A good part of the political debate has recently been on importing cheaper drugs from Canada. In a move which could be considered no more than pandering to win votes several politicians have come out in favor of allowing this to occur. I thought it may be useful to point out some of the problems with this approach to lowering health care costs which have been totally ignored by the politicians. The webmaster even emailed questions to the officials representing his area and various political candidates and received no response.

It has become cache to bash the drug companies. Just go do a search on Amazon.com and you will find several books blaming these companies for the problems with escalating health care costs (click here to do a search). While there obviously is a need for cost cutting at the large players in the pharmaceutical industry (primarily in marketing), my experience is with small companies and startups and I assure you that the problems we encounter have more to do with paying the high cost of drug approval than high overhead.

The rate of failure of drug candidates in pre-clinical analysis is extremely high. Only 5 of 5,000 new potential drugs tested in animal models make it to clinical trials and only 1 actually is approved for use by the FDA. Pretty long odds if you are looking to start your own company...

My opinion on this subject comes from being a scientist and entrepreneur in the biotechnology field.

What about intellectual property?

Intellectual property is currently managed and prosecuted by country. One of the major problems with importing drugs from Canada is that many companies have either (1) licensed the Canadian rights to another company or (2) have no Canadian rights due to not filing patent coverage.

Let's imagine a scenario. Company A develops a drug and goes through the expense of approval in the United States. After approval Company A licenses the Canadian rights to the drug to Company B. Company B is required to offer the drug at lower cost than company A, however the risk and financial outlay of Company B is considerably less than Company A. Furthermore, the cost of Canadian approval of a pharmaceutical product is considerably less than in the United States and all the legal costs of protection of intellectual property would have already been assumed by Company A. Under some of the suggested plans Company B would now undercut the price of Company A and violate the terms of the license agreement and the United States patent coverage (through no action of their own).

An even more disturbing scenario is revealed if the company in question does not have intellectual property rights in Canada, but has them in the United States. In some currently proposed plans, competitors would be able to swoop in and market drugs from the North in violation of United States patent coverage.

Either of these scenarios makes a mockery of the US patent system and will discourage innovation and cause the giant pharmaceutical companies to gain an even tighter grip on global health care.

Also intellectual property protection in countries around the world cost money. Companies have to realize that expense and that can only come after approval. Drugs are more expensive prior to patent expiration due in part to the cost of intellectual property protection being built into the costs over the life of the patent. Since costs of patent protection vary by country so will the markup.

What does it cost to obtain drug approval?

The Tufts group third drug-cost report estimated the out of pocket costs for drug development at $403 million (I have removed the $399 in cost of capital calculations from the often quoted $802 million to reflect actual out of pocket costs). Adjusting for inflation, this is an increase of 2.5x in the past ten years. The majority of the costs are incurred in the clinical trials process which was absorbed in more extensive safety screening, and recruiting sometimes thousands of patients for clinical trials involving chronic diseases. In contrast a study prepared for the Life Sciences Branch, Industry Canada in May of 2003 concluded that biotechnology and pharmaceutical companies could save up to 45% over trials conducted in the United States.

Although less costly overall, the approval process in Canada actually takes longer and there is a delayed acceptance of new pharmaceutical products due in large part to the fact that each province must approve the drug independent of the Canadian government. Also ironically, whereas many branded pharmaceuticals are less expensive, many generic products are actually more expensive than the United States.

There is obviously significant room for improvement in the way drugs are approved and administered in the United States and we can learn from other countries. One point is that the clinical trials process has become lengthy and costly to try to eliminate 100% of the risk in pharmaceuticals. We need to become adults and accept the fact that medical intervention carries risk and not undergo it lightly.

Safety

Frankly, I am less concerned regarding safety of imported drugs. At a minimum, the prescribing pharmacy should be liable for selling of drugs that do not meet FDA standards if they are going to export.

Potential fallout of any legislation

• Tougher price negotiations abroad to even the field and not have the US consumer bear the majority of drug development burden. That is probably a good thing.
• Less innovation. Without assurance that pricing will allow money invested to be returned, the existing companies will become more conservative. Also, venture capital firms will fund fewer and fewer life science start-ups.
• Complications regarding intellectual property.

The bottom line is that it costs money to characterize potential disease treatments, patent them, and run them through the clinical trials process. Someone has to pay for that and fund the development of the therapies of the future. Importation of drugs from Canada is a non-inventive solution that will cover a small number of treatments and will create a beaurocracy to oversee to insure that it does not infringe on existing laws regarding patent protection and the FDA regulation of pharmaceuticals.

theLabRat