January 2001
The Medicine Piracy & Counterfeit Drug Promotion Act of 2000
On October 28, US President Clinton signed into law the Medicine Equity and Drug Safety Act, a law which will relax restrictions on the importing of prescription drugs into the United States. It is a terrible law. It has nothing to do with free trade, and everything to do with stealing property derived from patents and restricting manufacturers' ability to develop and maintain their own distribution channels.
Patented prescription drugs cost more in the United States than Canada, primarily because Canada is a poorer country (bad for us) and because we are less litigious (good for us) (Graham, 2000; Manning, 1997). Software, movie tickets, and automobiles also cost more in the United States, but these are not as politically charged as medicines are.
Previous US law dictated that only the manufacturer of a medicine or his appointed agent could bring drugs into the country. The new Act explicitly destroys a manufacturer's control over his product once it leaves the factory. Imagine a pharmaceutical manufacturer in New Jersey who makes a patented drug and sells it in two batches, one to a wholesaler in New York for 30 cents a tablet, and one to a wholesaler in Ontario for 20 cents a tablet, with the contractual obligation on the wholesalers to sell the drugs only to retail pharmacies in their respective territories. This sort of restriction is common in almost all businesses. The new law allows the distributor in Ontario to turn his trucks around and drive them into New York. Alternatively, a third party can purchase the medicines from the Ontario wholesaler and send them to New York. In either case, the New York distributor will be undercut by sales of the "re-imported" drugs.
The potential for counterfeit drugs to ender the US, despite the Act's imposition of more bureaucratic oversight, is one reason why several American commentators have pointed out that this law is a nonsense (Barfield and Groombridge, 1999; Dykes, 2000; Goldberg, 2000). However, Canadian observers have not had much to say about the matter, nor has the Canadian government taken a public position on it. Repeated telephone calls by the author to Health Canada and the Department of Foreign Affairs and International Trade revealed no sense of urgency or even awareness of the issue in those ministries. This is a shame, because Canadian inaction may lead to withdrawal from the Canadian market of many patented drugs.
Canada comprises less than 2 percent of the global market for prescription drugs, whereas the US makes up almost half. If you ran a movie theatre which charged a higher price to adults than to children (as almost all do), and the government ordered you to charge grown-ups the same discounted price as for children, how would you react? If a large enough share of your customers were children, you might bite the bullet and give adults the discount. However, if children were less than 2 percent of your audience, you would eliminate their discount, write them off as customers, and continue to charge the same price to adults.
This is what will happen in the Canadian pharmaceutical market if this US legislation is implemented without Canada's objection. Since the Canadian Patented Medicine Prices Review Board will not allow Canadian prices to increase to the American market-clearing price, we should expect to see pharmaceutical manufacturers stop shipping their products north of the border. Furthermore, the pharmaceutical industry in Canada will be destroyed. As a result of the Patent Act amendments of 1987 and 1991, multinational brand-name pharmaceutical companies invested in R&D and manufacturing capacity in Canada (Pazderka, 1999). Since the US law will allow any output of these plants to be pirated away across the US border at below market prices, we can expect the manufacturers to close these facilities.
It will not be easy for Canada to respond to this threat. Indeed, there is no perfect answer to it. Nevertheless, Canadian law does present potential remedies. The Food and Drugs Act permits drugs
packaged with "Export" overprinted on the label to be shipped out of Canada with a certificate from Health Canada that the product conforms to Canadian Good Manufacturing Practices. This certificate is not required by Health Canada. It is provided as a service to facilitate other countries’ acceptance of the product. Health Canada should not issue export certificates for shipments destined for the US under the new American pro- piracy law. Furthermore, Canadian customs agents should monitor wholesale shipments at the border, stripping export certificates off misdirected stocks.
Furthermore, the North American Free Trade Agreement article 309 supports members’ rights under the General Agreement on Tariffs and Trade article XI, to impose export restrictions in cases of "critical shortage."
Canada’s Import Permits Act authorizes the government to establish an "Export Control List, including therein any article the export of which the Governor in Council deems it necessary to control... to ensure that there is an adequate supply and distribution of the article in Canada for defence or other needs."
These measures will make stealing drugs away from their manufacturers’ control more difficult. Hopefully, American legislators will see the folly of the Medicine Equity and Drug Safety Act and not implement it. However, Canada should anticipate a worst-case scenario and be prepared for it.
References
Barfield, Claude E., and Mark A. Groombridge (1999). "Parallel Trade in the Pharmaceutical Industry: Implications for Innovation, Consumer Welfare, and Health Policy." Fordham Intellectual Property, Media & Law Journal X, 1 (Autumn): 185-265.
Dykes, Laura (2000). Adverse Reaction: Why the United States Should Not Adopt Price Controls for Prescription Drugs. Action Alert No. 56. (September 20) (San Francisco: Pacific Research Institute).
Goldberg, Robert (2000). Reimporting Prescription Drugs. Brief Analysis No. 342. (September 29) (Dallas: National Center for Policy Analysis).
Graham, John R. (2000). Prescription Drug Prices in Canada and the United States—Part 2: Why the Difference? Public Policy Source No. 43. (Vancouver: The Fraser Institute).
Manning, Richard L. (1997). "Products Liability and Prescription Drug Prices in Canada and the United States." Journal of Law and Economics 40 (April): 203-243.
Pazderka, Bohumír (1999). "Patent Protection and Pharmaceutical R&D Spending in Canada." Canadian Public Policy XXV, 1: 29-46.
John R. Graham (johng@fraserinstitute.ca) is Senior Analyst and Acting Director of the Pharmaceutical Policy Research Centre at the Fraser Institute. He has an MBA from the London Business School, University of London.
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