Montreal, April 1, 2004 – An Economic Note published today by the Montreal Economic Institute (MEI) concludes that the federal government’s current policy of price controls on patented drugs makes R&D investment less attractive and may result in a decline in Canadian pharmaceutical research.
“The Patented Medicine Prices Review Board, which controls the launch price for drugs and then caps further increases, establishes prices at an artificial level that harms innovation and the production of new medications,” according to Mr. Valentin Petkantchin, MEI’s research director.
The damaging effects of these price controls will be most evident in Quebec, as this province has the highest concentration of pharmaceutical R&D, with 42.3% of all Canadian spending.
The current administrative price fixing also forces Canadians to pay for older medications that cost more than they would if the controls did not exist, the MEI researcher says.
This distortion of the price structure is another perverse effect of price controls. The cost of medications currently on the market serves as the basis of comparison when setting prices for new ones. Companies therefore keep those prices high so that they can launch new medications at prices that allow them to recover costs.
The abolition of price controls would not result in a general increase in prices, since the distortion caused by this control would cease to exist and there would be pressure to lower the prices on older and non-patented medications.
In this regard, factors specific to the U. S. explain the higher prices for our neighbours to the south. Between one-third and one-half of the difference in Canadian and American prices is due to lawsuits in the United States. A large part of the remaining difference is explained by the significant gap in the living standards and incomes between Canada and the United States. Companies adjust their prices according to the purchasing power in specific markets where they sell their products.
The document, titled Drug Price Controls and Pharmaceutical Innovation, was sent to Canada’s Minister of Health and all members of the House of Commons Standing Committee on Health. The author of the Economic Note, Valentin Petkantchin, is available for interviews.
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