International Trade Committee on Dec. 3rd, 2013

[The Chair, Conservative, Rob Merrifield]

We'd like to call the meeting to order. We have one witness who is on his way and will be here in a very short time. We're dealing with CETA, the Canada-European Union free trade agreement. We are continuing that study, and we have the Canadian Generic Pharmaceutical Association here with us, represented by Jody Cox, director of government relations, and Jim Keon, president.

Also, I'd like to let the committee know that some of our witnesses have a plane to catch at 11 a.m., so you want to be out of the room a little bit early. We have business at the end of the meeting, so we'll accelerate this segment just a little bit to accommodate that.

So with that, Jim, you're doing the presentation? The floor is yours.

[Jim Keon, President, Canadian Generic Pharmaceutical Association]

Thank you very much, Mr. Chair.

Good morning. On behalf of the Canadian Generic Pharmaceutical Association and our member companies, I would like to thank you, Chair, and honourable members, for this opportunity to participate in your study of CETA, the comprehensive economic and trade agreement.

I'm joined today by Jody Cox, who is federal affairs director for the CGPA. She is responsible for our intellectual property and international trade files.

The generic pharmaceutical industry operates the largest life sciences companies in Ontario, Quebec, and Manitoba. We are Canada's primary pharmaceutical manufacturers and exporters, and are among the top R and D spenders across all industrial sectors. Generic pharmaceutical companies directly employ more than 12,000 Canadians in high-skilled research, development, and manufacturing positions. Our industry is a strong supporter of free and open trade. We export our high-quality, made-in-Canada generic medicines to more than 115 countries. We also procure raw materials and other imports for our medicines from around the world.

Canadian generic pharmaceutical manufacturers are globally focused, and all play an integral role in their companies' sophisticated global supply chains. This includes companies headquartered in Canada that are successfully competing in the global environment, as well as many of the world's leading generic pharmaceutical companies that have made strategic investments in Canada. The generic pharmaceutical industry also plays an important role in controlling health care costs in Canada. Generic drugs are dispensed to fill 65%—nearly two in three—of all prescriptions but account for less than 24% of the $22 billion that Canadians spend annually on prescription medicines.

Before moving on to the specific topic of CETA, I would like to provide a brief overview of the Canadian generic pharmaceutical industry's perspective on trade negotiations. The global generic pharmaceutical industry, as you might expect, is highly competitive. In order to operate in this environment, companies need to be able to access export markets for new generic medicine as soon as they open up to competition. Being late to the game generally means a permanent loss of potential market share that can never be recovered. The country's intellectual property regime for pharmaceuticals has a direct impact on the competitiveness of its domestic generic pharmaceutical manufacturing facilities. Generic pharmaceutical companies must navigate a domestic intellectual property system in order to manufacture for both its domestic market and its export markets. Companies typically have multiple manufacturing sites around the world, and the larger international companies have dozens of global manufacturing sites.

When changes are made to a domestic intellectual property system that create delays in when a generic medicine can be manufactured in a country, it becomes difficult for that country's domestic manufacturing facilities to compete effectively for new global R and D and production mandates from their headquarters. Excessive and conflicting IP requirements in trade agreements hinder competition and create barriers to trade for generic pharmaceutical manufacturers. Before CETA, Canada was already home to one of the strongest pharmaceutical IP regimes in the world. Canada's period of data protection, for example, was three years longer than that of any other country with a patent linkage system.

In addition, our patent linkage system created a great deal of unnecessary and costly litigation, because it did not bring finality to proceedings. This created an enormous financial risk for generic pharmaceutical companies that launched new generic medicines in Canada. It is the CGPA's view that too much emphasis in trade negotiations is placed on the wish list of rights-holders. More emphasis should instead be placed on the types of things that actually help to facilitate trade and would be beneficial to all life sciences stakeholders. These include things like regulatory cooperation, increased harmonization of regulatory standards, and mutual recognition of inspections.

Interestingly, the European Union's negotiations with the United States with respect to pharmaceuticals are focused in these areas, and not on intellectual property. The CGPA would like to see Canada take a similar approach in future trade negotiations.

I will now focus my remarks specifically on the CETA negotiations and the pharmaceutical aspects of those. Early in the negotiations, the European Commission tabled a series of proposals aimed at increasing pharmaceutical intellectual property measures for pharmaceuticals in Canada. This happened despite the fact that the actual pre-CETA market protected periods provided to brand name drugs in Canada were already consistent with the EU and about six months longer than in the U.S.

A study prepared for the CGPA by two leading Canadian health economists in early 2011 estimated that, if adopted, the proposals would delay the introduction of new generic medicines in Canada by an average of three and a half years. The cost to pharmaceutical payers of this delay was estimated at $2.8 billion annually, based on generic prices in 2010, and they've actually come down. In addition to increased drug costs, these original proposals would have had a major impact on generic pharmaceutical manufacturers. As I mentioned earlier, generic companies must navigate the domestic intellectual property system before they can manufacture for both domestic and export markets. Delays of this magnitude would have made Canadian generic manufacturers uncompetitive in attracting new R and D and production mandates to the country.

How did the CETA negotiations end up? The measures in the agreement, in principle, fall short of the European Commission's original and necessary demands on behalf of brand name drug companies. That's a good thing. But the measures will still delay market entry of cost-saving generic prescription medicines in Canada in the future. The full cost to Canadians of the actual delays in generic drug competition resulting from the new measures will depend on the specific manner in which they are implemented by the government.

The responsibility for the negotiation fell to Minister Fast and the Department of International Trade. The responsibility for ensuring the provisions are implemented in the least harmful way falls to Minister Moore and Industry Canada. That implementation is very critical to us. We are pleased that the government has made commitments for additional safeguards and reforms to Canada's pharmaceutical intellectual property regime to provide greater business certainty for Canadian generic pharmaceutical manufacturers. These commitments are actually outlined in a letter that Minister Fast sent to the CGPA.

I will quickly address each of the three areas, the first being the right of appeal. This was a very one-sided ask of the European Union. The Government of Canada understood there are major problems with our linkage system and the CGPA, as I said, has received written assurances from the Government of Canada that, in implementing the right of appeal that's spelled out in the treaty, it will also address the excessive and duplicative litigation by ending the practice of dual litigation. We welcome this. We've been advocating for these reforms for several years. Canada is the only country that allows brand name pharmaceutical companies to sue generic manufacturers multiple times on the same patents. This adds to the costs and risks of bringing generic drugs to the Canadian market.

While the specific implementation details will be crucial to the success of the reforms, we again welcome the commitment to reduce the burden on the courts, to bring earlier finality to pharmaceutical patent disputes, and deliver greater business certainty for generic companies in Canada. If implemented correctly, the reforms should end dual litigation and help protect Canadian consumers by ensuring invalid or non-infringed patents do not prevent cost-saving competition from coming to the market.

On patent extensions, we are disappointed by the inclusion of patent term extension in CETA. Given the overall strength of our Canadian intellectual property regime for pharmaceuticals, the adoption of such a measure was unnecessary. That said, as I said earlier, we do welcome some of the mitigating factors, including the government's commitment that the maximum length of extension—and this was in the technical document—will never exceed two years. The government has indicated that other predefined safeguards will also be part of the extension, reflecting the concerns that we raised. CETA sets an international precedent. It's the first trade agreement that permits an exception under the period of patent extension for the production and other activities related to the export of generic medicine. This provision recognizes the importance of Canada's generic pharmaceutical manufacturing to the domestic economy. If implemented correctly, this provision will help our members keep life sciences jobs in Canada.

We're pleased that CETA does not impose changes to the domestic data protection regime which were asked for by the European Union. We're disappointed, however, that the treaty obligations have been extended by three years to reflect current levels. From a global perspective, this is the first time that eight years of pharmaceutical data protection has been included in a trade agreement. It sets an unfortunate precedent for future agreements.

While the negative outcome of the CETA negotiations has been mitigated by the Canadian negotiators, the CGPA is also concerned about upcoming negotiations in the Trans-Pacific Partnership agreement. We are concerned that the hard-fought concessions achieved by Canada are not eliminated for pharmaceuticals. The TPP negotiations are complex and involve 12 countries with a wide range of economic and trade interests.

In the TPP negotiations, the U.S. has tabled measures that go far beyond the provisions tabled in CETA. We understand that this committee is planning a separate study on the TPP, and I would recommend that members play close attention to the pharmaceutical IP aspects of those negotiations.

In conclusion, I would say that the outcome of the pharmaceutical IP negotiations in CETA was mitigated by the Canadian negotiators and the minister, particularly when compared to the original proposals. However, as I said, it will cost Canada in the future with patent extensions.

I cannot stress it enough; proper implementation of provisions is key, and we are aware that the brand name pharmaceutical industry may attempt to undo many of the concessions and the commitments provided by the Government of Canada, particularly in regard to the patent linkage system. As such, we ask government members of this committee to ensure that pharmaceutical IP provisions are implemented in a manner both consistent with the new treaty obligations and in line with the commitments that the government has made to the pharmaceutical industry.

Jody and I would be pleased to answer any questions you have this morning.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

I'm sure you've spurred a number of questions, but before we get to that, we have with us from the Canadian Council of Chief Executives, Ailish Campbell, vice-president of policy, international and fiscal issues.

Ms. Campbell, thank you for being here. The floor is yours.

[Ailish Campbell, Vice-President, Policy, International and Fiscal Issues, Canadian Council of Chief Executives]

Thank you so much. I would like to apologize to the committee for being late. I unfortunately ended up at your Sparks Street location. I like your old digs, actually, myself.

Thank you, Mr. Chairman, and committee members. Here is a little bit about our organization.

The Canadian Council of Chief Executives is a not-for-profit, non-partisan organization made up of 150 CEOs of Canada's leading enterprises. We engage in an active program of public policy research, consultation and advocacy.

The Canadian Council of Chief Executives represents 150 leading enterprises. Members collectively administer $4.5 trillion in assets, have revenues in excess of $850 billion, and are responsible for the vast majority of Canada's exports and investment in R and D. The council is representative of virtually every sector of the Canadian economy.

It is the strong view of the Canadian Council of Chief Executives that the overall impact of the Canada-European Union comprehensive economic and trade agreement will be extremely positive for Canadian consumers, Canadian companies, and Canadian workers. Our analysis of the agreement indicates an ambitious, far-reaching agreement that will boost economic growth, create jobs, and expand opportunities across the board for firms of all sizes, including small and medium-sized enterprises in virtually every sector. The CCCE would like to extend its congratulations to the Government of Canada; Minister Ed Fast; our chief negotiator, Steve Verheul; and their team for creating a next-generation trade agreement that covers traditional areas as well as regulatory cooperation, government procurement, and, for the first time, a chapter on sustainable development.

The Canada-EU deal also addresses such issues as agricultural protection, and promotes intellectual property as a driver of innovation. This will improve our country's brand and signal to the world that we are capable of negotiating a modern, far-reaching trade agreement. I know that members of this committee are interested in other specific aspects of the deal, including the investor-state provisions. I'd be happy to answer questions on those later.

Twenty years ago our country signed the North American Free Trade Agreement and benefited from a surge in exports, investment, and economic growth. The Canada-EU agreement is the next logical step forward in Canada's global trade agenda.

Based on our analysis, there are three key principal reasons that we feel CETA will be of benefit to Canada.

First, it positions us with privileged access to the world's two wealthiest markets. The agreement also provides Canadian firms with a first mover advantage over their U.S. rivals. Combined with NAFTA, access on top of this to the EU provides Canadian companies with access to over 800 million customers with a combined GDP of $30 trillion.

I've mentioned improved goods and agricultural trade. It's also vital to note that the services sector right now composes 70% of Canada's GDP. International trade and services were worth over 4.5% of our GDP. CETA provides broad and improved market access to a number of sectors, including engineering, professional, and environmental services. Again, this is a very future-facing agreement.

The CCCE also wishes to underscore the improvements that will occur in labour mobility and temporary entry of professionals. In our view, these provisions are of particular importance.

Second, CETA will enhance competition. Canadian consumers and companies will benefit from improved access to European products, components, and services. Eliminating tariffs on European imports will help lower prices in Canada. Canadian consumers will benefit from less expensive products, while businesses will benefit from cheaper imports. In short, CETA is firmly part of a consumer agenda for Canada.

Third, CETA will help diversify Canada's trade and set the stage for talks with Asia. The global downturn brought home to many Canadians the need to diversify our trade and lessen our dependence on the U.S., which currently buys 70% of what we export in terms of goods. Canada-U.S.trade is a mainstay of our economy, and this will not change. We should do everything in our power to strengthen it. But we need to be working equally hard to expand our trade with other regions, the EU in particular.

Canada has not concluded a single free trade deal with a large economy since NAFTA in 1994. With CETA, Canada can reclaim its former role as a leader in the global move towards trade liberalization. We would note that Mexico has had an FTA with the EU since 2001. Our ultimate objective should be eventually creating a NAFTA-EU free trade area once the U.S. has concluded with the EU.

Canada does not need to choose between such agreements as CETA and a separate push into emerging markets. We can and must pursue both. The Canada-EU deal establishes a template for other trade negotiations, including those with India, Japan, and the countries of the Trans-Pacific Partnership. The CCCE also feels that Canada should explore a strategic partnership with China, similar to what China enjoys with Australia.

In conclusion, given the export-oriented nature of the Canadian economy, the conclusion of a deal of this magnitude with a partner as progressive and as dynamic as the European Union is to be warmly welcomed. Canada is the eleventh-largest economy in the world, yet we are only 35 million people. Our prosperity and jobs depend on exports. Our prosperity and jobs depend on trade. CETA, alongside NAFTA, provides access to the customer base that firms require to create jobs and grow in Canada.

Finally, real results will only come when this deal is in force. The Canadian Council of Chief Executives encourages federal, provincial, and territorial officials, as well as the European Parliament and member states, to proceed as quickly as possible towards final approval and ratification.

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Now we'll move to question and answer.

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 coming today and giving us your precious time. Welcome to the trade committee.

Mr. Keon, I want to get a clear idea of this. Will CETA increase the costs of pharmaceutical products in Canada once it is fully implemented, or not?

[Jim Keon]

Yes.

The patents will be extended by two years. That will occur in the future. The agreement is to apply patent extensions to products coming on the market after the agreement comes into force, so perhaps in 2015. At that time, patents will be extended by two years. By definition, generics will be two years later entering the market. The price differential between the brand product and the generic will be the extra costs to the health care system.

[Don Davies, NDP, Vancouver Kingsway, BC]

I realize the costs have been pushed into the future because of the way CETA will be implemented and the way the IP provisions will be implemented.

Could you give us a range of what you might estimate would be the cost annually of the IP provisions to the pharmaceutical industry?

[Jim Keon]

The best study that was done during the negotiations was by Professor Aidan Hollis, in Calgary, and Paul Grootendorst, at the University of Toronto. Their estimate was that for the full range of commitments that the Europeans were demanding at that time, the cost could be up to $2.8 billion per year. As I said in my presentation, the government did not agree to all those demands. There were lesser demands. There was no increase in data protection, only a two-year patent extension, so clearly the costs will be less than that.

I will give you a number, but the other qualifier I would put on it is that we're looking into the future, probably eight or ten years, before the costs come into play. It really depends on what products come on the market during that time as to what the actual costs would be.

Having said all that, if we simply take their estimate and use two years instead of the extra years that were being asked for, it could be somewhere in the range of close to $1 billion extra per year in the future.

[Don Davies, NDP, Vancouver Kingsway, BC]

If I understand this technical summary, it says, for the patent term restoration:

The 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.

Then, of course, we've capped the amount of time that will be added to the brand name patent holder at two years.

My reading is that this will virtually always add two years because of the way the patent system works. In other words, the brand name patent holder will apply for a patent as soon as possible to protect their interests and then apply for regulatory approval to Health Canada some time later. That period of time between those two things will almost always exceed two years.

Am I correct in that assumption?

[Jim Keon]

Yes.

Exactly how the system will work will depend on the Canadian legislation and regulations. Our expectation is that given the way the agreement is set out, in almost all cases pharmaceutical patents will move from 20 years to 22 years once the agreement is in effect.

[Don Davies, NDP, Vancouver Kingsway, BC]

In terms of creating jobs, will CETA and these provisions create jobs or cost us jobs in the generic manufacturing industry in Canada?

[Jim Keon]

CETA itself will not create new jobs. What we worked hard to do was to ensure that these excessive demands that were being put on our intellectual property system on pharmaceuticals did not ruin the Canadian generic pharmaceutical industry.

As I said, I think the mitigating factors are important. We have an export exception, so that during the period of extension—again, the implementation will be crucial—we will be able to develop a product, submit it to Health Canada for approval, and get approval.

We won't be able to sell it in Canada until the patents expire, but during that period we could export it to other markets. We're hoping that with that, our industry will continue to flourish in Canada.

[Don Davies, NDP, Vancouver Kingsway, BC]

What about R and D?

Is there anything in CETA that in your opinion will lead to more research and development in your field in Canada?

[Jim Keon]

If I go to the brand name side first, my answer would be no. The patents worldwide are of a national treatment obligation. So we give the same patent treatment to all countries. That's good because when Canadians go abroad they want patent protection the same there. But what that means, however, just in pharmaceuticals is whether the research is done at a headquarters in New Jersey or in Europe, you would get the same protection as if you did the research in Canada. It doesn't in and of itself generate and move research to your country.

If we look at the Patented Medicine Prices Review Board over the last number of years, we've seen that despite Canada having a generous pharmaceutical patent regime, research spending in Canada by brand name pharmaceutical companies by patentees has actually been going down. So we do not think that this agreement will increase that. In fact, I don't think the Government of Canada negotiated it that way. This was seen as a defensive interest for Canada.

[Don Davies, NDP, Vancouver Kingsway, BC]

This was a concession that we made. Would you agree?

[Jim Keon]

I think that this was a concession we made as part of a broader deal to get access to the market. I'll give negotiators credit. They did mitigate some of the features and, as I said, the export exception and things like that are going to be helpful.

[Don Davies, NDP, Vancouver Kingsway, BC]

In terms of that, there's some more work to do in this area too. I understand that there's a commitment in the technical summary for the government to work on the issue of dual litigation. In other words, a patent holder can challenge a generic at Federal Court and then if they lose, they can then initiate patent litigation in the courts. I think it's recognized in the technical summary that this is a problem.

Are you hopeful or can you give the government any advice in terms of what you'd like to see in that regard?

[Jim Keon]

The agreement in principle mentioned that there would be added to the litigation system a right of appeal that the European Union on behalf of brand name pharmaceutical companies had asked for. In the technical document and in our other discussions with the government, they've committed to revamping the system in entirety, that is, what we call the patent linkage system for pharmaceuticals in Canada. It's a very complicated system. It blocks the generic approval at Health Canada until there's litigation determining whether a patent is infringed or not. So you're blocked.

When the generic is successful, there are still full patent rights to sue a generic under the Patent Act. What we're finding is an excessive amount of patent litigation delaying generics, adding to our cost, and adding to the cost of the brand name companies. So I think that simplifying this system and unifying this system will be a very important measure and it's something that we are looking forward to developing with the government.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move to Mr. O'Toole.

The floor is yours for seven minutes.

[Erin O'Toole, Conservative, Durham, ON]

Thank you, Mr. Chair. I'd like to thank our witnesses for coming today and shining light on how the opportunity and some challenges with CETA will impact our economy and our employment.

Mr. Keon, I want to pause for a second on the $2.8 billion number you quoted, because certainly you did recognize that was an estimate based on the early negotiation stages of CETA. We now have an agreement in principle, which those professors did not have. We talked a little bit about the mitigating aspects of our negotiation, which you did highlight in fairness, but I'd like to pull them all together.

These are: the commitment to try to end dual litigation, which causes business uncertainty for both branded and generics; the export exception specifically for the generic industry; the fact that the European Union did not achieve their negotiated hopes with respect to data protection, patent extension, and retroactivity. So there's no retroactivity and no retroactive application. Those various mitigating factors alongside with the provincial move in recent years to bulk purchase in terms of pharmaceuticals together, all of those things considered, how accurate do you think that $2.8 billion number truly is?

[Jim Keon]

All of those mitigating factors are there and, as I said, we appreciate those and have congratulated the negotiators for having done that. The reality is that there will be extra costs, as I mentioned, with the two-year patent extension. The fact of the matter is generic drug prices have been dropping in Canada as a result of provincial regulation. So the gap between generic prices and brand prices has actually grown.

Generic prices now are capped in many cases somewhere between 18% and 25% of their equivalent brand name product. Any delay does add cost. Again, a very good mitigating factor is these costs for the health care system and these delays for generics will be into the future. So we'll have time to adjust. But if anything, the gap between brand prices and generic prices is going to increase and the costs will therefore increase as well.

[Erin O'Toole, Conservative, Durham, ON]

One of the benefits of the phase-in is that it will allow the federal government to work with the provinces to see what the delta will be once the extension comes into play as part of a multi-year health and social transfer. Our government has increased that. We've not cut it like the previous government did.

You mentioned the 12,000 jobs in the generic industry in Canada. I know some of the excellence in southern Ontario with respect to the industry, and I applaud it. You talked about research and manufacturing. How many of those jobs would be on the research side of the industry?

[Jim Keon]

The generic industry in Canada has a significant research base. Our largest member company, Apotex, has been the largest spender on pharmaceutical research and development for many years now in Canada. Apotex does both new chemical research—it owns a company Cangene, an arm of its own company—as well as research and development of the generic products in Canada.

Our percentage spend on research and development to sales is actually significantly higher than the brand companies in Canada. This is interesting, simply because we have a lot of that centred in Canada. Our ratio of R and D to sales is over 12%, and we have hundreds of jobs in R and D. I can't give you a precise number, but it's in the hundreds.

[Erin O'Toole, Conservative, Durham, ON]

Thank you.

Ms. Campbell, thank you very much for your presentation as well. I have one question for you.

I'm glad you seized upon one of the really innovative aspects of this agreement, which is the extension of the agreement beyond conventional goods and services into a broader range of services, including professional services. You quoted a stat I had not heard before—that these services account for 70% of our GDP. You described it as the most future-facing aspect of the agreement.

How do you see our services sector accessing Europe? What should we be doing in the next two years as we go towards ratification to prepare these industries to take advantage of a truly exceptional opportunity in the European market?