The Canadian Drug War

The new Democratic congressional majority hasn't refined its health agenda yet, but getting more senior citizens access to cheaper drugs sold in Canada is sure to be right up there.

And, why shouldn't it? Prescription drugs cost less in Canada, even American-made ones. Many of the big fans of importing drugs from Canada represent states that border on Canada — Senators Dorgan of North Dakota and Snowe of Maine. Others, such as Nancy Pelosi, the House Democratic leader, have merely heard about the deal the Canadians offer. Their constituents see that Canada's state-dominated system gets its citizens better prices.

These days, grandparents are like professional traders, regular arbitrageurs. They demand lease contracts tight enough to make car dealers squeal, and hunt the Internet for the best prices on everything from mutual funds to condominiums.

It seems only right that this crowd should be able to add their Lipitor or Fosamax, to name two senior staples, to that list of savvy transactions.

Yet this particular market transaction is more complex than it seems. Prescription drugs produced by American companies are indeed cheaper in Canada, but not because drug companies want them that way. They are cheaper because Canada imposes price controls on drugs. Americans pay the full amount; Canadians, and the rest of the world for that matter, don't. In the case of Canada, drug companies decided long ago that forgoing top prices was a trade-off worth making in order to be present in a significant North American market.

As a result, purchases of such drugs from Canada by customers in America have grown enormously. This past year, Brett Skinner, the director of health and pharmaceutical policy research at the free-market, Vancouver-based Fraser Institute, found that Americans spent about $500 million at some 275 Canada-based online drug vendors. American Internet orders continue apace even though America's new Medicare prescription-drug benefit has kicked in and the Canadian dollar has surged against America's currency.

Naturally, Big Pharma hates this. It notes that drugs still under patent in the America are often classed as generic by Canadian authorities. When Americans order those generics from Canada they are committing theft of valuable intellectual property. What's more, some drugs from virtual pharmacies are counterfeits doctored with sawdust, concrete, or worse.

Some observers say the industry's problem may be self-correcting. The results of the November 7 election were barely in when the Canadian Pharmacists' Association, the Best Medicines Coalition, and all the other groups representing traditional brick-and-mortar drug stores in Canada, began lobbying for a national law banning such exports. The old-fashioned pharmacists understood that eventually American companies would curtail supply.

Indeed, Mr. Skinner points out that 10 of the largest brand-drug companies, including Pfizer Inc., Merck & Co., and Abbott Laboratories, are already showing signs of doing so. In this case, it may be unnecessary for President Bush to veto any drug-importation law written by the Democrats. The Canadians will do the vetoing for him.

Yet in the longer term, this story of market transactions is not so benign. For grandparents who can order from Canada can also order from South Africa, Asia, or Europe. Unchecked, this sort of importation will continue. In the end, the effect will be to force the companies to cut their prices in America.

That would be just fine, except that drug companies need American profits to fund new drug development. What American politicians ought to be doing is helping those companies defend their rights overseas and in Canada so that other countries pay full price for a valuable product. Then the producers wouldn't need to charge so much in America. But without the cash, the drug companies will stop innovating.

If you think this is so much pharmaceutical industry spin, consider Europe, the original drug innovator.

Over the years, governments and insurers have forced companies to drop their prices below American levels. Importing or re-importing from other European countries, Africa, or wherever is cheapest, has also put pressure on prices. As a result, European drug companies have moved much business to America. Or they have stayed in Europe and curtailed availability of drugs to European patients.

Fuzeon, a hot new anti-retroviral for HIV, is a good example. Fuzeon takes 106 steps to produce, and costs $20,000 per patient for a year in America. In Europe, however, as Roger Bate of the American Enterprise Institute points out, government budget caps have limited the drug's availability, even though the maker, Roche Holding AG, is based in Basel, Switzerland. What's more, Mr. Bate notes, Fuzeon is one of very few HIV products made by European companies. The best new drugs tend to come from America.

Mr. Bate also says the other drugs that are hard to get in Europe tend to be the costliest — anti-cancer drugs, for example. Europe spends relatively more on surgery or medical treatment because it caps drug spending.

"If you want to know what the U.S. will look like if the government prices down in the U.S., think worse than Europe," he says.

Every year that Americans pay full price for drugs is a year that innovation continues. So even little steps, such as protecting American patents or rejecting imports, including cheap knock-off drugs, are a help.

In other words, there is an additional contract at issue here, beyond the short-term one between the octogenarian and the Internet pharmacy. It is the intergenerational contract between senior citizens and their great-grandchildren. If cheaper drugs today mean no new drugs tomorrow, seniors may reconsider whether the Canada deal is one they want the Democrats to make.

Miss Shlaes is a visiting senior fellow at the Council on Foreign Relations and is a Bloomberg News columnist.