International Trade Committee on Dec. 10th, 2013

[The Chair, Conservative, Rob Merrifield]

We'll call the meeting to order.

We are continuing our study of the Canada-European Union free trade agreement, I guess technically the comprehensive economic and trade agreement.

I'm would just remind the committee that we are the only committee sitting this week. I don't know what they do in other committees, but we've got places to go, people to see, things to do. I appreciate all of your being here this morning and taking part in this important study.

We do have with us Spirits Canada and Rx&D, Canada's Research-Based Pharmaceutical Companies.

We'll hear from Spirits Canada first, Jan Westcott, president and chief executive officer.

We'll open the floor to your presentation first, and then we'll get to Mr. Russell.

[Jan Westcott, President and Chief Executive Officer, Spirits Canada]

Thank you, Mr. Chairman.

I'm Jan Westcott, the president and CEO of Spirits Canada, and I'm here with my colleague, C.J. Helie, who's our executive vice-president. We're pleased to be here today in support of the Canada-European Union comprehensive economic and trade agreement, or CETA.

Spirits Canada is the only national organization representing the interests of Canadian spirits manufacturers, exporters, and consumers. Spirits producers in Canada are primary manufacturers. We source locally grown cereals such as barley, corn, rye, and wheat, and transform them into high value-added consumer products. Our signature products and our international recognition are based on Canadian whiskey and Canadian rye whiskey, but we produce and market a full range of spirits products, including gin, rum, vodka, liqueurs, and ready-to-drink products. Spirits annually represent more than 65% of all Canadian beverage alcohol exports, significantly more than beer, cider, and wine exports combined. In fact, total spirits exports during calendar year 2012 were worth over half a billion dollars, and, happily, were 33% greater in value than they were in 2008, so we're on a good track.

Building on this international success, spirits industry exports in the first nine months of 2013 are running approximately 20% more than last year's. I mention as an aside that spirits are also the only Canadian beverage alcohol sector that is not subsidized by taxpayers. Canadian spirits brands have a great reputation internationally for quality and authenticity, and our members have invested heavily in recent years in new product development and expansion into new markets.

CETA offers another important step in the evolution of bilateral alcohol trade between Canada and Europe. CETA builds on the previous 2004 wine and spirits agreement, and will provide further positive forward momentum.

Today, I'd like to highlight four key sector-specific initiatives within CETA that would be beneficial to Canada.

One, spirits consumers will benefit from the elimination of remaining import tariffs.

Two, most of the growth in the market is in the premium and super-premium end of the business. People are drinking less, but they're drinking better. These premium brands will benefit from the conversion of certain liquor board service fees from an ad valorem or price-based application that penalized higher-value products to a new flat rate, volume-based price structure.

Three, Canadian spirits manufacturers will also now be able to source spirits in bulk from the European Union and bottle them here in Canada, providing first of all greater flexibility, potential cost efficiencies, as well as additional value-added activities here in Canada for certain companies.

Finally, CETA will ensure greater transparency and marketplace discipline in regard to state trading enterprises, otherwise known as liquor boards in Canada, engaged in various aspects of liquor importation, distribution, and retailing.

Last year, spirits represented over 80% of all Canadian beverage alcohol imported by the 27-member-state European Union. Our principle current markets in Europe include France, Germany, Finland, Spain, Sweden, and the United Kingdom, with these six countries representing the majority of our sales. There are great growth opportunities for us across many EU states, including the Czech Republic, Estonia, Hungary, Latvia, Lithuania, and Slovenia, as these eastern European consumers increasingly migrate from vodka to brown spirits such as whiskey.

Some trade critics are concerned that free trade agreements encourage offshore production to lower-cost countries. This concern does not apply to spirits because under Canadian law all Canadian whiskeys must be mashed, fermented, distilled, and matured in Canada; hence, our geographic indication, “Canadian whiskey” and “Canadian rye whiskey”. More importantly, fresh and pure Canadian water and Canadian-grown premium barley, corn, rye, and wheat are essential to creating the unique taste profile of our beloved iconic brands, brands that in a number of cases, such as Canadian Club and Wiser's, have been manufactured and sold continuously for over 150 years in this country. The growth in international exports of Canadian spirits translates directly into more jobs here in Canada on Canadian farms, in Canadian spirits facilities, and in hundreds of small and medium-sized businesses that serve and support our production and maturation facilities.

On behalf of our member companies, we want to extend our appreciation to the Prime Minister and Ministers Fast and Ritz for the leadership they have shown through these negotiations. We also want to commend our Canadian trade officials, particularly chief negotiator Steven Verheul and his team, who were extremely responsive to industry priorities.

I'd also like to recall for the committee members that the Canadian spirits industry has a request before the government for a reduction of $1 per litre of absolute alcohol in spirits excise duty. The impact of the 2006 excise rate changes has dramatically escalated the federal fiscal burden on spirits versus those of our direct competitors. Such a modest decrease in our tax load would be a critical precursor to the industry. It would allow us to take full advantage of the emerging trade opportunities being created through the government's trade agenda, thus enabling Canadian spirits to attain their full potential.

That's the end of my presentation. Thank you very much. At some point we would be pleased to answer questions.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Before we get to the questions, we will proceed with a presentation by Russell Williams, president of Canada's Research-Based Pharmaceutical Companies.

The floor is yours.

[Russell Williams, President, Canada's Research-Based Pharmaceutical Companies (Rx & D)]

Thank you very much.

I would like to express my thanks for this opportunity to appear before you to discuss the landmark Canada-European Union Comprehensive Economic and Trade Agreement. It is a historic accord.

My name is Russell Williams. I am the president of Rx&D. I am accompanied by Darren Noseworthy, vice-president and general counsel of Pfizer Canada.

Our industry, the innovative pharmaceutical sector, is a key player in Canada's knowledge-based economy.

Rx&D applauds the Government of Canada on the CETA agreement in principle, which is an outstanding and truly historic achievement. With this new agreement, Canada is setting the pace. CETA has been recognized around the world as a model for other 21st-century trade agreements.

From the start of CETA negotiations, Rx&D has been a strong and consistent supporter of the Government of Canada's goal to reach a mutually beneficial trade agreement with the European Union.

We believe a knowledge-based economy like Canada's must be built on the foundation of innovation, not imitation. And IP rights help protect and drive innovation across all sectors.

There's no escaping the fact that Canada lags behind our other trading partners when it comes to life sciences IP. With CETA, Canada is taking one step towards establishing a more level playing field for life science investments, and sending a positive message to international investors that Canada is a market that supports innovation. And I say this despite the fact that only two of three requests were actually acknowledged within CETA, but those two, which I'd like to describe now, are a step towards levelling the playing field.

The life science IP improvements in CETA include, first, patent term restoration, which has offered to research-based pharmaceutical companies the potential to recover up to two years of time lost on their patents as the result of lengthy development cycles and government regulatory approval processes. I'd like to remind the committee that Canada is currently the only G-7 nation that does not have any form of patent term restoration.

The second improvement that you find in IP in CETA is something called the right of appeal, which will allow research-based pharmaceutical companies to more effectively appeal court decisions when a patent is ruled invalid. An appeal process is currently available to the challengers, but not to the patentees, so this is a matter of fairness in front of the courts.

Why do these changes matter? They matter because improved IP protection will help drive investment, support higher-paying jobs, and lead to an improved health care system and better health care outcomes for Canadians.

And we know it works. Each time Canada has strengthened its IP regime in the past, it has been good for Canadian patients, our health care system, our economy, and for our members as well as the generic manufacturers. The IP reforms enacted by the government 25 years ago drove a 1,500% increase in annual investment over time, unprecedented domestic growth in pharmaceutical R and D, and one of the fastest growth rates for the sector among leading OECD countries.

To be fair, we acknowledge that our member investments, which still exceed well over $1 billion annually, have declined over the last few years. This is due in part to other countries surpassing Canada's IP regime. As a consequence, the global pool of well over $110 billion in annual life science investments is migrating to other jurisdictions. Other nations also boast supportive business environments and top-flight scientific talent. It's a fiercely competitive global environment. Canada must keep pace.

However, it is more than simply an economic issue. Innovation continues to provide more efficient and effective means of fighting some of the most complex health problems. We hope to be able to decrease the number of hospitalizations and the need for surgical procedures.

Throughout the negotiations, CETA opponents have argued that the health care system would be imperilled by IP improvements. They made the same arguments—the same arguments—against the historic NAFTA agreement with the United States and Mexico. They were wrong then, and they are wrong now. Their recycled arguments make for sensational headlines, to be sure, but their analysis is simplistic and biased.

This speculation fuels fear, but adds little value to meaningful policy discussions. Moreover the dire predictions have continuously been revised. It used to be $2.8 billion, then it was $1 billion; next week it will probably be something else.

Let's now consider the facts: first, drug prices will not increase due to CETA; second, nothing in CETA restricts or impairs the ability of any Canadian government to manage and control its health or medication costs; third, as the Government of Canada has stated, the CETA changes will have no significant impact for a good 8 to 10 years, and will apply to medicines that aren't even available today; fourth and finally, the European Union has higher IP protection than Canada, yet somehow the EU countries spend less on health care as a percent of GDP than Canada.

The costs of new medicines must be placed in proper context. According to a recent analysis of the data from PMPRB, the total cost of patented medicines has grown by only 4.1% over the last five years and, in fact, there's been negative growth in recent years. At the same time, according to data from CIHI, total spending for the whole health care system in Canada grew by 28.5%.

CETA opponents also completely disregard the value of innovative medicines in improving the health of Canadians. Recent studies prove that investments in new medicines offset health and social costs by at least two to one. Imagine the positive impact that might have on managing future health care costs, of even small increments of innovation in the medicines—keeping employees off disability, keeping them at work, and promoting productive citizens.

The development of new medicines has changed the world: think of polio, asthma, rheumatoid arthritis, and HIV/AIDS.

There are still too many Canadians living with disabling, painful and potentially deadly illnesses. This is unacceptable. It is why a number of Canadian patient groups strongly support the IP changes in the agreement.

CETA by no means resolves all life-science IP issues, but is an important step in the right direction. It will help our members to advocate within the respective organizations to secure those new investments in clinical trials, in product management, and plant improvements.

The committee recently heard some presentations that referred to dual litigation, so I'd ask my colleague Darren Noseworthy to make a few comments on dual litigation before we finalize the presentation.

[Darren Noseworthy, Representative, Vice-President and General Counsel, Pfizer Canada, Canada's Research-Based Pharmaceutical Companies (Rx & D)]

Thank you, Russell.

Thank you for the opportunity to speak to the committee today.

Dual litigation, as a first point, was never raised with the innovative industry in the context of CETA, and we are deeply concerned about any changes that grant the industry a right of appeal at the expense of other existing legal rights.

Just in terms of background, in Canada, when a generic elects to make a copy of an innovative drug before the expiry of all the relevant patents, it will engage what's called the patent linkage system. Why does Canada have a patent linkage system? This is because without it, generics would enter the market while patent issues are being resolved in the courts. This is different from the European Union, where the innovator can obtain an injunction to keep the generic challenger off the market while the legal issues are being resolved in court.

Under our linkage system, when an innovator wins, the generic can appeal. But when the generic wins, it enters the market for the most part within hours, leaving the innovator with no remedy under the linkage regime whatsoever. This is why the industry has been calling for a linkage appeal right for several years. As Russell mentioned, it is simply a matter of balance and fairness.

In addition, if a generic is successful in its linkage case it may sue the innovator for revenues lost due to delayed market entry, and in such cases, as you can well imagine, the generic argues for market conditions that maximize its damages claim. This is unique to Canada.

So what is dual litigation? In Canada, when a party wins its linkage case another challenge is possible. Innovators can sue for damages in an infringement action; that is true. Equally, however, generics can bring a similar action seeking to impeach an innovator's patent. Even if the generic loses all the linkage cases up to the Supreme Court of Canada, it can still start a new proceeding to invalidate the patents. The point is that dual litigation cuts both ways: it exists equally for all parties and has been used by both innovators and generics alike.

There are many aspects of the current IP enforcement regime that are unfavourable to the innovative industry. Innovators must win every linkage case against every generic. If you win two and lose the third, you have lost your market and you have no right of appeal.

As for section 8 damages, claims worth hundreds of millions of dollars that only benefit the generic industry, again, are characteristic only of the system in Canada.

Moreover, heightened patent utility requirements and the promise of the patent doctrine, again, exists only in Canada.

In closing, the right of appeal is an issue of fundamental fairness that has a relatively simple regulatory solution. This was the mutually agreed upon outcome of the CETA negotiations.

Thank you very much.

[Russell Williams]

Just in conclusion, we salute the government for reaching this landmark CETA agreement in principle. Obviously, the next two years are very important as we move towards implementation. I think it has been said in front of this committee before: the devil is in the detail. We have a lot of work to do, but we will work in complete collaboration to build a stronger and more competitive Canada.

Thank you very much.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

I'm sure you've stimulated some very good questions and we'll start with Mr. Davies. The floor is yours for seven minutes.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chairman.

Thank you to all the witnesses for being here and welcome to the committee.

Mr. Williams and Mr. Noseworthy, I want to start with patent term restoration. I'm reading from the detailed summary provided by the government. It says:

Period of protection will be calculated using reference points including the filing of the application for the patent and the first authorization to place the product on the Canadian market. Period of protection offered by Canada will never exceed a fixed cap of two years.

I want to make sure I understand this. You're an innovator, you develop a new molecule, and you apply for a patent. I've been told that's usually done as quickly as possible so that you can protect your intellectual property against other people who may be seeking to file a patent.

At some later point you then apply for regulatory approval to market the product. Once that is approved, you're able to go to market. It's that period of time between those two applications, or the application and the product approval, with a cap of two years that CETA has given. Is that correct? Do I understand that properly?

[Darren Noseworthy]

I think that's generally correct. Obviously, the devil will be in the details of how it's implemented, but if it follows the European supplemental protection certificate model, that's generally how it will work.

[Russell Williams]

Again the devil is in the details, but it seems that it's modelled after the European model, which has five years. Canada cut that short and said only two years.

[Don Davies, NDP, Vancouver Kingsway, BC]

It seems to me, though, and what I've been told is that from the time of the filing of the patent until product regulatory approval, it is almost never less than two years.

Do you agree with that?

[Darren Noseworthy]

There are some products...and I think you'll see recently in the field of oncology where the development time and the regulatory approval time are in some cases less than five years, but certainly two years is less than what is offered in Europe.

[Don Davies, NDP, Vancouver Kingsway, BC]

What I'm trying to find out is this. When applying for a patent you have to put together all of the paperwork for regulatory approval and then get that approved, which I'm told will never be less than two years—or virtually never. What I'm told is that what we've really done is added two years. Even if there's a cap of two years, for practical purposes we're talking about two years.

Do you agree with that?

[Darren Noseworthy]

It depends on what the basis for the exclusivity is. And we talk about it. I read Mr. Keon's testimony. It's not taking the 20-year term and adding two years. There is a practical amount of exclusivity that innovators enjoy in the market. That's in the neighbourhood of around 10 years. We never reach the 20 years because of all the developmental issues that you've just identified. Adding two years will never even get us up to the 20 years.

[Don Davies, NDP, Vancouver Kingsway, BC]

I understand that.

What I'm trying to determine is, will it add generally two years?

[Russell Williams]

Sorry, everybody jumps in. My apologies.

No. The rules haven't been set and we can't come to those conclusions. We could look towards the European model and learn from it, and we're trying to understand exactly how it works. However, I actually see patent term restoration as remedial in nature. I would love it if our approval process were as rapid and quick as anybody else's in the world so that we could make innovative medicines available to Canadians as soon as possible. I have always seen this as remedial in nature. We're working very hard with Health Canada domestically—it has nothing to do with CETA—to try to improve the approval process so that's done more quickly for Canadians.

[Don Davies, NDP, Vancouver Kingsway, BC]

Right. We share those.

By the way, we also say the devil is in the details as well. I'm glad to see that both of you have used that term as well.

[Russell Williams]

We'll be talking over the next couple of years.

[Don Davies, NDP, Vancouver Kingsway, BC]

In terms of the right of appeal, in the government's technical summary, it says that “Canada agreed to a general commitment to ensure that litigants are afforded effective rights of appeal,” which you've described, “which gives scope for Canada to end the practice of dual litigation.”

If I understand you properly, have you been consulted by the government on the issue of ending dual litigation?

[Russell Williams]

Not prior to reading that in the technical document, as far as I can tell, no.

My understanding is that it wasn't part of discussions. You don't see that in the CETA accord either.

[Don Davies, NDP, Vancouver Kingsway, BC]

Okay.

Do you have any idea, then, why that is included in the document entitled “Technical Summary of Final Negotiated Outcomes of CETA”?

[Russell Williams]

This was the government's statement of its agenda moving forward. All I can say is that this is not part of the CETA agreement. The CETA agreement was a clear statement on equalizing fairness, if I can call it that, in front of the courts—but both sides would have the same rights. I have to say it's unclear to us exactly what that means.

Darren Noseworthy suggested what it could mean. It may look like there is forward movement with a right on the one hand, but that it gets changed with the other hand.

[Don Davies, NDP, Vancouver Kingsway, BC]

We'll need more information, I think.

[Russell Williams]

We're going to need a lot more information.

It would be disconcerting if it moves forward with one and takes with the other.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

Do you have any idea of how many jobs Canadians can expect your industry to create as a result of CETA? Do you have any estimate to give the committee?