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Illegal Cross-Border Trade in Prescriptions Threatens Canadian Medicine Supply and May Violate Free Trade Agreements: Study

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Release Date: September 24, 2003
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 Canadian distributors."

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," explains Graham.

Illegal Cross Border Trade in Prescription Drugs and the US Government

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."

Challenging NAFTA

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 innovative products.

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."