Dozens of Internet pharmacies in Canada are facing the loss of supplies from miffed American drug manufacturers, and the burgeoning industry may also be slapped with sanctions based on sometimes dubious allegations about safety and quality. This disruption, as with lumber and beef, highlights a weak link in the trade chain. When free markets have to accommodate different sets of regulations, they don’t work too well.
Some patriots are sure to raise the hackneyed charge that the drug companies are predatory and merely acting to form. The cut-off notices that companies such as Pfizer and GlaxoSmithKline are sending to Canadian pharmacies, and now to wholesalers, would seem to confirm that view. But the issue is more complicated. In 2000, when the U.S. Congress made it easier to buy cheaper offshore drugs, some economists at the time predicted the current impasse. How long would U.S. manufacturers put up with outsiders who buy their products at controlled prices and sell them back for peanuts?
Contrary to the easy assumption that greed lies at the heart of the conflict, the drug giants claim unfair trade practices. “Canada sets the prices,” says Henry McKinnell, Pfizer’s CEO. “There is no negotiation and if we don’t agree, they threaten us with compulsory licensing of the drug [for generic manufacture]. But the price discount … means there is no contribution towards research, so Canada and the other countries are getting a free ride.”
The “free ride” charge has substance, as the record of European countries with similar controls shows. In 1988, Britain produced three of the 10 best-selling new drugs; today, it has none. German investment in drug research and development has actually declined. France enjoys some of the lowest drug prices in Europe, but has a poor record for developing new products. Ten years ago, Europe and the United States each spent $10-billion a year on drug research and development. Current levels stand at $20-billion and $30-billion respectively.
The average new drug now costs about $800-million to bring to market, a large proportion of that due to regulatory costs. Researchers at Tufts University calculate that a new medication costs two-and-a-half times more than it did in 1987, after inflation. In the 1990s, clinical costs, the component of research associated with testing drugs on humans, rose 12% a year. Even when one country coercively demonstrates a new drug’s safety and effectiveness, other jurisdictions may require the process to be repeated. It takes an average 12 years to bring a new drug to market and only one in 5,000 is eventually approved for use. A Duke University study of 100 drugs showed that the profits from a majority of them did not cover the company’s investment.
By ignoring these facts, price-controlled countries shoot themselves in the foot. New drugs pass the cost-benefits test with flying colours. They cost more, but they also reduce lost job days and hospital stays. Between 1994 and 1997, American spending on drugs that lower cholesterol rose about 80%. But two-thirds of the rise in outlays reflected an increase in the number of people treated, according to Robert Goldberg, a senior fellow at the Dallas-based National Center for Policy Analysis. Many fewer will therefore require cardiac surgeries, a remedy many times more expensive. Given the value they confer, we ought to promote the development of new products, not discourage it.
Which brings us back to Internet pharmacies. They play a valuable role in the transmission of product and price information. They offer consumers advice about generic substitutes and the smart use of private and public subsidies, thereby expanding consumer choice and ensuring vigorous competition. But the market they represent will naturally exploit artificial, mandated prices. The mixing of an open border and price controls is collapsing the pharmaceutical industry’s old business model, and drug companies won’t stand idly by and watch it happen. If Internet pharmacies are to prosper in the long run, we’d better recognize that and negotiate a solution.
The recent record of resolving such problems is not promising. Trade desks in both countries failed to deal with a relatively simple problem, stumpage fees for softwood lumber. Instead of harmonizing health and safety protocols for livestock, we allowed the door to slam on billions of dollars in beef trading. Expect supply restrictions to widen and shortages to emerge.
It may offer comfort of a sort to sit back and rant about American drug giants who are cutting off our cheap drugs. We can thereby avoid facing the unpleasant truth that a well-meaning Canadian policy of controlled prices is now backfiring.
This article was originally published in the March 3, 2004, edition of the National Post.