Patents And Profits
issue 246 - August 1993
Patents and profits
It’s not just in the Third World that big corporations manipulate weak governments.
After more than a decade of lobbying, the multinational drug companies have just
won a major victory in Canada. Roxanne Snider tells us how they did it.
Until recently Canada had an approach to controlling drug prices that was unique in the West. The system, called ‘compulsory licensing’, allowed domestic companies to produce cheap, generic copies of brand-name drugs. Part of the requirement for obtaining a license was that the drug be manufactured in Canada.
The system worked reasonably well. And that was part of the problem, as far as the foreign-owned multinationals were concerned. The generic drug industry increased competition and lowered prices for consumers and tax-payers. Compulsory-licensed generics cost, on average, 30-40 per cent less than brand-name drugs. In addition, compulsory licensing allowed the government to keep a lid on drug costs, vital if the state-run medical system is to survive.
Now after the largest, most aggressive lobbying spectacle in the country’s history, Canada has gone from having some of the most affordable drug prices in the industrial world to the most costly. The windfall profits that the multinationals will soon be harvesting will amount to millions of dollars yearly – money that goes directly out of the pockets of Canadian consumers, tax-payers and health insurers, into the salaries of drug company executives and stock dividends.
So how did this happen? There’s no question the drug companies have enormous financial clout. In fact, they’re one of the most profitable industries in the world. In 1990 American-based drug companies showed profits of 15.5 per cent on sales, compared with an average 4.6 per cent for other major industries. In the same year, a Standard and Poor survey found that a quarter of the 20 highest-paid executives in America work for multinational drug corporations, earning between $5.8 and $8.4 million a year.
The multinational drug industry also has friends in the right places.
In Canada their main lobby group, the Pharmaceutical Manufacturers’ Association of Canada (PMAC), is run by former Tory Cabinet member Judy Erola. Ms Erola was the Minister of Consumer and Corporate Affairs in 1984 when much of the legislation favorable to foreign drug companies was first introduced.
The industry’s opposition to compulsory licensing was about more than profits – by 1983 the major drug manufacturers had given up only three per cent of the Canadian market to licensed generics. More important was the fear that Canada might be setting an example to the rest of the world – particularly the Third World – on how to control drug costs through an open market of generic competition.
‘Countries like Mexico, India and Brazil have potentially huge markets for pharmaceuticals,’ says Toronto doctor and industry watchdog Joel Lexchin. ‘Most of these nations had very weak patent laws and the multinationals knew changes in Canada would make it easier to bring others into line.’
The Canadian laws were first changed in 1987 when the multinationals were given a seven-to ten-year monopoly on patents. With patent protection smaller domestic companies were cut out of the market, forbidden from producing a cheaper generic version until the patent expired. Still not satisfied, the PMAC pushed for a further extension. In early 1993 they finally won, retroactively eliminating compulsory licensing and gaining a full 20 years of competition-free market monopoly – exactly the same conditions as in the US.
The lesson here seems to be that if you want to make trade agreements with the US, you have to be willing to bring laws in line with theirs. In the mid-1980s, when the multinationals first began to agitate, Canada was just beginning to talk with the US about a free-trade agreement. President Reagan’s top trade advisor at the time was Edward Pratt, chairman of Pfizer, one of the giants of the US drug industry. Pratt pushed the patent issue to the top of the trade agenda. When Brian Mulroney’s Conservatives were elected in 1984 the stage was loaded with politicians eager to make the world a more profitable place for big business.
The fact that Canada initially changed its drug patent protection laws to smooth the way for ‘free trade’ was never publicly acknowledged. By the time patent protection was extended to 20 years in February 1993, Canadian Trade Minister Michael Wilson claimed the changes were inevitable – to bring Canada into line with the GATT (General Agreement on Tariffs and Trade) and NAFTA (the new North America Free Trade Agreement involving Canada, the US and Mexico). The question remains why Mulroney and Wilson were so eager to fulfil a treaty that had yet to be ratified – at the time of writing it’s still held up in the US Congress.
Critics like JG Castel of the Osgoode Hall Law School in Toronto argue that Canada was not obliged, under NAFTA, to eliminate compulsory licensing. But the problem for Canadians is that once compulsory licensing becomes locked in under NAFTA no future Canadian government can rewrite or abolish the laws, regardless of how ill-conceived they may prove to be.
Critics also point out that the multinationals will make windfall profits as a result of extended patent protection. Consider the case of the brand-name drug Vasotec. It is estimated that without the cheaper generic – Enalapril – the added cost to Canadians will average $50 million annually ’til the patent expires in 2008. Vasotec is made by Merck-Frosst, who stand to make nearly $1.4 billion in extra profits as a result of the recent legislation. ‘We call it the Merck-Frosst bill,’ says Opposition spokesman John Harding. ‘Because they’re the ones who have been driving this thing all along.’
According to Harding the lobbying pressure from the companies was intense. ‘When we got close to the final vote,’ says Harding, ‘we were offered baseball tickets, invites to expensive restaurants, promises of research and development grants for the university in my riding. The PMAC hired practically every lobby firm in Ottawa. The message we got was: “Whatever you want, you can have”.’
The companies made lots of promises, none of which was written into the legislation: 3,000 new jobs in research and development (R&D) were promised by 1995. And total spending on R&D in Canada was to double. In 1992 a confidential government report found that just over 1,000 jobs had been created since the initial 1987 changes: half were in sales and marketing and only a quarter in R&D. More than two thirds of this new R&D was in clinical research – testing drugs that were researched and developed elsewhere. This kind of research has to be done anyway before a new drug is launched in Canada, regardless of patent length.
The multinationals claim that since they do the lion’s share of the research needed to develop new drugs they deserve longer patents and larger profits. In fact the drug industry spends nearly a quarter of its budget on marketing and promotion and only 13 per cent on R&D.
In addition, very few new, patented drugs are really ‘new’ in anything but name. In 1991 Canada’s Patented Medicine Prices Review Board found that only five of the ninety four new drugs sold that year were substantial improvements over existing therapies. The majority of new patents are issued for ‘me-too’ drugs – copies of an existing drug, with one new patentable characteristic.
‘It’s a kind of “molecular roulette”,’ explains economics professor Robert Kerton, a longtime observer of the drug industry. ‘Each company tries to develop a patented “copycat” of a successful drug. Firms spend millions of dollars on marketing, then recover these costs through higher prices. The patent system shifts research and development towards commercializing those ideas which are patentable, and away from worthwhile ideas which would not, by their nature, be patentable. At the same time, it tips the rewards system away from basic research.’
The sellout of the generic drug industry to the multinationals will cost Canadians dearly. At the moment drugs are the fastest-rising cost-factor in health care in the country: with a demographic bulge of baby-boomers headed for old age, this trend can only intensify. According to a 1992 report by Green Shield (a nonprofit health insurer) the average drug-claim costs rose by 53 per cent from 1987 (when 10-year patents were introduced) to 1991. The total cost to Canada over the next 20 years could be as high as $7 billion – a stiff price to pay for the promised $500 million in new R&D investment.
The changes in the Canadian drug patent laws have already rippled out to the Third World. India has given similar concessions. Mexico, as a result of trade talks with the US in 1990-91, went from having no patent protection for brand-name drugs to the full 20-year US standard.
Ironically, the changes have had an impact in the US too. Canada’s socialized health-care system has been lauded by American liberals as a possible model for changes to the current US free-market system. Americans are looking at ways of controlling drug prices and realizing that reducing patent terms and compulsory licensing are as good a bet as any. The fact that Canada capitulated to the multinationals and that the new provisions may be enshrined in NAFTA is a worry for many.
Democratic Senator David Pryor is concerned the precedent ‘may tie our hands in using pharmaceutical patents as a mechanism to contain drug costs’. And US Congressman Pete Stark also believes the Conservative government in Ottawa gave away the store. ‘One would think Canadians would be smart enough to demand a renegotiation of this provision.’
Well, think again.
Roxanne Snider is a freelance writer based in Toronto. She last wrote for NI in our February, 1993 issue.
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