EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, March 5, 1997

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[English]

The Chairman: Ladies and gentlemen, the committee will begin on time, probably in about one or two minutes. Please get yourselves ready. Thank you.

This meeting is pursuant to Standing Order 108(2), a review of section 14 of the Patent Act Amendment 1992 (Chapter 2, Statutes of Canada, 1993). The committee will now resume its proceedings.

I would like to welcome the witnesses from the Canadian Drug Manufacturers Association.

Brenda Drinkwalter, welcome. I'll let you coordinate the presentation of your group and introduce the people who are with you. Because this is televised, Ms Drinkwalter, I'll just ask you to go slowly. As you turn things to other members of your delegation for answers, just count to two and give the cameras a chance to catch up to them, as this is being telecast.

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The committee is scheduled to go from 3:30 p.m. to 5 p.m. You represent a major interest in this debate. We want you to feel that you have a lot of time to respond, but we ask you to go through your first part as quickly as you can so you can get to questions. As you have seen from watching previous witnesses, committee members have lots of questions and a lot of interest in your perspective.

Welcome, and perhaps I can turn it over to you.

Ms Brenda Drinkwalter (President, Canadian Drug Manufacturers Association): Thank you, Mr. Chairman and honourable members.

On behalf of the Canadian Drug Manufacturers Association, I would like to thank you for this opportunity to address your committee on part of the parliamentary review of Bill C-91. The outcome of this review will have major long-term consequences for Canadians and our health care system, and for the future development of the small and medium-sized enterprises that make up Canada's national pharmaceutical sector.

As Mr. Walker has said, my name is Brenda Drinkwalter. I am president of the Canadian Drug Manufacturers Association, and with me today are several key members of the industry: Mr. Leslie Dan is chairman and CEO of Novopharm; Mr. Joseph Kerba is vice-president of Novopharm Quebec; Mr. Jim Keon is vice-president of research and international affairs for CDMA, and I will tell the committee that Mr. Keon has extensive trade and intellectual property expertise from his 17 years with the federal government, including his participation in the NAFTA and the WTO negotiations; and finally, Dr. Barry Sherman is chairman and CEO and founder of Apotex, one of Canada's largest generic companies.

The Chairman: I must apologize in advance to the witnesses. There's a debate on the CPP, which is another responsibility I have, so Walt Lastewka may be taking over before the end of proceedings. I'm not sure, but if that happens that's the reason for it.

Please continue. I'm sorry to interrupt your flow.

Ms Drinkwalter: That's all right.

I would like to tell the committee members that at the end of our presentation, you will all be receiving copies of our brief in both English and French.

To continue, today we will provide you with an overview of our industry and the cost implications of Bill C-91 for Canadians. We will outline our recommendations for changes, which would effectively rebalance the Patent Act so that it best represents the interests of Canadian consumers, governments, and third-party payers, those of our national generic industry and those of the foreign-owned multinational drug industry.

Canada's treasured health care system is one of the things that defines us as Canadians, and drugs are playing an increasingly important role in health care today. The National Forum on Health has recently recommended that Canada ensure access to drugs for all Canadians through a national pharmacare program. In order for that to be viable, drugs must be affordable.

The Canadian Drug Manufacturers Association represents an important segment of Canada's national pharmaceutical industry, a group of entrepreneurial companies that specialize in the production of high-quality, affordable generic drugs, fine chemicals, and new chemical entities including biotech drugs. These companies are mostly Canadian owned and today employ close to 4,000 people right across the country. The birth of major CDMA companies like Apotex, Novopharm, Technilab, Pharmascience, Genpharm, and Pro-Doc is fostered by legislative policies and our continued growth is dependent on fair and balanced legislation.

Today, while our industry participates strongly in the generic market, we see our leading companies moving into innovative product development, investing heavily in research and development. Our industry is making significant investments in biotechnology, growing our innovative biopharma research capabilities. Through companies like Apotex Fermentation, Cangene Corporation, and Novopharm Biotech, we are strengthening our foundation for growth into fully integrated pharmaceutical companies.

We strongly believe that given the right policy environment, companies represented by CDMA will continue to expand their job creation, investments in research and development, and exports. At the same time, we will continue to play an important role in our health care system by providing affordable medications to Canadians, which helps to control drug costs.

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To do so, however, there must be a greater balance in Canada's drug patent policy. This balance must reflect the interests of all parties involved: Canadians who pay for drugs, the domestically owned industry, and the foreign-owned multinational drug corporations.

How do we achieve this balance? There are several issues that we believe must be addressed in reaching this goal.

These issues include the right for all Canadians to have access to affordable medication; a patent policy that respects Canadian needs and interests and is based on considerations that reflect Canada's health care, economic and industrial needs; a recognition of the contribution the generic industry makes to the Canadian economy and our health care system, and the development of policies that encourage its growth and assist its transition from generic to innovative phase; guarantees of sustained investments in basic research and development, which will develop domestically owned intellectual property and help Canada become more competitive at home and abroad; freedom from unnecessary bureaucratic regulations that unfairly block the entry of cost-saving products onto the market; the rights of Canadian companies to export products to other countries where the patents may have already expired, providing our companies with the right to operate their businesses and create jobs here in Canada and not in some foreign country; and finally, an appropriate length of patent protection and resulting market monopoly that balances the time needed for a fair return on investment for the brand name industry with the need for cost-saving medications for Canadians.

These are the key issues we believe this committee must address. We will discuss each in greater detail, outlining our position and solutions for reaching a fair and equitable balance.

We want to stress to you that the Canadian Drug Manufacturers Association and its member companies understand that patents serve a useful purpose, and as a result we are not against them. What we do oppose is what we see as the abuse of the patent system and levels of protection that we believe are unsuitable given today's health care environment.

The Canadian system of compulsory licensing that was eliminated by Bill C-91 helped meet this goal. It provided an effective method of controlling drug costs by allowing cost-saving generic drugs onto the market after brand name companies had received a fair period of market exclusivity. At the same time, it was a strategic tool to foster the growth and development of the domestic pharmaceutical sector. It can be credited for helping the generic industry grow to where it is today.

Canada followed the United Kingdom's lead in introducing compulsory licensing in 1923, which allowed for the manufacture of medicines and fine chemicals in Canada. This legislation, however, did not allow for the import of active ingredients. This restriction, along with the lack of manufacturing capacity in Canada, meant that the compulsory licensing provisions were seldom used and pharmaceutical patentees enjoyed effective monopolies.

In the 1960s concern over rising drug costs led to an extension of compulsory licensing provisions to cover imports, which became law in 1969. Manufacturers were now allowed to import the active ingredients needed to develop a particular drug. Under this system generic manufacturers paid royalties to the drugs' inventors to offset the cost of research and development. This spawned the growth and development of Canada's domestic generic pharmaceutical industry and resulted in lower drug costs by allowing competition to set prices.

Over the next decades the industry's increasing sophistication allowed it to bring its products to market faster, resulting in stable drug prices in Canada but also in increasing pressure from foreign-owned multinationals to amend or repeal compulsory licensing provisions. This led to restrictions on licences in Bill C-22 in 1987, and ultimately to the elimination of compulsory licensing in Bill C-91 in 1993. The scales were tipped in favour of the foreign-owned brand companies, at the expense of purchasers of drugs and Canada's generic drug manufacturers.

We believe this review provides an opportunity to correct some of the unfairness and imbalance in Bill C-91. Without changes, Canada risks an unprecedented increase in drug costs and a downturn in its domestic industry. Action must be taken now so that in 10 to 15 years we're not right back where we were in the 1960s, with high drug prices and a weak domestic industry. We risk erasing the past 25 years of industrial development in our sector, and we put the future viability of our health care system at risk. Today we will present evidence that shows the impact Bill C-91 is having on drug costs in our health care system.

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To correct the imbalances in the current patent system, we believe the government must undertake the following: repeal the patented medicines or notice of compliance regulations made under subsection 55.2(4) of the Patent Act; eliminate export restrictions that prevent Canadian drug manufacturers from exporting products still under patent in Canada to countries where the patent has expired; retain the existing Bolar provisions and the generic industry's right to conduct research and development and prepare for market prior to a patent's expiry for the purpose of meeting regulatory approval; correct the retroactive unfairness of Bill C-91 -

[Translation]

Mr. Ménard (Hochelaga - Maisonneuve): Could we ask the witness to speak more slowly? If I understand correctly, she doesn't want us to have a copy of her brief, in order to maintain the suspense. If we are to have a meaningful discussion, we need a little less passion and a little more... We want to be able to take some notes so that we can ask the right questions.

[English]

The Chairman: Despite your strategy, that's one of the reasons we ask witnesses to distribute the briefs ahead of time.

Ms Drinkwalter: We would like to correct the retroactive unfairness of Bill C-91 and reinstate compulsory licences that generic manufacturers should have received prior to the passage of Bill C-91 in February of 1993. We see reducing the period of market monopoly through a return to compulsory licensing, and we should refuse to introduce patent term extension, which would further increase patent protection and the costs associated with Bill C-91.

We would like to ensure that the biopharmaceutical patents as yet unissued be given a term of 20 years from filing. We would like to direct the Canadian intellectual property office to avoid issuing broad blocking patents that would harm the development of our domestic biotechnology sector.

We see amending the food and drug regulations and the Trade-marks Act to require generic drugs to be similar in size, shape, and colour to their brand equivalents.

We would like to see a strengthening of the powers of the Patented Medicine Prices Review Board to better control patented prices and use more stringent criteria to secure commitments from the brand name industry.

And for Mr. Ménard....

[Translation]

Mr. Joseph Kerba (Vice-President, Operations, Novopharm Quebec; Canadian Drug Manufacturers Association): We will be taking a brief look at the nature of the generic drug industry in Canada and its growth potential. As we said at the outset, the industry has grown so much in recent years that it now employs more than 5000 Canadians, 4000 of whom work for companies who belong to the Canadian Drug Manufacturers Association. The number of employees who work in the area of research and development has increased regularly - increasing from 14% of the total number of jobs in 1990 to 23.5% in 1995.

Jobs and investments in our national industry have increased, while the foreign-owned brand name industry has declined, despite the additional protection granted to it by Bill C-91. The drug industry throughout the world has been cutting staff since 1993 and this trend had been felt in companies located in Canada as well. The regional distribution of jobs in the generic industry is similar to that for the brand name industry.

We are particularly proud of the growth of the canadian industry in Quebec, where we now have close to 2000 employees. Major firms such as Technilab, Pharmascience and Pro-Doc have their head offices in the province. Apotex and Novopharm have some activities in Quebec as well, including a Novopharm manufacturing plant in Montreal.

In recent years, the industry has also extended its activities to Winnipeg, Manitoba. Winnipeg has become a biopharmaceutical centre for Apotex, through its subsidiaries, Cangene Corporation and Apotex Fermentation. A Novopharm subsidiary, Novobiotech, works in the area of biotechnology in Winnipeg. In British Columbia, most the activity is carried out by Stanley Pharmaceuticals, a subsidiary of Novopharm, and one of the leading manufacturers of over-the-counter drugs.

The Canadian industry is determined to step up its activities in the country even more and to invest its profits here. Our total R & D spending in 1995 exceeded $ 128 million and the sale/R & D ratio was 16.3% that year. This ratio is a significant increase over the amount spent in 1990, when $24 million were devoted to research and development. Our investments have increased, and they would have been even greater if Bill C-91 had not been passed.

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The industry is growing and is using the profits from manufacturing generic drugs to focus more on discovering new drugs. Apotex and Novopharm are among the 50 companies which spend the most on research and development in Canada.

We have attached to our brief a recent report by health economist James Heller. The report, entitled Positioning of the Canadian Biopharmaceutical sector for the next millennium, updates the comprehensive research done by Mr. Heller for the federal government in 1995 on intellectual property matters and competitivity in the area of biotechnology.

A number of the recommendations deal with issues relevant to the review of Bill C-91 and support the position taken by the Canadian Drug Manufacturers Association. We would mention in particular the repeal of the patented drug regulations, the notice of conformity and the introduction of an exception for exports.

The Canadian industry is turning more and more toward international markets. In recent years, a number of generic manufacturers have increased their exports and international trade, despite the export restrictions contained in Bill C-91, which prevent us from exporting products still under patent in Canada, but which are not under patent in the country to which they are exported. In our opinion, knowledge-based industries and highly scientific industries such as ours are Canada's best hope for the future and are essential to its competitivity in world markets. Bill C-91 is a serious obstacle to our ability to compete effectively.

Canada has an independent, entrepreneurial industry that uses its profits to do research, create jobs and recognize that our health care system needs drugs at affordable prices.

If the Canadian industry was strengthened, Canada would enjoy the long-term advantages of research and would become more independent technologically. In our opinion, this will never happen with the multinational drug companies.

Foreign companies make investment and employment decisions based on their international priorities. The Canadian subsidiaries of four multinationals exist to increase the net benefit of the parent companies, and not to further promote research in Canada. They are motivated by international interests and a desire to maximize profits throughout the world. Canada remains a market to be used, not a centre of discovery.

The Eastman Commission concluded that it is unlikely that Canada will ever become a major centre for foreign multinationals. Changing the legislation to try to encourage them to do R & D in Canada would not solve the basic problem of building a world-class industry in the long term.

[English]

Ms Drinkwalter: We would like to turn our focus to the cost implications of Bill C-91 by examining drug costs in general, the role that generics play in controlling costs, and the cost impact of particular aspects of Bill C-91, all within the context of the health care situation that Canada faces today.

As we heard yesterday, drugs today are the most inflationary component of health care costs and the third highest expenditure category after doctors' fees and the costs of running hospitals. In its report ``Directions for a Pharmaceutical Policy in Canada'', the National Forum on Health notes that between 1975 and 1994, Canadian expenditures on drugs increased from $1.1 billion to $9.2 billion. Expenditures per person, adjusted for inflation, more than doubled, rising from $108 to $232. Drug expenditures increased faster than any other major category of health care. That share of total health care spending thus rose from 8.7% to 12.7%.

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In its report, the forum notes that Bill C-91 will be a primary cause of inflationary drug costs and acknowledges that the elimination of compulsory licensing removed one of the most effective methods of controlling drug costs available to Canadians. Generic drugs, on average, cost 40% to 60% less than their brand name equivalents. Canadians saved more than $800 million a year by using generic drugs, a figure that could, and should, be much higher.

We know through our consultations with senior citizen organizations, consumer groups, private-payer insurers, labour groups, and many more grassroots citizens organizations that drug costs are of paramount concern to Canadians. And in the years since Bill C-91's passage, provinces right across the country have reformed their pharmacare programs to cope with rising drug costs.

In July 1966, Ontario introduced a new co-payment system for seniors and others covered by the Ontario drug benefit program that requires those receiving benefits to foot part of the bill.

Beginning in January 1997, Quebec seniors and those on social assistance must now pay a deductible charge plus 25% of drug costs, in addition to annual premiums.

In Nova Scotia, seniors are required to pay premiums for a government drug insurance plan whether or not they ever purchase drugs.

In Saskatchewan, the birthplace of medicare, rising costs have meant that the provincial government now requires those covered by pharmacare to pay the first $850 of their family's drug cost every six months or $1,700 per year.

In British Columbia, the government has introduced reference pricing through which it specifies the only drug therapy it will pay for. British Columbia has directly linked its introduction to the need to save money in anticipation of the higher costs resulting from Bill C-91.

At the same time, employers across Canada are struggling to cope with rising benefit costs. Employee benefits are among the highest of the costs of doing business and have a definite effect on a company's bottom line, impacting their ability to grow and create jobs.

The government has signalled its intentions to act on the National Forum on Health's recommendations for a national pharmacare program. It begs the question: how are we going to pay for it given the cost increases we can expect if Bill C-91 is not changed?

In late 1996, CDMA commissioned the health policy research unit of Queen's University in Kingston to undertake an exhaustive study of the cost implications of Bill C-91. Its findings show that Canadians would save between $4.1 billion and $9.4 billion over the next twenty years if pharmaceutical monopolies are reduced to periods comparable to those prior to the passage of Bill C-91.

It's important to note that Queen's findings are comparable to the earlier work of Dr. Stephen Schondelmeyer, an internationally renowned expert in the pharmacoeconomic field. Dr. Schondelmeyer's exhaustive study on the cost impact of Bill C-91, tabled in 1992, projected the total cost of the legislation at between $4 billion and $7 billion. We would like to stress to you that these two independent studies both show a minimum cost impact of $4 billion.

Health Canada's own study shows similar dramatic cost increases for the health care system as a result of Bill C-91. Studies obtained under access to information looked at the cost implications of two of Bill C-91's most restrictive features: retroactivity and the notice of compliance regulations.

According to the studies, the retroactive elimination of compulsory licences by Bill C-91 will cost an additional $198.4 million to Canada's health care system, sales losses of $552.5 million for the generic industry, and a gain of $750.9 million for brand name companies.

Health Canada says the notice of compliance regulations will cost Canadian taxpayers $131.5 million between 1993 and 1999. They also state that the regulations pose a potential loss of $475.5 million in lost sales to the generic industry, which translates into $603.3 million in windfall sales for the brand name industry.

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Let me total the government's own projections for you. Retroactivity and the notice of compliance regulations alone will cost Canadians $330 million in just six years, result in lost sales of approximately $1 billion for Canadian generic manufacturers, and provide a windfall of $1.35 billion for foreign-owned multinational drug corporations. If you factor in the projected losses beyond 2000, the number will be much higher.

It is important to note that the majority of the cost increases predicted by these studies will not be seen until well into the next century. It is only at this point that the absence of generic competition for new drugs entering the market today will begin to be felt.

What actions must be taken for a fairer balance? We would now like to spend the final few minutes of our presentation discussing our positions on key issues being addressed in this review and outlining our recommendations for changes to meet the objectives we have discussed today.

First of all, the patented medicine notice of compliance regulations made under subsection 55.2(4) of the Patent Act are perhaps the best example of the current abuse of the system. These regulations permit the delay of a generic product's federal approval on notice of compliance for up to thirty months and even longer. All a brand name company needs to do is allege patent infringement and it obtains what amounts to an automatic injunction without ever having to step into a courtroom. No other legislation in Canada creates what is, in effect, an automatic injunction without a hearing of any kind.

To date, there have been more than a hundred cases blocking the entry of generic products. Brand name companies have been taking every opportunity to block generic product approvals by the use of these regulations, which have given brand name companies an unheard of undue advantage.

In a recent judgment, the Federal Court of Appeal noted that:

the Minister's authority to refuse a Notice of Compliance originally designed to protect the personal health of Canadians has been harnessed to protect the financial health of drug patentees.

A policy paper written by the federal government's drugs directorate, and obtained under access, acknowledges that these regulations are being abused by the brand name industry and are not working in the original manner intended under Bill C-91.

These regulations are resulting in lost savings to Canada's health care system and lost sales for generic companies. They must be repealed as part of the recommendations of this review committee.

At the end of my presentation, in view of the remarks made yesterday, particularly by the drugs directorate, I will give Dr. Sherman the opportunity to tell the committee just how these regulations are working in practice.

The export provisions of Bill C-91 restrict the ability of the Canadian industry to compete actively in export markets. Canadian manufacturers are prohibited from producing products for export that are under patent in Canada, even if the product is not under patent in the country where it will be sold.

For example, many patents are granted for drugs in the United States before they are granted in Canada. As a result, they expire earlier. Under the current rules, we are forced to locate manufacturing facilities in the United States in order to market such drugs if they are still under patent here. The result is that we are exporting jobs, not products, at a time when Canada's trade deficit in pharmaceuticals, now at more than $1.6 billion, is growing at an alarming rate.

These restrictions are also limiting the business potential for Canadian companies to export drugs to Third World countries, where they are not under patent protection and where affordable medication is needed. CDMA believes that the export restrictions in Bill C-91 must be removed by providing for an export exception.

Bill C-91 includes provisions, known as the Bolar provisions, that allow for research and development prior to the expiration of the patent term, along with the application for regulatory approval. It also allows manufacturing for stockpiling so that generic firms can be ready to ship their product as soon as the patent expires.

These provisions must be preserved, as their removal would mean that a generic company could not begin the regulatory approval process until a patent has expired, therefore extending the brand name product's monopoly for potentially another five to seven years, at great cost to our health care system, forcing research out of Canada and making our firms uncompetitive in international markets.

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When Bill C-91 became law in February 1993, it was made retroactive to December 21, 1991, abolishing all compulsory licences granted during that period. As stated earlier, Health Canada estimates this will result in a potential additional expenditure of $198 million for Canada's health care system between 1993 and 1999. This provision was clearly punitive to the generic industry, which had made extensive business investment in the 36 licences that were revoked without compensation and in the dozens of other licences for which applications had been made prior to the passage of Bill C-91.

Retroactive changes fly in the face of long-standing common-law principles because of the unfairness of changing laws on which the parties relied when making business decisions. The TRIPS and the NAFTA treaties are ambiguous as to the dates when or if compulsory licences need to be eliminated, and CDMA has obtained a legal opinion that the government was not required to act retroactively. In fact, CDMA believes compulsory licences are permissible under the broadly worded exceptions in both the TRIPS and the NAFTA. However, if the federal government believes compulsory licences needed to be abolished, the implementation date should have been when Bill C-91 came into effect. We therefore believe the ability to market those 36 products where licences were abolished retroactively should be restored.

Bill C-91 eliminated compulsory licensing and guaranteed market exclusivity to the pharmaceutical patent holders throughout the twenty-year life of the patent. Under Bill C-22 the patent term was also twenty years, but generic companies could enter the market with a compulsory licence after seven or ten years, after the brand product came to market. The brand name industry claims that under Bill C-91 brand name products enjoy an average ten-year period of market exclusivity. This period varies from product to product, based on development time and the time required for regulatory approval.

In the United States the average period of market monopoly is approximately 11.7 years, according to Gerald Mossinghoff, the previous president of PhRMA, the association which represents the American brand industry. In Canada, Queen's health policy research has found the average patent life is longer than the 10 years claimed by the brand industry. Their analysis found the effective patent life in Canada is actually between 12 and 14 years, because of practices known as ``evergreening'', or the use of multiple patents for new formulations, new uses, or new crystal forms. As a result, Canadian market exclusivities are already as long as the exclusivity in other jurisdictions. For this reason patent term extension should be unthinkable.

CDMA has also presented legal opinions in its brief to show Canada has the flexibility to return to a system of compulsory licensing. In this regard the Patented Medicine Prices Review Board should be given the powers to grant compulsory licences when it determines that prices are excessive.

An escalating number of lawsuits pertain to size, shape, and colour of generic medications. This matter is linked to many of the C-91 patent issues, since it involves the same marketplace concern: after patent expiry, how will we ensure lower-cost generic products can effectively compete in the marketplace?

Marketing generic versions in similar size, shape, and colour to that of the brand name equivalent is a long-standing Canadian practice. This helps reduce confusion among those who often take several pills at a time, many times a day. There is widespread support among Canadian patients and health care stakeholders for legislative changes that would enshrine the practice of marketing generic products similar in size, shape, and colour to those of their brand name equivalents. We urge this committee to recommend that the government take action.

Canada has a fledgling biopharmaceutical industry. Since 1987, under Bill C-22, any biopharmaceutical product invented in Canada has received full twenty-year patent protection, with no possibility of compulsory licensing. Bill C-91 did not change the patent status for these products.

Few biopharmaceutical patents have been issued in Canada, despite numerous applications. As a result, patents issued for applications filed under the old system will receive a different level of protection, which in many cases will be longer than twenty years. Much of this problem arises from delays at the Canadian patent office. We believe the Patent Act should be amended so any unissued biopharmaceutical patent applications are given a term of twenty years from filing.

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Another issue is related to the use of broad blocking patents, which will have a dampening effect on innovation and development of the Canadian biopharmaceutical sector. Such patents are mostly held by foreigners and can be defined as patents that have claims encompassing many biotechnology products and processes within their scope. The use of broad blocking patents has become an integral part of the global patent strategy of the international pharmaceutical industry and must be limited. We believe the Canadian Intellectual Property Office should avoid issuing such patents.

In the lead-up to this review, and in early testimony, there has been a great deal of attention focused on Canada's international trade obligations. CDMA supports that any changes to Canadian law respecting intellectual property must be consistent with the requirements of those agreements we have signed. We believe, however, that there is flexibility in those agreements, as outlined in the legal opinions from some of Canada's leading trade lawyers. Therefore, changes to Bill C-91 are a matter of the political will of Parliament.

In conclusion, then, the National Forum on Health has highlighted the rising cost of prescription drugs as one of the biggest threats to Canada's universal health care system, and it acknowledges that Bill C-91 has contributed to higher drug costs, with very little benefit to Canadians. The forum also states that drugs are medically necessary and as a result should not be treated as a commodity like shoes and ships and sealing wax, and that it is irrational and inconsistent with our broader objectives to do so. Public policy, the forum says, must safeguard what is in the best interests of the public.

The CDMA interprets these statements as clear indications that drug patents should be treated differently from other consumer products so as to guarantee access to affordable medications in a timely manner. Drug patent reform is necessary to meet Canada's broader health care objectives.

Canada's national generic pharmaceutical industry is a Canadian success story. We have created thousands of jobs and are investing heavily in the future of this country. At the same time, we play a substantial role in controlling health care costs by providing quality, affordable medications to all Canadians. Our vision is to continue this remarkable success, which we can do if the right policy environment is in place. Ladies and gentlemen, the growth of our industry into an exciting world-scale player is in your hands.

Bill C-91 is threatening the future of this industry and the future viability of our health care system. Generic competition, which reduces drug costs, is being limited due to extended patent terms for brand name products. In addition, neither Bill C-91 nor its predecessor, Bill C-22, have led to the development of a fully integrated pharmaceutical industry.

Canada should develop an industrial policy for pharmaceuticals that recognizes the tremendous value to a country from having strong, nationally owned pharmaceutical companies. We therefore urge members of the industry committee to support changes to Bill C-91 that will better balance the interests of the Canadian industry and Canada's health care system.

Now, I will ask Barry Sherman to spend five or ten minutes -

The Vice-Chairman (Mr. Lastewka): Mr. Sherman, before you begin - I'll put this delicately - the worst thing you can do to a committee is leave with questions unanswered. It has been 45 minutes now, and we usually do between 20 and 30 minutes.

It's up to you. You use your time the way you want. I'm just telling you that having unanswered questions is the worst way to leave a committee.

Dr. Barry Sherman (Chairman and CEO, Apotex Inc.; Canadian Drug Manufacturers Association): Thank you, Mr. Chairman. I'll try to be brief, but the issue of the patented medicines regulations is, to us, the most crucial single issue. I think it's very important that I try to convey to you what's going on, what is being done to us pursuant to these regulations, and why it's crucial to our future that the regulations be rescinded.

You should have in front of you a document entitled The Patented Medicines Regulations. I presume it has been distributed. I will follow it. It's fairly brief. It will give you an overview and a few examples.

First of all, what are the patented medicines regulations? These regulations were authorized by section 55.2 of Bill C-91 and were promulgated in March 1993, soon after Bill C-91 passed.

The regulations, in essence, enable a patentee to block the approval of any generic drug merely by purporting that a patent will be infringed, regardless of whether or not what is purported is true. To invoke the regulations, a patentee merely submits to the Minister of Health -

[Translation]

Mr. Ménard: It is very difficult for the interpreters to do their job, because they did not get a copy of the text. Everyone should get good working conditions.

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[English]

The Vice-Chairman (Mr. Lastewka): Thank you, Mr. Ménard.

Dr. Sherman: Do you have a copy now?

To invoke the regulations, the patentee merely submits a patent list to the Minister of Health that lists patents purported to be relevant to a product. Once he does that, before a generic manufacturer can get regulatory approval it must submit to the patentee an allegation that the patents are invalid or will not be infringed. The patentee can then initiate an action in the Federal Court that results in a de facto automatic injunction against the generic approval for 30 months or longer, until the matter is litigated, even if there is no basis whatsoever to suggest patent infringement.

The argument is made that these regulations are for some reason necessary. The PMAC purports that the regulations are necessary to prevent infringement. It is no doubt true that the regulations do prevent any possibility of patent infringement by preventing sales of generic drugs. The problem is that the regulations prevent the sale of generic drugs regardless of whether or not there would be patent infringement.

Before the regulation-making power was added to Bill C-91, Honourable Pierre Blais, then the Minister of Consumer and Corporate Affairs, sent a letter rejecting the request for the regulations. If you would look at the fourth-last page, I'd like to refer to that letter.

This is a letter to Burroughs Wellcome from the minister, stating:

Thank you for your letter of November 15, 1991, concerning the regulatory approval of generic copies....

Your suggestion that Canada establish a link between the patent status of a medicine and the regulatory approval of its generic counterparts has been noted.

However, I believe that adequate protection from the patent infringement already exists in Canada. Were the situations you described to result in the sale of a patent infringing medicine, civil remedies including damages and injunctive relief are already available. No evidence is known that shows those civil remedies to be generally insufficient.

This is the opinion of the Minister of Consumer and Corporate Affairs. It was written in 1992. Shortly thereafter, notwithstanding this and for no explained reason, the regulation-making power was introduced, and then so were the regulations, with no opportunity for comment whatsoever by those adversely affected.

The key question is, do ordinary remedies suffice? They do. In the absence of regulations, as in any other field of commerce, a patentee believing its patent is infringed can bring suit and, if the assertion of an infringement is sustained, will obtain an injunction, damages, and costs. Moreover, if the alleged infringer has no substantive defence, the patentee can get almost immediate relief through an application for an interlocutory injunction and/or a summary judgment.

It should be clear that a generic producer cannot benefit from patent infringement. If held to infringe, the generic producer will suffer all of the following consequences: one, it will be enjoined; two, it will have to pay either its profits or the patentee's losses, whichever the patentee elects; three, it will have to give up all remaining inventory for destruction, thus suffering additional losses; and four, it will have to pay its own legal costs as well as those of the patentee.

Hence, at the end of the day, if there is infringement, the patentee is restored to its original position and fully compensated, while the infringer ends up only with large losses. It is thus unreasonable to suggest that the absence of the regulations would result in rapid patent infringement. In fact, it hasn't in the past in this industry or in any other industry or in any other country. To suggest that it would here has no basis whatsoever either in fact or in common sense.

Moreover, there is no basis to single out pharmaceuticals for such regulations. Indeed, it is ironic that Bill C-91 was purported to be necessary because GATT and NAFTA prohibit discrimination among fields of technology, yet the regulations are exactly such discrimination in reverse. If the government and PMAC had a problem with compulsory licensing because they only applied to a certain field of technology, why don't they have the same problem with the regulations? They violate NAFTA and GATT.

Given the remedies as aforesaid, it is unreasonable to suggest that regulations are necessary. Indeed, the very reason that the patentees want the regulations is that they are not necessary. That is to say, the regulations enable the patentees to keep generics off the market even when there would be no patent infringement, thus giving to the patentees enormous, unjust enrichment at the expense of generic firms and the health care system. The regulations are in fact being systematically abused by the patentees for that purpose.

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On the third page, we set out the nature of the systematic abuse. First, irrelevant patents are listed. Second, applications for orders of prohibition are routinely initiated even when the patentees know that there is no substantive basis whatsoever to allege infringement. Third, proceedings are systematically delayed to make sure they take as long as possible, be it thirty months, four years, or five years. They delay as long as they possibly can. Fourth, additional patents are subsequently added to the patent list, thus evergreening the automatic injunctions and making the generic firms start over again so that the thirty months never ends.

On the first point about listing of irrelevant patents, we have set out some observations. The Minister of Health requested an audit of the patent list. It was done by CIPO in 1995. That audit disclosed that out of 722 listed patents, at least 169 patents were improperly listed, either because they contained claims only for processes or because they were entirely irrelevant to medicines. The list of patents included patents for a compact disc storage container, a bicycle, a mobile crane, and a lens for a cathode ray tube, all listed as patents for drugs when they weren't.

Furthermore, in addition to these patents, there were and are many others improperly listed for other reasons. For example, the courts upheld that patents for intermediates are not qualified to be listed, yet many of the listed patents are such patents. Furthermore, many other patents, while relevant to certain medicines, are listed on patent lists for other medicines for which they are not relevant.

The Minister of Health tried to take some steps to remove some of the patents that were clearly not relevant, but Merck Frosst and Glaxo have brought suit against the minister to enjoin the minister on the basis that the minister has no authority to remove irrelevant patents.

The patentees are thus not only listing irrelevant patents but are endeavouring to prevent the removal so as to continue to enable obstruction of competition, even on the basis of clearly irrelevant patents.

The next way in which the regulations are abused is the frivolous invocation of the regulations. Virtually every time we file a new generic drug submission, we get an action started against us under the regulations, even though in most cases, if not all, there is no substantive basis whatsoever for those actions. In a minute I will tell you about three particularly outrageous examples.

Next, the regulations are abused through procedural delays. They take the maximum length of time permitted at every step. For example, the regulations provide 45 days for initiation of the application and they always do it on the 45th day.

We make various comments about this here, but suffice it to say that they systematically delay us at every stage as much as they possibly can to make sure the matters never get to a hearing or that they take as long as possible. Why wouldn't they? That's what they do.

The fourth thing they do is evergreening. The regulations do provide that if they get a new patent they can add that to the patent list. Then the thirty months starts all over again, even if you're well into the period. That has now happened in many cases, and will presumably continue to happen.

I would like to tell you about three specific examples because I think they will illustrate for you the outrageousness of what we're subjected to.

If you'll turn to the third-last page, it deals with lovastatin. These are all Apotex examples and are obviously selected because I happen to be the chairman of Apotex, but they're illustrative of what goes on. Lovastatin is probably the most bizarre case.

Lovastatin is an anticholesterol drug made using microbes in a fermentation process. To make lovastatin, Apotex invested heavily in research and development and facilities in Winnipeg, starting about ten years ago. The total investment is approaching $100 million. However, not one dollar of product has yet been sold. Merck does have a patent that covers lovastatin, but not the drug itself. It only covers production using a specific microbe, aspergillus terreus. The process that Apotex has developed uses an entirely different process, not even in the same genus, and it unequivocably does not infringe Merck's patent.

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As soon as the patented medicines regulations were passed, Apotex served Merck with a notice of allegation of non-infringement. Even though Merck thus knew beyond doubt that our process was non-infringing, Merck brought an application for an order of prohibition on June 1, 1993, simply because it could thereby prevent competition. Forty-five months have elapsed and Merck's application has still not been dealt with.

It is bizarre that the position Merck takes is not that our process infringes but that we should be disqualified on the basis that our allegation was premature because we were not ready to produce non-infringing material when we gave the allegation in 1993. In essence, it asserts that we are required to completely build the factory and perfect the process, and only then can we begin the process and wait thirty months from that period of time, despite the fact that our process is non-infringing beyond doubt.

The Court of Appeal a couple of weeks ago ruled that the thirty months had been unlawfully extended and therefore put us in the position where we could theoretically obtain a notice of compliance for this lovastatin. But Merck has now appealed for a stay to the Supreme Court of Canada and is planning to try to drag on for years the issue of whether or not the thirty months expired a year ago. While we're held off the market month after month and year after year, we're litigating over whether or not the thirty months really did expire or not.

There's a second application before the courts in relation to lovastatin. Apotex filed a second notice of allegation on a different material from Hungary. We had a back-up source that also did not infringe. Apotex subsequently withdrew the allegation for that lovastatin. We don't want to sell Hungarian material; we only want to sell the material from Winnipeg.

Merck's position is that we can't withdraw the notice of allegation. It says we have to go to court on it. We can't get a notice of compliance until the court rules on that, and if the court rules against us that the Hungarian material is infringing, then we can't get a notice of compliance for the product at all and we can't sell the material from Winnipeg that is non-infringing.

We were in court on this matter last week and I was told that the judge, Justice Rothstein, asked Merck's lawyer, ``Are you telling me if Apotex has six sources of supply, five of which are non-infringing and one of which turns out to be infringing, that Apotex can't sell any of the five that are non-infringing because one was infringing? Are you telling me that makes sense?'' Merck's lawyers response was, ``Well, I can't tell you that makes any sense, but that's what the regulations say.'' The regulations don't say that.

They only say that if you try to read them in a way that doesn't make sense, to accomplish Merck's objective. The regulations were intended only to prevent infringement. Merck has kept us off the market year after year by invoking the regulations and taking absurd legalistic positions, even though it was and is undeniable that our process does not infringe.

During these four years Apotex has had to pay continuing expenses in Winnipeg of about $10 million per year without revenue. Moreover, Merck's process patent will expire in 1999 and inexpensive imports will then be available. While Apotex invested to enable six years of sales of non-infringing lovastatin, the remaining two years or less will be insufficient to recover the cost of investment, leaving Apotex with only an enormous loss. Merck has gained additional revenue of over $100 million for this product alone, at the expense of the Apotex health care system, and has destroyed the value of Apotex's investment already.

I have other examples here that are equally outrageous and I won't take the time to go through them, but I do have a couple of comments on the impact, which begin on the fifth page under ``Consequences to Apotex and other generic firms''.

Apotex and other Canadian generic firms were built on the foundation of a compulsory licensing system. The availability of licences gave them the market access necessary to build an industry. The loss of the licensing regime, including retroactive cancellation of many licences, was severely damaging, as it denied market access even where investments had already been made. The unfair regulations are severely compounding the damage.

Apotex is suffering particularly severely because Apotex maintained an aggressive development program in the expectation that the unfair regulations would be rescinded after the election of 1993.

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Over 100 applications for orders of prohibition have been initiated, and about half of them have been against Apotex. Apotex is thus waiting for HPB approval of about 50 products in which it has invested hundreds of millions of dollars in production facilities and research over the past decade.

Almost every significant new product in which Apotex has invested is now held up by the regulations, notwithstanding that there is no basis to believe that Apotex would infringe any valid unexpired patent in any of these cases.

The ramifications for Apotex are as follows. First, we've had to defend all 50 actions at a cost of many millions of dollars per year, with no revenues to pay the legal bills. Moreover, even when we win, the regulations do not provide for recovery of legal costs. Second, we've had to carry hundreds of millions of dollars of investments with no revenue to pay the covering costs. Third, the value of all those investments is being dissipated by the lapse of time, because when we get there there won't be enough of a market for our product to justify the investment we have made, particularly in relation to lovastatin.

Before Bill C-91 was passed and the regulations were promulgated, Apotex was a profitable and growing company. We took nothing out of Canada and reinvested all profits in building a fully integrated Canadian industry.

Now, as a result of the inability to introduce new products in which we have invested and the reduced usage of older products, Apotex is experiencing declining sales and large monthly losses. Moreover, through systematic abuse of the regulations, the patentees have sent the message that they will make it impossible to profit from investment in generic products, even when there are no relevant unexpired patents.

As a result, unless and until the regulations are rescinded, Apotex and others are unable to make further investments in the building of a Canadian industry. The inevitable result is greatly reduced investment in the generic sector, the demise of chemical production in Canada, a continuing growth of the trade deficit, and the continuing of monopoly pricing long after the expiry of all relevant patents.

It is impossible to adequately communicate the outrage and desperation we feel in these circumstances. The sole interest of Merck and other PMAC companies is to shut down our Canadian production, notwithstanding our enormous investment, so they can continue to monopolize the market with expensive imports. The regulations give them complete power to starve our enterprises to death on any pretext, regardless of merit and without any prior adjudication whatsoever. That is what they are doing.

We deserve and need immediate relief.

Ms Drinkwalter: We would now welcome your questions.

The Chairman: Thank you for your brief introduction of your position.

I'll turn it over to Mr. Brien.

[Translation]

Are you the first questioner, Mr. Brien?

Mr. Brien (Témiscamingue): Yes. I appreciate your sense of humour, Mr. Chairman. We hope it will be contagious.

Obviously, we will be dealing with diametrically opposed views, and I imagine that we will be hearing from somewhat more neutral witnesses in the future. I would like to tell you about some statements made by various ministers before the committee and ask you to comment on them.

The Minister of Health says that there should perhaps be some monitoring - by means of a process that could be discussed - not only of patented drug prices, but also of non-patented drug prices. Clearly, non-patented drugs include not only the generic drugs, but also the whole generic sector.

We do not have many ways of checking whether the figures you have given us for R & D spending are accurate, because they come from private companies, which are not monitored by the Patented Medicine Prices Review Board.

Would you agree to come under the authority of the Board for two matters: monitoring generic drug prices and spending on research and development?

[English]

Dr. Sherman: On the question of research and development expenses, we'd be glad to welcome any member of the committee who wants to come to our facility to see what we're doing and review figures.

On prices, I'm not sure I even understand the question. The market we sell in is a competitive market; prices are determined by competition. The only need for regulation is in the case of monopolies. We don't operate under monopolies, so our prices are determined by competition.

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[Translation]

Mr. Brien: The Minister of Health tabled a document yesterday. It had been tabled at the meeting of the provincial ministers of Health. The document reported on discussions among various deputy ministers, who expressed concern about the price of non-patented drugs.

They suggested a different delegation of authority and an expansion of the Board's mandate to include the monitoring of non-patented drug prices. The Minister of Health and the others who apparently discussed this matter seemed concerned after analyzing the price of non-patented drugs.

Talk about competition does not seem to satisfy them. In any case, if there is enough competition, the Board will conclude that the market price of drugs is in keeping with their commercial value. Would you agree to come under the Board's authority?

Second, I don't want to check your books on research spending, but I would like to know whether you would agree to have the Board monitor your R & D investment, as it does for brand name drug companies.

[English]

Ms Drinkwalter: Mr. Brien, in the documents the Minister of Health tabled yesterday he made a clear distinction between the off-patent drugs that were single-source and did not have competition and ones that were multi-source - and that's another word for generics - where there was competition. He showed in his documents that for generic drugs competition only brings prices down. In the documents on drug costs tabled by the minister, he showed that the more generics there were on the market, the further price came down.

We would suggest to you that where competition is bringing price down, it would really be a waste of taxpayers' dollars to spend money on an administrative exercise where you have competition. However, we are happy to look at some kind of monitoring mechanism, if that's what you're looking for.

It's unfortunate - and I did speak to Dr. Elgie about it - that PMPRB and the report it tabled did not make that clear distinction, although Dr. Elgie assured me the Minister of Health now does have a clear understanding that generic products, where there is competition, do not need the same kind of price regulation. In fact, the National Forum on Health made that same conclusion, as did the report by Tom Brogan, or Brogan Consulting, done for the federal-provincial ministers of health.

[Translation]

Mr. Brien: I understand that you have no interest in this, and that if we were to move in this direction, you would have to discuss the procedures with us. So you have no desire to come under the Board's authority.

You spoke about the international context, particularly as regards NAFTA and the WTO. You said that according to some legal opinions, which I hope you will table with the committee, the minister is expressing a view that does not exactly square with the facts when he says that we could go back to a compulsory license system under some of the provisions of the WTO and NAFTA agreements.

You are saying clearly that the minister's position in this regard has no legal basis.

[English]

Mr. Jim Keon (Vice-President, Research and International Affairs, Canadian Drug Manufacturers Association): We believe there is flexibility for Canada to change its patent laws on pharmaceuticals, yes. We believe the six or seven issues we outlined today all relate to different aspects of the conventions. We believe the legal issues respecting those are somewhat different in each case. We can go through each of those separately, if we like.

The fact of the matter is that whether you're talking about the NOC regulations, exports, the Bolar provisions, size, shape, and colour, or compulsory licensing, they are different aspects of the conventions. The legal flexibility the government has is greater in some areas than in others. Minister Manley himself, when he was here, said about the patented medicine NOC regulations that clearly Canada had gone beyond its commitments. It had added an extra system of infringement and enforcement, to the benefit of the pharmaceutical industry, which it didn't have to do.

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So yes, we believe there's a great deal of flexibility. We think a black and white statement by a minister or anyone else that Canada cannot change its law is wrong, because there is flexibility.

I see that our report is going around. We have commissioned legal opinions on each of those questions - you'll see them in the document - from what we could find to be the leading trade lawyers in Canada. I'd be happy to go through it in detail, if that would be useful, on each and every question. But the simple answer is yes, Canada has flexibility.

Dr. Sherman: If I may, I'd like to add something to that. The licensing system we had before, which was revoked, was a system of automatic licences on request. Every applicant essentially got a licence.

What is absolutely clear is that GATT and NAFTA do specifically provide for compulsory licences in cases of patent abuse. Canada in fact has a section in its Patent Act allowing for licences under abuse circumstances. The problem is, that's a very difficult section to use unless procedures are streamlined.

Clearly what could be done is that the Prices Review Board or some other board could be given authority to declare a price to be excessive, and that could serve as a basis for issuance of a compulsory licence to a generic company under an abuse section.

Certainly that is something that could be added to the arsenal, because right now what is happening is that the Prices Review Board is simply accepting as fair the monopoly prices in foreign countries, whereas there are many cases where we could show that the prices are very unfair in relation to cost and in relation to the prices we could sell at.

If the board had the authority to take an application from us to say, for example, that we would sell a certain product at 10% of the price, they could look at that information and say, ``In this circumstance the brand price is too high; it's not fair'', and then a licence could be issued under the abuse section. That's certainly open to Canada to do, and it's a compromise that I think makes a lot of sense.

[Translation]

Mr. Brien: I myself asked the Minister of Industry whether there was a connection between the linkage regulations and the Bolar protection, which would allow you to go into production ahead of time. Both the Minister of Health and the Minister of Industry told us that there was a very clear connection between the two. You are asking us to repeal the linkage regulations, but that the early production advantage be maintained.

So as far as you are concerned, there is definitely no connection between the two, whereas both ministers told us there was.

I would like to hear what you think about that. Do you think that Canada is competitive as regards effective patent protection? Are you saying that Canada complies with international standards in the area of effective patent protection?

[English]

Dr. Sherman: On the first point, I can see no logical basis to suggest any linkage. They're independent issues. Whether or not Canada is to allow stockpiling or whether or not Canada allows research and development is totally unconnected in any rational way with the issue of the regulations. I can see no basis whatsoever to suggest their link - logically, there's no linkage.

Canada can get rid of the regulations, as it should. At the same time, there's no reason not to keep the exceptions. One can say anything is linked to anything. The compulsory licensing regime was taken away, and yet these other regulations were put in that are tremendously damaging. There's no logic to keeping the regulations, in that there's no logical connection with the other two provisions.

The Chairman: Thank you.

Mr. Schmidt.

Oh, I'm very sorry.

[Translation]

Mr. Keon: On the second part of your question regarding patent protection in Canada, the Queen's study looked into this issue and determined that in Canada, the period of exclusivity was between 12 and 14 years. They looked at the date on which the product was introduced, which is determined by IMS, the company which does all the statistics for the job industry in Canada.

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This company compared the date with the patent expiry date, which is also determined by IMS, and found that the average was two years. Then they took the list of drugs manufactured by the brand name companies, and working with the Department of Health and this list, determined the length of time between the date on which the last patent on the list expired and the date on which the drug was introduced was 14 years.

Thus, the patent protection period in Canada is between 12 and 14 years. As Brenda said, the period is between 11 and 12 years in the United States. We think that Canada is now competitive with other countries as regards the patent protection period.

[English]

The Chairman: Mr. Schmidt.

Mr. Schmidt (Okanagan Centre): Thank you, Mr. Chairman.

I have a number of questions. First, I'd like you to explain if you could in a little more detail what you consider an integrated pharmaceutical company to be.

Ms Drinkwalter: An integrated pharmaceutical company has all of the components, starting with the production of the fine chemical, the development of the fine chemical; research into the pharmaceutical entity; manufacturing; and finally, export of those products to world markets - the full range, from development of the fine chemical through to export of the product.

Mr. Schmidt: Does this mean that it is not a company that does breakthrough drug manufacture?

Ms Drinkwalter: No, not at all. It would encompass a range of research activities including breakthrough drugs, but it does start at the beginning.

What we have in Canada, as with many industries in Canada, are largely truncated branch plants that only do certain of those activities. Sometimes they only sell. Less and less they are engaging in manufacturing on the foreign-owned side, as plants are being rationalized within North America.

Mr. Schmidt: May I be a little more specific, Mr. Chairman? We have two examples here - Apotex and Merck. Which of those are fully integrated pharmaceutical companies?

Dr. Sherman: Apotex is; not Merck. Apotex does chemical manufacturing, chemical fermentation, biotechnology, and dosage-form manufacturer production, exports to the whole world, and spends almost 20% of revenues on research. We outperform Merck in every single measure, and certainly in terms of giving value to the health care system, by a country mile.

Mr. Schmidt: Okay. My question then is, how do we distinguish between a strictly brand name multinational company and a fully integrated company? I want to get clear what the conflict is here, because there's obviously a conflict here.

Dr. Sherman: It's really a conflict of marketing philosophy more than anything else. Merck and the other PMAC companies are basically foreign-owned firms who see the Canadian market as a market to be exploited, primarily with imported value. The bulk of the value they sell is imported. They're here to make money in Canada, and to take it out - obviously, to take out as much as they can. That's why there's a $1.6 billion trade deficit. That's their only interest in Canada; it's a market to be exploited and to take money out of.

As a Canadian company we are interested in building our company too, but just as they want to build in the United States, we want to build in Canada. I'm a Canadian and one of my ambitions is to build an integrated, world-scale Canadian industry. That's why we do everything in Canada we possibly can, including research, chemical manufacture, dosage-form production - everything - and we export to the whole world. We create an export surplus, not an export deficit.

Mr. Schmidt: In order to put this into practical terms so I can understand this better - because I'm not a pharmacist or an owner of a pharmaceutical company of either description - could we maybe approach it in a bit of a different way? Would it be true to say that Apotex enjoys 20-year patent protection for some of its products?

Dr. Sherman: Yes.

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Mr. Schmidt: Would it also be true to say that through other aspects of its operations that would be similar to the generic companies -

Dr. Sherman: Apotex is a generic company.

Mr. Schmidt: All right.

Dr. Sherman: Primarily.

Mr. Schmidt: It's primarily a generic company, but it does have certain other patents that would fall into the same category as those enjoyed by Merck, for example.

Dr. Sherman: Yes, we have many patents.

Mr. Schmidt: Okay, so the significance then is that with Merck there is a restriction of the kinds of activities it does, and those restrictions do not exist vis-à-vis...they're not company-type restrictions.

Merck does not do generic work - or does it? - copying its own pills or whatever.

Dr. Sherman: It does only when there's another generic.

The philosophy of Merck and the other PMAC members is to avoid competition on the identical compound, because that way they can get very high prices. They will put out a generic of their own product only when another generic comes along, in order to try to get both ends of the market. But they don't promote competition on the same chemical entity, because that would require giving lower prices and better value.

Mr. Schmidt: Okay.

Is Novopharm also an integrated pharmaceutical company?

Mr. Leslie Dan (Chairman and CEO, Novopharm Ltd.; Canadian Drug Manufacturers Association): We are integrated to the extent that we have notice for manufacturing; we have original research; we are exporting. But we do not, at this point in time, manufacture raw materials. That's the only part that is missing. We have all the other elements you might consider an integrated operation.

Mr. Schmidt: Would Novopharm then also have patent protection for some of its products?

Mr. Dan: Yes, we always file patents, and we have patents assured.

Mr. Schmidt: So Novopharm and Apotex could be in competition on the generic part of their operation.

Mr. Dan: We certainly are. It's commonly known.

Mr. Schmidt: I want to make absolutely sure we understand what is really going on here.

Dr. Sherman: You'll notice that they sat us at opposite ends of the table.

Mr. Schmidt: Yes, I noticed that, and Ms Drinkwalter is sitting right in the middle and there are two men on either side.

Ms Drinkwalter: You bet.

Mr. Dan: As you can see, we are far apart even at this table.

Mr. Schmidt: Would it also be possible, or does it happen, that Apotex, for example, would allege that Novopharm is infringing on its patent?

Dr. Sherman: It conceivably could happen at some point in the future, sure.

Mr. Schmidt: If it did happen, would the arguments that are obtained here not create a conflict of interest within your own company?

Dr. Sherman: Not at all. If Novopharm were to infringe a patent of ours, we would sue Novopharm.

Mr. Schmidt: I'm sure you would.

Dr. Sherman: Of course we would.

Mr. Schmidt: And they would you.

Dr. Sherman: Yes, but we wouldn't expect to be able to put them out of business on an allegation that they're infringing a patent, without anybody adjudicating it.

Mr. Schmidt: But you could.

Dr. Sherman: Under this system, yes. It's bizarre.

Mr. Schmidt: That was the point I was trying to make. If you wanted to, you could do that.

Dr. Sherman: Yes, and given the opportunity, I'd probably do it.

Mr. Schmidt: So in other words -

Dr. Sherman: That doesn't make it right.

Mr. Schmidt: That's not the question. The point is, you could do this to each other even though both of you consider yourselves to be generics under here, under the CDMA rather than under the PMAC banner.

Dr. Sherman: The competition is vicious, and we would do whatever we could within the law to get an advantage, just as the brand name companies do, the PMAC companies. I don't blame them for doing what they're doing; I blame us for being stupid enough to let them do it.

Mr. Schmidt: That's very clear, Mr. Chairman.

Some hon. members: Oh, oh!

The Chairman: Do you have a final question, Mr. Schmidt?

Mr. Schmidt: I have another question.

I'm going to change tactics here, because I do want to get into another area. It has to do with the kind of research you do.

Mr. Dan: There are basically two types of research. One I would call product formulation, product improvement, which is essential research and is done by all the companies, whether they are small or large, generic or brand name companies. But the more important and exciting research is totally original, innovative research in the field of biotechnology. Specifically we believe we have a novel way of treating cancer, a more effective way, and time will tell if we are right. I for one believe there will be a very major discovery that will benefit not only Canadian citizens but the world at large.

Mr. Schmidt: Will that put you in conflict with Biomira?

Mr. Dan: I would say that we are way ahead of Biomira.

Mr. Schmidt: That's good.

Mr. Dan: That's our opinion.

Mr. Schmidt: Yes, of course.

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Dr. Sherman: Apotex is the largest research spender in the industry, I believe. We're spending about $70 million per year on research and development, which is approaching 20% of our sales. We're doing it as aggressively as we can. A large part of it is in chemical manufacturing - the fermentation process - to build a basic integrated industry. A lot of it is on the regulatory approvals, just as every company does. A lot of it is on new compounds. We have a big research agreement with the Department of National Defence on a living skin replacement product, which is coming along very nicely. So we have a lot of things.

In addition, along with Novopharm, we support very heavily basic research and academia at a level out of all proportion, of course, to foreign-owned companies through funding of chairs. I think Novopharm funded a chair of neurosurgery at the Toronto General Hospital. We have funded a chair at the Sandra Lunenfeld Research Institute in Toronto on molecular biology.

Last year, in association with the Medical Research Council, we gave the largest grant that MRC has ever administered. Apotex contributed $4 million and MRC contributed $1 million. We had a competition involving researchers from around the country. It was peer reviewed, and we gave a $5 million grant to the Toronto Cell Cycle Group at the Toronto General Hospital.

We're doing basic research and applied research out of all proportion to any foreign-owned company. We have about 60 PhDs.

The Chairman: We'll give Mr. Schmidt a chance to pursue this questioning later.

Just before we continue, I have two announcements. First, I think the committee has agreed to continue until 5:30 p.m. to give people a chance to ask questions. At 5:30 p.m. you can huddle with me if you want more time, but we'll continue for awhile, because there's quite a list of people who want to speak.

Second, I would like to ask those in the audience to turn your cellular phones off, if you don't mind.

Mr. Schmidt: Thank you, Mr. Chairman.

The Chairman: In the west, we would say leave them at the door with your guns, but that would confuse this audience. We wouldn't know who was in and who was out.

Mr. Bodnar.

Mr. Bodnar (Saskatoon - Dundurn): With that introduction, thank you very much.

I can see from the presentation today that you're indicating we require a repeal of the regulations, in particular the NOC regulations. Given that at this point we have not determined how to deal with the regulations, would the CMA be willing to sit down to discuss alternatives to the current system, including possible modifications to the NOC-linked regulations?

Dr. Sherman: The core concept of the regulations is fundamentally flawed. The alternative is the legal system that has been developed by the judiciary for eons on the very basis of what makes sense. It's not as if the regulations serve any purpose whatsoever. They serve no purpose, so the whole concept of them is fundamentally flawed. You can't really compromise, because you're either going to have them or you're not.

Mr. Bodnar: Excuse me, Mr. Sherman. On this particular point, I realize what your position is on the regulations, but are you speaking on behalf of yourself or the association?

Dr. Sherman: I'm speaking on behalf of the association.

Mr. Bodnar: Is the association willing to sit down to discuss possible modifications to the NOC-linked regulations or not?

I realize you're saying they're fundamentally flawed, and I don't know if we're going to repeal them, but what about discussing possible changes to them? Are you willing to look at that?

Dr. Sherman: We'd look at anything, but I can tell you that conceptually I can't see how it is even possible. It's so flawed, not even in terms of the injustice, for us to have to tell our competitors what we plan to do and get their approval. Not only do they do everything they can to obstruct us, but they react to the very knowledge of our plans. It's fundamentally against sound business practice to be telling your competitors what you're planning to do.

Mr. Bodnar: Ms Drinkwalter, do you want to add to this?

Ms Drinkwalter: Yes. We have been talking to Industry Canada for the last four years and I think we have exhausted that discussion. No one has ever been able to justify why those regulations are necessary for pharmaceuticals.

It's not as though there haven't been extensive fact-finding exercises. Industry Canada folks have been to London and Washington. We have dialogued with them and we've made every resource available to them to look at that issue. I think the conclusion is that no matter how we've looked at it, and we've tried, repeal is really the only option. No one has ever justified their necessity.

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Mr. Bodnar: In other words, unless there can be justification, you're indicating that repeal is the only alternative; modification is not an option. Is that correct?

Ms Drinkwalter: That's right.

Mr. Bodnar: With respect to the letter by Pierre Blais that was referred to, there's an indication that damages are available and should be the remedy.

You made reference to that, Dr. Sherman, with respect to the aspect of damages. Of course you've referred to the other aspect that in Canada right now it's an automatic injunction. In effect, that's the result.

Have you looked at the American experience and what is available in the U.S. with respect to this particular aspect? From what I understand, the Americans have a system of allowing double or triple damages against the loser in such an application.

Dr. Sherman: No.

Mr. Bodnar: Do they not?

Dr. Sherman: No, the Americans have a similar set of regulations, but it has nothing to do with damages. I don't know what you're saying.

The Americans have a similar set of regulations. They're the only country in the world that does, and they're a disaster in the United States. It's costing tens of billions of dollars.

Indeed, what's happening in the United States is that the generic companies are finding they can't even afford to fund the litigation, so they're making deals.

As an example, Genpharm, which is a Canadian company, filed a submission for ranitidine in the United States, was sued, and then settled. Merck paid them something like $50 million, I believe, and gave them certain other things to agree that an invalid patent had -

A voice: Glaxo.

Dr. Sherman: Glaxo, sorry, paid Genpharm to agree that an invalid patent was valid. So what you're finding is that the regulations are obstructing competition terribly in the United States, and the generic firms, when they find flaws in patents and reasons to find them invalid, are simply compelled to enter into conspiracies with the patent holders to share the loot, so to speak, causing terrible damage to the health care system in the United States - billions of dollars.

Mr. Bodnar: I realize your submission today is about the moneys you are losing as a result of the procedural wranglings that are occurring within the system as it is. If there were a program - and I'm not even suggesting that this is a possibility, but I'm thinking out loud with you right now - of allowing damages either to you if you're successful or to the other party if they're successful, is that something you believe would be workable?

Dr. Sherman: But the other party, the patentee, if we were to get on the market, gets damages under the ordinary system. Under this system, we don't even get damages if we ultimately win.

But that's not an answer, for two reasons. First, it's the public that's out. Even if they were required to pay damages to us when we win, those damages are a fraction of the benefit they get, because their prices are so much higher. So they make this enormous windfall at the expense of the health care system, plus, on top of that, we can't wait for damages. We have 50 cases against us now. We can't continue in business and invest in things. We don't have any revenues to wait because maybe 10 years from now we'll get damages. We're not in the business of being in litigation; we're in the business of trying to make pharmaceuticals. We can't be in business unless we can get on the market with our products when we believe we're not infringing patents. It's a disaster.

Mr. Bodnar: You made reference to the Queen's study. I have it before me. It was just distributed, so I have not had the chance to review it.

Do you know how that particular study was financed or who financed it? In other words, did the CDMA have a role in financing it, or did the patent drug manufacturers have a role in financing it? How was that study financed?

Mr. Keon: I'm sorry, I missed it. Which study are you referring to?

Mr. Bodnar: The Queen's study.

Mr. Keon: The Queen's study was done under a grant with the CDMA by the Queen's health policy group.

Mr. Bodnar: And only from you?

Mr. Keon: Yes.

Mr. Bodnar: I see.

Do I have time yet?

The Chairman: You can have one more question.

Mr. Bodnar: Okay.

.1700

With respect to the minister's comments yesterday on the Patented Medicines Prices Review Board - and there has been some comment with respect to that and the reference to competition, etc. - the board does exist, and the board does give information that the prices of patent medicines in fact are lower because of the existence of the board.

I see you're anxious, Mr. Sherman, but just let me finish. Keep your seat belt on and I'll give you a chance.

With respect to the generic drug industry, would it not perhaps be advantageous that if one group is in that category with a prices review board, maybe the other group should be in the same position with a prices review board? We have no authority, obviously, over the generic.

Dr. Sherman: We've dealt with that question before. The only reason to have price controls is for monopolies, because the prices are high.

Mr. Bodnar: That's just the whole point. In the generic drug industry are there not two principal players in Canada, being Apotex and Novopharm? Is that not as close to a monopoly or at least an oligopoly in economic terms that one can get?

Dr. Sherman: There are many generic firms. In any event, if there is no barrier to competition in terms of patent, and we come out with a generic product that's priced too high, that attracts other competition to come in. That's the brilliance of the free enterprise system. If there's a free market and people in business see that a price is too high, they'll go and compete and take the market away. The prices are set by competition. It's the ideal system.

Mr. Bodnar: One final question dealing with the export restrictions. Even if there is no infringement in the foreign country, you indicated you cannot produce here an export if it would be an infringement here. Do you know the reasoning behind this particular restriction?

Ms Drinkwalter: Yes. I was at this table in the last round, and it was a mistake. In fact, the minister of the day, Mr. Wilson, admitted that it was problematic, that it was an unforeseen consequence. They did not really understand that there were different patent expiry dates between jurisdictions. Having made that mistake, however, we have been mired in it ever since.

Mr. Bodnar: I see. Thank you.

The Chairman: Thank you.

[Translation]

Mr. Ménard.

Mr. Ménard: With all due respect, I think the Board's role could very well be expanded to include generic products. We should not forget that it is not simply a matter of monitoring activities as regards competitiveness. The Board would also look at the research done by companies. So this would be of use to taxpayers and consumers. The Board's annual report contains information and figures on the research work being done.

Mr. Sherman, I think you were rather brief in this regard. Personally, I think your Association's credibility would be enhanced if it were to agree that the Board could play a very useful role if it were to monitor both your activities and your research work.

Second, I am sensitive to your arguments about the notice of allegation. I think this is something that should be checked, but I would like to understand the process. You say that when a notice of compliance is issued and you want to copy a drug, you have no way of being heard, because there is an automatic injunction and a 30-month period that comes into play. That is what you told the committee. I think this is something that should be looked at.

Moreover, I think we have to recognize that the major difference between your industry and the brand name drug industry is that the latter markets new generations of drugs that have a curative effect. In order to do that, the companies need a minimum amount of patent protection. I would like you to at least agree that the status quo is a reasonable minimum, and I would like to hear what you think about that.

Companies have to invest between 500 and $600 million in order to market a new drug. Are you aware of that? Do you acknowledge that fact? Let me take the case of AIDS, which with I am quite familiar. Without significant investments, in a period of less than 10 years, we would not have seen three generations of drugs which will transform AIDS from the fatal disease it was, into a chronic disease.

.1705

How do you see the cost involved in marketing a new drug? Please talk about the notice of allegation. Perhaps there are some principles of natural justice that are being violated in this area, and that we should examine.

I'm somewhat sensitive on this point. I am asking you to kindly show a little more regard for the Patented Medicine Prices Review Board, because I think your arguments for not coming under the Board's authority are extremely weak. I say that in a spirit of friendship, even for the parliamentary secretary.

Mr. Volpe (Eglinton - Lawrence): Would you go that far?

Mr. Ménard: No, not that far, but, anyway...

[English]

Dr. Sherman: I'm not quite sure what the question is, but I'll try to answer it anyway.

No one from our side is saying a patentee should not get a fair reward for the invention. Our problem is we believe, with the knowledge we have, that the prices are outrageously high, sometimes as much as 1,000 times cost - out of all proportion to what any reasonable person would say is fair if he had the facts.

The problem with the prices review board is it doesn't have the facts. All it does is look at what the prices are in other countries where they're not regulated and say, ``Well, if that's okay for them, that's okay for us''. That's advocating the mandate; it's not performing the mandate. We have to avoid patent abuse. We have to give a fair ability to make a return on an invention and on an investment, but not abuse.

So we say the board should be looking at what's fair by looking at the cost, by looking at what we could do it for in a competitive market and seeing how much higher the price is. Is it 100 times or is it 1,000 times? Does it make sense? If the price is out of all proportion to what it should be to give a fair return, then the board should have the power to give a compulsory licence.

In other words, the patentee should have the right to have a monopoly but sell at a fair price, but if he's not prepared to do it, then he should let somebody else do it and take a royalty so the Canadian public gets drug products at reasonable prices.

[Translation]

Mr. Ménard: You would like to come back...

[English]

The Vice-Chairman (Mr. Lastewka): Mr. Ménard, you're over your time. I gave you some extra time, but you're over your time.

I'll go to Mr. MacDonald now.

Mr. MacDonald (Dartmouth): Thank you very much, Mr. Chairman.

I've been sitting here patiently. It's been a few years since I had these witnesses at a committee I was at, and unfortunately some of the same issues that were debated a few years ago are on the table.

I have to start off by saying something to Barry Sherman.

I've been around perhaps too long, but sometimes common sense will tell you whether or not a regulation is doing the job it was intended to do. I have to tell you, Mr. Chairman, I didn't think I'd ever agree with Mr. Blais, who I was a critic of officially in this place a few years ago, but I'll have to fax him today. I agree with the letter he has in there with respect to the regulations.

I can tell you, as somebody who had to sit through hours and days of debate on Bill C-91, if anybody, even the Conservatives at that time, had thought the regulations would cause so much money to be made by so many lawyers, they may have thought twice about approving the piece of legislation.

I'm of the view that the regulations are there to try to implement policy, implement the legislation. I sat here for days, months - it was part of my life. It was never the intention to have competition and pharmaceuticals kept out of the market through actions, some of which obviously are frivolous, for 30 and 45 months. It was never the intention. My memory goes back far enough that I can say that with a great deal of certainty. It was never the intention. It's almost embarrassing to sit here and see this type of stuff with respect to the regulations. I can't believe it.

Mr. Chairman, if this committee does one thing, it has to seriously look at whether or not this is in the best interest of consumers. There are other remedies, and the other remedies are very clear. In these situations it should be treated as any other patent: you litigate and you go to court, and if you lose, you pay big time, so you think twice before you go to court and make sure you have a darn good case before you initiate.

My concern is not to get the generics any more money; it's to get consumers the best price they can get for prescription medication. That's it. I know that Barry and Leslie would probably like to make a few more dollars, and if they do, that's fine, but I make my statements because I think consumers are ill-served by a system that does that.

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The Vice-Chairman (Mr. Lastewka): Are you going to get to your question?

Mr. MacDonald: Yes, I'll get to my question in my five minutes.

The Vice-Chairman (Mr. Lastewka): I want to warn you that -

Mr. MacDonald: First of all, I think it's important that I'm the only guy who was here the last time and served on this committee. It's important that's stated for the record. We have very few minutes to speak on any of these issues -

The Vice-Chairman (Mr. Lastewka): I agree.

Mr. MacDonald: - and it's one of the biggest issues facing the health care system in Canada today.

I want to state very specifically that the issue comes down to pricing. The PMPRB comes here and I think its members are fulfilling the mandate we gave them. I'm not going to criticize the PMPRB. Its members can only do what they've been asked to do in law, but they cannot go for it - and I said this to the chairman of the PMPRB last night.

I want to know how they can tell me with any certainty that the entry level price of a drug is reasonable, that it bears some resemblance to the investment that's been put in, as well as the period of market exclusivity it has had to recapture its investment and make a reasonable profit on it. All they could tell us was they look at the median price of seven industrialized countries. That's how they're doing it now, but I want somebody to explain to me the other options. It's fine to say that a drug comes on the market and its increase in price every year is less than the rate of inflation, but if the original price is 100% or 200% higher than it should be, you can decrease the price, look like a hero, and still whistle all the way to the bank.

Can somebody please tell me what are the other options we would have for the PMPRB on that?

Dr. Sherman: The other option, of course, is to get the information from us. You can't get it from the patentees because they're not going to give it to you, but we have available the information on the cost of raw materials and the cost of manufacturing - what we could do it for. The PMPRB could be authorized to entertain applications from us for declarations that specific prices are excessive, but it would only make sense if, as a result of us being right, we would get a compulsory licence. It's the only thing I can see that makes sense.

Mr. MacDonald: Would you not be accused of being self-serving for your side of the industry, in your answer? There are PMAC reps down here who will tell me that when they come to the table.

Dr. Sherman: It would have to be an adversarial proceeding. We would give certain information and they would have a right to respond to it. We'd give it under oath as in any other adversarial proceeding. That's the only way. If you're going to decide what's fair, the only way is to base it on costs, or what they would be in a competitive market. The other thing I could do is look at prices in competitive markets, not in markets where there is no competition. That would tell you what's fair as well.

Mr. MacDonald: One of the other really objectionable parts of Bill C-91 was the fact that it was retroactive. It was one of the first times a piece of legislation like that was made retroactive. There were a number of applications in the pike in approval for compulsory licensing that effectively were gone. I think you mentioned 36 licences. Of those 36 compulsory licences that were impacted by the retroactivity, how many of those products still have patent exclusivity four year later? If the bill had not been made retroactive, there would have been competing products on the market.

Dr. Sherman: There are a lot of them. I can't give you the information, but certainly there's enalapril, lovastatin and lisinopril. Some of them run for another 10 years.

The Vice-Chairman (Mr. Lastewka): Could you give us that and table it with the clerk?

Mr. Sherman: We'll compile the information.

The Vice-Chairman (Mr. Lastewka): Thank you.

Mr. MacDonald: Were these big ticket items that were captured in that retroactivity?

Dr. Sherman: You're talking about billions of dollars.

The Vice-Chairman (Mr. Lastewka): Thank you, Mr. MacDonald.

I'll go to Mr. Schmidt now.

Mr. Schmidt: Thank you, Mr. Chairman.

I'd like to further pursue the research, and in particular the kind of research you do. You mentioned something about the universities and the basic and innovative types of research. What proportion of the total research budget would be devoted to curiosity-driven or basic research that ultimately, hopefully, will result in some kind of new breakthrough?

Dr. Sherman: I can only speak for Apotex. It would be about one-third, which is probably higher than in any other company.

Mr. Schmidt: Out of a total of what?

Dr. Sherman: That would be out of a total of $70 million.

Mr. Schmidt: That's what I thought you said. What would it be for Novopharm?

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Mr. Dan: It would save about one-third. Our research expenses in 1996 came to slightly in excess of $35 million, but pretty close to $9 million would be totally original innovative research.

I should point out that the information we have is that the brand name companies do not spend 35% on original research. The information is somewhere around 15% to 20% at the most. I'm not saying they're not doing original research, but quite frequently they may purchase a product that has been sufficiently developed that they can continue with the clinical studies. In fact, it's a fairly common practice that they acquire products from smaller companies and they further develop them.

So by and large I would say what we spend on original research is above the average that is being spent in the industry.

Mr. Schmidt: The next question is this. This other research: there's a balance here of roughly 70% of the research. What is that money spent on?

Dr. Sherman: It's spent on stability studies, analytic methodology development, clinical trials, and bioavailability studies with human subjects. In our case we spend enormous amounts on process development for chemical manufacturing and for fermentation.

I might add that I think the most important fact about our research, one that distinguishes us, is that when we do research, the purpose of the research is to put it into production and create production jobs in Canada, whereas with the other side, whatever they do in Canada, it's to get regulatory approval of largely imported products, or if it's basic, if anything is discovered, it gets removed from the country, not to create jobs here but to create jobs elsewhere.

Mr. Schmidt: The other question I have on some of this business has to do with the process for patents. What part of the patent process has to do with a patented process as compared with the actual medicine? They are two very different things. It seems to me they are not the same. I believe they were integrated in the patent process earlier. Has that been separated, or should it be separated?

Dr. Sherman: Since about 1987, I think it is, companies were able to get patents on products per se - on the compound - whereas before that time any patents that were issued had process claims or product claims only when made by specific processes. Today, on all new compounds that are patented, the patentees are getting complete monopolies on the compound regardless of how it's made.

Mr. Schmidt: I think that's pretty significant.

Dr. Sherman: Yes, it's very significant.

Mr. Schmidt: I would now like to follow on the question Mr. MacDonald asked, and that had to do with the 36 retroactive licensees. How much of that was actually process and how much of that was actually compound?

Dr. Sherman: I couldn't say. I guess most of them would have been process patents.

Mr. Schmidt: That's what I was afraid of.

Dr. Sherman: But in many cases the process patents are blocking. There are no routes around them. In some cases there are. In the case of lovastatin, we developed a route around it, at enormous expense, but ironically we can't sell even that, because of these regulations, even though it doesn't infringe.

The Chairman: Dr. Patry.

[Translation]

Mr. Patry (Pierrefonds - Dollard): I would like to continue on the matter of research and development for a moment. In answer to my colleague, Mr. Schmidt, you spoke about the amounts spent by generic companies on research and development for new products.

You told us that in 1995, the generic companies spent up to $127 million on R & D. I would like to know how much of this amount was eligible for tax credits. Is the percentage of these amounts eligible for R & D tax credits the same as the figure you gave in answering Mr. Schmidt's question?

[English]

Dr. Sherman: As far as I know, it's all eligible. I don't know why it wouldn't be.

Mr. Dan: In order to get a tax credit, we had to make a submission to the Department of National Revenue and they are auditing our figures. It's very carefully audited.

[Translation]

Mr. Keon: The data you were given are the same as that reported to Revenue Canada by the companies.

[English]

Mr. Patry: The next question. You seem to claim the notice of compliance regulation extends patent life. This I don't understand. I would like you to explain to me how come the linked changes change the date at which a patent expires.

Dr. Sherman: It doesn't change the date at which the patent expires. What it does is it enables the patentees to keep us off the market forever, even after a patent expires, by alleging that we're going to infringe some other patent that isn't even relevant. Take the drug lovastatin as an example. The patent can expire in 1999, but in 1999 they could take a patent for dog food and put it on the list for lovastatin. Then you have to wait 30 months, 40 months, or 10 years to prove that by selling lovastatin you're not going to infringe the patent for dog food. That's what they do.

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Mr. Patry: Okay. I just wanted your opinion about this.

[Translation]

Yesterday evening, many of my colleagues asked Dr. Elgie questions about the excessive of cost of drugs in general. I thought I understood an answer given earlier by Mr. Sherman.

[English]

You said that prices are regulated by competition. That's what you mentioned.

[Translation]

I would like to know why your companies sell drugs to other countries much more cheaply than they sell them to our consumers, to our provincial governments. For me, the cost to consumers is very important. If you are saying

[English]

that prices are regulated by competition,

[Translation]

I conclude that the cost of generic drugs, which is about 75% of the cost of brand name drugs, is excessive, and this is harmful to Canadian consumers.

Mr. Keon: According to our figures, the price of generic drugs in Canada is on average 40 to 50% lower than the price of brand name drugs. Our figures show as well that prices in Canada are lower than in the United States. We therefore do not think our prices in Canada are too high. As Mr. Sherman said, the more competition there is, the lower the prices.

[English]

Mr. Patry: Do you want to add something?

Dr. Sherman: It is true that in some export markets our prices are lower than they are in Canada, with good reason. It's because that's what the prevailing conditions in those markets require and because we have no additional regulatory costs.

In Canada we have enormous costs in order to get a regulatory approval. We have to recover those costs and maybe some other market in which our marginal cost is very small because we don't have to do any studies for regulatory approval and that enables us to sell at a lower price in those countries. It's hard to generalize, but there are good reasons why export prices could be lower than Canadian prices in some cases.

The Vice-Chairman (Mr. Lastewka): Thank you, Mr. Patry. I must go on to the next questioner.

Mr. Patry: Thank you.

The Vice-Chairman (Mr. Lastewka): I'm going to allow the Bloc one short question, and then we'll hear from Mr. Discepola, Mr. Volpe, and Mrs. Parrish.

[Translation]

Mr. Brien: The questions that were just raised about research and development show how important it is to have somebody review the information you give us to determine... Finally, you can see that there is a problem of trust, because we have to rely on the information you give us. It should be submitted to an objective body.

You say there is competition and that your prices are fine. All right. We would set up an agency to monitor the price of non-patented drugs and report on R & D activities. In this way, there would be an independent body reporting to us. The information you provide would be confirmed objectively by this group.

I do not understand why you refuse to come under some agency on these two issues: the price of non-patented drugs and research and development activities.

[English]

Dr. Sherman: I would have no objection to disclosing research information to any authority. In fact, the information is available through Revenue Canada and Statistics Canada. Statistics Canada could be asked to prepare those reports. They can make and do make reports on exports and on all kinds of things. Surely Statistics Canada can do that from information already available to the Government of Canada. But certainly, if somebody wants the information on the research, I would have no objection to submitting it. I'm very proud of what we do.

Mr. Dan: We have the same view. We don't at all mind making information available, and what you may find, to your surprise, is that they're spending more money than most large companies. Not all the large companies are engaged in significant research. Some are; others are not.

The Vice-Chairman (Mr. Lastewka): We'll have one more question from the Bloc and then we'll hear from Mr. Volpe and Mrs. Parrish.

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[Translation]

Mr. Ménard: Mr. Chairman, I will try to be clear with Mr. Sherman, because I did not get clear answers to my other questions.

The Department of Revenue has very specific criteria whereby all eligible research expenditures are not considered by the Review Board. We obtained a copy of the list of criteria. They include capital costs, investments, and so on. I think this is important, because in all due respect to your organization and to your integrity, you will appreciate that it is rather easy to appear before us and tell us that you are investing $128 million, when no one can attest to the accuracy of this figure.

This is the heart of the matter. Why would a company invest $600 million to discover a drug if it can be copied 10 years later without having necessarily become profitable? Your spending on R & D is extremely important.

Earlier, you we're extremely quiet about your association's assessment of the cost involved in marketing and discovering a drug. Is this 600 million dollar figure erroneous?

[English]

Dr. Sherman: I can't give you those figures, but I do know there are all kinds of data all over the place suggesting anywhere from a few million to a few hundred million, depending on who you're talking to. In any event, it's a small percentage of the worldwide sales for most products.

I can only repeat what I said before. Nobody over here is suggesting a patentee should not be able to get an adequate return on investment. The problem is when they set their own prices, as they do in the United States and Europe, and we accept those prices. They're set arbitrarily high - naturally they are, and it would be ridiculous to expect otherwise - out of all proportion to what would give a reasonable return.

You only have to look at the bottom lines. The drug industry is by far, by a wide margin, the most profitable industry in the world in terms of return on sales or on the dollars invested, and that's because prices are too high, far more than can be justified by research.

If we could do the job of looking at the information and determining what prices are fair independently, I'm convinced the conclusion would be that virtually all of the prices of the patentees, as set in the United States, are out of all proportion to what's fair and that compulsory licensing should be allowed under the abuse regulations to remedy what has happened.

The Vice-Chairman (Mr. Lastewka): Mr. Volpe.

Mr. Volpe: Thank you, Mr. Chair. I'm hoping I can do this very quickly in the time allotted.

I want to address a couple of questions in the context of part of the preamble and part of the preamble that was also introduced by both ministers in their presentations before this committee.

Like Mr. MacDonald, I was part of the debate here in 1991-92, when we were discussing Bill C-91. He was on the consumer and corporate affairs committee. He was the critic at the time, so he has a very intimate knowledge of the development of the issue.

The issue that was raised by both ministers and repeated by you has to do with the question of compulsory licensing. It was introduced by the Canadian government of the day to achieve two specific purposes.

One, it was to create a home-grown industry that would provide for fine chemical development and pharmaceutical development and to generate a product that was Canadian-owned. In our debates we saw this as a creature of Canada and therefore a creature of Canadian policy and Canadian legislation. That concept was still valid in the debates when Bill C-91 was developed.

Secondly, it was to provide an environment wherein the Canadian consumer and the health care system would have access to pharmaceuticals that would be competitively priced.

Keeping those two issues in mind, I want to ask a couple of questions my colleagues have asked others.

On the question of industrial strategy, even under Bill C-91, one of the trade-offs made was that the industry would endeavour to create many more high-quality, high-skill jobs in order to ensure that the Canadian brain drain would not take place.

Mr. Schmidt started to ask you, Mr. Sherman, a question, and I'd like to have Mr. Dan answer it as well. He asked you how many PhDs are employed by Apotex, and I'd like to add to that. How many MAs are employed by Apotex and how many MDs are employed by that specific company?

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Maybe while you're ferreting through your information, Mr. Dan can come up with that as well. I think it's important for our members around the table to understand that with any legislation that has as its objective a particular goal such as this, when we ask questions of witnesses before us, they should be able to give us those types of responses.

While you're looking for your information, the second issue I want to address is the question of cost, and there I would like to ask two questions. The first of these has to do with the fact that we have prices of drugs up at one level and cost to the health care system and to the Canadian public at another. We've been told that while prices have been coming down, the costs have been escalating. A doctor from McGill said to the health committee yesterday that drug costs are spiralling out of control. That's in the Hansard. It's there for everyone else. That's probably her opinion, but she had statistics to back her up.

I wanted to ask both gentlemen here, and perhaps Madam Drinkwalter, how the pharmaceutical companies - yours as well as the patentees - promote their product. What do they do to influence doctors when they prescribe a product? Clearly, prescribing techniques and strategies by doctors are a contributing factor to increased cost to the health care system.

My final question, because I know they're going to think that one through, is that Dr. Sherman talked about the linkage regulations, the problems with going to court, going through the litigation, and not being able to recover either the costs of the litigation or in fact damages. What I think he said was one thing I would like him to pursue, and that is while he might be prepared to accept a system whereby damages and costs might be awarded as a result of a frivolous action under the regulations, he said the health care system and the consumer were getting the shaft nonetheless. I would like him to elaborate on that, because that's something I don't understand quite clearly.

If you don't mind, Mr. Chairman, those are three questions, and perhaps we can get answers.

Ms Drinkwalter: Barry, would you start with the first question, on the type of employees you have?

Dr. Sherman: Perhaps I'll give you my observations quickly on all three questions and then others can add if they wish.

On the advanced degrees, directly in Apotex and our subsidiaries we have 76 PhDs, 120 with master's degrees, 321 with bachelor's degrees, and 164 with certificates or diplomas from post-secondary schools. So it's a total of 688 persons with degrees of some sort, including PhDs, and in addition one medical doctor. Apart from that, of course, outside, in the universities and various hospitals and the like, we employ many others through contracting research to them or through sponsoring their work. So the policy as an industrial policy, what was done in 1969, of course worked brilliantly, and that's what Eastman found in his review.

On your second question, promotions to doctors, far more than is spent by the brand name sector on research is spent on advertising to doctors. If you look at the Medical Post or any of the medical magazines, you'll see page after page of this expensive advertising, and all it is doing is promoting the use of those products that give the most profit to the drug companies, not the best therapy to the patients. Over 90%, I'm told, of new patented drugs introduced are in fact not therapeutically better than other things on the market but they are promoted...and the only things that are promoted really are things with monopolies, because that's the way the drug companies can make more money. I believe they spend well over $1 billion per year.

Does someone have a figure on promotions?

Mr. Volpe: Where do you market?

Dr. Sherman: We don't market to doctors. I believe the doctors should get their medical information from objective sources, not from drug companies; some advisory body, whether it's from their own profession or government or some combination. They should get all the literature on side effects and benefits of various drugs, and objective, independent persons should be telling the doctors what drug is best for what indication. They shouldn't be prescribing based on how much a drug company spends to influence their prescribing practice. I think it's unethical.

Mr. Volpe: And the third question?

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Dr. Sherman: On the third question, on damages, actually I think I'd go as far as to say the advertising of prescription drugs to doctors should be banned.

On the damage issue, the problem is that it's not sufficient for us to get damages at the end of the day. Because we've had these regulations in effect, I think it's crucially important, to Apotex in particular, that a remedy be put into the act so that even if these regulations are rescinded we can still collect for damages that have already been done to us.

But having a damage available, to collect damages to us, isn't an answer, because for all the time we're off the market, even if we get damages at the end of the day, the health care system doesn't. Our products are 25% to 50% - whatever it is - lower in price, and all those years the health care system is being denied the savings when we're off the market. You can't give that back to the health care system unless you put in some penalty to the originator, which would be very difficult.

The other problem with damages is we can't wait. We have hundreds of millions of dollars invested now - $100 million in lovastatin alone - in investments where we can't sell the products. They're not patent-infringing products, and we are starving to death. We can't carry the investments. We can't pay the salaries without income. We're losing money on a monthly basis.

Mr. Volpe: Your competitors are happy to hear that at the back.

How about Mr. Dan?

Mr. Dan: I will be glad to provide you with a list rather than come up with inaccurate figures. We just have to look at our own statistics. We certainly have MDs, PhDs, and BScs, among others - 27 pharmacists.

As a matter of interest, before I came here I took a quick look at how many new jobs we created in the last six years. We created 645 permanent jobs and 475 temporary jobs. Temporaries may not work all year, but this is certainly very strong job creation, over 100 new jobs per year. Whether we can continue or not is going to be the question.

The second question is how we promote. As you're probably aware, in order for the generic companies to sell their products in any appreciable volume and quantity, it's necessary that the various provincial authorities include the products in their formulary. The formulary is distributed to all the physicians and pharmacists, and that is probably the primary source of promotion, in addition to the comments that pharmacists from time to time tell the doctors, that the product is available in generic form.

In addition, representatives do call on physicians, but we admit this is the odd call, rather than the constant call by the so-called sales representatives of the brand name companies.

In addition to that, I might say we advertise in professional magazines, and we presume they're read by the physicians and also by the pharmacists.

Dr. Sherman: It's a very small percentage of the sales.

The Vice-Chairman (Mr. Lastewka): Thank you.

Mrs. Parrish.

Mrs. Parrish (Mississauga West): If I might, Mr. Chairman, I'd like to abort my first question and go on with what Mr. Sherman has said.

You were talking about using very little advertising. You also talk about the fact that the big pharmaceutical companies, particularly with breakthrough drugs, I assume, advertise heavily to doctors.

When I go to the pharmacy to get a prescription filled, your pharmacists are your best advertisers. They always offer me the generic alternative.

Dr. Sherman: Only if there is a generic.

Mrs. Parrish: Only if there is a generic. Do you just not negate your own argument? If the large pharmaceutical companies have brand new drugs they want to describe to doctors, they're going to have to advertise. You don't have to, because you're merely copying something that already exists.

Dr. Sherman: What I'm suggesting is that it's improper for a physician to be prescribing a drug for a patient because it happens to be the drug that makes the most money for the drug company. He should be prescribing for the patient what is best for the patient. He can't get that information from the drug company.

Mrs. Parrish: Excuse me, Mr. Sherman, but is that a value judgment on your part?

Dr. Sherman: I suppose it is.

Mrs. Parrish: I would suggest that doctors would be most offended to hear that you don't think they have discretionary powers to read an ad and know it's a new medication that's being described to them.

Dr. Sherman: I can tell you that there's absolutely no doubt - this is not a subjective thing - that the advertising by the brand name companies works or they wouldn't be spending the billion dollars a year to do it. They tremendously influence the prescribing habits of doctors by how much they advertise.

Mrs. Parrish: If I might, Mr. Chairman, do they not obviously advertise their newest drugs and explain what those drugs will do?

Dr. Sherman: Yes, they do, but they don't explain. They don't say, by the way, this drug is no better than something else for which the patents have expired that will cost one-tenth of the price. That isn't stated in the ad. The ad says use this because it's terrific, and it doesn't say it costs ten times as much for no reason.

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Mrs. Parrish: Well, you've got an excellent advertising system in, for example, my Shoppers Drug Mart. If I don't get Stemetil before I fly, then I fly with a bag under my chin. When I go to get it, the pharmacist says he can give me the generic substitute. Nine out of ten customers, I'm sure, will take it if they're paying for it themselves. So you don't need to advertise.

Dr. Sherman: No, but we do advertise to the pharmacists. We sell on value. The only way we can get a sale from a particular drug store is by giving him the best value in comparison with our other customers. When you've got advertising for prescription drugs, the decision isn't being made on value. The doctor isn't paying. The doctor is influenced very heavily by the advertising, and he's not making that value comparison.

Mrs. Parrish: If I might just ask one more question, this is something that's been coming up for the last two days. You brought it up in your report. It's about pharmacare and breaking into the pharmacare business, which covers pharmaceuticals. You talk about abuses. The people yesterday talked about the growing cost of health care in this country.

Here is one of my primary concerns. I know that in this committee we're supposed to be looking specifically at Bill C-91, but I think good recommendations also come out of committees like this. That's because people like you and people like the coalition yesterday keep telling us that we have all these abuses that are driving the costs up.

Do we not have one of the worst countries in the world for abusing pharmaceuticals? In other words, every mother with a kid with the sniffles who goes to the doctor is given a prescription. If it's covered by pharmacare and if it's constantly forced on those kids, do we not have a whole generation of bacteria that are resistant to antibiotics? Do we not have a generation in this country that is buying more and more drugs, which is what's driving the costs up? They're running to the doctor.

Do you not believe, even as generic or non-generic companies, that you have a social obligation to train people? This is just like the tobacco industry, which has to give non-smoking ads. You should be saying this: don't use these drugs, don't overuse drugs, don't use penicillin if you don't have to. Is that not part of the cost problem?

Ms Drinkwalter: There are prescribing guidelines under active consideration, both federally and provincially. Companies in our sector are participating in an initiative in Ontario called the ORTAP, the Ontario Round Table on Appropriate Prescribing.

In addition, in terms of where we are as a country - it bears verification, because I thought I had it with me - I did read the new sector competitiveness document out of Industry Canada, which actually says our drug utilization is in fact half what it is in the U.S.

Mrs. Parrish: But they're the worst in the world.

Ms Drinkwalter: We're a long way from the top, but I think it's a widely acknowledged problem. Certainly, the industry is working on both sides - that's the government along with the medical and pharmacy community - to try to look at how to resolve that problem.

Mrs. Parrish: Thank you.

The Chairman: One last comment from Mr. MacDonald.

Mr. MacDonald: Just a very quick question that I didn't get to ask before. It deals with the prohibition of the manufacture of product in Canada for export to America when patents have expired. Ms Drinkwalter mentioned earlier that it appeared, when we did Bill C-91, that this might have been a mistake and that the result might have been unanticipated.

Following up on Mr. Volpe's comments, the initial intention back in 1969 with compulsory licensing was to try to build a Canadian home-grown industry. This was not just an industry to serve Canadian needs, but a multinational, home-grown pharmaceutical industry.

I want somebody to tell me whether or not this particular provision has altered investment decisions by generic companies. In short, has this decision meant that, in some cases, we are exporting investment, and perhaps jobs, to other countries just to service their markets?

Mr. Dan: I think it certainly has been a factor. If we cannot manufacture products in Canada and export them, then it more or less compels us to set up manufacturing facilities abroad. So there's no doubt that it's a factor.

Dr. Sherman: It's a growing factor. There are a lot of problems, such as enalapril, lisinopril, and quite a few I can think of that have a patent life that's much longer in Canada than in the United States.

Ranitidine is one that has been available under compulsory licence in Canada. Novopharm's going to be making that in the United States because there's a patent in Canada. We're going to make that one in Canada because we have a compulsory licence that was not cancelled. So we can still do it in Canada. But for the future, we'll have to do more and more production outside Canada for the United States and other world markets unless we can get this fixed.

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The Chairman: Thank you very much to the group for coming and giving us your presentation and answering the questions from the members. As you can see, there's a great deal of interest and curiosity in all four parties about this.

I'm sure you'll be following the witnesses extensively. We have about 145 more to go, and everybody will be given a fair hearing.

The committee is now adjourned until 7 p.m., when we will continue our hearings.

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