Fraser Forum

Trump pharmaceutical policy may help raise Canadian drug prices to American levels

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A statement from Donald Trump’s health reform proposal poses a potential problem for Canadians:

Remove barriers to entry into free markets for drug providers that offer safe, reliable and cheaper products. Congress will need the courage to step away from the special interests and do what is right for America. Though the pharmaceutical industry is in the private sector, drug companies provide a public service. Allowing consumers access to imported, safe and dependable drugs from overseas will bring more options to consumers.

Mr. Trump is not hostile to pharmaceutical innovation. In his 100-day plan, he promised “reforms will also include cutting the red tape at the FDA: there are over 4,000 drugs awaiting approval, and we especially want to speed the approval of life-saving medications.” However, the idea of lowering drug costs by allowing “imported, safe and dependable drugs from overseas” misrepresents the nature of the global pharmaceutical market and the role of intellectual property within it.

The policy is properly called “reimporting” or “parallel trade.” It has been a topic of concern at the Fraser Institute since I wrote a critique of it in 2003. At the time, certain American politicians gained minor celebrity by organizing bus trips of seniors into Canada to fill their prescriptions for lower prices than they could in the United States.

The policy can be summed up very easily—a research-based drug company sells a therapy for a certain price in the U.S. and another (usually lower) price in Canada or another country. Politicians decide this is unfair, so propose a law making it illegal for the research-based drug company to manage its supply chain to maintain different prices. This would allow foreign sellers to bring the drug into the U.S. at lower prices.

There’s more than one reason for these price differences. Critics of parallel trade often point out that drug prices are sometimes under stricter government control in other countries than the U.S. However, even in markets where there’s no government intervention in prices, the countries where households enjoy higher incomes will experience higher prices for brands protected by intellectual property rights, such as software licenses.

The problem with the policy is that it creates a lose-lose situation. The U.S. is a massively larger pharmaceutical market than Canada. Research-based drug-makers would respond by hiking Canadian prices to the same level as American prices, despite losing Canadian sales. If Canada’s Patented Medicine Prices Review Board prevented that from occurring, the drug-makers would restrict supplies to Canada. There would be no benefit to American patients.

In turn, that would tempt Canadian politicians to retaliate by compulsory licensing. This is a policy of (for lack of a better term) stealing a research-based drug-maker’s intellectual property and allowing generic drug-markers to manufacture copies, despite a valid patent. Such a move would jeopardize Canada’s innovation economy and likely threaten international trade agreements. Capital would flee as pharma and biotech investors get nervous about their ability to protect their intellectual property.

Canadian policymakers concerned about the Canada-U.S. relationship under Mr. Trump should make sure the president-elect understands the very harmful consequences of parallel trade in medicines.


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