The Importance of Not Penalizing Pharmaceutical Innovation and Favouring Timely Access to New Drugs

Economic Note showing how price reduction policies can lead to longer access delays by discouraging research and development as well as the marketing of pharmaceutical innovations

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This Economic Note was prepared by Emmanuelle B. Faubert, Economist at the MEI. The MEI’s Health Policy Series aims to examine the extent to which freedom of choice and entrepreneurship lead to improvements in the quality and efficiency of health care services for all patients.

Numerous studies have addressed, from various angles, the question of innovative drugs, notably by examining the importance of these innovations as well as the access issues stemming from price reduction policies. In Canada, there has recently been a renewed focus on reducing drug prices,(1) whereas in the United States, the government blames high prices on the fact that other countries, including Canada, enjoy lower prices.(2)

This stems among other things from several measures adopted by the Canadian government in recent years aiming to control the prices at which new drugs are introduced. These policies, though motivated by legitimate objectives of controlling spending, can lead to longer access delays by discouraging research and development as well as the marketing of pharmaceutical innovations.(3) It is therefore important to remember how pharmaceutical innovation contributes to the health of the population, and how the decisions of the Canadian government, notably in prioritizing low prices, lead to undue delays in accessing new treatments, and are now fuelling tensions with our southern neighbour.(4)

The Importance of Timely Access

Many studies have shown that pharmaceutical innovations are very beneficial for patients. They provide them with treatments that are more effective, better targeted therapeutically, and accompanied by less harmful side effects. The important role played by pharmaceutical innovation in increasing the population’s life expectancy and reducing infant mortality has also been amply demonstrated(5) (see Table 1). Innovative drugs allow patients not only to live longer, but also to maintain a better quality of life over a longer period of time, despite illness.(6)

These studies have also shown that the benefits of pharmaceutical innovation generally outweigh the costs, despite the often high prices of these new treatments compared to older treatments. Indeed, one of the main advantages of drug innovation is the reduction in spending associated with other health system resources, notably through fewer hospital visits, shorter hospital stays, or the replacement of surgical interventions which are often very costly in terms of human, material, and financial resources.

One Canadian study covering the period from 1980 to 2002 estimated that each dollar invested in innovative and generic drugs had entailed a median reduction of between $1.05 and $1.50 in hospital and other healthcare spending, without affecting life expectancy.(7) Although spending levels for drugs and health have changed substantially since this period, we can nonetheless conclude that innovative drugs thus contribute to reducing costs elsewhere in the healthcare system.(8)

Innovative drugs allow patients not only to live longer, but also to maintain a better quality of life.

These pharmaceutical innovations also generate productivity gains, notably by reducing the number of workdays lost and school days missed.(9) By improving patients’ health more quickly, they favour a quicker return to work, and extend the period during which they remain likely to contribute to economic activity.

However, a determining factor of the cumulative benefits associated with these drugs remains the delay before their marketing or their addition to provincial lists of covered drugs. Several years can elapse between a new drug’s authorization in Canada and its effective use by patients, thus postponing its benefits both for them and for society as a whole.

Obstacles to Innovation

Pharmaceutical innovation is a long and risky process. It mobilizes hundreds of researchers for many years in laboratory to develop a single drug,(10) followed by several years of clinical trials required for its approval.(11) This is therefore a particularly costly area of research. Between 2000 and 2018, the average cost of developing a new drug, taking into account the research failures and the cost of capital, was estimated in the United States at US$879.3 million (in 2018 dollars).(12) These costs can even reach several billion dollars if we include all the expenditures required to bring a drug to market.(13)

These investments of capital, labour, and time are necessary to develop drugs that are safe and effective. However, on top of these inherent constraints, artificial barriers undermine access to innovative drugs.

It is essential for these investments to be profitable if pharmaceutical innovation is to be sustained. When prices are kept too low, pharmaceutical research is affected in two ways. First, decisions to invest in research and development are made on the basis of anticipated earnings in a context of high uncertainty, where price reductions can lead to the abandonment of research projects deemed too risky or unlikely to be profitable. Second, price controls that are too rigid weaken the incentives for future innovation.

The average cost of developing a new drug was estimated at US$879.3 million.

In Canada, approval of a new drug by Health Canada is followed by an evaluation of its clinical and economic value (cost-utility) by the Institut national d’excellence en santé et en services sociaux (in Quebec) and by Canada’s Drug Agency (in the rest of Canada), which issue reimbursement recommendations.(14) In parallel, the Patented Medicine Prices Review Board (PMPRB) sets a maximum legal price by conducting internal price referencing with other therapeutic substitutes, when possible, or based on the median price at which this new drug is sold on international markets (external price referencing).(15)

The price is then negotiated by the pan-Canadian Pharmaceutical Alliance (pCPA). These agreements feature confidential rebates and sometimes price-volume clauses. The result is therefore not a new official price (which often remains unchanged) but a price actually paid by the public plans that accept to cover it. The pCPA does not publish the size of the confidential rebates obtained in the context of these individual negotiations. In the annual reports of the Régie de l’assurance maladie du Québec, the sums obtained through these agreements are made public. In 2024-2025, these rebates totalled over $1.2 billion in Quebec.(16)

Historically, the PMPRB used seven reference countries for the international comparison, the PMPRB7.(17) Of these countries, only Switzerland and the United States had prices that were generally higher. Since July 1st, 2022, the PMPRB has been basing its comparison on eleven OECD countries (PMPRB11), after having added six new countries and removed Switzerland and the United States from the list (see Figure 1). The result is increased downward pressure on the prices of new drugs. This change weakens the profitability of drug innovations and, consequently, reduces the attractiveness of Canada for pharmaceutical innovation.

When manufacturers start to market their innovations in different countries, they inevitably choose to prioritize more profitable markets. In Canada, the market is generally considered more limited, due to a relatively small population. Moreover, the prices of patented drugs are tightly regulated by the PMPRB, to which is added a particularly demanding price negotiation process with the pan-Canadian Pharmaceutical Alliance.

Even when price ceilings remain relatively high, the anticipation of prolonged delays and a laborious regulatory process can be enough to postpone drug launches and relegate Canada to a lower position in the launch sequence. For example, Canadian researchers recently showed that the proportion of drugs presenting major therapeutical benefits marketed in Canada within two years of their global launch went from 46% in 2018 to 31% in 2021, suggesting a decline in timely access to the most important innovations following the reform of the PMPRB’s basket of reference countries.(18)

The proportion of drugs presenting major therapeutical benefits marketed in Canada within two years of their global launch went from 46% in 2018 to 31% in 2021.

When governments ramp up the pressure on the pharmaceutical industry to considerably reduce the prices of new drugs, manufacturers tend to favour launching their products in other markets, which further lengthens access delays in Canada.

These constraints are on top of an already long approval and marketing process, and delay access to innovative drugs even further.(19) For example, Canadian patients wait on average nearly two and a half years (29.8 months or 906 days) between approval by Health Canada and coverage by public drug insurance plans.(20) It is therefore not surprising that Canada is last among the G7 and 19th out of 20 OECD countries in terms of approval delays for innovative drugs.(21)

Furthermore, the effects of long negotiations in Canada go beyond our national borders. By exerting downward pressure on drug prices, they undermine the coherence and viability of an external reference pricing system. This system complexifies marketing decisions, increases regulatory uncertainty, delays launches, and hampers the dissemination of innovations.(22) Indeed, it is in this context that the American administration adopted its “Most Favored Nation” decree, which aims to reduce the prices of drugs in the United States, a measure likely to have a negative effect on pharmaceutical innovation, to the detriment of patients around the world and at the price of increased trade tensions.(23)

Public Policy Recommendations

To fully benefit from pharmaceutical innovations, it is essential to adopt policies that favour research in this sector and ensure timely access to new treatments. In order to stimulate this research, it is important not to prevent pharmaceutical companies from earning a return on the investments required for innovation, notably when the PMPRB determines the maximum sale price and the pan-Canadian Pharmaceutical Alliance negotiates rebates through registration agreements.(24)

In this context, the PMPRB’s reference basket should reintegrate markets with strong innovative capacity—notably the United States and Switzerland—in order to improve the predictability of the regulatory framework, without calling into question existing mechanisms for the approval, oversight, and evaluation of the clinical and economic value of new drugs.(25) The systematic pursuit of the lowest possible prices ultimately comes at the expense of future patients.

Canada is last among the G7 and 19th out of 20 OECD countries in terms of approval delays for innovative drugs.

Moreover, nothing justifies such long delays for drug approvals. For one thing, certain purely administrative delays could be eliminated.(26) When a molecule has already been approved by authorities recognized for their rigorous standards, those decisions should be taken into account, and Canadian procedures should be accelerated in order to improve access for patients.

Finally, concrete measures should be put in place to accelerate access to pharmaceutical innovations approved by Health Canada, but awaiting negotiation. The pilot project launched by Ontario this year for a few cancer drugs could serve as a model. This kind of approach should be generalized to all innovative drugs across the country.(27) This would allow Canadian patients to benefit more quickly from the therapeutic effects of innovative treatments approved by Health Canada, even before they are added to the lists of drugs covered by public plans.