Quarterly Financial Report for the Quarter Ended June 30, 2014

Management Statement for the Quarter Ended June 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.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 first quarter of 2014-15 has increased by $10 thousand (0.7%) over spending for the same quarter in 2013-14. 

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)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 first quarter of 2014-15, the PMPRB received a payment adjustment for a prior year VCU in the amount of $2 thousand. In the first quarter of 2013-14, the Chairperson accepted 4 VCUs covering 5 medicines and a payment adjustment for a prior year VCU all of which generated $7,205 thousand in non-respendable revenue.  

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 8 of this document, there were no significant changes to the total authorities available for the year.

2.2 Significant Changes to Budgetary Expenditures by Standard Object

The PMPRB's first quarter spending has increased by $10 thousand over first quarter spending in the previous year.

Planned spending in “Personnel” has decreased by $17 thousand from the previous year. The variance is mainly due to savings from the Budget 2012 Spending Review and an adjustment for contributions to employee benefit plans which are partially offset by increases for newly signed collective agreements. Spending in “Personnel” for the first quarter of 2014-15 has decreased by $161 thousand from the first quarter in 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.  

Planned spending in “Professional and special services” in 2014-15 has decreased by $30 thousand from the previous year as a result of anticipated lower consultant costs for mission critical database development and development of an electronic data and records management system.

Spending in “Utilities, materials and supplies” for the first quarter of 2014-15 has decreased by $17 thousand from the first quarter of 2013-14. This is mainly due to the delayed receipt of an invoice for subscriptions for specialized pharmaceutical information normally paid in the first quarter.

Planned spending on the “Acquisition of machinery and equipment” in 2014-15 has increased by $30 thousand over 2013-14 and spending has increased by $20 thousand in the first quarter of 2014-15 when compared to the first quarter of 2013-14. The variances are largely due to costs associated with the modernization of data safeguarding capabilities as part of the PMPRB's network evergreen plan.

Spending in “Other subsidies and payments” has increased by $171 thousand from the first quarter in 2013-14. The increase is mainly due to a one-time transition payment of $166 thousand 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 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 63% 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

In June 2014, a new Board Member was appointed. That same month, as the result of an organizational restructuring, the Director, Board Secretariat and Communications was assigned responsibility for Strategic Planning. The title for this position was changed to Director, Board Secretariat, Communications and Strategic Planning. Due to a retirement, there is a new person in this position.

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 Board proposed amendments to the Patented Medicines Regulations to move from twice to a yearly filing. Work is underway to pre-publish the proposed regulatory amendments in Part I of the Canada Gazette for formal consultation in 2014-15.

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 will increase 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.

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

Approval by Senior Officials

Approved by:

Ottawa, Canada
August 14, 2014

* 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.