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Canadian pharmaceutical policy is based on the foolish assumption that we can pay economy prices and still enjoy first-class access to the most advanced medicines. But every first-year economics student knows there is no such thing as a "free" lunch. The truth of this maxim is clearly illustrated by Bristol-Myers Squibb Canada's justifiable decision not to sell Erbitux, its new drug for colorectal cancer, in Canada. The company won't sell the drug here because Canada's price-control agency is demanding an unreasonably low price for it, hence probably destroying the business case for introducing the drug to our market.

Canadian policy-makers arrogantly assume they can interfere in pharmaceutical markets forever, without suffering the consequences. The Erbitux decision indicates that enough misguided pharmaceutical policies can eventually make the business environment for pharmaceutical makers so inhospitable, the reason for serving the market disappears altogether. Yet, while policy-makers bear no consequences for such decisions, Canadian patients nonetheless suffer.

The decision not to sell a promising cancer treatment in Canada is a totally predictable response to pharmaceutical policies that ignore pharmaceutical economics. While the cost of manufacturing pills is cheap, the expense and risk of discovering and developing new drugs is enormous.

Research published by academics at Tufts University's Center for Drug Development in the Journal of Health Economics in 2003, and later confirmed by research published in Health Affairs in 2006 by Christopher Adams and Van Brantner, shows that the average risk-adjusted cost of developing a new drug is between $800-million and $900-million (U.S.). Other research published by Tufts academics shows that only one in 10,000 drug molecules discovered will finally make it to market as a drug product, and only 30 per cent of the drugs that make it to market actually generate revenues that meet or exceed their research and development costs.

When governments interfere in the market, it often raises the risks of doing business and reduces profit potential below market expectations, removing any reason to do business at all. In fact, a combination of wrong-headed pharmaceutical policies has created a poor business environment for pharmaceutical-makers in Canada, and thus reduces incentives to launch advanced medicines in our market.

For example, the federal government interferes in pharmaceutical markets through price controls that cap the introductory price of new drugs at arbitrary levels. The controls mandate that growth in the price of existing patented drugs not exceed the rate of general inflation.

At the same time, provincial governments use the monopoly buying power of public drug programs to negotiate de facto price controls on patented drugs that are even lower than this. Such policies reduce the practical value of a patent in Canada.

But price controls aren't the only policy making it unattractive to introduce advanced drugs in Canada. Many other pharmaceutical policies are also producing a hostile business environment for companies that invent and develop new medicines to treat human illness.

For instance, some provinces refuse to declare many new drugs eligible for reimbursement under public drug programs. According to the Canadian Institute for Health Information, public programs pay for nearly half of all prescription drug sales in Canada, and IMS Health data show that Canada represents only two per cent of the global market for drugs. This means that when a province refuses to reimburse for a new drug, its manufacturer is limited to half of an already small market. This could be much less than half for cancer drugs and other high-cost drugs that are often funded almost entirely by provincial programs.

Many of the new drugs in question also serve very small patient populations, reducing the market even further. Often this means there is simply no business case to be made for investing the time and expense of gaining regulatory approval and marketing the drug, because any profits to be earned probably approach zero.

This situation is even worse when provinces such as Ontario and British Columbia override doctors' prescriptions and force the substitution of generic products for brand name (patented) drugs. Under Bill 102, Ontario wants to extend this policy beyond publicly reimbursed drugs, to the privately funded half of the market, through "off-formulary interchangeability." This kind of policy not only violates physician prescribing orders and patient preferences, but also takes the remaining private half of the market away from patented drug-makers and gives it to generic competitors by force of law.

Under such circumstances, what company can afford to waste its time launching new drug products in Canada? Would you invest in such a company if it did? Economic reality is a hard teacher. When governments attempt to free ride on pharmaceutical development, it is patients who pay the price in lack of access.

Brett Skinner is director of Health, Pharmaceutical and Insurance Policy Research at the Fraser Institute (Toronto) and a PhD candidate in public policy at the University of Western Ontario.