The supply of brand-name prescription drugs to
Canadian patients is likely to dry up if the Canadian government
does not act to stop the illegal shipment of medicines from
Canada to the United States, according to a new study, Canadian Prescriptions for American Patients Are Not the Solution
, released today by The Fraser Institute.
The study analyzes the consequences of the Canadian and Manitoban
governments' encouragement of Canadian Internet-based and
mail-order pharmacies that ship prescription drugs to American
patients in violation of US law. According to the study, a
growing number of American patients are using Canadian
Internet-based and mail-order pharmacies to buy prescription
drugs at lower prices than they can in the US. These pharmacies
enjoy annual sales of about $650 million (US).
"Prices for brand-name prescription drugs are lower in Canada
because of its weak currency and lower standard of living than
south of the border. As well, government drug benefit plans in
Canada are able to free ride on research and development
expenditures that are primarily borne by American patients," says
John R. Graham, author of the study and the Institute's director
of health and pharmaceutical policy research. "Canada's
Internet-based and mail-order pharmacies exploit this difference
to satisfy the needs of some American patients in a way that is
unsustainable and harmful in the longer term."
The US comprises 37 percent of the world's pharmaceutical market,
and a larger share of its profits. Canada comprises less than two
percent of the world's market, and contributes negligibly to
profits. This means that it makes no sense for drug makers to
continue to supply Canada when their medicines are diverted into
the US to destroy their margins there.
"We have already seen some large, research-based drug makers take
steps to reduce supply in Canada," says Graham. "Although drug
makers are trying to ensure that they only cut off the grey
marketers, the federal government and the government of Manitoba
are making it difficult for them to do so. This will push drug
makers to err on the side of drastically reducing supplies to all
Manitoba and the Grey Market
Because of a mistaken belief that these pharmacies are a
legitimate and sustainable export industry, Manitoba's industry
minister has encouraged legal action against drug makers who
decline to supply Manitoba's grey marketers. Ironically, if an
entrepreneur tried to open a private clinic or hospital to serve
Manitobans who suffer unacceptably long waiting times for surgery
in the government-run health system, the provincial government
would shut it down immediately. Last year, Manitobans experienced
a median waiting time of 18 weeks from a general practitioner's
referral until treatment by a specialist. Instead of permitting
entrepreneurship where it's needed, the Manitoba government
encourages businesses whose effect will be to further deprive
Manitobans of health care by denying them prescription drugs.
"What's developing now is a lose-lose-lose situation where
Canadian patients will lose their medicines, American patients in
need will not get affordable prescriptions, and drug makers will
lose profits that they need to invest to develop new medicines,"
Illegal Cross Border Trade in Prescription Drugs and the US
The study says that Canada is not solely to blame for allowing
illegal cross border trade in prescription drugs to develop. Many
American politicians accuse the drug makers of gouging American
patients, when in fact the US government is largely responsible
for the high prices of prescription drugs. First, the government
imposes a huge regulatory burden on the research and development
of new medicines - which is a cost ultimately borne by buyers.
Second, American health care subsidies isolate prescription drugs
because many seniors have to pay out-of-pocket for them, whereas
third-party payers cover most other health costs. Third, rules
that regulate government drug benefits demand that government
agencies get the best price available. This means that it is more
difficult than necessary for uninsured Americans who are not
enrolled in government drug benefit plans to receive discounts.
"Although this grey market is currently illegal in the US, the
House of Representatives recently passed a bill that would
prevent drug makers from enforcing contracts with distributors.
These contracts prevent distributors from shipping drugs to the
US without the manufacturers' consent, which allows drug makers
to supply Canada and other countries effectively," notes Graham.
As legitimate drug makers reduce their deliveries outside of the
US, counterfeiters will increase the volume of fake pills that
are shipped into the US. Without legitimate manufacturers'
participation in the international supply chain, it will not be
possible for the US government to stop this through increased
regulatory surveillance. The study warns that the failure of US
lawmakers to find domestic solutions to the challenge of getting
prescriptions to American patients who cannot afford them
increases patients' risks unnecessarily.
"The certain failure of this grey market might motivate US
legislators to impose explicit price controls on prescription
drugs. This would be disastrous for the development of future
medicines," cautions Graham. "Price controls that artificially
lower US drug prices to Canadian levels would lead to a reduction
in companies' annual research and development spending of between
$5 billion and $15 billion (US), or between 15 percent and 47
percent of the pharmaceutical industry's worldwide R&D
spending in 2002."
If the drug makers are forced to cut off supplies to Canada, the
Canadian government would be tempted to gut its intellectual
property laws, thus allowing companies other than the inventors
to supply Canadian pills. This would put Canada at risk of
violating international rules protecting intellectual property,
and jeopardize Canadians' participation in the global trade in
Even at its current level, the grey market violates the
intellectual property laws that give investors the incentive to
finance the research-based pharmaceutical industry. It also
challenges the spirit, and perhaps the letter, of the North
American Free Trade Agreement. "Most medicines sold in Canada are
invented by companies that are headquartered in the US. When
Canada entered into the free trade agreement with the US, Canada
created an environment that increased research-based drug makers'
willingness to risk capital in Canada," says Graham. "If Canada
cannot stop this grey market, those investments will become
millstones around the companies' necks and because government
action is causing the assets to devalue, Canada may be inviting a
trade dispute under NAFTA's clauses that prohibit discrimination
against foreign investors."