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Prescription Drug Prices in Canada and the United States --
Part 2: Why the Difference?

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Generic drugs

The United States has far more generic competitors than Canada. In 1992, the United States had an average of 5.7 manufacturers of each therapeutic molecule whereas Canada had only 2.02, that is, one branded firm and one generic firm (Danzon 1996: 94). As well, the median price of generic drugs in Canada has increased relative to that of brand-name drugs from 1990 to 1997 (Conference of Federal/Provincial/Territorial Deputy Ministers of Health 1999b: 35). During the term of the PMPRB's existence to 1999, the Patented Medicine Prices Index rose at an average annual rate of 0.8 percent while for the Industrial Product Price Index (Pharmaceutical), which is published by Statistics Canada and includes both patented and non-patented drugs, rose 1.9 percent (PMPRB 2000: 20). Certain generic drugs in Canada are sold at multiples of their prices in the United States (Robson and Graham 2000). This is surprising: given the income and legal differences between the two countries, we would expect Canadian generic drugs to be significantly cheaper than those sold in the United States, as we have observed for branded drugs and other consumer goods, such as OTC drugs and software, with relatively low marginal costs of manufacturing and distribution.

Another interesting difference between the brand-name companies and the generics is the level of market concentration. Of the top ten pharmaceutical companies in Canada, ranked by sales, only one is a generic manufacturer (IMS Health 1999). The second largest generic ranks thirteenth by sales. However, these two firms together had sales of $568 million in 1998, fully 71 percent of the total generic market by revenue. In comparison, the top two brand-name firms captured only 15 percent of the market for that sector, and it took 16 companies to account for 71 percent market share.10 Research-based companies do compete against each other within a therapeutic class, as described below through the example of Cozaar®. It appears that the brand-name companies have a large, highly competitive market, whereas generic companies appear to make up a near duopoly.

This observation is contrary to what one would expect in a free market. Patented drugs have limited monopolies, which give them market exclusivity, and give them incentives to continue to invest in research and development. When patent protection for a drug expires, one would expect generic competitors to operate within a market structure of almost perfect competition. How is it that, in Canada, generic competitors have enjoyed superior pricing power relative to their research-based competitors? The Patented Medicine Price Review Board gives us the answer.

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