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how to build a pharmaceutical
industry:
québec’s story
by david griller and daniel denis
ISBN 978-0-9811583-0-3
Price $24.95
How to Build a Pharmaceutical Industry:
Québec’s Story by
David Griller
and
Daniel Denis
Copyright© 2008 by SECOR Consulting Inc.
All Rights Reserved. Printed in Canada. No part of this book may be used or
reproduced in any form or by any means, or stored in a database or retrieval
system, without prior written permission of the publisher except in the case
of brief quotations embodied in critical articles and reviews. Making copies
of any part of this book for any purpose other than your own personal use
is a violation of Canadian Copyright Laws. All requests for reproduction
may be addressed to: SECOR Consulting Inc. 555 René-Levesque West,
Montréal, H2Z 1B1.

ABOUT THE AUTHORS
David Griller is a partner in
SECOR
Consulting
and has a passion for life sciences. His clients
range from major pharmaceutical companies
to small biotechnology firms involved in
drug discovery and diagnostics. David also
works with the public sector providing advice
on policy and technology trends. He has a
Ph.D. in Chemistry from University College
London and is a fellow of both the Royal
Society of Canada and the Canadian Institute
of Chemistry.
David spent half his career as a research chemist at the National Research
Council of Canada and the other half in business. He has worked in
management, strategic planning, and consulting with Plastic Constructions
Inc. Deloitte Haskins and Sells, and KPMG.
Daniel Denis is a specialist in regional development and economic
analysis. He is a partner in SECOR Consulting and has also served as its
President. Daniel has a Masters in Economic Science from the Université
de Montréal.
Daniel’s consulting practice covers a range of activities from strategic
and business planning with firms in high-tech sectors to the management of
research and its economic impacts. With his broad knowledge of Québec’s
economy, he is a frequent commentator on economic affairs in the media.
Daniel has worked extensively with the pharmaceutical industry in Québec
and with hospitals and research institutions.
Prior to joining SECOR, Daniel was an economist with the National
Bank of Canada.
about secor
SECOR Consulting is Canada’s largest strategy consulting firm. SECOR’s
clients are mainly large companies that want frank, pragmatic advice on
how to build for the future. SECOR’s consultants work closely with senior
managers.

SECOR’s practice in life sciences has grown very rapidly over the last
decade. Clients include firms of all shapes and sizes including a number
of major pharmaceutical companies. SECOR has worked with federal and
provincial governments as well as organizations that work to promote
innovation. Canada’s economic and social well-being depends on innovation.
This is what drives SECOR and its clients.
Acknowledgements
The authors would like to thank Mark Legault of Pfizer Canada Inc. for his
continuous support and advice in the development of this book.
We also express our appreciation to our colleagues at SECOR. Vicky
Wong helped us with extensive research, particularly on European public
policies related to the pharmaceutical industry. Marcel Côté, Michel Leblanc,
and Philippe Martel gave us very helpful advice on the development of the
text and on the public policies that helped make Québec’s pharmaceutical
sector flourish. We also thank Hugues Lachance of KPMG for sharing data
on Québec’s fiscal approach.
About the
Authors
TABLE Of CONTENTS
About the Authors
i
1 How Did Québec Build a Pharma Industry?
1
1.1 The Story in a Nutshell
1
1.2 How Québec Succeeded
1
2 Innovation Fixes a Faltering Economy
3
2.1 Social Upheaval and Dying Industries Weaken the Economy
3
2.2 The Community Supported Innovation
4
2.3 Levering Québec’s Rich Intellectual Assets
5
2.4 Who Is Responsible for What in Canada?
5
2.5 Changes in Policies on Intellectual Property
6
2.6 Improvements in Intellectual Property Protection
7
2.7 Québec Captures a Major Share of R&D Investment
8
2.8 Sustained Effort Pays Off
9
3 A Brief Portrait of Québec’s Life Sciences Sector
11
3.1 The Life Sciences Sector
11
3.2 Urban Geography
11
3.3 Pharmaceutical and Biotechnology Companies
11
3.4 Clinical Research Organizations
12
3.5 Publicly funded Research Organizations
12
3.6 Public Research funding
15
3.7 Venture Capital
15
3.8 Examples of Organizations Supporting the Cluster
16
3.9 A Healthy Cluster
17
4 Economic Benefits
19
4.1 Investments in R&D
19
4.2 R&D in Québec Compared to Sales
20
4.3 Employment
23
4.4 financial Impact on Quebec’s Economy
27
4.5 Taxes Paid
28
4.6 Summary of Economic Impacts
29
5 Québec’s Sustained Pro-Pharma Policies
31
5.1 Additional Initiatives
31
5.2 Corporate Tax Rates
31
5.3 R&D Tax Credits
34
5.4 The “fifteen Year Rule”
36
5.5 What if Québec Had Not Taken a Pro-Pharma Stance?
38
5.6 Lesson’s from Québec’s Experience
40
6 Québec’s Approach To Pharmaceutical Insurance
43
6.1 Insurance for Pharmaceutical Products in Canada
43
6.2 Lack of Actuarial Soundness in Drug Insurance
44
6.3 Québec’s Approach to Pharmaceutical Insurance
45
6.4 Québec’s 2007 Policy on Medications
46
6.5 Interprovincial Comparisons
47
6.6 Conclusion
48
7 Could Canada Do More to Build the Sector?
49
7.1 Progress Since the Nineteen-Eighties
49
7.2 Why Innovation in the Pharmaceutical Industry is Unusual
49
7.3 Canadian Mechanisms that Control Access
51
7.4 What Improvements Could be Made?
52
7.5 Summary
54
8 International Winners and Losers
55
8.1 The Public Policy Dichotomy
55
8.2 The Locus of R&D Has Moved from Europe to North America
56
8.3 Some Examples of the Transition
59
8.4 Why Did R&D Shift from Europe?
60
8.5 Examples of Price Control Schemes
61
8.6 Bayer’s Experience with Gray Markets
62
8.7 Some Disagree with the Concept of R&D Migration
62
8.8 Potential Impact of China and India
64
8.9 Conclusion—Canada and Québec at the Crossroads
66
9 Lessons Learned From Québec’s Experience
67
9.1 What Can Be Learned from Other Regions?
68
9.2 Can Québec Continue to Grow its Industry?
69
9.3 The Bottom Line
69
Appendix 1: Pharmaceutical Sector Profile
71

1
HOW DID QUéBEC BUILD A PHARMA INDUSTRY?
1.1 the story n a nutshell
Québec is Canada’s second largest province. With 7.6 million people it
makes up 24% of Canada’s population. The Montréal region is the engine
of Québec’s economy and the jewel in Montréal’s industrial crown is the
biopharmaceutical industry. Montréal is home to much more than a
biotechnology cluster although Québec has many biotech firms. Montréal
attracts almost half of Canada’s multinational pharmaceutical investments
and, by most metrics, is a worthy international competitor to any other city
renowned for its pharmaceutical industry.
Was this an accident of history? Were Quebec’s researchers and
infrastructure a “must have” for pharmaceutical firms? Did Québec buy its
good fortune with subsidies and grants or did it act wisely over time to build
its pre-eminent position?
In a nutshell, Québec built its pharmaceutical industry through a
reaction to economic adversity. In the mid-1980s the economy of the
Montréal region faltered. Politicians and business leaders mobilized their
efforts to focus on three major knowledge-based sectors, pharmaceuticals,
aerospace, and information and communications technologies (ICT). Over
the next two decades these sectors helped revitalize both the economy of
Montréal and that of Québec as a whole.
1.2 how québec succeeded
Nothing came easily especially in the pharmaceutical area. Québec worked
hard with the federal government to ensure that the pharmaceutical
industry was awarded proper patent protection. As a pharmaceutical
insurer, the province offered a broad formulary of drugs. In addition,
Québec introduced the “15 Year Rule”. Under the rule, patented drugs are
reimbursed for 15 years after they are listed on the province’s formulary
even if less expensive generic versions become available. These initiatives
were more than compensated for by the tax revenues generated by the
thriving pharmaceutical industry.
1
2
How Did
Québec
Build a
Pharma
Industry?
At the global headquarters of pharmaceutical firms, investment priorities
were evaluated country by country and region by region with cost of doing
business, market access, and pricing being key determinants. By consistently
sending positive signals that it was open and ready to do business, Québec
captured more than its fair share of the industry’s spending.
In religion, a person’s faith is not judged in absolute terms but on whether
he or she is ascending or descending the ladder of piety. So it is with the
investments of multinational pharmaceutical firms. They respond more to
changes in the direction of public policy than to absolute positions. for
twenty years Québec has been moving steadily in a positive direction. In the
main, this is what it took to succeed.
3
INNOVATION fIxES A fALTERING ECONOMY
2.1 socal upheaval and dyng ndustres weaken the economy
Montréal is everything that a great city should be. Built on hills and
cascading down to the broad expanse of the St. Lawrence River, it is a fusion
of villages, each with its unique culture and character. Montréal drives
Québec’s economy but in the mid 1980s, Montréal was in crisis.
The province had been through two decades of dramatic social change.
In the 1960s, influential Québecers precipitated the “quiet revolution”.
1
They
held the view that the province had fallen behind Western ways and values
especially in education and in the role of the state. Québec entered a period
of modernization that involved the rise of secularism and an enhanced role
for government. Networks of state universities and public colleges were
established. Hydro Québec, the electricity giant, was formed through a
program of nationalization as was a state pension fund—Caisse de dépôt et
placements du Québec.
The changes kept coming irrespective of which political party was in
power. However, the Charter of the french Language—Bill 101—was
transformative.
2
It defined the linguistic primacy of french when English
was Québec’s language of business. The Bill recognized the fact that 80% of
Québecers used french in their daily lives but it shook the confidence of the
Anglophone community. Many thousands of Anglophone entrepreneurs
left the region and many important corporate head offices were relocated. In
1952, for example, Montréal was home to 20% more head offices of financial
institutions than was Toronto. By 1988 it had 60% less. US investments
in the Canadian automobile sector in the region around Toronto and
heavy Québec taxes on high wage earners spurred the migration.
3
The
transformation hurt the economy of Montréal.
1 See for example: http://faculty.marianopolis.edu/c.belanger/quebechistory/events/quiet.htm;
http://history.cbc.ca/history/?MIval=EpisContent&series_id=1&episode_id=16
2 http://www.oqlf.gouv.qc.ca/english/charter/index.html
3 « Pour un redressement durable. Plan stratégique du Grand Montréal. »
Gouvernement du Québec 1992.
2
4
Innovation
Fixes a
Faltering
Economy
In the midst of this social upheaval, heavy industry in Montréal went
into a downward spiral. The plants and factories in the east-end of the city
fell into deep decline just as they did in Pittsburgh, Cleveland, and the mill
towns of Northern England. By 1988 the unemployment rate in Montréal
stood at 9.3% which was the highest of all major conurbations in North
America.
The economy of Montréal and, hence, of Québec stalled.
2.2 the communty supported nnovaton
The federal government commissioned a strategic planning exercise to
revitalize Montréal that was documented in the “Picard Report”. The
report identified economic priorities—pharmaceuticals, aerospace and
information and telecommunications technologies (ICT) among them—and
made little or no effort to resurrect those industries that were failing. The
report insisted on a new territory for action, that of the city-region, which
embraced the Municipality of Montréal and the surrounding urban area.
The report saw Montréal as an international player being close to New York
and other major financial and industrial centers on the Eastern Seaboard
of the US.
The plan did not trigger immediate investment but provided a conceptual
framework for future thinking and action. It was supported by all levels of
government and by the major trade union of the province, the federation
of Workers of Québec (fTQ). One key action that followed the report was
the introduction of generous research and development tax credits that did
much to encourage the development of the high-tech sector.
4
The plan was not revolutionary but evolutionary. Québec was building a
new industrial culture. Academics, politicians, public servants, and business
leaders were jointly developing ideas on industrial clusters and how to grow
them.
5
They developed a community purpose that transcended political
divides and they established public policy instruments and financial
investment tools to achieve their goals.
6
Interestingly San Diego stalled economically some years after Montréal.
The Cold War ended and San Diego’s indigenous defense industries
sputtered. The community rallied around essentially the same industries
4 J-A. Boudreau, P. Hamel, B. Jouve, and Roger Keil: Progress in Planning, vol.66, pp7, 2006.
5 See for example: http://www.cirst.uqam.ca/chaire_gestion/pdf/Niosi-Bas-EPS2003.pdf
6 See: http://www.sandiego.gov/economic-development/glance/economy.shtml
5
Innovation
Fixes a
Faltering
Economy
that Québec favored and built highly successful biopharmaceutical and ICT
sectors. In Québec and San Diego, economic adversity triggered intelligent
policies and broadly-based community action aimed at rebuilding through
innovation.
2.3 leverng québec’s rch ntellectual assets
The Picard Report turned its back on Québec’s old industrial economy and
targeted knowledge-based industries for economic growth. Montréal was
ideally suited to this purpose. Its renowned centers of higher education—
McGill University, Université de Montréal, école Polytechnique, école des
Hautes études Commerciales, and the Université de Québec à Montréal—
produced the highly qualified people needed by the new economy.
McGill and its affiliated teaching hospitals provided an excellent nucleus
of biomedical research. Indeed, pharmaceutical firms had been drawing on
this rich resource since the early years of the twentieth century. However,
major shifts in provincial policies had to be deployed to lever these
impressive assets to the full. Québec argued convincingly for improvements
in Canada’s intellectual property protection and also developed its own
policies to encourage the pharmaceutical industry. In Canada’s federal
system bringing about these changes was not easy.
2.4 who s responsble for what n canada?
The Canadian federal system is a complex web of political relationships. The
structural integrity of the web is maintained through tension between the
provincial and federal governments. Money and control keep relationships
taut especially in the delivery of healthcare, now the major item of
expenditure in all provincial budgets.
The Canada Health Act is a federal statute that guarantees access to
healthcare for all Canadians.
7
However, it does not specify how healthcare
is to be managed and delivered. This is left to the provinces. Interestingly,
Canada is one of the few remaining countries on earth that bans privately-
funded healthcare, making the provinces the exclusive suppliers of
services and the managers of health outcomes. Somewhat surprisingly,
the current Canada Health Act and its predecessors do not guarantee
7 http://www.hc-sc.gc.ca/ahc-asc/media/nr-cp/2002/2002_care-soinsbk4_e.html
6
Innovation
Fixes a
Faltering
Economy
access to pharmaceutical products.
8
In 1957 and 1968 when key federal
laws on healthcare were promulgated, relatively few drugs were available
and constituted a minor component of expenditures. The last major piece
of federal healthcare legislation eliminated user fees for medical services.
Access to drugs was again left out; it was as simple as that.
All provinces have developed some kind of pharmaceutical insurance
coverage for seniors, people with disabilities, and those needing social
assistance. Most also provide catastrophic drug coverage to cover cases
where a family’s drug bill consumes an excessive amount of its income.
9

However, roughly half of all Canadians receive some kind of pharmaceutical
coverage from their employers and are not covered by government plans.
Public policy makers in provincial governments are very much aware
of the interplay between industrial policy, healthcare delivery and the cost
of pharmaceutical products which has risen rapidly in recent years. Most
have tried to manage healthcare expenditures through cost-containment
practices. They have paid relatively scant attention to the impact of these
efforts on industrial innovation or, indeed, health outcomes. Québec took
a different view and paid careful attention to the relationship between
healthcare and industrial policies beginning with its support for enhanced
intellectual property rights in the mid-1980s.
2.5 changes n polces on ntellectual property
Up until the early 1990s, Canada provided only meager pharmaceutical
intellectual property rights. Under a “compulsory licensing” scheme
established in 1923, Canada had allowed generic drug firms to copy and
market patented products before patent expiry. A condition of licensing was
that the active ingredient be manufactured in Canada. The patent holder
received a small royalty in return.
In 1969, the Act was amended to allow generic drug companies to
import active ingredients and to formulate them into final products for
sale. The royalty rate paid to brand firms was 4%. The Act created a golden
opportunity for the generic drug industry. Several talented entrepreneurs
quickly built highly successful companies: Barry Sherman—Apotex
(Toronto), Leslie Dan—Novopharm (now owned by Teva, Toronto), and
8 http://www.hc-sc.gc.ca/ahc-asc/media/nr-cp/2002/2002_care-soinsbk4_e.html
9 See: “Drug Expense in the Canadian Population: Protection from Severe Drug Expenses” fraser Group
– Tristat Resources August 2002.
7
Innovation
Fixes a
Faltering
Economy
Morris Goodman and Ted Wise—Pharmascience (Montréal). These firms
remain leading players in Canada’s generic drug industry.
Canada’s policies built a strong generic drug industry but effectively
abrogated international standards for intellectual property (IP) rights.
Under pressure from the brand-name pharmaceutical industry, the federal
government established a Commission of Enquiry on the Pharmaceutical
Industry in 1984.
10
The Commission did not find a great deal wrong with
the compulsory licensing approach and recommended some modest
IP enhancements and a complex formula for paying royalties to patent
holders.
In Québec, however, a broadly-based coalition of business leaders,
industry organizations, and politicians pushed the federal government
hard for much better patent protection than the Commission of Enquiry
proposed. The coalition was successful and federal legislation went much
further than the Commission recommended.
2.6 mprovements n ntellectual property protecton
Bill C-22 passed into law in 1987. It provided substantial improvements to
the rights of Canadian pharmaceutical patent holders. following regulatory
approval of a product by Health Canada, a brand-name manufacturer
received 10 years of protection from compulsory licensing if the generic
firm proposing to copy the product imported the active ingredient. It
received 7 years if the ingredient was manufactured in Canada. The Bill
also created the Patented Medicines Prices Review Board.
11
This is a quasi-
judicial body designed to ensure that prices charged by patent holders are
not excessive.
12
In return for these improvements, the Pharmaceutical Manufacturers
Association of Canada made the commitment that its member companies
would increase the ratio of R&D to sales to 8% by 1991 and to 10% by 1996.
This was a substantial increase over the figure of 4.9% reported in 1984.
Industry did indeed meet the targets.
10 The “Eastman” commission.
11 http://www.pmprb-cepmb.gc.ca/
12 The PMPRB has steadily transformed itself into a price regulating body contrary to the intent of the
original legislation.
8
Innovation
Fixes a
Faltering
Economy
In 1991-1992 Canada was negotiating the North American free Trade
Agreement
13
with the US and Mexico. It was under pressure to subscribe
to international patent norms. Bill C-91 came into force in 1992. The
Bill honored international norms, and abolished compulsory licensing
altogether.
2.7 québec captures a major share of r&d nvestment
Of course, the pharmaceutical industry argued in favor of these
improvements to patent rights. As importantly, the Government of Québec
lobbied hard with the federal government to upgrade rights as part of its
plan to encourage pharmaceutical investment in the province. Québec also
made substantial increases in tax credits provided to firms involved in R&D
at precisely the time that Bill C-22 came into law.
14
By contrast, Ontario
with its important generic drug industry was less enthusiastic. When the
dust settled, industry clearly understood that its support came from Québec
and it weighted its investments accordingly.
Québec continued to send positive signals to the brand-name
pharmaceutical industry. The provincial drug plan generally listed more
pharmaceuticals for reimbursement than other provinces. In addition,
Québec insisted on receiving “Best Available Canadian Price” from firms.
In return, it allowed doctors to prescribe and patients to demand brand-
name products for a period of fifteen years after their initial listings on
the provincial formulary and even if less expensive generic versions were
available. Québec’s approach did not in fact cost a great deal but it did
generate a huge amount of goodwill.
We revisit these public policies in Chapter 4 to see, in detail, how
much they cost the province and the extent to which they encouraged
investment.
Québec also undertook a series of tactical initiatives to encourage the
growth of the pharmaceutical industry. It secured a major new federal
laboratory—the Biotechnology Research Institute—to support emerging
biotechnology companies. It helped create networking organizations
such as Montréal International, BioQuébec, and Montréal In-vivo. In
addition the province was quick to provide supporting funds to match
13 The agreement essentially contained the so-called “Dunkel Text” negotiated at the international
General Agreement on Tariffs and Trade. See: http://www.google.ca/search?q=dunkel+text+trips
14 B. Pazderka, Canadian Public Policy Vol. 25, pp29, 1999.
9
Innovation
Fixes a
Faltering
Economy
federal investments made through the Canada foundation for Innovation
and Genome Canada. The foundation provides financial support for
infrastructure in universities and research institutions. The combined efforts
of Genome Canada and the provincial government led to the formation
of Génome Québec which finances and oversees large-scale genomics and
proteomics research projects.
Over the entire period, Québec captured 41% of the national investment
in the pharmaceutical sector despite having only 24% of Canada’s population.
Ontario averaged 43% with 39% of the population. The compound annual
growth rate of pharmaceutical investment in Québec was a staggering
11.3% over the period, almost three times greater than the growth in the
economy as a whole.
Source: Patented Medicines Prices Review Board
2.8 sustaned effort pays off
Most regions target high-tech sectors as engines for economic growth.
Biotechnology and pharmaceuticals are always on the agenda. Research in
life sciences has undergone explosive growth in the last few decades due
mainly to the advent of recombinant DNA technologies and extraordinary
10
Innovation
Fixes a
Faltering
Economy
advances in our understanding of the role of genomics. Communities
simply want to lever the huge public research investments being made in
these fields in their local universities and hospitals.
Success in building biopharmaceutical industries has often been elusive.
Of 51 centers in the US that targeted pharmaceutical growth only 9 succeeded
to a substantial extent.
15
San francisco and Boston were early adopters of
biotechnology in the 1970s. San Diego, Seattle, and Rayleigh-Durham built
on well-funded medical research establishments. Washington/Baltimore is
the home of the federally funded National Institutes of Health that did much
to pioneer gene mapping. Los Angeles hit a “home-run” by being home
to the largest biotech firm in the US—Amgen. However, New York and
Philadelphia draw their strength from the presence of major pharmaceutical
companies.
Given the experience in the US, building a successful biopharmaceutical
cluster has only about a 20% chance of success. Public policy makers,
therefore, need to seize on every advantage to make a life sciences cluster
work. Québec wisely levered the presence of multinational pharmaceutical
firms on its territory. Montréal, like New York and Philadelphia, relied on
these companies to anchor its biopharmaceutical development.
Québec’s achievements were not simply built on a few initiatives
going back to the mid-1980s. They reflect sustained commitment to the
industry with support for building social networks, enhancing publicly
funded research, strategic management of the provincial drug formulary,
and good pharmaceutical reimbursement policies. These initiatives
transcended political party interests and were protected by a dedicated
public service. The sustained public policy commitment and the presence
of multinational pharmaceutical firms as anchor tenants have been the
keys to Québec’s success.
15 http://www.brookings.edu/~/media/files/rc/reports/2002/06labormarkets_
joseph%20cortright%20and%20heike%20mayer/biotech.pdf
11
A BRIEf PORTRAIT Of QUéBEC’S LIfE SCIENCES SECTOR
3.1 the lfe scences sector
16
Québec’s life-sciences sector counts almost 400 businesses, 25,000 employees,
and 13,000 researchers in publicly funded institutions. Specialties include
neurology, oncology, cardiology, immunology, and genomics.
3.2 urban geography
In many cities that aspire to build biopharmaceutical sectors, hospitals and
universities are landlocked in the downtown core by expensive real estate.
firms generally locate in suburban areas where commercial real estate is
less expensive. Having good transportation access between downtown and
the suburbs really matters if firms and publicly funded researchers are to
collaborate effectively.
The greater Montreal area is home to most of Québec’s biopharmaceutical
industry. Its urban geography works fairly well except of course at the height
of rush hours. Universities and hospitals are mainly located in the core of
the city. Pharmaceutical firms are spread out along Highway 40, the main
access route from the West and along Highways 13 and 15 which run north.
The trip from pharmaceutical territory to the downtown core takes 15 to
20 minutes by car. Montréal also has a very efficient public transportation
system including an extensive and heavily-used metro.
3.3 pharmaceutcal and botechnology companes
Some 30 international pharmaceutical firms have their Canadian head
offices in Québec. Major players in Québec include: Abbott Laboratories,
AstraZeneca, Boehringer Ingelheim, Bristol-Myers Squibb, GSK Bio,
Johnson & Johnson, Merck frosst, Novartis, Pfizer, sanofi-aventis, Servier,
and Wyeth. Essentially all conduct clinical research in Québec.
16 Investissement Quebec “Life Sciences - Québec: A Dynamic and Profitable Business Environment”
3
12
A Brief
Portrait of
Québec’s
Life Sciences
Sector
Several multinational pharmaceutical companies conduct discovery
research in the province. Collectively, they employ some 1,000 laboratory
researchers. AstraZeneca, Boehringer Ingelheim Canada, GlaxoSmithKline
(GSK Bio), and Merck frosst Canada are among the major players.
Pharmaceutical manufacturing accounts for one-third of the industry’s
workforce (3,000 people) spread across 30 manufacturers (see Appendix 1
for details).
Medium and small-sized firms in the pharmaceutical industry are
generally referred to as “biotechnology” companies. In Québec, their main
focus is human health with 75 companies employing more than 2,100
people (see Appendix 1 for leading firms).
3.4 clncal research organzatons
Montréal ranks 15th out of 102 cities around the world as an ideal center
for the conduct of clinical research. It ranks higher than all US locations
and, in Canada, is only outranked by smaller centers such as Halifax (Nova
Scotia) and Sherbrooke (Québec).
17
Clinical research services are offered by
approximately 20 companies employing some 4,300 people. Opportunities
for conducting clinical research abound. Québec has 20 university-affiliated
hospitals in 5 major urban centers and a large talent pool of medical
specialists (see Appendix 1 for details).
3.5 publcly funded research organzatons
Publicly funded research organizations are essential for the development
of any biopharmaceutical cluster. Québec’s university system is a major
contributor in terms of its fundamental research and as the vehicle for
training the highly qualified personnel needed by industry. Québec is also
home to a number of highly specialized research institutions in human
health.
Biotechnology Research Institute (BRI)
The BRI is Canada’s largest R&D biotechnology center employing more
than 800 people.
18
It is one of five National Research Council (NRC)
17 “Competitive Alternatives—KPMG’s Guide to International Business Location 2008.” Pp 37.
18 http://www.irb-bri.cnrc-nrc.gc.ca
13
A Brief
Portrait of
Québec’s
Life Sciences
Sector
Institutes dedicated to biotechnology. Established in 1987, the BRI is active
in two sectors, health and the environment. In the health sector, projects
range from drug discovery to bioprocess scale-up, and biopharmaceutical
production for preclinical trials.
Clinical Research Institute of Montréal
The Clinical Research Institute of Montréal (CRIM) is a not-for-profit
organization employing close to 450 staff members. The Institute focuses its
research on the causes and mechanisms underlying disease. Thirty-seven
units conduct research in areas such as medicinal chemistry, molecular
biology, functional genomics, clinical research, biomedical engineering,
and bioethics.
Institute of Research in Immunology and Cancer (IRIC)
IRIC was founded in 2002 by the University of Montréal to focus on
immunology and oncology.
19
IRIC employs 500 people. It provides an
integrated research approach by deploying 10 advanced technology
platforms including proteomics, bioinformatics, imaging, and high
throughput screening
20
.
McGill University and Génome Québec Innovation Center
The Center focuses on genetic diseases and is one of the three major genomics
and proteomics facilities Génome Québec has formed with Québec’s
universities.
21
Currently, the Center operates five platforms: genotyping,
sequencing, functional genomics, proteomics and pharmacogenomics. The
Montréal Heart Institute partners with the Center on pharmacogenomics.
Their shared research goal is to partially personalise medications and
treatments to match the genetic profiles of patients.
19 http://www.iric.ca
20 High throughput screening is used to identify drug candidates from among thousands of
chemical compounds.
21 http://www.genomequebec.com
14
A Brief
Portrait of
Québec’s
Life Sciences
Sector
McGill University Cancer Center (MCC)
The McGill Cancer Center is the largest oncology center in Canada.
22
The
main research goal of the MCC is to fast-track fundamental oncology
research, to advance cancer drug discovery and to enhance early diagnosis.
Molecular Endocrinology and Oncology Research Center
The Center is located at the Center hospitalier universitaire Laval (CHUL)
and employs approximately 30 people. In 2000-01, the Center received
$50 million in funding for research. Its main research focus is on cancer.
The CHUL has already developed a number of novel approaches for the
treatment of prostate and breast cancer.
23
Montréal Heart Institute (MHI)
The Montréal Heart Institute is affiliated with the Université de Montréal
and is one of the largest cardiology institutes in the world. MHI employs
1,400 people of whom 75 are researchers.
24
Their efforts focus on cardiology
and surgery, radiological and nuclear imaging, psychiatry, psychology, and
biology.
Montreal Neurological Institute (MNI)
The Montreal Neurological Institute (MNI) is affiliated with McGill
University and is comprised of 11 research units covering all aspects of
neuroscience.
25
Specialities include stroke, epilepsy and neurodegenerative
disorders. Recently, the MNI was named a Center of Excellence in
Commercialization and Research, and also received CDN $105 million
from the Canadian federal government. MNI is one of the world’s top three
centers for 3D structural and functional imaging of the brain.
22 http://cancercenter.mcgill.ca
23 http://www.crchul.ulaval.ca
24 http://www.icm-mhi.org
25 http://www.mni.mcgill.ca
15
A Brief
Portrait of
Québec’s
Life Sciences
Sector
3.6 publc research fundng
The Canadian Institutes for Health Research comprise a federally funded
granting council that supports university and hospital research in health
sciences. Québec-based researchers capture roughly 29% of CIHR’s funds,
CDN $191 million in the year 2005-2006.
The provincial government also provides annual funding in the order
of CDN $90 million for health research through fonds de la récherche en
santé du Québec (fRSQ).
26
Created in 1964, the fRSQ funds a wide variety
of projects covering basic, clinical, epidemiological, public health, health
services, and social science research.
funds for publicly funded health research from other sources such as
Genome Canada, the Canada foundation for Innovation
27
and the Natural
Sciences and Engineering Research Council
28
bring the annual total to
approximately CDN $400 million per year.
3.7 venture captal
Venture capital investments in Québec have rebounded in recent years after
a major fall in 2003. In 2007, investments in all sectors reached CDN $648
million up 8% from the CDN $600 million invested in 2006. Québec’s share
of all disbursements in Canada was 31% in 2007 and its share of companies
financed was 41% with both parameters being well ahead of Québec’s share
of population (25%). foreign investors contributed CDN $ 210 million of
the total invested.
29
Life-science companies received 40% of total funds. CDN $ 262 million
was invested in 26 companies. Of these, 22 companies were directly involved
in biopharmaceutical development and received CDN $222 million; 85% of
the amount.
Interestingly, the provincial pension fund, Caisse de depot et placement
du Québec has used its considerable financial power to help develop
the venture capital sector. The Caisse originally had a venture capital
subsidiary—Sofinov—but now favors a partnership approach. In the last
26 http://www.frsq.gouv.qc.ca
27 http://www.innovation.ca/index.cfm
28 http://www.nserc.gc.ca/index.htm
29 http://www.newswire.ca/en/releases/archive/february2008/12/c9140.html
16
A Brief
Portrait of
Québec’s
Life Sciences
Sector
few years, it has invested over CDN $260 million in local venture capital
firms and in foreign firms that have set up shop in Québec.
30
3.8 examples of organzatons supportng the cluster
Montréal In-vivo
Montréal In-vivo is the organization that represents the city’s life sciences
cluster. The cluster consists of 150 public research organizations and 480
private companies of which 80 are subsidiaries of multinational firms.
31
Montréal In-vivo is a highly influential organization on the Québec
scene. Its work focuses on seven themes:
Research;
Technology transfer;
finance;
Commercialization;
Visibility;
Economic and scientific impacts of the university-affiliated hospital
network; and
Human resources.
Each theme has an associated working group of between approximately
5 and 15 members. The members are typically senior managers drawn
from the biopharmaceutical industry, the financial sector, publicly-funded
research organizations, government, and teaching hospitals. In total,
approximately 80 members serve on the working groups representing
diverse research, industrial, public policy, and financial interests. The scope
of the membership, the personal influence of the individual members, and
the focus on building have made Montréal In-vivo highly successful in its
efforts to grow the biopharmaceutical cluster in Québec.
Génome Québec
founded in 2000, Génome Québec is one of the six Canadian genomics
organizations created by Genome Canada, a nationwide Government
30 http://www.lacaisse.com/en/financement/entreprises/Pages/risque.aspx
31 http://www.montreal-invivo.com







17
A Brief
Portrait of
Québec’s
Life Sciences
Sector
initiative to create a world-class genomics and proteomics network. Génome
Québec is a private, non-profit organization that funds genomics and
proteomics research. It is co-funded by Genome Canada and the Québec
government. By 2006, cumulative funding for genomics research in Québec
had reached CDN $266 million.
32
Quebec Biotechnology Innovation Center (QBIC)
founded in 1995, QBIC is a non-profit private biotechnology business
incubator and is recognised as a leader in business mentoring for the
biotech sector. Located in Laval, just north of Montréal, its main goal is to
provide physical space and business advice to start-ups. The organization
supports businesses from pre-incubation to post-incubation with the help
of its public and private partners.
BIOQuébec
BIOQuébec is a life-science industry association that represents more than
215 companies and R&D centers in Quebec.
33
Its members employ more
than 25,000 people in Québec alone and it conducts research in animal and
human health, agriculture and forestry, and the environment. BIOQuébec
aims to develop the industry by promoting access to capital, advances in
public policy, training and international awareness.
Pharmabio Développement
Pharmabio Développement is a Human Resources Sector Committee
for Québec’s biopharmaceutical industry. It is a non-profit organization
with a membership made up of companies, individuals, associations, and
government bodies. Its aim is to develop the talent pool by identifying the
sector’s needs and by creating programs.
3.9 a healthy cluster
Québec has developed an impressive life-sciences cluster. All of the key
components are in place; firms of all sizes, excellent publicly-funded
32 http://www.genomequebec.com
33 http://www.bioquebec.com
18
research institutions, platforms for advanced research, venture capital,
incubation centers, organizations that promote the sector and encourage
networking, university affiliated hospitals and research centers, and funds
for public research.
The provincial government has been heavily involved in encouraging
and developing all aspects of the cluster supporting, encouraging and, in
some cases, inventing some of the organizations described above. It has
aggressively pursued every opportunity for growth and the results speak
for themselves.
19
ECONOMIC BENEfITS
34
4.1 nvestments n r&d
Large pharmaceutical firms in Québec have increased their investments in
R&D at a compound annual growth rate (CAGR) of 11.3% per year for
almost 20 years. Their R&D spending reached almost CAD $ 500 million in
2006. The pace of investment outstripped growth in the economy (CAGR =
4.0% per year) by almost a factor of three. The magnitude of the investment
and its sustained growth for almost two decades are remarkable testaments
to the partnership between government and industry in the province.
Source: Deloitte survey of Rx&D members
34 A large proportion of the information presented in this section was collected
and calculated by SECOR in a mandate commissioned by Rx&D, the association
representing Canada’s Research-based pharmaceutical Companies. We thank
Rx&D for allowing us to present key components of the data in this book.
4
20
Economic
Benefits
Major pharmaceutical companies
35
generate 24% of their revenues through
sales in Québec. This figure is equal to the percentage of Canadians who live
in Québec. Yet the major firms carry out 46% of their overall research in
Québec and 66% of their discovery research. Major firms account for 90%
of all industrial pharmaceutical research in the province.
Source: Deloitte survey of Rx&D members
4.2 r&d n québec compared to sales
One of the crucial metrics applied to the investments of major pharmaceutical
firms is the ratio of R&D to sales made in any jurisdiction. In 2006, for
every CAD $100 in sales, large pharmaceutical firms invested CAD $16.2
in Québec as compared with CAD $8.3 in Canada as a whole, CAD $8.1
in Ontario and CAD $2.8 in British Columbia (BC), an important hub for
biotechnology firms.
35 The members of industry association Rx&D.
21
Economic
Benefits
Source: Deloitte survey of Rx&D members
Québec outstrips Canada as a whole and Ontario by a factor of two. Canadian
inter-provincial comparisons highlight Québec’s success in attracting
investment, but international comparisons are more compelling.
36
36 https://www.cia.gov/library/publications/the-world-factbook/print/sz.html
22
Economic
Benefits
Sources: Deloitte survey of Rx&D members; and PMPRB Annual Report,
2006—citing data for 2004
Among western industrialized nations, Québec scores well. With the
exception of Italy and, Canada, all of the countries listed have headquarters of
large multinational pharmaceutical firms within their borders. Switzerland
with its population of only 7.6 million
37
has two of them: Novartis and
Hoffmann—La Roche.
Québec is doing well as the above data for 2004 show. However, its
position has actually weakened over time. In 2000, it was fourth ranked and
was ahead of the US with a ratio of R&D to sales of 20.3%. After many years
of sustained growth, R&D expenditures in Québec have recently been flat
(see section 4.1) while sales have continued to move forward.
37 https://www.cia.gov/library/publications/the-world-factbook/print/sz.html
23
Economic
Benefits
Source: Deloitte survey of Rx&D members
R&D is important but so too is investment in plant, equipment and the land
to put them on. In 2006, the book value of these investments in Québec was
CAD $831 million for the members of industry association Rx&D. This was
59% of the total invested in Canada as a whole.
4.3 employment
Job creation enriches communities economically and socially. Québec
captured 45% of the industry’s jobs in Canada even though it has only 24%
of Canada’s population. In 2006, when the number was last tallied, Québec’s
brand name pharmaceutical industry employed 9,200 people.
24
Economic
Benefits
Source: Deloitte survey of Rx&D members
The major pharmaceutical firms also paid their employees more, on average,
than other important sectors in Québec’s economy.
25
Economic
Benefits
Sources: Statistics Canada and Deloitte survey of Rx&D members
Information on the number of jobs and the type of jobs in the pharmaceutical
sector—manufacturing, research, sales etc—can be plugged into the
economic model of the economy. The model outputs the additional jobs
created among suppliers to the industry. The pharmaceutical industry
delivers a high leverage since it creates 1.86 additional jobs in the economy
for every person directly employed. In Québec this amounts to a little over
17,000 jobs. When combined with the 9,200 direct employees, the sector
generated the equivalent of 26,200 full time jobs. These are generally
referred to as fTEs—“full Time Equivalents”. The model also shows where
these jobs are created in the economy.
26
Economic
Benefits
Source: Modeling by Statistics Canada based on data supplied by SECOR
The estimated 3,774 professional services jobs or “full Time Equivalents”
created by the pharmaceutical industry can also be broken down into type of
service. Not surprisingly, information technology coupled with engineering
account for the highest number of jobs created.
Details of Professional Services
Full Time
Equivalents 2006
Information technology and engineering
1,054
financial services
865
Legal services
479
Publicity and information services
228
Security services
194
Other professional services
954
The numbers for job creation by the pharmaceutical industry exclude
employment created by personal spending. The people in the 26,200 full
Time Equivalent jobs created by the pharmaceutical sector buy homes, cars,
27
Economic
Benefits
food, clothes, go to restaurants, the corner store, the movies, and so on.
These activities generate a further 5,200 jobs in the economy. The grand total
of all the employment created by the innovative pharmaceutical industry in
2006 was 31,400 when all of these other impacts are included.
4.4 fnancal mpact on quebec’s economy
The innovative pharmaceutical companies in Québec create wealth or
“added value” in the economy. Salaries as well as company profits and other
revenues generate this extra economic activity. The total can be estimated
through economic modeling. for Québec, the value added to the economy
by the pharmaceutical industry was CAD $2.1 billion in 2006—almost the
same as the sales made by the same pharmaceutical companies in Québec. Of
the sales of brand name pharmaceutical products, public insurance covered
CAD $1.11 billion while private insurance paid for CAD $1.18 billion.
Source : SECOR’s analysis
The added value to the economy comes from two sources: the direct impacts
generated by the expenditures of innovative pharmaceutical firms and the
indirect impacts flowing from the goods and services bought from suppliers.
28
Economic
Benefits
Economic Impact of Operating and Capital Expenditures
Made By The Innovative Pharmaceutical Industry in 2006
(CAD $ millions)
Type of impact
Direct
effect
Indirect
effect
Total
Added value
1,009
1,103
2,112
- Salaries (excluding benefits)
588
585
1173
- Net profits of individual firms
11
65
76
- Other revenues (including benefits)
410
454
864
Full time equivalent positions involved
9,164
17,044
26,208
Source: Simulations by the Statistics Institute of Québec, data provided by SECOR
4.5 taxes pad
38
With all of this extra economic activity, governments reap benefits through
taxation. In Canada, taxes are levied both federally and provincially. If we
look only at the taxes captured by Québec in 2006, the total was CAD $343
million and was made up of CAD $170 million from direct activities of the
major pharmaceutical firms and CAD $173 million from indirect sources.
Annual Impact of the Government of Québec’s Revenues 2006
(CAD$ millions)
Category
Direct
impacts
Indirect
impacts
Total
impacts
Government of Québec’s Revenues
170
173
343
Taxes on salaries and wages
64
54
118
Sales taxes
-
17
17
Social benefits e.g. pension
72
102
174
Corporate taxes
34
NA
34
Source: Rx&D. We thank Rx&D for generously sharing this information
38 Calculated by the Statistics Institute of Québec using data provided by SECOR
29
Economic
Benefits
from the government’s perspective, it paid out $1.14 billion to reimburse
drugs used by patients in its drug benefit plan but recovered 31% (CAD
$343 million) in taxation. In addition, patients contributed to the drug
plan through premiums and co-payments, significantly reducing the
government’s outlay (see Section 4.4).
4.6 summary of economc mpacts
By providing a public policy environment that encouraged the brand name
pharmaceutical industry, Québec with 24% of Canada’s population:
Captured industrial R&D investments amounting to CAD $500
million in 2006 equivalent to 46% of total R&D investments made in
Canada and 66% of those made by firms in fundamental research;
Purchased 24% of all products sold by the industry—a percentage
identical to Québec’s share of Canada’s population;
Achieved a ratio of 16% of R&D to sales, similar to those of countries
that have one or more major pharmaceutical firms headquartered
within their borders;
Was home to 9,200 (45%) of the industry’s employees whose average
salary amounted to $86,000 per year—substantially higher than most
other sectors of importance to the provincial economy;
Benefited from the creation of a further 17,000 full Time Equivalent
jobs among the firms that supply the brand name pharmaceutical
industry;
Captured an additional 5,200 jobs due to the personal expenditures
on goods and services made by the direct employees of the
pharmaceutical firms and the people in supplier companies who
worked with them;
Derived CAD 2.1 billion of wealth creation from the pharmaceutical
sector—an amount almost equal to all the purchases of brand name
pharmaceutical products in the province;
Spent CAD $1.14 billion on pharmaceutical products for citizens in
the provincial drug plan and collected 31% CAD $343 million in taxes
derived from the pharmaceutical industry; and, most importantly;
Provided Québecers with access to many leading-edge pharmaceutical
products.









30
Economic
Benefits
Québec has derived substantial benefit by encouraging the brand name
pharmaceutical industry. By having major multinational firms on its
territory, it has secured a number of anchor tenants for its pharmaceutical
cluster—firms that can help and partner with Québec’s emerging biotech
companies.
31
QUéBEC’S SUSTAINED PRO-PHARMA POLICIES
5.1 addtonal ntatves
In the 1980s Québec strongly encouraged and supported the federal
government’s efforts to improve the protection of intellectual property rights
for pharmaceutical products. The federal government struck a deal with the
pharmaceutical industry and granted improved intellectual property rights
in 1987 in return for a commitment to increase R&D expenditures to 10%
of sales. At the same time the federal government set up a quasi-judicial
body, the Patented Medicines Prices Review Board, to make sure that the
prices being charged by firms were not excessive.
In 1992, the federal government removed the last vestiges of compulsory
licensing of intellectual property rights in the context of the North American
free Trade Agreement. While these changes were going on, Québec set
itself apart from other provinces by providing reasonable corporate tax
rates, and generous tax credits for research and development. It later added
the “fifteen Year Rule”. The rule allowed doctors to prescribe and patients to
request brandname products for a period of 15 years after the products were
listed on the provincial formulary for reimbursement. The rule applied even
if generic versions of the drugs were available at lower cost. .
We will investigate these initiatives to see what they cost the province
and whether or not they have had a material impact on pharmaceutical
investment.
5.2 corporate tax rates
Québec captures relatively little advantage through its corporate tax rates.
Over time, taxes on corporate earnings have been steadily decreasing in
OECD countries. In 1993 average rates were 38% but by 2007 had fallen
to 27.8%. Ireland, for example, aggressively reduced its rate to 12.5% to
encourage corporate investment. At 32.0%, Québec’s rate is slightly lower
than the average for Canada and is in the middle of the OECD pack.
39
39 We thank Hugues Lachance of KPMG for generously sharing his data on taxation
and R&D tax credits and for allowing us to reproduce key components of it.
5
32
Québec’s
Sustained
Pro-Pharma
Policies
Source: KPMG
Social benefits paid as a percentage of salary also represent a significant
cost of doing business. Canada provides a relatively low cost environment
while france, Italy, Spain, and Germany have much higher charges. The US
seems to have relatively low costs but healthcare insurance for employees is
a major cost that is paid directly to insurers and not to government. Ireland
emerges as a low cost environment from the perspectives of both corporate
tax and social benefits and has enjoyed sustained economic growth.
40
40 for an assessment of Ireland’s success see: http://slate.msn.com/id/2111312/
33
Québec’s
Sustained
Pro-Pharma
Policies
Source: OCDE, KPMG
Unlike Ireland, Québec has not captured competitive advantage by having
very low corporate tax rates or low costs to employers of social benefits.
Indeed, for small firms such as emerging biotechnology companies with
profits of less than CAD $400,000 per year, Québec has the highest rate
of tax in Canada at 19.5%, The Canadian average for small companies is
16.2%.
Corporate tax rates for the principal biopharmaceutical clusters in
North America are higher than those in Montréal and yet they all seem
to flourish. We would have to conclude that the decision on where to
place pharmaceutical investment is fairly insensitive to direct taxation and
benefits paid on salaries.
34
Québec’s
Sustained
Pro-Pharma
Policies
Source : SECOR, Investissement Québec
5.3 r&d tax credts
Canada provides tax credits for scientific research and development at both
federal and provincial levels. R&D is, of course, a business expense just like
general operating costs, interest charges, and depreciation. firms deduct
these expenses from revenue in order to arrive at a taxable profit. Tax credits
reduce taxes paid by firms involved in R&D.
Canada, started tax credits in 1983 with a federal rate of 10%, meaning
that firms could deduct 10% of eligible R&D expenses from corporate
income tax due. The rate was increased to 20% in 1987. This was around the
time when Canada significantly improved its intellectual property rights in
return for greater R&D investments by the pharmaceutical industry. Québec
provided an additional credit of 17.5% on salaries paid to researchers by
large corporations.
To capture the R&D tax credit, large corporations have to make a profit
and to have taxes due on that profit. They can then deduct the R&D credit
from the taxes they owe. This is not the case for small Canadian controlled
private corporations where tax credits are even more generous. The small
firms receive the tax credit whether or not they make a profit. If they have
35
Québec’s
Sustained
Pro-Pharma
Policies
no taxes to be paid to the federal and provincial governments, they still
receive checks from both levels of government to compensate them for
a proportion of their R&D spending. The federal proportion is the same
across the country but the provincial contributions vary from province to
province.
The Canadian federal government provides an R&D tax credit of 35% to
small Canadian-controlled corporations. Again, Québec follows suit with
a credit of 37.5% on the salaries of researchers. Credits also apply but at
different rates when firms contract-out R&D.
A small start-up in biotech in Québec making no profit that spends
$600,000 in a year on R&D with most of the cost going to salaries, would
expect to receive checks from the two governments totaling around
$400,000. Government actually pays the firm back more than half of the
money it spends on R&D even if it has no profit and has no corporate taxes
to pay. Québec is the most generous province in terms of R&D tax credits.
The two governments are not quite as generous with large firms. federal
credits, for example, have to be deducted from taxes due. Suppose a Québec
pharmaceutical firm has revenues of $100 million a year and makes $16
million of profit. The firm spends $17 million on R&D of which $9 million
goes to salaries. Here is how the numbers work out. The corporation pays
only $900,000 of tax on $16 million of profit, an effective tax rate of 5.6%.
This is a huge tax advantage.
Amounts
(millions)
Taxes & Credits
(millions)
Revenue
$100.00
Profit
$16.00
Taxes due @ tax rate of 32%
$5.12
Research expenses
$17.00
federal tax credit @ 20% rate
-$4.26
Research salaries
$9.00
Provincial tax credit @ 17.5% rate
-$1.58
Tax payable on credits
$1.62
Tax payable after credits
$0.90
36
Québec’s
Sustained
Pro-Pharma
Policies
Clearly, any firm that spends large amounts on research in Québec can easily
find itself in a position where it has very little tax to pay.
41
Other countries
also provide tax credits. for example, Ireland and the US have tax credits
that can run as high as 20%. No other country is as generous as Canada and,
within Canada no province is as generous as Québec.
Québec introduced generous tax credits at about the same time as
improvements to intellectual property rights came into play. Economic
analysis cannot untangle the impacts of the two approaches. However, one
fact is undeniable; investments in R&D by multinational pharmaceutical
firms quickly increased after these measures were introduced. Investments
in Québec quintupled in the period 1988 to 2006 representing a compound
annual growth rate (CAGR) of 11.3%.
5.4 the “ffteen year rule”
When Canada upgraded intellectual property rights for pharmaceutical
firms in the late 1980s and early 1990’s, it provided full protection from
generic competition for twenty years after the patent on a new drug had
been issued. This seems like a very long period but, in reality, it is not.
Development of a drug from the point of discovery in the laboratory to the
time when it receives market approval can take 10 to 12 years and costs, on
average, USD 800 to 900 million.
42
firms have to recover the costs invested
in R&D and make a profit during the 8 to 10 years of patent protection that
remain. Once patents expire, generic drug companies typically enter the
market with similar, lower-cost, products.
Government regulators consume two to three years of patent lifetime
while they assess drugs to see if they should be released onto the market.
They carefully check data gathered by firms on the clinical safety and efficacy
of drugs as well as the quality of manufacturing. Many OECD countries
provide up to five years of additional patent to compensate firms for this
loss. The compensation is called “Patent Term Restoration”.
43
In Canada, the protection of intellectual property is a federal jurisdiction.
The federal government does not provide Patent Term Restoration. To
encourage the pharmaceutical industry on its turf, Québec created the
41 Credits can be carried forward to years when tax needs to be paid up to a limit of 20 years.
42 for a review of the literature see: “Pharmaceutical Research and
Its Value to Canadians” by David Griller, 2006.
43 http://content.healthaffairs.org/cgi/reprint/1/2/6.pdf
37
Québec’s
Sustained
Pro-Pharma
Policies
“fifteen Year Rule” which goes some way towards providing the protection
afforded by Patent Term Restoration.
44
The rule allows the patented drug
to be reimbursed for fifteen years after it is listed on the provincial drug
formulary even if a less expensive generic version becomes available.
45
The
patient who is covered by provincial drug insurance and his or her doctor
can ask for the brand name product to be dispensed.
The “fifteen Year Rule” sets Québec apart from other provinces.
It effectively provides intellectual property rights approaching OECD
standards when other provinces and the federal government do not. This
is a clear signal that Québec encourages the brand name pharmaceutical
sector. Of course the key question is, what does it cost the province?
Brogan Inc. calculated the cost of the “fifteen Year Rule” for the period
June 2002 to July 2005 to be CAD $31 million per year on average. To do the
calculation, Brogan looked at the impact of switching prescriptions from
brand to generic drugs once patents had expired.
46
The $31 million per year
is a relatively small amount compared, for example, to the tax revenues of
CAD $343 million collected in 2006 by Québec from the activities of the
pharmaceutical sector. It is trivial compared to the CAD $2.1 billion of value
added to Québec’s economy by the brand name pharmaceutical industry.
More recently, the impact of abolishing the rule was calculated for the
provincial economy by considering factors such as reduced investment
in R&D and capital assets.
47
The pharmaceutical sector has consistently
invested more heavily in capital assets and R&D in Québec than in the rest
of Canada. The calculation assumed that abolition of the rule would slow
the pace of these investments to the levels seen in the rest of the country. If
this were to occur the economic impacts would be quite high based on data
for 2004:
A reduction of Québec’s gross domestic product (GDP) of CDN $340
million i.e. -0.14%;
44 The rule is also referred to as “BAP 15” meaning that the province buys drugs at Best Available
(Canadian) Price and also applies the 15 year rule on prescribing brand name products.
45 A generic drug contains the same active ingredient as its brand name precursors but
may have a different formulation and method of manufacture. As a consequence, its
“bioequivalence” i.e. the dose distributed in the patient’s body may not be identical to
that of the brand name drug. for a discussion of the potential consequences see, for
example: http://www.americanheart.org/presenter.jhtml?identifier=3015266.
46 Analysis by Brogan Inc. carried out for Merck frosst Canada Ltd. and cited in
http://www.finances.gouv.qc.ca/documents/feuille/fr/2005_002.pdf
47 http://www.finances.gouv.qc.ca/documents/feuille/fr/2005_002.pdf

38
Québec’s
Sustained
Pro-Pharma
Policies
A reduction of 0.66% in GDP produced by the manufacturing
sector;
An increase in the rate of unemployment of 0.38%;
A reduction in household income of 0.11%; and
A reduction in the value of exports to the rest of Canada (0.56%)
and to the rest of the world (0.21%) accompanied by corresponding
reductions in imports of 0.03% and 0.13%.
5.5 what f québec had not taken a pro-pharma stance?
Québec took several measures to encourage pharmaceutical investment on
its territory. It:
Strongly encouraged the Canadian federal government to enhance
intellectual property rights and to end compulsory licensing;
Provided generous tax credits to encourage research and development;
and
Introduced the “fifteen Year Rule” to provide extra protection to
patent holders.
These measures came into play in the period 1988 to 1994. Assessing
their individual impacts on the growth of the pharmaceutical industry
is essentially impossible. Collectively, they seem to have had a beneficial
impact on capital investments in the province by the pharmaceutical
industry. These grew at an annual rate of 9.1% between 1994 and 2003 in
Québec as compared with 6.8% in the rest of Canada.
The same cannot be said for R&D expenditures. Québec’s compound
annual growth rate for R&D of 11.3% was essentially identical to the rate of
11.9% for the rest of Canada.
48
While Québec’s growth in R&D was similar
to the rest of the country, its share (41%) has been out of proportion to its
population (24%)
49
and has remained essentially constant over the best part
of two decades.
48 SECOR’s calculation based on PMPRB data,
49 Data from Statistics Canada suggest that Québec’s share in the late 1970’s approached 60%
but declined to around 35% in the mid-1980s. However, where comparison is possible
(1988 to 1995), the Statistics Canada results do not fit well with those reported by the
PMPRB which we take to be a better source of data on multinational pharmaceutical
company expenditures. See: B. Pazderka, Canadian Public Policy, Vol. 25, pp 29.







39
Québec’s
Sustained
Pro-Pharma
Policies
Source: PMPRB annual reports
The constancy of Québec’s share of R&D in Canada is somewhat surprising
since pharmaceutical investment grew very rapidly over almost the entire
period. The rate of growth was much greater than in other OECD countries
and also exceeded that in other Canadian industries. One might have
thought that firms would have used the growth period to allocate new
R&D spending to provinces other than Québec and especially to Ontario
which has an important concentration of multinational pharmaceutical
companies. By and large, they did not.
The ratio of R&D to sales in Québec was at 16.2% in 2006 versus 8.3% for
Canada as a whole and 8.1% for Ontario. Québec’s share represents 46.1%
of total R&D investment by brand name firms.
50
Québec was also home to
45% of the employees of brand name pharmaceutical companies.
50 The data in the figure refer to the R&D expenditures of all patent
holders not just those of the brand name companies.
40
Québec’s
Sustained
Pro-Pharma
Policies
Source: Deloitte survey of Rx&D members
5.6 lesson’s from québec’s experence
What might have happened had Québec not developed pro-pharma public
policies that were sustained over two decades and changing governments?
Which policies did Québec really need to implement to retain its share
of pharmaceutical investments in a period when these rose very rapidly?
The answers to these questions cannot be known precisely. However, some
important conclusions can be drawn from Québec’s experience.
first, if a region wants to develop its pharmaceutical industry but is
located in a country with poor intellectual property rights it will have an
extremely difficult task. It must do as Québec did and lobby effectively for
internationally competitive rights to be implemented at the national level.
The implementation of full rights can be coupled to a quid pro quo from
industry to increase its investments.
Second, local actions can work to protect a region’s share of investments
when, nationally, these rise rapidly. With the “fifteen Year Rule” Québec
effectively provided a measure of Patent Term Restoration that the rest of
Canada does not have. In addition, Québec implemented a favorable tax
credit system to encourage research.
41
Québec’s
Sustained
Pro-Pharma
Policies
How much further can Québec go? As we showed, Québec’s share of
R&D as a proportion of sales (16.2%) is similar to those of countries that
have had major pharmaceutical industries over long periods. Canada overall
is a laggard at 8.3%. However, to some extent Québec’s fortunes are tied to
Canada’s. Provinces provide drug insurance for about half the population
and most apply cost-containment approaches and restrictive formularies.
This certainly weakens Canada’s attractiveness as an investment location
with the spill-over effect of limiting Québec’s growth potential.
42
43
QUéBEC’S APPROACH TO PHARMACEUTICAL INSURANCE
6.1 nsurance for pharmaceutcal products n canada
Healthcare in Canada is delivered provincially. No national standards
guarantee Canadians access to pharmaceutical products or to prescription
drug insurance. The result is a patchwork quilt of coverage schemes. Most
provinces provide coverage for seniors, people with disabilities, and those
requiring social assistance.
51
Some provide coverage for the self-employed.
These groups constitute about half of the population.
52
Typically, the “formulary” or list of drugs reimbursed by provinces
tends to be limited. The approach is unlike Medicare Part D in the US
where pharmaceutical insurance for groups such as seniors and those with
disabilities is government subsidised but privately delivered. In the US,
patients have a wide range of choices in selecting plans and formularies that
suit them best. However, co-payments made by the beneficiaries tend to be
higher than those in Canadian plans.
53
Canadian employers often provide pharmaceutical coverage for their
employees and most drugs are available under private insurance plans.
Private plans do not provide true insurance schemes since very little risk is
pooled. A firm typically pays premiums based on the cost of drugs used by
its employees in the preceding year, an allowance for price increases, and
a service charge to cover the costs of administration and the profit of the
insurer.
Provinces in Western Canada and in Québec have insurance plans that
cover the self-employed. Ontario—Canada’s most populous province—and
provinces in Eastern Canada exclude the self-employed. However, most
51 for details of provincial insurance plans and the drugs they cover
see: http://www.drugcoverage.ca/default.asp
52 The federal government also provides coverage for certain groups including
aboriginal peoples, the armed forces, the Royal Canadian Mounted Police and
veterans. In aggregate, these groups represent about 2% of population.
53 http://www.medicare.gov/MPDPf/Public/Include/DataSection/Questions/MPDPfIntro.asp?versi
on=default&browser=firefox%7C2%7CWinxP&language=English&defaultstatus=0&pagelist=Ho
me&ViewType=Public&PDPYear=2008&MAPDYear=2008&MPDPf%5fMPPf%5fIntegrate=N
6
44
Québec’s
Approach To
Pharmaceutical
Insurance
provinces now provide “catastrophic” drug coverage which protects all
citizens including the self-employed in situations where drug costs exceed
3% to 5% of family income.
54
To add to the complexities of the Canadian scene, drugs administered
in hospitals are paid for out of hospital budgets but are subject to provincial
formulary guidelines. Hospital drugs would include, for example, those for
oncology even if administration is handled on an outpatient basis.
6.2 lack of actuaral soundness n drug nsurance
Provincial insurance plans differ substantially in the ways in which they are
structured.
55
In general, however, they provide a safety-net for populations
at risk such as seniors
56
and those unable to work. As a consequence, most
provincial plans are not actuarially sound by design since they cover people
with limited ability to pay insurance premiums. Tax revenues pay for the
shortfalls in provincial plans between the cost of providing drugs and the
revenues from insurance premiums and co-payments. This mechanism
partially transfers the financial burden to the working population which is,
on the whole, younger, healthier, and in less need of prescription drugs.
A national approach to pharmaceutical insurance would be consistent
with Canada’s philosophy of providing universal access to healthcare.
However, bringing provinces together in a national scheme would be
difficult. Some provinces provide broad formularies and demand high co-
payments and premiums while others take the reverse approach.
57
Citizens
with private insurance would surely object to having the more limited
formularies provided by public insurance. In many respects, insurance
through health savings plans might be better. People would contribute
premiums when they are young and healthy so as to provide funds for
periods when they are less well. This would, however, be a major departure
from the status quo.
58
54 “Recommendations for a federal/Provincial/Territorial Approach
to Catastrophic Drug Coverage “, Rx&D 2006.
http://longwoods.com/product.php?productid=17236&cat=369&page=1 [en anglais seulement]
55 http://longwoods.com/product.php?productid=17236&cat=369&page=1
56 Skinner has argued that providing subsidized drug coverage for seniors is inappropriate since
they often have the ability to pay. He suggests that subsidies be reserved for those in genuine need.
http://www.fraserinstitute.org/commerce.web/product_files/UniversalDrugBenefitsforSeniors.pdf
57 Brian ferguson has eloquently discussed this issue: http://www.hc-sc.gc.
ca/english/pdf/romanow/pdfs/Dialogue_5_Pharmacare_E.pdf
58 See for example: http://www.ustreas.gov/offices/public-affairs/hsa/
45
Québec’s
Approach To
Pharmaceutical
Insurance
6.3 québec’s approach to pharmaceutcal nsurance
59
In this complex situation Québec adopted a compromise position. It decided
to continue with a public/private mix of insurance as opposed to all public
or all private plans. It reformed coverage to ensure universal access to a
good drug formulary irrespective of income. All political parties subscribed
to this approach as a principle of social justice.
Québec launched a comprehensive prescription drug insurance program
in 1997 and replaced a mix of earlier programs designed to support the poor
and very sick. By law, every Québecer must have either private drug insurance
or that provided by the public health agency, the Régie de l’assurance maladie
du Québec (RAMQ). By 2006, Québec’s public plan covered 3.2 million
citizens. Private plans covered the remaining 4.4 million.
The law requires that all private plans provide, at a minimum, access to
the 5000 prescription drugs listed on the provincial formulary. It also caps
a beneficiary’s out-of-pocket expenses in premiums and co-payments at
CDN $881 per year. In addition, co-payments must not exceed 29% of drug
costs. All other payments have to be covered by the beneficiary’s plan.
Citizens covered by the public plan pay premiums in the range CDN $0
to CDN $538 per adult depending on income. The premiums are collected
through the provincial income tax system. Drug costs for the public plan
almost tripled in the period 1997 to 2005 reaching CDN $2.4 billion. By
2006, only 27% of the RAMQ’s revenues were generated from premium
payments. The balance came from general taxation.
The RAMQ’s per capita drug expenditure was the highest of all provinces.
In 2005, drug costs amounted to 20% of medical expenditures versus 17.5%
in the rest of Canada. In addition, 61% of purchases were for brand-name
drugs versus 51% in the remainder of the country. The weighting towards
brand-name products was encouraged by the “fifteen Year Rule” and by the
fact that Québec listed many more products on the formulary and did so
in a more timely way than other provinces. To partially counterbalance the
impacts of this approach, Québec froze drug prices during the period 1994
to 2007. Overall, Québec encouraged the use of brand-name products in an
effort to promote its pharmaceutical industry.
When it launched its revised drug plan in 1997, Québec effectively
increased user fees for many seniors and those receiving social assistance.
Subsequent studies showed that the approach decreased drug consumption
59 http://www3.interscience.wiley.com/journal/118541267/abstract?CRETRY=1&SRETRY=0.x
46
Québec’s
Approach To
Pharmaceutical
Insurance
by the poor and especially the mentally ill. It concurrently increased doctor
and emergency room visits as well as costly hospitalization. In 1999, the
scheme was reformed. It reduced to zero all contributions for those unfit
to work and, in 2007 it further exempted 280,000 citizens with low income
from making co-payments. Approximately one million Québecers now
have access to drugs without payment.
6.4 québec’s 2007 polcy on medcatons
60
In 2007, Québec revised its policy on medications after extensive public
consultations with stakeholders. The policy led to a detailed action-plan
based on four key directions:
Access to medications;
The establishment of a fair and reasonable price for medications;
Optimal use of medications; and
Sustaining a dynamic biopharmaceutical industry in Québec.
Québec improved access by exempting low-income citizens from co-
payments as mentioned above, and by streamlining administrative
procedures for listing drugs on the provincial formulary. The province also
launched initiatives to deal with reimbursement of drugs for rare diseases
and to address the current shortage of pharmacists.
The government lifted a price-freeze that had been imposed in 1994. It
also required that firms charge the provincial insurance plan the lowest prices
available in Canada and that any request for price increases be accompanied
by proposals to attenuate their financial impact. The government took steps
to impose ceiling prices on generic drugs and on the distribution charges
captured by wholesalers.
The 2007 policy proposed a number of initiatives for the optimal use
of medications including efforts to sensitize patients to the best use of
pharmaceutical products. firms were invited to join in this effort and, if
necessary, to share the financial risks associated with the use of innovative
medications.
The biopharmaceutical industry benefited from the new policy. In
addition to the relaxation in the price-freeze, and speedier formulary listing
60 http://msssa4.msss.gouv.qc.ca/fr/document/publication.
nsf/fb143c75e0c27b69852566aa0064b01c/f1331768c96d1b918525726f006c7e5f?OpenDocument




47
Québec’s
Approach To
Pharmaceutical
Insurance
procedures, the “fifteen Year Rule” was maintained. Government also set
up a permanent forum for the exchange of ideas that links the Ministry
of Health and Social Services, the Ministry of Economic Development,
Innovation and Export Trade, and the biopharmaceutical industry.
These measures struck a balance between the interests of the key
stakeholders and reflected the merits of having an extensive consultation
process.
6.5 nterprovncal comparsons
Interprovincial comparisons of expenditure on prescription drugs reflect
parameters such as age distribution. If we look at Canada’s largest provinces,
Québec’s per capita expenditure on prescription drugs is the highest: CDN
$746 (Québec), CDN $732 (Ontario), CDN $572 (Alberta) and $530 (British
Columbia).
61
However, Québec’s total per capita expenditure on healthcare
is the lowest: CDN $3,878 (Québec), CDN $4,595 (Ontario), CDN $4,820
(Alberta) and $4,317 (British Columbia). While Québec spends more on
prescription drugs per capita than other large provinces, it spends far less
on total healthcare costs.
The obvious conclusion is that spending more on prescription drugs
saves healthcare expense at the end of the day. This is probably an over
simplification since many factors influence total healthcare expenditure. In
particular, salaries for healthcare professionals in Québec are lower than
those in the rest of the country. However, good evidence from multiple
sources, including Québec’s experience, shows that overall savings in
healthcare can be made by:
Aggressive intervention in primary care with pharmaceutical
products; and by
Ensuring that low-income patients have access to prescription
medications.
Analyses by Lichtenberg as well as Cremieux and his collegues, show
that increased spending on new drugs is greatly offset by savings in the
healthcare system as a whole.
62
In fact, the best cost-saving approaches
61 Data for 2007: http://secure.cihi.ca/cihiweb/dispPage.jsp?cw_page=AR_80_E&cw_topic=80
62 http://www.nber.org/papers/w8996 and Cremeieux, Pierre-Yves; Ouellette, Pierre; and Petit, Patrick, “Do
Drugs Reduce Utilisation of Other Healthcare Resources?”
Pharmacoeconomics
. 25(3):209-221, 2007.


48
Québec’s
Approach To
Pharmaceutical
Insurance
identify patients at risk for serious disease and treat them aggressively in
the primary care environment using drugs as appropriate. The approach
reduces the progression to serious illness and to costly hospitalization.
Pitney Bowes, the office equipment manufacturer, has been a leader in this
area on behalf of its employees.
63
As well as allowing them access to a full
formulary it reduced co-payments for prescription drugs. for example, since
cutting co-pays, Pitney Bowes now spends 19% less on each employee with
asthma compared to six years ago. Pitney Bowes achieved similar success in
the management of diabetes.
6.6 concluson
All Québecers by law have access to a good formulary of prescription drugs
irrespective of income. Québecers have access to drugs through either
private or public schemes. The public scheme provides a safety net for
citizens less able to cope with drug expenditures. Its revenues do not cover
the full cost of drugs and general taxation pays for the shortfall.
Québec’s spends more money per capita on prescription drugs than do
other Canadian provinces because it:
Has an extensive drug formulary for citizens with provincial
insurance;
Lists innovative prescription drugs more rapidly than other provinces;
and
Applies the “fifteen Year Rule”.
However, Québec’s per capita total health expenditures are lower than
those of other provinces. Québec’s experience and indeed that of other
payers suggest that intelligent spending on prescription drugs may lead to
reductions in overall healthcare costs.
Québec has shown that public policies that encourage a regional
pharmaceutical industry by reimbursing innovative drugs and control
healthcare costs, are not in conflict. If anything, the evidence suggests that
they are mutually supportive.
63 “New Tack on Copays: Cutting Them” Wall Street Journal, 8 May 2007



49
COULD CANADA DO MORE TO BUILD THE SECTOR?
7.1 progress snce the nneteen-eghtes
Pharmaceutical investment in Canada grew rapidly starting in the late
1980s and early 1990s triggered by national policies to enhance intellectual
property rights. Québec was a strong advocate of these policies. It added to
them measures aimed at building the provincial pharmaceutical industry.
Québec was successful. It retained a disproportionately high share of
pharmaceutical investments during the period of rapid investment growth
and captured important economic benefits as a result.
Major multinational companies respond to public policy initiatives when
they make investment decisions. Major firms may be attracted to cities or
regions that have excellent research institutions or top hospitals for clinical
studies. However, pharmaceutical firms have to sell drugs and market access
is a key determinant in their investment decisions. In Canada, a blend of
national and regional policies impact market access. We may, therefore, ask
if Canada should do more to build the pharmaceutical sector at the national
level. We may also ask if any lessons could be learned from Québec’s success
that could be generalized to other provinces.
7.2 why nnovaton n the pharmaceutcal ndustry s unusual
The 1990s saw explosive growth in innovation in two important fields:
pharmaceuticals and ICT (information and communications technologies).
The relationships between governments, consumers, and firms in these
sectors are strikingly different.
During the 1990s, the cost of computing technology declined rapidly
while computing power rose dramatically.
64
fiber-optic technologies
transformed telecommunications and made the Internet possible. Many
of us now have a laptop, wire-line phone, cell phone, broadband Internet
access, and digital television. A consumer can easily spend two or three
thousand dollars a year on these technologies. Government intervention
64 http://www.intel.com/technology/mooreslaw/index.htm
7
50
Could
Canada Do
More To
Build The
Sector?
in ICT has been light and, in the main, has worked to increase consumer
access to technology, especially to the Internet.
While telecommunications technologies advanced rapidly so did those
in molecular biology. Based on new science, pharmaceutical firms delivered
miracle drugs to manage heart disease, diabetes, asthma, HIV/AIDS, anxiety,
and depression. The treatment of chronic disease rapidly improved and, in
many places, entire hospitals were closed for want of patients. Government
intervention is heavy in the pharmaceutical sector. It goes beyond checking
the safety and efficacy of new products and focuses on patient access.
Governments rightly feel that access to pharmaceutical products should
not depend on personal income. In many countries, now including the US,
governments have stepped in as payers of last resort for prescription drugs
and, in many instances, as payers of first resort.
Governments and firms recognize that the R&D investment needed to
deliver a new drug to market is very high and has to be recovered in the sales
of product. They also recognize that the marginal cost of manufacturing
additional product is typically low. Making extra pills generally costs very
little. The economic theory that describes this situation is called “Ramsay
Pricing”.
65
In a nutshell it says that firms can maximize their returns by
adjusting prices in individual markets based on the ability of consumers
in those markets to pay.
66
Effectively, people in poorer countries or their
insurers are asked to pay less than those in richer countries.
Any government can intervene, however, to fix prices at lower levels
than ability to pay would indicate. In doing so, they are taking advantage
of the low marginal costs of production and are effectively pushing a
proportion of the R&D cost onto consumers in other markets. Tension
over prices and pricing mechanisms have increased in recent years as
pharmaceutical products have become a more important component of
healthcare expenditures.
Governments easily managed expenditures on drugs before the wave
of innovations in the 1990s. Relatively few drugs were available and their
total cost was not onerous. However, during the innovation wave, the sales
of patented drugs in Canada, for example, showed double digit annual
percentage increases year after year. Only in 2004 did the annual percentage
65 See for example: http://hc.wharton.upenn.edu/danzon/PDf%20files/Diff%20Pric%2
0for%20Pharma_Recon%20Access%20RD%20Patents_Danzon&Towse_%20IJHCfE.
pdf; http://oldfraser.lexi.net/publications/forum/1998/march/health.html
66 Ability to pay is reflected in metrics such as per capita gross