If it is okay with everyone, I'm going to present in English. I think it will be easier.
I'm going to be discussing policies to encourage innovative R and D in the Canadian pharmaceutical industry and basically show how these innovation policies right now are very costly and also very ineffective. I'll give just a brief overview of the political economy of the sector and then a better understanding of these innovation policies in terms of costs and benefits.
In terms of the overview of the political economy, we have to keep in mind that we have core companies, basically, what's called “big pharma”. They represent two-thirds of world market share. At the same time, two-thirds of the Canadian market is controlled by 15 companies. I think the focus must be more on these companies.
Over the last 30 years we have seen that in terms of increasing profitability, there has been an important increase in profits for these companies. If you compare them to dominant companies in other industrial sectors, you'll see a differential accumulation, so basically an increase in the gap in profits for the pharmaceutical sector. Now, this could be normal, but the problem is that when you look at what has been going on in the pharmaceutical sector in the last 20 years or so, everybody agrees that we have this huge innovation crisis. In terms of therapeutic innovation, right now the situation is a bit of a catastrophe. So how can we explain this paradox of having increasing profits while at the same time decreasing therapeutic innovation?
We need to understand that basically the dominant business model of the pharmaceutical sector right now, not only in Canada but globally in the pharmaceutical sector, is way more focused on promotion, for example, than on real innovation. The patent system right now allows these companies to focus more on promotion, because they have large protection for the very little innovation they bring to the market, for example, with metered drugs.
The dominant business model is based on heavily promoting new medications that are insignificant in terms of therapeutic innovation. The existing financial incentives encourage large-scale promotion, not innovation.
On the question of innovation policies specific to Canada, we must keep in mind that patent policy is one of them, but we do have other innovation policies that are important for the sector. First, there are tax credits and the SR&ED program, but we have other tax credits as well. More or less, companies benefit from a 48% tax credit on R and D expenditures.
We have a system in Canada with the Patented Medicine Prices Review Board that sets the price for patented medicines in such a way that we always aim to be the world's fourth or fifth most expensive country, which is very problematic. This is something that is very costly. There is just no reason, for example, that when we compare ourselves to France or to the U.K., we spend 10% to 15% more for patented prescription drugs. The overall cost of that basically is that if we had a price comparable to that in France or the U.K. we would save around 12%, or $1.5 billion.
We have other innovation policies, such as the 15-year rule in Quebec and also some direct subsidies in Quebec and Ontario. If we do the math on all of this, basically, if you look at pharmaceutical R and D in Canada, the total gross private R and D expenditures are $1.2 billion, but if you take into account the tax credits, it means the net private R and D expenditure to the pharmaceutical sector is $640 million that is being spent by the companies.
If you add up the amounts, a conservative estimate of the cost of direct and indirect subsidies is $1.7 billion. So right now we have a system where Canadians pay at least $1.7 billion in different direct or indirect public financial subsidies to the pharmaceutical sector in order to generate a total of $614 million, for a rate of return of negative 65%. If you were running a company with this type of result, you would be fired on the spot, but this has been going on for at least the last 20 years.
In terms of innovation policy, the problem is that it's not working. The common measure to look at R and D intensity in the pharmaceutical sector for a country is the ratio of R and D to sales. It has been declining since the mid-1990s. It was 6.9% in 2010, and in 2011 it was still declining.
When we compare ourselves to other countries, we're not part of the leading countries in terms of the ratio of R and D to sales. We're more on par with Cyprus and Romania right now.
How can you solve the problem? My take on the issue is that we must not plow more money into the system. I have three very simple recommendations.
First, we need to change the way we set prices, for example, to aim at countries like the U.K. or France in terms of prices, so it would save us at least $1.5 billion.
There's discussion with the CETA agreement right now, Canada and Europe. My take on this is that you need to scrap the patent linkage regulations. This is costly, it is ineffective, it is a waste in patent litigations, and it creates real insecurity for brand-name companies in terms of the length of market exclusivity.
Finally, if we want to go for a patent term restoration--for example, the delay for approval--to get it back in terms of extended patent protection, it's not a problem. It's just a patent. It's not a right. It's a privilege granted by the state, and the state can require specific conditions to grant this privilege. The idea would be to impose the condition that a significant portion of these additional revenues because of patent term restoration be reinvested in Canada. I think you would really create a knowledge-based economy.