cost of subsidising the macrolides.  In comparison, the cost of subsidising Klacid was tiny.  Fairness to Roussel had to be judged at the time the decision was made, and balanced against the public interest in reducing expenditure on pharmaceuticals.  The point is put well in the following paragraphs from the majority judgment of the Court of Appeal:-

 

“The reasonableness of the decision, i.e. whether there was justification for progressive establishment of the new sub-group, is to be judged at the date it was made and in the light of the facts and information then available to Pharmac.  These included the very small market share of Klacid and the apparent determination of Abbott Laboratories not to reduce its price.  The existence of a substantial part charge for Klacid was one reason for not giving priority to a review of that drug.  The advice from PTAC was that its expert members were unwilling to proceed with an evaluation of Klacid until further information was available.  The two drugs certainly shared some properties and effects but there were also differences and, in good faith, PTAC was not prepared simply to continue to treat them as having the same properties without further investigation.

 

28. Importantly, completion of a review of Klacid was not then seen as being something which would be long delayed.  The risk to Roussel of losing market share to Klacid, or being driven out of the market because of an advantage to Klacid must have seemed very slight.  There was apparently a rather greater risk that macrolide users would favour Augmentin and Ceclor.  We are of course not now concerned with any argument about those two drugs.”

 

29. Their Lordships find themselves in complete agreement with this reasoning of the Court of Appeal. Roussel have failed to establish any breach of the OPP, or any procedural unfairness by Pharmac in reaching their decision of 1st December 1995.

 

© CROWN COPYRIGHT as at the date of judgment.