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Byline: James P. Lucier, INSIGHT

The pictures are political gold: gray-haired senior citizens boarding buses for a two- or three-hour trip to Canada to get their medications at half the price they pay in the United States. As often as not, or at least when the cameras are there, some eager politician is standing front and center vowing that U.S. pharmaceutical manufacturers no longer will be able to gouge elderly constituents helpless victims, the politicians say who often have to choose between taking their heart medicine or eating dinner. Never mind that importing prescription drugs from Canada is illegal, shouldn't the price of drugs manufactured in the United States be the same here as in Canada?

Senate Minority Leader Tom Daschle (D-N.D.) is a leading proponent of legislation to allow U.S. consumers to purchase prescription drugs in Canada and elsewhere abroad. "Americans pay 38 percent more on average for their prescription drugs than consumers in Canada," says Daschle. "Allowing this practice would help numerous Americans by allowing them to have access to lower prices."

Daschle also claims that the pharmaceutical industry is "the most profitable in America," and "was 5.5 times more profitable than the average Fortune 500 company." He asserts that research and development (R&D) costs averaged only 11 percent of revenues, compared with 27 percent spent on marketing, advertising and administration. "Drug-industry profits are made at the expense of patients who cannot afford excessive drug prices," he says.

In these comments Daschle is quoting (without giving credit to) a controversial report by Minnesota Attorney General Mike Hatch, who is suing the drug companies and calling them "the other drug cartel." According to Hatch, the pharmaceutical industry had a profit margin of 18.6 percent in 1989, with 85 percent of R&D coming from the National Institutes of Health and academic research (www.ag.state.mn.us).

But a study by Joe Moser of the Washington-based, free-market, Galen Institute (www.galen.org) says the average profit margin of the pharmaceutical companies on the Fortune 1000 list in 2002 is 16 percent in line with other major industries. In fact the Fortune list shows that Coca-Cola had a 20 percent profit; Bank of New York, 19 percent; Mellon Financial, 33 percent; Microsoft, 29 percent; and Oracle, 24 percent. Even the Washington Post had a 10 percent profit as much or more than four of the 14 drug companies on the list.

Nevertheless, drug companies can't seem to beat the rap for charging "too much" for drugs that didn't even exist until the drug companies invented them. That scenario led this summer to both the U.S. Senate and the U.S. House of Representatives passing legislation legalizing consumer importation of prescription drugs not only from Canada but from a host of specified countries, including France, Germany, Italy, the Czech Republic and a number of others never noted as centers of pharmaceutical research. But these bills are awaiting final agreement on Medicare reform, which, as Insight goes to press, remains locked in a Senate-House conference committee. Republican conferees are seeking to cap Medicare spending at $400 billion, while the Democratic leaders want universal coverage regardless of ability to pay. In addition, Daschle said at a special news conference expressing opposition to the Republican plan, "We insist on drug-reimportation provisions."

But will reimporting U.S. drugs from Canada or elsewhere really provide better access to medication for U.S. consumers? What proponents of importation really want to do, say critics, is to import price controls to the United States a regime that always has induced scarcity, rationing and the stifling of new investment and innovation.

"The drug industry has high fixed costs but low marginal costs," Steve Entin, former chief economist of the congressional Joint Economic Committee and now head of the Institute for Research on the Economics of Taxation, tells Insight.

"Once a drug is perfected, it costs very little to produce each unit. Drug companies can sell to foreign countries at a reduced price just above marginal costs, but it is not enough to pay for new research. The United States is the only country that allows companies to charge for research costs. Development requires a patent to allow exclusive sales until the cost of research is recovered. Reimportation of drugs [at a controlled price] trespasses on the patent rights which make development possible. It's just economics 101."

Why are foreign prices for U.S. drugs so much lower outside the United States? Most foreign countries have socialized health regimes run by government boards that set arbitrary prices based on what they estimate is the manufacturing cost plus a small marginal profit. By excluding the huge development costs peer-reviewed studies published by Tufts University show an average of $802 million in research investment for each U.S. Food and Drug Administration (FDA)-approved product central planners abroad can give their citizens a free ride at the expense of U.S. consumers who foot the bill for research.

In Canada, the Patented Medicines Prices Review Board (PMPRB), which approves drugs for sale and monitors the prices at which manufacturers may sell drugs to wholesalers and pharmacies, ensures that the Canadian government can seize the intellectual property of U.S. companies at the point of a regulatory gun, thereby keeping Canada's reimbursements to patients as low as possible. "Most drug manufacturers can afford to sell their pills to smaller customers like Canada [which has only 33 million citizens] at discounted prices and make a lower profit, but selling them to everyone at these prices, which are well below the average costs or production of a new meditation, would be prohibitive," says Sally Pipes of the Pacific Research Institute, a Canadian who now works in San Francisco. In addition, according to Pipes, Canada delays the introduction into the approved formulary of new drugs, which often are more complex and more expensive, in order to trim costs for the government health plan.

Moreover, there are only three ways reimportation would work on a practical basis. Would patients go to Canada to fill prescriptions at a bricks-and-mortar pharmacy? Would they buy them on the Internet? Or would U.S. pharmacy chains and health-maintenance-organization (HMO) dispensaries buy medicines from wholesale distributors in Canada and sell them in the United States with a markup slightly less than current prices?

The much-publicized bus trips to Canada by seniors seem appealing. Indeed, bus-tour companies, always alert to profit centers, have organized $99 tours to Canada for seniors seeking discounts. But as a practical matter the senior-citizen tours are more flash than substance. "There are not enough bridges to Canada and not enough highways to Canadian population centers for [an appreciable number of U.S. seniors] to go to buy at brick-and-mortar pharmacies in Canada," says Peter Pitts, associate commissioner for external relations at the FDA, which opposes reimportation.

Furthermore, Canadian studies show that the cranked-up benefits may be illusory. In 2001 the free-market Fraser Institute (www.FraserInstitute.ca) in Vancouver, British Columbia, did a survey of the retail price distribution in three test regions in the United States and Canada that were most favorable geographically to transborder shopping: Washington state and British Columbia; North Dakota, Minnesota and Manitoba; and New York state and Ontario.

What the institute found was that there was a wide price distribution among pharmacies in each of the two countries, even before cross-border trips were considered. "Because there are a variety of prices charged by Canadian and American pharmacies, American patients can save money by bargain hunting at home as well as by crossing the border," says John Graham, who directed the study.

"Differences among services offered by individual pharmacies explain some of the price variations. For example, prices in the North Dakota and Minnesota areas are cheaper than in the Washington [state] and New York [state] areas." And a personal-service pharmacy that offers advice well may charge more than mail-order agencies.

The study covered 300 pharmacies in the three regions, which were selected on the basis of the distance a patient conveniently could travel in a day's journey. It examined the prices of three prescription drugs that patients use for long periods: Celebrex (for arthritis), Lipitor (to lower blood cholesterol) and Paxil (to combat depression). Celebrex at that time was a prescription drug but recently has been approved for over-the-counter distribution. It was found that a Midwestern shopper for Celebrex would save $30.77 (all prices in U.S. dollars) for a month's supply by going from the cheapest pharmacy in North Dakota to the most expensive pharmacy in Manitoba; he saves $25.10 by going from the most expensive pharmacy in North Dakota to the cheapest pharmacy in Manitoba. Moreover, the report says, "The shopper for Paxil in the same area saves at least $22.98 by crossing the border, but saves up to $27.55 by bargain-hunting at home."

But what happens if a patient chooses to buy medicines, even name-brand medicines, on the Internet? "If you order off the Internet, you don't know how they are being shipped or packaged," says the FDA's Pitts. "If you walk into a brick-and-mortar pharmacy in Canada, you get a prescription drug that's just as safe as in the United States. But if you order off the Internet, you don't know how they are being shipped or packaged. You are replacing the 'learned intermediary' that is, a trained and licensed pharmacist with a greedy intermediary. It is illegal in Canada for a physician to sign a prescription without seeing the patient."

In practical terms, drug reimportation would not be a friendly chat with a registered Canadian pharmacist but more often would be a dubious transaction with an invisible wizard of Oz on the Internet. The wizard may claim to have a Canadian address, but a purchaser's package of pills could arrive from a surprising destination. The FDA joined with U.S. Customs in late July and August for a blitz examination of drugs coming into the United States by mail. In a six-day period they examined 1,153 imported drug packages. Among the samples, 15.8 percent were from Canada, 14.3 percent from India, 13.8 percent from Thailand and 8 percent from the Philippines.

According to Bernard Etzinger, a spokesman for the Canadian Embassy in Washington, pharmaceuticals that are manufactured in Canada or imported for distribution there are subject to the safety regulations of PMPRB. But once the drugs are put in the mail for export, PMPBR no longer can guarantee safety. Nor does any Canadian law prohibit export. "The import of prescription drugs by U.S. consumers, although illegal in the United States, is considered to be an internal U.S. matter," says Etzinger.

The most likely scenario, therefore, would be wholesale reimportation by large U.S. pharmacy chains or HMOs purchasing from wholesalers in Canada. These U.S. purchases then would compete against Canadian wholesale buyers, probably paying a small premium to gobble up the Canadian supply. The result would be that pharmaceutical manufacturers would quit supplying Canadians with drugs in excess of present levels. In fact,

GlaxoSmithKline, an international firm with operations in the United Kingdom and the United States, already has cut off supplies to Canadian pharmacies that are engaging in export practices.

"What are the intended effects of this legislation?" asks Jack Calfee, resident scholar at the American Enterprise Institute, a Washington think tank. "It presents a simple scenario of free imports from other countries. The implication is that reimportation would increase. But the Canadian market is now 4 percent of the U.S. market. If it jumped to 8 percent, manufacturers would lose an amount equal to the present Canadian market, and they would drop Canada. There is no reason to expect manufacturers to ship huge volumes at low prices. But that is not the goal. The supporters want price controls in the United States. In fact, the Senate version contains some very intrusive controls to ensure 'nondiscrimination' against Canadian wholesalers who want to sell back to the United States."

Carolyn Aldige of the Cancer Research and Prevention Foundation, a patients-advocacy group, says, "Nothing in the bill would make sure that imported drugs are safe and properly handled. The issue is not about cost; it's about innovation. There are 8 million cancer survivors living today because of drug innovation. Lance Armstrong emphasizes that it was the drugs of one company [Bristol-MeyersSquibb] that saved him."

According to the Pharmaceutical Research and Manufacturers of America (PhRMA), between 1993 and 2003 alone Americans obtained more than 363 new medicines, biologics and vaccines approved by the FDA to treat more than 150 diseases and conditions. Before 1998, patients with rheumatoid arthritis depended upon aspirin and the like for relief. But now new medicines have provided new treatments, and 29 more are in the pipeline. A decade ago there were no effective treatments for Parkinson's disease, HIV, bipolar disease and type-2 diabetes. Now new medicines have revolutionized treatment (www.phrma.org).

The drug industry says that the average cost to develop a new drug has grown from $138 million in 1975 to that Tufts study of $802 million in 2000. Moreover, says PhRMA, "Of every 250 drugs that enter preclinical testing, only one is approved by the FDA. Only three of 10 marketed drugs produce revenues that match or exceed R&D costs." In 2002, the industry in the United States spent $32 billion for research, more than the entire budget of the National Institutes of Health. "On average," according to PhRMA, the R&D-to-sales ratio for its members is higher each year than those of companies such as Microsoft, Boeing and IBM. Although Europe was formerly the lead region for pharmaceutical development, today eight of the top 10 worldwide prescription drugs by sales originate in the United States.

Precisely because Congress recognizes Medicare reform as watershed legislation with unforeseen consequences from the included prescription-drug benefit particularly in terms of fiscal responsibility there is a distinct possibility that Medicare reform will fail, with both sides pointing their fingers at the other as the cause of the failure. But the pictures of those little old ladies getting on the bus to Canada may result in the reimportation provisions being pulled out and passed just so Congress can say it is doing something.

James P. Lucier is a senior editor for Insight.

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