Healthy Skepticism Library item: 13372

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Publication type: news

Gallus M.
Under The Sugar Coating
The Globe and Mail (Canada) 1984 Apr 21

Full text:

The multinationals say Canada’s prescription for high drug prices is hard to swallow

A SILVER machine behind a glass door is spitting out little yellow pills, sometimes half a million or more in one day. The machine is called a “tablet press” because it forms tiny, perfect pellets of compressed powder. Down the end of a long tube come the pills in speedy, orderly fashion. Next they will be coated with sugar in what look like miniature cement mixers. A girl sits beside a green garbage bag filled with pills, transferring them onto trays and patiently plucking out defectives with a pair of tweezers.

The capsules are not so orderly. Hundreds of thousands of them come spilling out of the “capsule machine,” sometimes cracking and leaving a trail of white powder. They are inspected manually as they travel along a conveyer belt; faulty capsules meet their doom at the bottom of a disposable plastic container. Here at Novopharm Ltd.‘s Scarborough plant, pills and capsules that pass these tests, such as the sleeping aid flurazepam and the heart drug propanolol, are packaged and sold under the Novopharm label.

They are not ordinary medicinals; they are generic drugs – low-cost substitutes for Dalmane and Inderal respectively. The term “generic” is a household word now, due largely to the efforts of Loblaws Limited president Dave Nichol, the friendly giant of supermarket no-name products. But it’s one thing to buy standard-issue toilet paper, and another matter altogether to pop a cut-rate prescription drug into one’s mouth. Yet by doing so, consumers save up to 16 times the cost of a brand name equivalent. These generic pills and capsules are at the heart of a struggle within the $1.1-billion prescription drug industry in Canada.

In 1969, when the cost of Canada’s prescription drugs was among the highest in the world, the federal Government passed legislation permitting the manufacture and sale of cheaper generic drugs. Today, brand name multinational pharmaceutical manufacturers see their sales sinking and claim that the Government has granted the generic drug makers a licence to steal. While the multinationals have a lot of research dollars to spend on the development of new drugs and new technology, they’re not interested in spending it in Canada – they claim the Government is providing a hostile environment by infringing upon their patent rights.

A manufacturer of a brand name prescription drug spends between $50-million and $150-million developing a new drug and the discovery is patented, a protection that lasts 17 years. Eight to 10 of those years are spent on additional research and countless lab tests before the drug is finally marketed – with usually about eight years left on the patent.This means that a brand name drug manufacturer should have eight years worth of sales with which to recoup its research and development costs.

But the laws passed in 1969 changed all that. Under the auspices of Consumer and Corporate Affairs, the Patent Act was amended to include a “compulsory licence” provision for drugs imported into Canada. Previously, the compulsory licence provision applied only to drugs manufactured here. Under the new amendment, the generic drug industry snowballed. Between 1943 and 1969, 17 compulsory licences were issued in Canada. In the first 12 years following the 1969 amendment, 275 compulsory licences were granted for 31 drugs.

This new legislation essentially provides that the commissioner of patents must issue a licence to any generic drug producer that applies for the right to copy a brand name drug and provides sufficient evidence that the substitute will be equivalent to the original. In exchange, the generic manufacturer must pay the original patent holder a royalty fee which, the legislation states, is set at the commissioner’s discretion, but which in fact is always 4 per cent of the income from sales.

In effect, this legislation means that the brand name drug manufacturer’s eight-year holiday from competition is significantly reduced (by as much as half). It also means that the number of years over which their R & D costs can be recovered is also slashed. The 4 per cent royalty fee is supposed to compensate for this infringement on the original patent.

While the brand name drug manufacturer spends tens of millions to bring a product to market, a generic drug manufacturer incurs perhaps a few hundred thousand dollars worth of legal bills and distribution costs. The generic substitute may be on the shelves along with the name brand, at a lower price. In some cases, several generic producers market separate versions of the same drug, causing prices to dip even lower as they compete with each other.

Since the 1969 compulsory licencing amendment came into effect, Canadians have saved considerable amounts of money – almost $100-million a year for the past 15 years, according to government estimates. While Canadians enjoy the benefits of new drugs developed by multinational companies, the cost of R & D is being borne by consumers in other countries. The Canadian Government appears to be more interested in keeping drug costs down than in developing a domestic biotechnology sector or at least sharing in the costs of R & D.

Ontario alone spends almost $285-million annually to provide prescription drugs for senior citizens and welfare recipients. By using generic equivalents instead of brand name labels, the province saves $40-million. British Columbia uses only one generic drug in its medical plan and saves about $700,000.

In Ontario, the Government has assisted generic manufacturers through a program called Parcost, in which pharmacists are reimbursed only for the lowest list price on prescriptions paid for by the province, thereby encouraging pharmacists to dispense the lower-priced generic drugs.

Some brand name manufacturers have retaliated by offering volume discounts on their products to pharmacists. Under this discount system, pharmacists can dispense a brand name drug at its regular price, but actually pay the manufacturer a lower price, and profit from the difference. There is no rule, but on prescriptions paid for by the province, generic drugs are generally dispensed, and on those paid directly by the consumer, either brand name or generic drugs are dispensed.

Manufacturers of brand name pharmaceuticals are understandably distressed. The generic producers are not stealing, since they pay for a licence, plus pay royalties on their sales. They are, shall we say, adapting someone else’s recipe available from public sources. What they are doing would be illegal in the United States, where generic products come onto the shelves only after the original patent has expired.

“In no other industry that I’m aware of are you allowed to take over the fruits of expensive research,” complains Alun Davies, president of Connaught Laboratories Ltd. “Who pays for the abortive research? We spend about 12 per cent of our revenue on R & D. The trouble is, you never know which part of our 12 per cent will be successful. Any major corporation spends millions on things that never happen. Who pays for that?”

Although Mr. Davies says he does not have an axe to grind, he aligns himself with the multinationals. Connaught has no generic competitors, since only one other company in Canada, Institut Armand Frappier, would have the equipment and research facilities to copy their products. Consequently, Connaught controls 96 per cent of the $14-million insulin market in Canada.

“The cost of one scientist is $60,000 to $70,000,” continues Mr. Davies. “Add one technician and a reasonable laboratory space, that’s $150,000 a year. Then you multiply by the number of scientists and that’s purely the bench work.”

Donald Thompson, professor of administrative studies at York University, is conducting his own study into the pharmaceutical industry. Speaking barely above a whisper, his fingertips forming a pyramid as he speaks, Mr. Thompson says: “The drug industry is such that one product out of 10 that is initiated reaches the market, and four out of five of those products never repay their R & D costs.”

Mr. Thompson concludes that Canada, already lagging behind other western countries in biotechnology, is losing some of its existing research base.

Novopharm Ltd. is the largest generic drug manufacturer in Canada. The company produces 180 drugs, of which about 25 (including flurazepam and ampicillin) are currently under compulsory licence. They also make penicillin and formulate new drugs, at a cost of $500,000 annually for research and development. Three hundred and fifty people are employed by Novopharm – just over a quarter of the number employed by all of the generic companies in Canada. Of about 26 different manufacturers that prospered in the seventies, only seven main generic drug firms exist today. The others disappeared or were taken over by companies such as Novopharm. If compulsory licencing were to be discontinued, most of the small generic firms would go out of business – Novopharm would not.

“We’ll survive no matter what,” Novopharm president Leslie Dan says confidently. “But the public will pay through the nose.”

The first Canadian pharmaceutical company was started in 1879 by E. B. Shuttleworth in Toronto. Despite significant breakthroughs in the development of new drugs (including the discovery of insulin in 1921), the Canadian market was not large enough to support great amounts of research and development. Ayerst, an innovative company, was taken over by American Home Products Corp. in 1943. Other domestic firms – E. B. Shuttleworth Chemical Company, Frank W. Horner Ltd. and Charles E. Frosst – became subsidiaries of multinationals.

Ninety years after Canada’s pharmaceutical industry was started, it became evident that the drug market was characterized by exorbitant prices. When federal legislation establishing compulsory licencing for imported drugs was introduced, the first licence was issued for a Hoffmann-La Roche product – the tranquillizer Valium. The licence was granted to Frank W. Horner Ltd., to market diazepam, a generic equivalent. (According to 1983 wholesale list prices – per 1,000 tablets – pharmacists pay $49.10 for 5 mg. strength Valium, and $3.13 for the equivalent strength of diazepam – almost 16 times cheaper.)

In response to this undesirable competition, the patent-holding firms appealed decisions to grant compulsory licences and made several attempts to saturate the market with brand name labels by drastically reducing prices. Ironically, it was Hoffmann-La Roche that was convicted in 1980 under the Combines Investigation Act for practically giving away such tranquillizers as Valium to hospitals in an attempt to prevent any generic competition, and for conducting public campaigns questioning the quality of low-cost drug substitutes.

The active ingredient – what makes a drug perform a certain function – is the same in both the brand name formula and its generic equivalent. The distinction is that manufacturers use different inactive ingredients – fillers like lactose or starch – to make up the body and size of the pill. Producers of a generic drug must meet the same standards (set by Health and Welfare Canada) as a new drug, but can obtain the necessary clinical evidence from literature published by the brand name manufacturer. This is what is meant by “riding piggyback” on another firm’s research.

The Pharmaceutical Manufacturers Association of Canada estimates that a new drug must remain on the market for at least eight-and-a-half years before it will show a profit. Some sources dispute this claim. “While this may be the case in countries with more stringent patent laws,” Gordon Floyd, a government relations consultant to several multinational drug companies says, “in Canada, the undermining of patent protection inevitably forces products to be introduced at a higher price than they otherwise would be, so that R & D costs can be recovered over a shorter time.”

Estimates on the amount of money spent on pharmaceutical research and development in Canada tend to be disputed as well. The Pharmaceutical Manufacturers Association claims that the figure is $75-million, while other sources estimate $61-million. That represents less than 5 per cent of industry sales. In the United States, research spending accounts for 7 per cent of sales, and the world-wide average is 11.8 per cent. Unless research spending is increased, Canada’s technology will fall even further behind.

Myron Gordon, an economist at the University of Toronto and co-author of The Drug Industry (James Lorimer & Co.), is skeptical that multinational firms will increase their research spending in Canada. “I don’t believe any figures that they give you. They make enormous profits. Maybe they just don’t recover what they feel they should recover here in Canada. I’m saying, give them better patent protection, but make them do more R & D here.”

The entire drug industry in the free world is valued at about $80-billion. Canada makes up 2 per cent of that market. Therefore, it follows that a multinational drug manufacturer would want to recover 2 per cent of its R & D costs here. Under current legislation, they claim this is not feasible.

The Pharmaceutical Manufacturers Association of Canada is lobbying for extended patent protection – 10 to 15 years after a product has been marketed. In exchange, they promise to maintain price limits set by the Government.

The generic manufacturers propose exclusive patent rights for brand name labels (for up to five years after they reach the shelves). But this protection, they argue, should be granted only to those companies that do significant research and development in Canada. The proposal sounds reasonable, but it conveniently eliminates the firms with the most products under licence – the multinationals.

Canada could continue its present system of compulsory licencing, but in the world drug market, many believe such legislation is irresponsible. If Canadians are going to enjoy the benefits of new drugs, says Mr. Floyd, we should be prepared to share the costs with consumers in other countries.

So far, Consumer and Corporate Affairs has proposed three options: raising royalty rates, extending patent protection, or banning certain generic substitutes in exchange for regulated price levels and a greater commitment to research and development in Canada. The ministry must attempt to strike a careful balance between developing a much-needed high tech industry, encouraging domestic generic companies to expand, and protecting consumers from inflated drug prices.

With luck, no one will have to swallow a bitter pill.