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CETA may cause inflated drug prices for Canadians

A version of this commentary appeared in the Winnipeg Free Press and the Huffington Post

Negotiations between Canada and Europe for a free-trade agreement has put pharmaceutical patents in the spotlight once again.  Improving patent protection for brand name drugs have been suggested as a means to curry favour with pharmaceutical companies and incentivize investment and innovation, but the cost to Canadian consumers could be out-of-proportion with the benefits it would create.

Currently, the innovation system in the Canadian pharmaceutical sector is broken. Expenditures in pharmaceutical research and development (R&D) in this country have significantly declined in recent years and many major research labs have closed down – all in a context where drug companies are increasingly focusing their investment in emerging countries.

The industry is now saying that if Canada wants to preserve R&D investments, it should use the on-going negotiation of the Comprehensive Economic and Trade Agreement (CETA) with Europe to extend patent protection.

This solution seems to forget that the Canadian pharmaceutical sector already benefits from the generosity of the state.

In Canada, drug companies can recoup around half of all R&D expenditures through tax credits.  At the same time Canadians pay 20% more for patented drugs compared to France or the UK – amounting to an incredible extra $2.1 billion a year. Compare this to what the pharmaceutical sector spends on R&D: around $992 M/year (before taking tax credits into account).

In spite of already having these important business advantages, the R&D to sales ratio in Canada, a common measure of R&D intensity in the sector, has declined by half since 1997. It is now 5.6%, the lowest rate since 1988.

The negotiations to implement CETA are confidential.  However, leaked versions of draft agreements present different European requests for changes in the Canadian intellectual property regime for patented drugs, while these clauses would have no impact on existing European regulations.

The different demands are very technical: Patent restoration to recoup regulatory time necessary for approval; Extension of data exclusivity to encourage research on existing drugs; Supplementary protection certificates to encourage clinical trials with children; Right of appeal under the Notice of Compliance regulations, often referred to as patent linkage.

The complexity of these issues, which may make patent lawyers happy, usually ensures that the general public cannot participate in the debate. One simply needs to keep in mind that each request would extend the monopoly power of drug companies in our country one way or the other.

A 2011 study estimated that introducing the suggested changes in terms of patent protection could indeed increase pharmaceutical R&D investment by around $345 M.  The problem is that it would also inflate drug costs to Canadians by an additional $2.8 billion per year. Brand-name drug companies argue that this is the cost Canadians must pay if they want to be on the same playing field as their European counterparts.

The argument is problematic for many reasons.

Europe has forms of extended patent protection that Canada does not have, and Canada has a patent linkage system that is not present in Europe. The issue is not just about the length of patent protection, in other words.  It is also a question of the cost of drugs to Canadian consumers while the drug is patent protected.

There is no good reason why Canada should pay 20% more than France or the UK for brand-name drugs.

Since the Conservative government has been very keen to defend patent protection in the past, one can expect that Ottawa might be ready to accept the European demands for CETA. If that is the case, we should consider ways to make sure that Canadians get some bang for the buck.

There is a simple way to generate significant benefits for the Canadian knowledge-based economy and develop a solid pharmaceutical sector: impose conditions on extended patent protection.

In 1987, under Mulroney, Canada extended patent protection for drug products under the condition that drug companies spend at least 10% of their sales in Canadian R&D. It worked — until 2001. The ratio is now only 5.6%. If Ottawa wants to extend patent protection once again, it should impose a new set of conditions, and enforce them.

Here’s a modest proposal: Any patent extension for brand-name drugs should require that a significant portion of additional earnings due to the extension be reinvested in Canadian R&D. Any breach would require the company to reimburse the additional earnings.

Canada should require drug companies reinvest a significant percentage (say 50%) of incremental sales into Canadian R&D expenditures (without tax credits), which would result in a sizeable benefits to our R&D capabilities, create jobs and expand the tax base.

Under such conditions we could develop a patent system that would generate important research expenditures, instead of windfall profit for shareholders, while companies focus their resources on marketing.

Patent protection is an acquired right provided by public authorities, so public authorities should not hesitate to negotiate conditions on how additional revenues from increased patent protection should be used to the benefit of all Canadians.

Marc-André Gagnon is an expert advisor with EvidenceNetwork.ca and assistant professor with the School of Public Policy and Administration at Carleton University.

August 2012 

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