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Jeffrey Simpson: Big Pharma’s lesson on the perils of private-sector research

Globe and Mail columnist Jeffrey Simpson.

The Globe and Mail

The Trudeau government is very keen to promote innovation in the Canadian economy, especially high technology, to prepare the country for what is called the "fourth industrial revolution."

This rather amorphous phrase, meaning superfast collection and dissemination of data and advances in technology the likes of which we have not seen and can barely imagine, was centrepiece at the World Economic Forum in Davos, at which Justin Trudeau spoke.

There, the Prime Minister said: "We don't want technology simply because it's dazzling. We want it, create it and support it because it improves people's lives." Yes, but does Canada "create it and support it" enough? By international standards, no – if by creating and supporting we mean doing research and development, and then bringing what is discovered from that R&D to market.

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Canada has lagged other major Western countries in R&D for a long time. Report after report has highlighted and analyzed Canada's shortcomings, and recommended courses of action, some of which have been taken by governments. Yet, as the Organization for Economic Co-operation and Development pointed out last week, Canada spends below the OECD average on R&D as a share of the total economy: 1.6 per cent for Canada, 2.4 per cent for the OECD average.

The core problem remains weak R&D in the Canadian private sector. The public sector, by OECD standards, is generous. So is university funding for research, although universities would never admit as much. But the private sector remains way behind businesses in, for example, Scandinavian countries, the United States, Israel, Japan and South Korea.

One part of the Canadian private sector – brand-name drug companies – offers an illustrative tale of disappointment. The companies in this sector call themselves the Research-Based Pharmaceutical Companies, with "Research" being the key word to distinguish themselves from generic producers of drugs.

Back when Canada was ratifying the free-trade agreement with the United States, Canada changed its patent protection laws to bring them into line with international practices. That meant extending patent protection for the companies' products, since it can take a lot of money to develop and bring to market a new drug, in exchange for which patents protect the resulting products for a certain period of time.

In exchange, brand-name companies pledged to ramp up R&D in Canada to 10 per cent of sales within a decade. Which they did about a decade after the free-trade agreement came into force. They never pledged what would happen thereafter.

What has happened is a steady fall from a ratio of 10 per cent of sales for R&D, the high point, to about 5 per cent in recent years, according to data collected annually by the Patented Medicine Review Board. In absolute dollars spent on research, the total has fallen from about $1.3-billion in 2007 to $1.2-billion in 2010 to $740-million last year, or a little more than half the spending in 2007.

The PMRB (some of whose numbers the brand-name companies always question) compares Canadian drug prices and R&D with a basket of seven other countries. Among these, R&D ratios from 2000 to 2012 rose in the United States, Britain, Switzerland and Germany, declined marginally in France and Italy, but fell sharply only in Sweden and Canada.

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From this list, there seems to be little connection between drug prices and where R&D is performed, since R&D rose in countries with lower drug prices than Canada, the United States being the exception. The result is that Canada has among the highest drug prices in the world (again, excepting the U.S.) but the country is losing its share of pharmaceutical R&D.

Companies will insist, not without reason, that some of their blockbuster profit-makers have gone off patent in recent years, costing them dearly. When times get a little tougher, R&D is cut back. Yes, but compared with other countries, the cutbacks seem to have been more severe here than elsewhere.

In the Trans-Pacific Partnership Agreement and in the Canada-European Union free-trade deal the large pharmaceutical companies more or less got what they sought by way of patent protection. The Trudeau government, with its push for a more innovative economy, should call out the brand-name companies publicly and ask what's been happening and why.

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