Our Surprisingly Expensive Pharmaceuticals

We like to think prescription drugs are cheap in Canada. Nothing could be further from the truth.

Canadians often think that their prescription drugs are cheap. Otherwise, why would so many Americans cross the border to buy them? Yet in the last five years, Canada has been the world’s third-most expensive country for brand-name drugs.

In 1987, Canada passed changes to the Patent Act extending patent protection for prescription drugs from 17 to 20 years and restricted compulsory licenses. This was done after brand-name drug companies agreed to spend 10 per cent of their sales on research and development. The rationale was simple: A generous patent policy for brand-name companies would ensure a more competitive, innovative pharmaceutical sector in Canada.

In order to prevent abuse, the Patented Medicines Price Review Board (PMPRB) was created as a watchdog to cap prices of brand-name drugs and ensure transparency of Canadian pharmaceutical activities.

At first, this strategy worked very well. While the costs of patented drugs increased due to extended patent protection, the pharmaceutical industry opened many important research labs in Canada.

The problem arose from the method of price capping and its bias toward pharmaceutical companies. Patented drug prices are capped based on the median price of the drug in seven comparable countries with the highest R&D expenditures as compared to sales – the United States, Germany, Switzerland, Sweden, France, Britain, and Italy. But, there is a catch: Most of these countries also have the world’s most expensive prices for patented drugs. The rationale was simple: These countries have a high ratio of R&D to sales. If Canada has the same prices as they do, it could get the same spinoffs.

Since drug companies in Canada have little incentive to sell their drugs at a significantly lower price than the cap set by the PMPRB, Canada effectively always ends up among the world’s five most expensive countries. Since 2005, Canada has been the third-most expensive country because exchange rates increased or foreign drug prices decreased while the cap was not adjusted.

The ratio of investment in research and development as compared to sales of drugs has increased in these countries since 2000, but not in Canada. Since 2001, pharmaceutical companies have not been holding up their end of the bargain and the ratio is constantly decreasing. It was only 7.5 per cent in 2009.

In 2006, the PMPRB explored the possibility of modifying the basket of countries to include other comparable nations: Finland, Australia, New Zealand, Austria, the Netherlands, and Spain. Except for Spain and New Zealand, they all have a higher R&D-to-sales ratio than Canada.

By using a model to cap prices based on the median between 13 countries, Canada would be aiming to be the world’s seventh-most expensive country. This would mean an average price reduction of 15 per cent on patented drugs. Since the total annual cost of patented drugs (at the manufacturers’ price) is $13.3 billion, this would be a savings of $2 billion.

Currently, Canada artificially inflates the cost of prescription drugs by $2 billion to facilitate pharmaceutical R&D, while total private R&D expenditures in Canada are only $1.27 billion per year.