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Annual review of fees and charges 2006-07 - Non prescription (registered and listed) medicines

Cost recovery impact statement

6 June 2006

The Therapeutic Goods Administration (TGA) is a business unit within the Department of Health and Ageing responsible for evaluating the safety, quality and efficacy of medicines, medical devices and blood components available for supply in Australia and their export. The TGA is a full cost recovery agency and derives its operating income from regulatory fees and charges imposed on sponsors and manufacturers of therapeutic products.

Each year the TGA reviews its fees and charges in consultation with industry associations and consumer representatives. Generally, fees and charges are increased in line with annual average wage and cost movements. Significant changes to regulatory arrangements of new regulatory proposals involve additional consultation with affected sectors and result in the preparation of cost recovery impact statements (review of prescription medicines fees and charges in 2003; regulation of in-vitro diagnostic devices in 2006).

In developing the 2006-07 TGA operating budget, it became apparent that fees and charges in the non prescription medicines sectors would not achieve full cost recovery. The TGA has proposed significant increases to fees and charges that would move these sectors toward full cost recovery. The fees are planned to take effect from 1 August 2006. As the increases exceed the consumer price index they represent a material amendment of an existing cost recovery arrangement. Accordingly, a cost recovery impact statement is required in accordance with Australian Government's Cost Recovery Guidelines.


The Australian community has an expectation that therapeutic products in the marketplace are safe and of high quality, to level equal to that of countries with comparable standards. The Therapeutic Goods Administration (TGA) is one of the world's front line regulators undertaking rigorous scientific and risk assessments of therapeutic products to ensure safety, quality and efficacy, without undue impact on the timely supply of essential products to consumers and patients.

Most products for which therapeutic claims are made must be assessed by the TGA and entered on the Australian Register of Therapeutic Goods (ARTG) before they can be marketed in this country. The ARTG keeps a record of products that are approved for marketing, the ingredients contained in each product, and the therapeutic claims made for medicines and the intended use of medical devices. The TGA also regulates fresh blood, blood components and banked tissues. These products are not generally included on the ARTG, their regulation is through audit and licensing of manufacturers and compliance with standards.

Australia has a risk-based system where the level of regulatory control of a therapeutic product is based on the relative safety of the product and the seriousness of the condition for which it is intended to be used. Products are reviewed by the TGA at a level consistent with the risk associated with their use in the community and subsequent entries on the ARTG are classified as either 'registered' or 'listed', or in the case of medical devices 'included'.

The TGA recovers the full cost of all activities undertaken that are within the scope of the Therapeutic Goods Act 1989 (the Act). Partial cost recovery was introduced in 1991 following the commencement of the Act, with full cost recovery being implemented in 1998.

Fees and charges are prescribed in regulations made under the Therapeutic Goods Act 1989, Therapeutic Goods (Medical Devices) Act 2002 and the Therapeutic Goods (Charges) Act 1990.

The TGA reviews its fees and charges each year in consultation with stakeholders through the TGA-Industry Consultative Committee. The Committee provides a forum to exchange information on industry trends and regulatory expectations, discuss the development of the TGA's corporate plan, annual business plans and budget, as well as consulting on fees and charges proposals.

Following turbulent fees and charges changes following the introduction of full cost recovery, the TGA and industry agreed to the adoption of an indexation model for fee increases. The model aimed to improve the predictability of fees and charges for industry budgetary planning as well as providing a guide to promote TGA's operational efficiency. Fee increases above this level would be subject to further consultation with industry. The index factor applied each year is a 50-50 composite comprising the Australian Bureau of Statistics' Consumer Price Index and the Wage-Cost Index.

From time to time the TGA will also undertake a more detailed review of its fees and charges structure and will involve affected industry stakeholders in the development of fees and charges proposals. In 2003 a review of the prescription medicines fees and charges structure was completed to simplify the scheme, realign fees to reflect the cost of the activities performed and to address compounding under-recovery. In 2006 the TGA completed a cost recovery impact statement for the introduction of a regulatory model for in-vitro diagnostic devices.

In 2004 the TGA completed a comprehensive review of its fees and charges. The review was triggered by the promulgation of the Australian Government's cost recovery policy and found that the TGA's cost recovery arrangements complied with the Government's cost recovery guidelines. Notwithstanding, the review noted the need to reform the fees structure for non prescription (registered) medicines in consultation with industry associations and stakeholders. The review also coincided with the commencement of development of a fees and charges framework for the planned joint regulatory scheme being developed with New Zealand.

Given the recent completion of a comprehensive review of cost recovery arrangements, and that the proposals that have triggered this cost recovery impact statement do not change the basis of the fee structure, a policy review has not been conducted.

There has been no change to the policy underpinning the TGA's fees and charges arrangements, nor at this time are there any proposals to alter the design of the fees and charges structure. These matters were discussed in detail in the 2004 cost recovery impact statement for the regulation of therapeutic products, which were found to be compliant with the Government's cost recovery guidelines.

  • Companies (product sponsors and manufacturers) that give rise to the need for regulation should pay cost recovery charges, as it is not cost effective to impose fees on individuals. The cost of regulation is expected to be incorporated in pricing decisions for products.
  • Fees and charges should be structured to ensure full cost recovery for the regulated sector - there is no inconsistency with other government policies, and there is no evidence that the proposed fee increases would result in a reduction in industry innovation or impact on competition.
  • Fees are used for pre-market services performed. These should reflect as closely as possible the underlying cost of the activities performed. Annual charges (a levy) are used to recover costs that cannot be reasonably assigned to individual firms.
  • The fees and charges are set by regulation pursuant to the Therapeutic Goods Act 1989, Therapeutic Goods (Medical Devices) Act 2002 and the Therapeutic Goods (Charges) Act 1990.
  • The administrative arrangements for cost recovery are simple and are cost-effective (though introducing online payment would improve efficiency).
  • Fees and charges will continue to be monitored by the TGA-Industry Consultative Committee to find the appropriate balance between fee predictability/stability and full cost recovery in the most cost-effective manner. The Committee meets twice annually and is supplemented with structured bilateral industry meetings.

This cost recovery impact statement deals with TGA's proposals for significant increases to fees in industry sectors that have not met the requirement to recover the full cost of regulation.

The fees and charges for non-prescription medicines, together with other fees and charges currently imposed by the TGA, will be subject to a further review and cost recovery impact statement ahead of the formation of a joint therapeutic products regulatory scheme with New Zealand during 2007.

Current regulatory arrangements for non-prescription medicines

Therapeutic products are regulated in Australia under the provisions of the Therapeutic Goods Act 1989 (the Act). Therapeutic products regulation is achieved through a risk management approach to pre-market evaluation and approval of therapeutic products intended for supply, licensing of manufacturers and post-market monitoring and surveillance. The principal activities of the regulatory scheme include:

  • Scientific evaluation of medicines, medical devices and blood and tissue products for supply in Australia;
  • Licensing and audit of manufacturing standards;
  • Monitoring compliance with standards, including testing of products, auditing product data, analysing reportable incidents, investigating complaints, and recalling non-compliant products from the market;
  • Surveillance, investigation and enforcement of the provisions of the Act;
  • Industry support activities, including the development of guidelines and promoting international harmonisation; and
  • Services to Government to support the objects of the Act.

Most non-prescription medicines (mostly over the counter pharmacy medicines) and complementary medicines are subject to a lower level of evaluation and have lesser data requirements. These products are intended for use for the treatment of minor self-limiting conditions and are subject to assessment of quality and safety only, not effectiveness. Data requirements for complementary medicines reflect the fact that comprehensive scientific data may not be available for herbal and alternative medicines, but that other evidence may be available to demonstrate a long history of safe use. These products are 'listed' on the ARTG.

Registered Medicines

Registered non-prescription medicines are predominantly 'over the counter' medicines but also include some complementary medicines.

  • Pre-Market activities for registered medicines comprise the evaluation of new products (processing, scientific evaluation, expert committee consideration, delegate approval and product registration on the ARGT) and the evaluation and processing of variations submitted by product sponsors for an existing approved product.
    • In 2004-05 the TGA received some 237 new product applications for evaluation, including 18 complementary medicine products). This level of activity is expected to be maintained in the medium term.
    • 190 variations and 41 notifications (variations that do not require evaluation) were received in 2004-05 with the number expected to remain constant.
  • Once available on the ARTG, the TGA performs routine and targeted monitoring of products drawing in the expertise of the TGA's laboratories, issues arising from periodic manufacturing inspections and matters raised with the TGA by consumers, industry associations and expert committees.
    • As at 31 December 2005, there were 3,600 non prescription products registered on the ARTG, 5% lower than compared with December 2004.

Listed medicines

Listed non-prescription medicines are lower-risk medicines and products that do not undergo pre-market evaluation by the TGA. This group includes most complementary medicines and some other over the counter medicines (such as some sunscreens).

  • Listing on the ARTG is be granted on the basis of self-assessment by the sponsor using an electronic lodgement facility which includes the sponsors name; the product's ingredients, intended uses/claims, and the dose(s) and form(s) of delivery; the product's manufacturer(s); and details of the product's packaging and labelling. Sponsors must certify that the information supplied is true and correct and that they hold all relevant information and certifications required. The lodgement system performs a range of checks, most importantly ensuring that the product only contains approved ingredients. Licence variations are also lodged electronically.
    • In the calendar year 2005, there were 1,920 new product listings added to the ARTG - this level is expected to be maintained over the medium term.
    • A further 1,412 listed medicine variations were processed over the same period.
  • Whilst products can gain immediate market access, they can only do so if their ingredients have previously been evaluated. The evaluation of the safety and quality of new substances (ingredients) is the major area of pre-market activity for the TGA for listed medicines. Applications for inclusion of new substances on the list of permitted ingredients are reviewed by the Australian Complementary Medicines Evaluation Committee.
    • The number of new substances approved varies from year to year. In 2004-05 a total of 7 substances were approved. Since that time, the number has declined as industry awaits the release of a special permitted ingredients list being evaluated as part of the implementation of a joint regulatory scheme with New Zealand.
  • Whilst the electronic lodgement facility provides almost immediate market access for lower risk therapeutic products, the TGA also undertakes a comprehensive post approval compliance monitoring program to assure consumers of the quality and safety of listed medicines. These activities include a random review of 20% of applications submitted through the Electronic Lodgement Facility (ELF); risk assessment and investigation of reported product problems; and safety and efficacy reviews of products or product groups which may arise from TGA laboratory testing, manufacturing inspections or consumer, industry or expert committee concerns.
    • As at 31 December 2005, there were 16,431 non prescription products listed on the ARTG, almost 2% lower than compared with December 2004.

Method for determining fees and charges

The TGA's method for the derivation of activity costs, and therefore fees and charges, was outlined in the 2004 review of cost recovery arrangements (a summary of which is available on the TGA Website.

The TGA uses an activity based costing methodology for the assignment and allocation of all direct, indirect and overhead costs to activities undertaken. The methodology allows costs to be allocated to activities based on their consumption at each stage of the process through to the final product or service. Activity based costing facilitates product costing and pricing, cost analysis and management, resource planning and industry reporting.

The TGA's ABC model is maintained using a proprietary product. A two-stage process is used to firstly attribute costs for corporate activities to each business unit, then a second step is used to assign these costs to activities and services (cost objects). The following diagram provides a representation of the costing model.

diagram showing costing model

Whilst a number of overhead costs are allocated directly to business units in the accounting system (Microsoft Great Plains), a number of cost drivers are used to allocate corporate service costs to match the consumption of the resource. For example, accounts processing costs were allocated to business areas on the proportion of payments made on their behalf. Similarly, indirect recruitment costs were assigned on the proportion of recruitment cases over the previous year. For other costs, effort data was used following a survey of staff time.

The cost model is used in budgeting by substituting the actual costs with the budgeted figures TGA has developed based on its business plans and forecasts of activity volumes. Specific fees and charges are determined by dividing the cost pool for each product group (cost object) by the number of applications/products expected to be received.

After completing the 2004 Cost recovery review, the revised ABC model was adopted and used for the allocation of costs. This model has continued to be applied, with minor modifications since that time, with all drivers (other than staff effort) being updated periodically. Staff effort updates have not been completed due to the expected commencement of the joint regulatory scheme with New Zealand. However, due to the recent decision to delay commencement of the joint scheme until 2007, the cost model, including staff effort, will be updated again in the first quarter of 2006-07.

Shortfall in cost recovery for registered and listed medicines

Both registered and listed non-prescription medicines have been found to be under-recovering for the past two financial years. The under-recovery was highlighted ahead of the 2005-06 budget, though due to the TGA's overall fiscal position and the development of the joint regulatory scheme, action was not taken to address the shortfalls and the deficits were off-set against TGA's reserves. It was expected that a new fee structure would be developed with industry for the evaluation of registered medicines that would address under-recovery as part of the joint scheme. Forecasts under the joint scheme also indicated that under-recovery for listed medicines would not represent a continuing concern.

However, during 2005-06 the TGA experienced several cost shocks, including an unexpected increase in the rent payable for the Symonston complex of $0.9m following a market rent review. In addition, the TGA identified an error in its budget for the forecast number of listed medicines products that pay annual charges (an over estimate of 1,000 units, or $0.5m). The shortfalls in cost recovery for the previous two years and the forecast projection for 2005-06 and 2006-07 (before fee increases) are set out below:

Medicine type 2003-04 Actual
2004-05 Actual
2005-06 projection
Registered Medicines 0.209 (1.599) (1.287)
Listed Medicines (0.421) (0.868) (1.276)

The significant change in 2004-05 resulted from a significant increase in post market monitoring and surveillance activities which coincided with the update of the ABC model from the 2004 cost recovery review. For listed medicines, the increases also reflected the introduction of the 20% post market random reviews that were earmarked to accompany the introduction of the electronic lodgement system.

Drawing on the activity based costing data as at 31 January 2006, the following shortfalls in cost recovery were identified. For this analysis, revenues for pre-market authorisation (application and evaluation fees) have been grouped. Monitoring and scheme support costs are recovered from annual charges imposed on all registered and listed products on the ARTG and any low turnover declaration processing fees.

Revenues have also been adjusted to include an estimate for annual charges for new products that had yet to be billed at 31 January 2006. These estimates are indicative and will not be certain until annual charges billing is completed and low turnover declarations have been processed to exempt products from the annual charge on the grounds of low sales turnover (low turnover exemptions for new products are usually high for the first year of marketing).

Registered medicines revenues and activity costs (year to date, January 2006)
Revenue Expenses Difference Percent
Application and evaluation fees $1.718m $2.135m $0.417m 23%
Monitoring and scheme support $1.426m $1.837m $0.411m 29%

Allowing for normal variations in monthly data for application and evaluation fees, the under-recovery in registered medicines appeared to span both pre-market activities and post-market monitoring and scheme support activities. The order of the shortfall was similar to the level of under-recovery identified during the 2004 cost recovery review, which highlighted the need to develop a new fee structure and address the continuing under-recovery of costs.

  • The shortfall in pre-market cost recovery relates to the increased complexity in applications received and associated increased workload associated with down-scheduling of medicines (previously regulated as prescription-only medicines).
  • The shortfall in post market recovery reflects increases in market monitoring and regulatory support activities that have arisen from greater government and community expectations for the safety and quality of medicines, including market surveillance, additional laboratory testing and investigations into problem reports.
  • Cost recovery in both areas have also been affected by larger than average corporate costs across the board for the TGA (including a $0.9m increase in rent costs) and limited increases in fee increases over the past three years (3.05% in 2003-04; 3.1% in 2004-05; and 1.6% in 2005-06)

The TGA has proposed a 20% increase in all application and evaluation fees and a $150 increase (20%) on the product annual charge.

These increases are expected to move the sector closer to full cost recovery. Any further fee adjustments are proposed to be deferred and taken into consideration in the planned review of the registered medicines fee structure as part of the development of a joint regulatory scheme with New Zealand. The new fee structure will be developed in consultation with affected industry associations over the next 12 months.

Listed medicines revenues and activity costs (year to date, January 2006)
Revenue Expenses Difference Percent
Application fees $0.697m $0.658m $0.039m 6%
Monitoring and scheme support $2.491m $3.378m $0.887m 36%

The primary cause of under-recovery in the listed medicines sector relates to the increase in the post-market monitoring program. The TGA implemented the electronic lodgement system in 2001-2002 which has permitted almost immediate market access for these lower risk medicines and therapeutic products. To maintain consumer confidence in the quality and safety of these products, the TGA commenced undertaking random reviews of applications submitted to validate sponsor certifications and evidence, including the packaging presentation and labelling. The review program has now built up to a sample size of 20% and is expected to reach 24% of all applications (as recommended by the Australian Bureau of Statistics).

Again, allowing for some monthly variation, the results at 31 January 2006 appear to confirm that the majority of the shortfall in cost recovery is in the post-market monitoring and scheme support area.

The TGA has recommended an increase in the product annual charge of $150 (up 28% on 2005-06). Application fees would increase by 3.5% in line with the general wage-cost indexation model agreed with industry.

Low volume turnover declaration application fees

Low volume turnover application fees apply to any therapeutic product (including registered and listed medicines) where the product annual charge exceeds 6.8% of the estimated or actual value of wholesale sales turnover of a product. The exemption aims to reduce the regulatory cost for products with very low circulation.

The TGA proposes an increase of $10 to the application processing fee to $110. The increase reflects the general 3.5% increase to all other fees and charges, rounded up to the next $10 increment.

Impact assessment on product sponsors

The TGA is aware that the increases proposed are significant, though not unexpected in light of cost recovery trends shared with industry over the past eighteen months.

The proposed 20% increase in registered medicine evaluation fees will represent between $1,050 and $7,400 per application, dependent on the size of the data package provided for clinical and/or toxicological evaluation. 60% of evaluations performed in 2004-05 were under 500 pages (increase of $1,840 each). The increased evaluation fees are likely to represent a small fraction of the cost of bringing the product to market and are not expected to impact on the development of products introduced into Australia.

The increase in annual charges for both listed and registered medicines of $150 is significant in percentage terms, but is not expected make any significant impacts on the number of products entered on the ARTG, nor on product pricing. As shown in the following table, the availability of the low turnover exemption from annual charges limits the impact of the annual charges increase to no more than 1.5% of the product shelf price per unit.

Charge Level Sales Value Units ($5ea) Units ($10ea) Units ($15ea) Units ($20ea)
Current low turnover threshold $540 $7,941 1,588 794 529 397
Revised threshold $690 $10,147 2,029 1,015 676 507
Fee increase per unit $0.07 $0.15 $0.22 $0.30
Percent of Price 1.5% 1.5% 1.5% 1.5%

The impact per product reduces based on the total sales volume (as many products sell well above the low-turnover threshold) as well as the price of each product. As shown in the following table, the increase falls sharply when the sales volume per product rises above 5,000 units (to as little as 0.2% based on a $20 unit price per product).

Sales volume Increase in Fee Fee per Unit Units ($5ea) Units ($10ea) Units ($15ea) Units ($20ea)
2,000 units $150 $0.08 1.5% 0.8% 0.5% 0.4%
5,000 units $150 $0.03 0.6% 0.3% 0.2% 0.2%
10,000 units $150 $0.02 0.3% 0.2% 0.1% 0.1%

The TGA has also assessed the maximum fee impact of the increase in listed medicines annual charges, given concerns industry concerns that the increase would put companies out of business. Assuming a normal distribution of low turnover exemptions for products, the cost impact on the largest sponsor of listed medicine products (with a range of 370 products) would be no more that $42,000 per annum. The impact for the tenth largest sponsor with 200 products was estimated at $22,500 in total.

Proposed fees and charges

Registered non-prescription medicines
Fees and Charges Basis of Charge Current Fee
Proposed Fee
New registered medicine application Per application 790 950 20%
Concurrent registered medicine application Per application 350 420 20%
Processing fee for a variation to an existing registered medicine Per variation 790 950 20%
New product not involving clinical or toxicological evaluation 5,270 6,320 20%
Variation not involving clinical or toxicological evaluation 1,900 2,280 20%
Evaluation fees (1-50 pages) Per application 5,270 6,320 20%
Evaluation fees (51-250 pages) Per application 6,750 8,100 20%
Evaluation fees (251-500 pages) Per application 9,200 11,040 20%
Evaluation fees (501-100 pages) Per application 12,300 14,800 20%
Evaluation fees (1001-2000 pages) Per application 18,400 22,100 20%
Evaluation fees (2001-3000 pages) Per application 24,600 29,500 20%
Evaluation fees (> 3001 pages) Per application 36,800 44,200 20%
Annual Charge - registered medicine Per registration 730 880 20%
Listed non-prescription medicines
Fees and Charges Basis of Charge Current Fee
Proposed Fee
New listed medicine application Per application 500 520 3.5%
Listed medicine variation Per application 250 260 3.5%
Product safety review Per product 4,900 5,070 3.5%
Annual charge Per listing 540 690 28%
Other fees
Fees and Charges Basis of Charge Current Fee
Proposed Fee
Application for Low Value - Low Volume Turnover1 Per application 100 110 10%

1A maximum application fee applies to the assessment of declarations from the same sponsor. The maximum application fee will be increased from $11,500 to $11,900 in 2006-07.

Stakeholder consultation

As in previous years, the TGA consulted with industry associations on its business priorities draft budget, and fees and charges proposals under the auspices of the TGA-Industry Consultative Committee.

The TGA met with the Australian Self Medication Industry Association (ASMI) and the Complementary Healthcare Council of Australia (CHC) on 15 March 2006 and provided written details of the budgetary position and fees and charges outlook. Industry associations were invited to provide comment on the proposals by mid-April to enable the TGA to provide advice to the Government on changes to its fees and charges for 2006-07. The TGA also prepared a brief paper outlining the drivers that gave rise to the need to increase fees.

Both associations did not support the proposed increases to fees.

The ASMI voiced its opposition to the principle of 100% cost recovery, citing the role of the TGA for public safety, in particular its post market functions, should be government funded. It also questioned whether the TGA's cost base was efficient in light of the recent market rent review that increased costs by $0.9m per annum and resources committed by the TGA to clear backlogs in preparation of the implementation of the joint regulatory scheme.

ASMI also reflected on the importance of price stability and the need for transparency and forward notice of the increases, and concerns that a significant increase in fees and charges may result in a reduction of new applications and/or cancellation of existing products. However, ASMI indicated its willingness to work with the TGA to develop a more appropriate fee structure based around preliminary concepts presented by the TGA ahead of the formation of the joint regulatory scheme with New Zealand.

The CHC expressed concerns regarding a downwards trend in net product listings in recent years (new applications less cancellations) and that the immediate impact of the fee increase would be to drive more products from the market and stifle innovation for new products. CHC also expressed concern that this may give rise for the need for a further fee increase ahead of commencement of the joint regulatory scheme with New Zealand. CHC noted that the Australian consumers pay more for complementary medicines than consumers elsewhere in the world as a result of the regulatory environment.

Both industry associations suggested increasing low-turnover application fees (currently $100) and raising the maximum application fee payable ($11,500) to broaden the base for post-market cost recovery. The associations acknowledged that this may not meet the entire shortfall. The TGA notes that in line with cost recovery policy, the low turnover declaration fee should reflect the processing costs involved. An arbitrary fee to recover post-market and scheme support costs would give rise to a cost recovery tax. Nonetheless, as fewer than 50% of listed medicines currently pay an annual charge, a further review of the exemption should be considered ahead of the establishment of the joint regulatory scheme with New Zealand.

Both associations suggested that the impact of the increases should be staged and introduced over 2-3 years, with the shortfalls each year funded from TGA reserves. TGA operating reserves are expected to be around $12m at 30 June 2006. However, the underlying reserve is around $5m, with $7m due to be repaid to the government relating to the set-up cost of the Australia New Zealand Therapeutic Products Authority and regulatory scheme. Use of the reserve would not be appropriate, and would in effect represent cross subsidisation from other regulated sectors.

Industry associations also suggested the TGA should undertake further reviews of service delivery and risk management approaches that may lead to either cost efficiencies and/or reduced regulatory burdens for industry. The TGA noted the recent review of the ANAO and measures being take to improve service delivery and has undertaken to assist industry in reducing regulatory demands without compromising regulatory standards.