Drug Importation Threatens Pharmaceutical Innovation

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This article appeared August 1, 2005 on the Heartland Institute's Heartland.org, and an earlier version appeared on NationalReview.com:

Canadian Health Minister Ujjal Dosanjh announced in late June his intention to introduce legislation this fall to Canada's Parliament to ban bulk exports of prescription drugs to the United States "when necessary" in order to safeguard the country's drug supply for Canadian citizens.

Dosanjh, who said earlier this year that Canada would not be the drugstore to the United States, told Canadian press in June that his actions were in the "best interests" of the citizens of Canada.

Similarly, American opponents of Canadian drug importation point out the United States cannot be the drug innovator to the world if citizens do not buy their drugs here.

Treaties Force Prices Down

Drugs cost less in countries like Canada than in the United States because international laws on commerce treat prescription drugs differently from other consumer products. U.S. pharmaceutical companies are required under a 1994 treaty to sell their drugs at drastically cut prices to countries with drug price controls. Any pharmaceutical company that fails to comply can be punished by having its patent protection taken away.

To comply with this treaty, drug companies slash prices for countries with price controls -- most countries in the developed world.

The purchasing countries in this deal are supposed to agree not to turn around and resell the drugs to Americans.

That means all the state programs to "reimport" drugs are illegal, but the law is almost never enforced. Currently, the U.S. Senate and House are considering bills that would make importation legal nationwide.

Controls Halt Innovation

If Congress approves and endorses importation of drugs from countries with price controls, and if the bill also requires U.S. companies to provide unlimited supplies of their products at the resulting reduced prices, the United States will be, in effect, importing price-control policies here under the guise of drug importation.

Countries with pharmaceutical price controls do not produce any significant supplies of new drugs. Instead, the innovators have fled to the United States, where they have the opportunities created by a market system and protection for the intellectual property they create.

The United States, which currently does not have price controls, produces nearly 90% of the world's supply of new pharmaceuticals.

If pharmaceutical companies cannot generate profits, they stop both innovating and producing products.

EU, Vaccines Show Problems

In 2003, American biotech and pharmaceutical firms increased their R&D investment by 16%, compared to a 2% decline in Europe.

"Below-market prices have caused companies to reduce production capacity and exit the market in key areas," said Robert Goldberg, Manhattan Institute senior fellow and director of the Center for Medical Progress. "At the same time, thanks to America's free-market pricing, U.S. biotech and pharmaceutical firms invest more relative to Europe."

Today, European pharmaceutical companies spend less than half of their R&D money within Europe, says Goldberg, down from 73% in 1990. "While Europe has more biotech companies than America, we have 75% of all biotech revenues worldwide, 75% of all R&D expenditures, and 80% of all key biotech patents."

In the United States, virtual price controls already exist on one segment of the pharmaceutical industry -- vaccines -- and many companies have abandoned this area of production. Given that governments purchase vaccines at discount prices, there are few incentives for companies to remain in the business.