Australian government rediscovers R&D value amid COVID-19 crisis

Prior to COVID-19, Australia enjoyed an enviable economic record; outperforming much of the world and avoiding recession for 29 years. With two quarters of consecutive GDP contraction due to coronavirus-related shutdowns, Australia is now poised to face economic challenges not experienced since 1991. The Australian federal government's 2020-21 budget incorporates an additional A$2 billion (US$1.42 billion)for additional R&D incentives, in the hope that homegrown will help on the road to fiscal recovery.

Australia's universal health-care system comes at a high economic cost. Managing the national purse while providing access to new therapeutics remains a challenge. The government performs this balancing act via the Pharmaceutical Benefits Scheme (PBS).

Similar to the United States' Food and Drug Administration (FDA), the Therapeutic Goods Administration (TGA) is Australia's regulatory authority for therapeutic goods, including prescription pharmaceuticals. Obtaining TGA approval to market and supply pharmaceuticals is a necessary hurdle for therapeutic products new to Australia.

However, acquiring TGA approval is not always enough for many pharmaceuticals to crack the market. The government subsidises pharmaceutical costs so that vital medicines are available and affordable for patients. Typically, at least one treatment for most diseases or conditions is subsidised. Since the retail cost of pharmaceuticals can be prohibitive for some patients, if the first choice of medication is not listed on the PBS, a treating physician usually prescribes an alternative that is subsidised by the PBS. Consequently, securing a PBS listing is considered a major regulatory barrier to market entry.

Medicines listed on the PBS are often pharmacy-dispensed prescription medication; although some supervised administration medicines (including chemotherapy drugs for hospital use only) are also subsidised. Not all prescription medications are listed on the PBS.

The Pharmaceutical Benefits Advisory Committee (PBAC), an independent expert panel whose members include health professionals and economists, recommends medicines for listing on the PBS. In its assessment of submitted therapeutics, the PBAC considers the condition for treatment, clinical effectiveness, safety and cost-effectiveness compared with other treatments. Most medicines that receive a positive PBAC recommendation are listed on the PBS. However, this can be influenced by the state of the economy, and sometimes political pressure.

A recommendation from the PBAC is only the first step in achieving a PBS listing. Once recommended, financial negotiations are undertaken with the government to determine the size of subsidy, which dictates the price at which the therapeutic can be supplied to patients. The current Liberal government claims it is committed to listing all PBAC recommended medicines, appearing more progressive than the former Labor government.

It is good to see the government’s recognition of the economic rewards available by investing in innovation.

In February 2011, Labor's health minister promoted the new PBS listings at the time in a press release, but deferred listing several other medicines for which existing treatments were already available on the PBS for reconsideration when circumstances permit.

The only instance where the government previously did not accept the PBAC's recommendation was in respect of the attempt to list Viagra, due to cost concerns. This decision prompted a slight reform to the PBS listing process, in which drugs expected to cost more than A$10 million a year in the first five years, also require Cabinet approval prior to listing.

Australian patent law has one of the more liberal approaches to the patenting of therapeutics in the world. While support for the breadth of claims must be strong, products can be claimed in a variety of forms. Examples include enantiomers, salts or polymorphs, in different morphologies, formulations and compositions; and as methods of treatment, in Swiss-style claims, as second and further medical indications, and even in the form of treatment regimes.

Since taking power in 2013, today's government has approved more than 2,450 new or amended listings on the PBS at a published spend of A$11.8 billion. Their promise to list all PBAC recommended therapeutics, and indeed actions to date which support this claim, are good news for pharmaceutical innovators.

The reasonable expectation that products will reach consumers through PBS listing (including those that are improved over existing treatments, are for second and further medical indications as well as for breakthrough treatments) gives some certainty that Australia is an attractive market to enter.

With improved market access through the PBS, in addition to a ruling government that appears to be listening to both industry and consumer advice, now is a good time to be a patentee in Australia, with exclusive rights to supply therapeutics.

In the 2020 federal budget the ovarian cancer drug Lynparza (olaparib) was announced for inclusion on the PBS. Rather than costing a patient over A$140,000 for a course of the drug, it will be available for about A$40 a month, or less than A$10 for those with an eligible concession. As well as Lynparza, new and amended PBS listings in this budget include medicines for liver cancer, Parkinson's disease, eye conditions and high cholesterol at an expected cost of A$376 million.

The expanded listing on the PBS of Tecentriq and Avastin (atezolizumab and bevacizumab) for combination use in the treatment of advanced unresectable hepatocellular carcinoma is projected to cost over A$230 million and is expected to benefit more than 500 patients a year. This is the most common form of liver cancer in Australia and currently has a low survival rate.

Other recent PBS updates include expanded listings for Eylea (aflibercept) and Apomine (apomorphine). The anti-VEGF agent Eylea is now subsidised for patients affected by subfoveal choroidal neovascularisation due to pathologic myopia (mCNV), where previously it was listed only for other ocular conditions, including diabetic macular oedema. The listing for Apomine was exclusively for the treatment of Parkinson's disease but is now approved for maintenance therapy through community pharmacies without restriction to hospital treatment.

The PBS also includes a price disclosure policy, applicable to medicines that are not exclusive and are therefore subject to competition. The policy aims to ensure the price at which the government subsidises multiple-brand medicines reflects the prices charged in the market. As announced in the budget, two high cholesterol medications, ezetimibe and rosuvastatin, will be cheaper under this policy. Around 300,000 Australians buy subsidised rosuvastatin, which will now be A$2 less per prescription.

Australia's Research and Development Tax Incentive (RDTI) is designed to encourage R&D spending in Australia by local and international entities. It provides tax offsets for R&D activities undertaken in Australia by companies liable for Australian income tax, which conduct at least one "defined core R&D activity" that incurs the minimum eligible R&D expenditure. The RDTI provides cash refunds up to 43.5% of spending on eligible R&D activities. Alternatively, entities with an annual turnover of more than A$20 million may be eligible for a non-refundable tax offset.

The scheme is one reason why Australia has historically been considered an attractive location to conduct clinical trials. When considered in addition to other favourable market characteristics, the opportunity to secure cash refunds for R&D spending makes Australia very competitive for conducting world-class clinical trials. Recently, the (mostly) effective domestic control of COVID-19 has further positioned Australia as an attractive choice.

The federal treasurer used the recent budget announcement to reveal that intended changes to the RDTI would not proceed. In September, legislation had been considered by Parliament which would cut A$1.8 billion from the scheme.

Australian patent law has one of the more liberal approaches to the patenting of therapeutics in the world.

The changes were pitched at improving R&D in Australia but were seen by industry as a cost-cutting exercise. One of the most criticised changes was the introduction of a A$4 million cap on the amount smaller companies could receive in refunded tax offsets. Also earmarked for introduction was a complex "intensity measure" for larger companies.

The role of R&D in strengthening the economy appears to have been given greater consideration as evidenced by the government's decision to limit drastic changes proposed to the RDTI. The scheme can greatly assist patentees seeking to bring new drugs to market through the ability to subsidise not just classic R&D spending, but also Australian clinical trials.

Many of the proposed RDTI changes have now been rolled back. The legislation implementing these changes has already passed Parliament, just days after the budget announcement.

Pleasingly, the A$4 million cap has been scrapped. The tax offset rate applicable for refunds available to smaller companies has also been increased. In other good news, the formerly proposed increase in the annual cap in R&D expenditure from A$100 million to A$150 million has been retained.

However, despite profound concern voiced by some sectors, the "intensity measure" remains, albeit in a simplified two-tier form. The size of tax offsets available to companies with an annual turnover of over A$20 million will now be determined by a comparison between their R&D spend and total expenses.

Critics of changes to the RDTI believe the new measures will damage local manufacturing. However, the budget incorporates a A$1.3 billion Modern Manufacturing Strategy driven in part by logistical frailties exposed by impacts from COVID-19. The strategy aims at improving Australian self-sufficiency in targeted industries, including food and beverage manufacturing and medical products. It will include a grant scheme informed by advice from Industry, Innovation and Science Australia and the Commonwealth Scientific and Industrial Research Organisation (CSIRO).

Though details are still sketchy, part of the strategy includes funding to the SME sector to support manufacturers by co-funding capital investments and associated reskilling. The intent is to assist SMEs in modernising and adopting new technologies, including investing in efficient and transformative manufacturing processes. In short, whereas in recent decades, manufacturing capability in Australia has diminished, fuelled by cheaper costs and greater skills particularly in the Asia-Pacific region, this programme aims to place renewed focus on Australian innovation.

This will hopefully translate to more intellectual property activity – not only in areas such as freedom to operate, but also in the protection of original ideas and new technologies. Where Australian originating patents have been proportionately decreasing at IP Australia (2019 compared to 2018), this strategy may see a trend reversal. An Australian manufacturing capacity increase should also incentivise offshore patentees to reconsider Australia as a patent destination.

In these uncertain times, it is difficult to know where to invest for good return. Typical spending on infrastructure and services feels far riskier when the usual income sources are no longer guaranteed. The government's 2020 Budget provides some assurances, however, that Australia is committed to assisting and rewarding innovators, especially in the health and medical sectors. COVID-19 has proven to be an unexpected pivot point for the medical, food and beverage manufacturing sectors after struggling for years to attract the government's attention.

The commitment to listing all medications recommended by the PBAC on the PBS should encourage the pharmaceutical sector and reduce some of the risk associated with bringing new drugs to the Australian market. The rewarding RDTI further incentivises R&D spending in Australia and continues to position the country well as an ideal location to conduct clinical trials.

It is good to see the government's recognition of the economic rewards available by investing in innovation; not only future-proofing advanced industry sectors, but for critical economic growth in the short term as well. Very few have been untouched by COVID-19; hopefully Australia's 2020 Budget will help repair at least some of economic damage caused this year and beyond.

Karen Sinclair is a principal and Sarah Cox an associate at Griffith Hack.