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Jeffrey Simpson (Brigitte Bouvier For The Globe and Mail)

Jeffrey Simpson

(Brigitte Bouvier For The Globe and Mail)

JEFFREY SIMPSON

The worst of both worlds: high drug prices, low R&D Add to ...

Here’s something to chew on as debate heats up over Canada’s poor innovation record.

Canadians are among the biggest consumers of pharmaceuticals in the world, the costs for which are also among the highest in the world. And yet, despite these consumption and cost patterns, coupled with patent protection for brand-name pharmaceuticals, Canada lags way behind in the volume of research and development.

Courtesy of the annual reports of the Patented Medicine Prices Review Board (PMPRB), we can trace what’s been happening. And the picture is dispiriting.

In exchange for expanded patent protection in 1987 (bringing Canada into conformity with international norms), Canada’s Research-Based Pharmaceutical Companies pledged to increase their ratio of R&D to sales to 10 per cent by 1996. These brand-name companies did that, and more. By 1996, the ratio had jumped to 12.3 per cent. The next year, it hit a record 12.7 per cent. The ratio has been declining ever since; it dipped below 10 per cent in 2004 and slumped to 8.2 per cent in 2010.

If R&D had remained at 10 per cent, these companies would have spent another $1.2-billion over the past eight years. But their specific commitment ran out in 1996. Worse for them, some of the patents on big blockbuster drugs have begun to expire. (Lipitor, the best-selling anti-cholesterol drug, lost its patent last year.)

When drugs lose their patents, generics replace them – sometimes produced directly by the brand-name companies or under contract, more often by a generic drug company. Whatever happens, prices fall. In addition, the PMPRB regulates prices such that patented drug prices can’t grow by more than the consumer price index over a three-year period.

There are no new blockbuster patented drugs hitting the market, here or elsewhere. So the companies try to rearrange the chemical formulas in products and seek patents for drugs very similar to the ones losing patent protection. If they succeed in securing a patent for this new but similar drug, they can ride the profits of this new patent for its duration.

With prices held down by the PMPRB and patented drugs losing market share, it’s hard to explain why drugs cost so much. Part of it relates to the absurd Canadian system whereby each province negotiates prices; part of it is because drug use overall has skyrocketed; and part of it is tied to these new patents for drugs being not very different from the previously patented ones. Drug expenditures in Canada from 2000 to 2008 grew at twice the growth in the economy (6.4 per cent), faster than anywhere else.

While sales rise, R&D declines. The ratio of R&D to sales rose from 2000 to 2008 in France, Germany, Italy, Switzerland, the United States and Britain, but fell in Canada. Indeed, studying the pattern of R&D to sales leads inevitably to the conclusion that head office location counts. Countries with pharmaceutical head offices definitely get more R&D than branch plant countries such as Canada.

In some of these countries with much greater R&D, patented drug prices are below those in Canada, meaning that no link exists between research intensity and domestic prices. In turn, this means Canada has the worst of both worlds: high prices, internationally speaking, with a low R&D intensity.

Brand-name drug companies have been extensive users of the research tax credits on offer from federal governments (augmented sometimes by provincial ones). These have come under assault from two federal studies into Canada’s lagging innovation. It would appear the Harper government is prepared to shake up this credit, which has been widely attacked as ineffective.

The reasons why R&D in pharmaceuticals has disappointed are many, and the companies certainly have their long list of laments. But the statistics illustrate that Canadian efforts haven’t produced the intended results. The country is being short-changed relative to what it pays for drugs, how it protects them under patent, and compared with what happens in comparable countries.

And in case anyone rushes to the defence of generic (off-patent) drug companies, Canadians pay among the highest prices for generic drugs in the world, in addition to the highest prices for patented drugs. It’s another example of having the worst of both worlds.

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