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Spurring Socially Beneficial Pharmaceutical Innovation in Canada Essay

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Updated: Jun 9th, 2020

Introduction

The public sector constitutes a critical component in a country’s health intervention, biomedical research, and development. Therefore, the sector accounts for a significant proportion of the total pharmaceutical expenditure. The importance of the public healthcare sector underscores the importance of an effective organization. Amongst the most important elements that should be considered in promoting the effectiveness and efficiency of the pharmaceutical industry is innovation. The significance of innovation arises from the fact that it contributes to new product development1. This aspect improves the effectiveness of the industry in dealing with emerging medical challenges. In order to support innovation, it is imperative for governments to support industry players’ research and development efforts.

One of the approaches that governments should consider entails the integration of Intellectual Property Rights [IPRs] such as patents. The significance of patents in the pharmaceutical industry arises from the capital-intensive nature of the process. A substantial amount of resources is involved in discovering, developing, and achieving regulatory approval by the relevant authorities2. Moreover, the lack of or ineffective integration of IP in the pharmaceutical sector can cripple the industry due to imitation and free-riding by unapproved parties. Policymakers have “the duty to ensure that they design a system in which production is organized to maximize the societal benefit from such public investment.”3

Over the years, the Canadian government, through the Canadian Intellectual Property Council has affirmed its commitment to making IP rights as one of its public policy priorities. However, minimal action has been undertaken so far.

In spite of the extensive investment in research and development in the Canadian pharmaceutical industry, considerable gaps exist with reference to patenting. The current patenting system in Canada has led to the distortion of pharmaceutical innovation. Thus, the country’s current patenting system does not lead to the attainment of socially beneficial outcomes. Therefore, it is imperative for the Canadian government to take the required steps and make the necessary reforms.

Analysis

The patenting system in the Canadian pharmaceutical industry

Pharmaceutical innovations constitute a critical component in the Canadian health care system. Its relevance arises from the fact that it promotes the wellbeing of the general population. Investment in research and development has promoted pharmaceutical innovation, hence the country’s ability to deal with diseases that were considered a threat to the country’s population, such as polio, measles, diabetes, tuberculosis, and asthma, among other illnesses. Despite its past efforts, Canada ranks noticeably low with reference to innovation4. A study undertaken by the Conference Board of Canada assigned a D grade with reference to innovation within the pharmaceutical industry.5 Some of the countries that lead with reference to innovation within the pharmaceutical industry include the US, Switzerland, and Ireland6.

During the past decade, Canada has implemented a number of measures in an effort to stimulate the development of the pharmaceutical industry. One of the most notable changes entails the implementation of the Patent Act. The Act has undergone a number of amendments over the years, which has culminated in increased investment in research and development by the research-based pharmaceutical companies7.

In order to support pharmaceutical innovation efforts, it is imperative for governments to integrate effective intellectual property rights. However, the Canadian pharmaceutical industry is heterogeneous in nature. Some of the industry players operate based on extensive IPRs. These companies mainly include innovative research-based firms. Conversely, some pharmaceutical companies do not appreciate the importance of IPRs8. Thus, the industry players are categorized into research-based and generic companies. The research-based companies mainly engage in the development new drugs while the generic companies engage in the replication of the newly developed medicines.

The generic companies undertake the replication process at a relatively low cost. Due to their low cost of operation, the generic companies are not focused on recouping the cost of R&D. Consequently, they are in a position to maximize their profitability by offering drugs at competitive market price. Canada leads with reference to the countries characterized by high prices of generic drugs in the world. In 2006, the price of generic drugs in Canada was 115% higher as compared to the price in the US9. Moreover, the ability of the generic companies to maximize profitability arises from the fact that there is no law that controls the price of generic drugs like in the case of innovative drugs.

Moreover, the intellectual property rights in Canada do not recognize the capital-intense nature of research-based pharmaceutical companies. It is estimated that the development and introduction of a new drug into the market take approximately 10 years. During the development and trial period, the new drugs do not generate any revenue. The table below illustrates the difference associated with the development of new drugs by the two company groups10.

Phase of Drug development Generic Companies Innovative Companies
Research and development 6 months to 1 year 2 to 6.5 years
Test and trial on drug 3 to 6 months at a cost of 1 million 7 years at a cost of 60% of the total cost
Duration from laboratory to market 2.25 to 6.5 years 11 to 13 years
Total cost [estimated] $ 4 million $ 897 million
Time to recoup investment no limit of time 7 to 9 years

The above table illustrates the existence of a considerable difference in the development of new drugs between the generic and innovative or the research-based companies. It is estimated that the generic companies incur over 200 times the cost incurred by the generic companies in their drug development process. These differentials underscore the need to assist the research-based pharmaceutical companies in recouping the cost of R&D. However, failure by the Canadian government to protect such investment leads to an ineffective pharmaceutical industry. These aspects highlight the extent to which the prevailing legal system in the Canadian pharmaceutical industry is skewed11.

In order to improve the contribution of the country’s pharmaceutical industry, the Canadian government should consider the formulation and integration of effective IPRs as an absolute necessity. Canada has entered different economic agreements, for example the World Trade Organization [WTO], agreement on the Trade Related Aspects of Intellectual Property Rights [TRIPS], and the North American Free Trade Agreement [NAFTA]. These agreements have led to a remarkable improvement in the Canada’s attractiveness to pharmaceutical companies. However, failure to protect such investment and promoting fair market exclusivity will affect the attractiveness of the pharmaceutical industry to local and foreign investors.

The ultimate effect is that the Canadian pharmaceutical industry will be dominated by generic companies, which from the analysis above are largely driven by profit maximization as opposed to being beneficial to society. On the other hand, research-based pharmaceutical companies are very conscious of a country’s IPRs. Thus, the ineffectiveness of the Canadian IPR system will limit the entry of such companies, hence affecting the creation of high-paying job opportunities12.

The Canadian Intellectual Property laws can be defined as relatively ineffective and stringent as opposed to other countries such as the European Union, the US, Korea, and Japan. The Canadian IP system provides data exclusivity to companies in the country’s pharmaceutical industry for 8 years as opposed to that of the US, which offers data exclusivity for a period of 10 years. Furthermore, the Canadian government does not provide the industry players with an opportunity for extension. Data protection constitutes a fundamental element in a country’s public health care system. Therefore, it is imperative for governments to develop effective IP laws in order to improve the effectiveness of their countries’ pharmaceutical industry. However, it is imperative for governments to ensure that the data associated with the pharmaceutical products meet certain standards. Some of the critical data sets that should be provided to the relevant authorities related to toxicity and efficacy of the drugs.13

Moreover, the Canadian intellectual property law does not provide the industry players with an opportunity for patent term restoration. Countries such as the US and the European Union members have integrated this aspect in their IP laws. For example, in the European Union, firms in the pharmaceutical industry are provided with a maximum of 5 years in addition to the data exclusivity period. This aspect shows that the patent term restoration has a considerable duration of 15 years. On the other hand, countries in the United States have a patent term restoration period of 5 years in addition to the data exclusivity period of extra 5 years.

Proposal for reforms

Intellectual Property rights comprise a vital element in any society. First, effective IP contribute to adequate protection of a country’s investment climate. This goal is attained by protecting the existing and potential investors from unfair competition. Consequently, the IP rights contribute to the effective establishment of a market-based reward system, hence compensating the high cost incurred during the innovation process.

The lack of or a poor IP system hinders companies’ ability to compete by reselling their innovation efforts, which drives their economic profit to zero. If investors anticipate the existence of an unfair competitive environment, they are not likely to enter such an industry due to difficulties in recouping the cost incurred in undertaking the research and development processes. The IP rights enable companies in selling their products by limiting the intensity of competition in marketing patented products. Past studies show that the implementation of effective IP rights have played a fundamental role in providing customers with diverse products that contribute to the improvement of the society’s welfare such as saving lives and promoting the citizen’s quality of life.

The above analysis illustrates the existence of significant gaps in the Canadian pharmaceutical industry with reference to patent. If this environment prevails in the future, the attractiveness of the country’s pharmaceutical industry to domestic and foreign investors will be affected adversely. Thus, it is imperative for the Canadian government to undertake a number of reforms with reference to the Intellectual Property Rights, viz. patenting. Some of the issues that the government should consider are evaluated herein.

Right of appeal

The Canadian government should consider the possibility of giving the pharmaceutical companies, which hold intellectual property rights, an opportunity to appeal any decision that is linked to the patent. Currently, the prevailing IP system underestimates the significance of IP rights to firms in the pharmaceutical industry as opposed to firms or investors in other economic sectors. One of the aspects that the Canadian government should consider entails providing the right to file a lawsuit against possible patent infringement.14

Patent term restoration

The Canadian government should formulate a system through which firms in the pharmaceutical industry can extend the pharmaceutical paten term. This move will provide the research-based organizations with a substantial amount of time to recoup the cost incurred in obtaining approval of their pharmaceutical product such as drugs by the relevant authorities. This approach will give the research-based companies an opportunity to market their products. Increasing the patent restoration period will further improve the effectiveness with which the pharmaceutical innovation efforts are socially beneficial. For example, the approach will improve the pharmaceutical companies’ investment in research and development. The ultimate effect is that the country’s research and development industry will experience a remarkable growth, hence translating into indirect economic benefits.

Growth in the research and development segment will lead to the creation of sustainable job opportunities, hence increasing the consumers’ disposable income and purchasing power. Furthermore, taking into consideration the patent term restoration period will improve the country’s effectiveness in dealing with counterfeit products within the pharmaceutical market segment. Counterfeiting in the pharmaceutical industry has been a major threat not only to sustainability of a country’s economic performance, but also the citizen’s health. The existence of counterfeit products in the market has been cited as one of the major causes of health risk faced by different countries. Through this move, Canada will be in a position to ensure that firms in the generic pharmaceutical market segment are not only focused on profit maximization by increasing the sales revenue15.

Data exclusivity

In its quest to improve the attractiveness of the pharmaceutical industry to investors, the Canadian government should give the research-based pharmaceutical companies enough data exclusivity period. This approach will ensure that investors within the industry are protected adequately. Moreover, this perception will lead to the development of the Canadian pharmaceutical industry through the entry of new investors.

Despite the significance of data exclusivity to the country’s pharmaceutical industry, the Canadian government should be cautious with reference to the time applicable to patents. The Canadian government should not assign extremely long durations to the patent period. Limiting the time applicable to patent will make the country’s pharmaceutical industry competitive by eliminating monopolistic practices by the large research-based pharmaceutical companies. The capital-intensive nature of the research-based pharmaceutical companies can lead to the development of monopolistic practices. For example, the companies might collude in their research, development, and price determination processes. These aspects might lead to unfair market prices, hence limiting the likelihood of consumers accessing social benefits.16

The available empirical evidence affirms that the integration of strong IP rights in the pharmaceutical industry increases the level of investment in R&D. This aspect translates into significant improvements in strengthening the competitiveness of a particular industry due to the ability to cope with emerging medical challenges. Limiting the time applicable to data exclusivity will make it possible for generic investors to venture into the industry successfully.

The entry of generic firms’ will increase the intensity of competition faced by the research-based companies. This assertion means that the price of the pharmaceutical products will be reduced considerably. The price of drugs tends to be relatively low in markets characterized by competition. This aspect shows that fair competition leads to pricing benefits that are difficult to achieve under monopolistic market conditions. The ultimate effect is that the patent system will be socially beneficial.

In the course of reforming the data exclusivity period applicable to firms in the pharmaceutical industry, it is imperative for the Canadian government to undertake extensive market research. The research should be aimed at understanding the approaches adopted by governments in the emerging economies. Through cross-country comparison, Canada will be in a position to develop attractive patent regimes that improve the environment for future innovation. Consequently, the Canadian pharmaceutical industry will become highly attractive to local and foreign investors.

Conclusion

The pharmaceutical industry in Canada is essential to the country’s economic development. Over the past decades, the Canadian government has been focused on promoting growth of the pharmaceutical industry. The government intends to achieve this goal by improving the attractiveness of the industry to local and foreign investors. One of the aspects that the Canadian government considers as critical in its pursuit for this goal relates to the formulation of effective Intellectual Property Rights. In line with this goal, the Canadian government has adopted a Patent Act, which guides investors within the industry. The patent mainly targets two main categories of investors, viz. the generic and the research-based companies.

Despite the efforts by the government to improve the country’s pharmaceutical industry, the current patenting system is characterized by considerable gaps. First, the patenting system does not provide adequate protection to the research-based companies. One of the most notable gaps relates to the failure of the patents to enhance fair competitive practices. Currently, the patenting system does not protect the research-based companies adequately. For example, the existing patenting system offers the generic companies within the pharmaceutical industry a shorter period within which their products move from the laboratory to market as compared to the research-based companies. This aspect highlights the fact that the patenting system in Canada promotes unfair competitive practices.

The existence of such patenting system within the country may limit the attractiveness of the industry to local and foreign investors. However, the Canadian government should make the necessary adjustment to the patenting system. Some of the issues that the Canadian government should consider in reforming the country’s patenting system include providing the research-based companies long patent term restoration period, right of appeal, and data exclusivity.

However, it is imperative for the Canadian government to ensure that the reforms do not have gaps that can lead to the emergence of monopolistic practices amongst the research-based pharmaceutical companies. One of the issues that the government should observe relates to limiting the applicable duration with reference to the data exclusivity period. By taking considering these elements, the Canadian government will be in a position to improve the extent to which the patenting system in the country’s pharmaceutical industry translates into socially beneficial outcomes. The industry will become highly attractive to investors, hence creating new jobs. Moreover, investment by new pharmaceutical companies will improve the country’s ability to cope with emerging health care challenges, which will further make the patenting system beneficial to society.

Bibliography

Adams, Christopher, and Vu Branter. “Spending on new drug development.” Health Economics 19, no. 2 (2009): 130-141. Web.

DiMasi, Joseph, and Henry Grabowski. R&D costs and returns: Handbook of Pharmaceuticals. New York: Oxford University Press, 2011. Web.

Fass, Josh, Arjun Athreya, Jackie Niu, Yanzhi Yang, and Yong Wu. “.” University of Virginia. Web.

Gendreau, Ysolde. An emerging intellectual property paradigm; perspectives from Canada. Cheltenham: Northampton Press, 2008. Web.

Guler, Isin, and Atul Nerkar. The impact of global and local cohesion on innovation in the pharmaceutical industry. London: John Wiley & Sons, 2011. Web.

Grabowski, Henry. “Patents, innovation and access to new pharmaceuticals.” Journal of International Economic Law 5, no.4 (2002): 849-860. Web.

Grabowski, Henry. “Evolution of the pharmaceutical industry over the past 50 years; a personal reflection.” International Journal of the Economics of Business 18, no. 2 (2011): 161-176. Web.

Ho, Cynthia. “.” University of Chicago. Web.

Iacobucci, Edward. “Innovation for a better tomorrow; a critique.” University of Toronto. Web.

“Innovation for a better tomorrow; closing Canada’s intellectual property gap in the pharmaceutical sector.” CIPC. 2014. Web.

Keon, Jim. “Canada’s patent laws promote genuine medical innovation.” Canadian Generic Pharmaceutical Association. Web.

Lechleiter, John. “How lax patent rules in Canada are suffocating life-saving innovation.” Forbes. Web.

Lilico, Andrew. Six issues in pharmaceutical industries: pharmaceuticals and government policy. New York: Cengage Learning, 2006.

Stigliz, Joseph, and Arjun Jayadev. “Medicine for tomorrow; some alternative proposals to promote socially beneficial research and development pharmaceuticals.” Columbia University. Web.

Footnotes

1 Christopher Adams and Vu Branter, “Spending on new drug development, Health Economics 19, no. 2 (2009): 130-141.

2 Henry Grabowski, “Evolution of the pharmaceutical industry over the past 50 years; a personal reflection,” International Journal of the Economics of Business 18, no. 2(2011): 161-176.

3 Andrew Lilico, Six issues in pharmaceutical industries: pharmaceuticals and government policy (New York: Cengage Learning, 2006), 42.

4 Joseph DiMasi and Henry Grabowski, R&D costs, and returns: Handbook of Pharmaceuticals (New York: Oxford University Press, 2011), 38.

5 Ysolde Gendreau, An emerging intellectual property paradigm; perspectives from Canada (Cheltenham, UK: Northampton Press, 2008), 145.

6 Ibid, 147.

7 Cynthia Ho, “Patent distortion; do patents promote pharmaceutical innovation,” University of Chicago. Web.

8 Isin Guler and Atul Nerkar, The impact of global and local cohesion on innovation in the pharmaceutical industry (London: John Wiley & Sons, 2011), 540.

9 Ibid, 112.

10“Innovation for a better tomorrow; closing Canada’s intellectual property gap in the pharmaceutical sector,” CIPC. Web.

11 Josh Fass, Arjun Athreya, Jackie Niu, Yanzhi Yang, and Yong Wu, “Managing innovation: a social benefit analysis of patents and alternatives,” University of Virginia. Web.

12 John Lechleiter, ‘How lax patent rules in Canada are suffocating life-saving innovation,’ Forbes. Web.

13 Edward Iacobucci, “Innovation for a better tomorrow; a critique,” University of Toronto. Web.

14 Jim Keon, “Canada’s patent laws promote genuine medical innovation,” Canadian Generic Pharmaceutical Association. Web.

15 Joseph Stigliz and Arjun Jayadev, “Medicine for tomorrow; some alternative proposals to promote socially beneficial research and development pharmaceuticals,” Columbia University. Web.

16 Henry Grabowski, “Patents, innovation and access to new pharmaceuticals,” Journal of International Economic Law 5, no.4 (2002): 849-860.

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