Little consensus on cause of largest year-over-year decline in pharma R&D

Industry misses key target nine years in a row

Debate over the state of R&D spending by patent-holding pharmaceutical firms in Canada has intensified following the industry's biggest single-year decline in recent history. R&D expenditures sunk nearly 16% in 2011 to $991.7 million— their lowest level since 2000 — prompting a clarion call from the industry's top spokesperson to improve the competitive environment for an industry largely composed of foreign-based multinationals.

R&D spending by members of Canada's Research-Based Pharmaceutical Companies (Rx&D) accounted for $901.2 million or 90.9% of the 2011 total, representing a year-over-year drop of 9.9%. Their R&D-to-sales ratio was 6.7% — far below the 10% that the industry committed to in 1987 and the lowest level since 1988. It marks the ninth year in a row the ratio has been missed, according to the latest report from the Patented Medicine Prices Review Board (PMPRB).

In 1987, the industry committed to spending at least 10% of Canadian drugs sales on R&D in Canada. In return, the Progressive Conservative government of Brian Mulroney strengthened its intellectual property protection (IP) for patented drugs, providing a competitive IP regime that has undergone several minor modifications since then.

Current expenditures comprised 96.3% of total R&D outlays, with capital costs and allowable depreciation expenses accounting for 2.1% and 1.6% respectively. Current R&D spending declined 14.7% in 2011. On a regional basis, Ontario suffered the most severe drop, declining 19.4% to $403.2 million while Quebec spending slumped 10.7% to $411.8 million. The decline in the western provinces was 12.7%, for current R&D spending of $122.5 million.

"(The PMPRB report) is an urgent and compelling call to action … We did something good 25 years ago but to expect a policy created 25 years ago (will allow us) to be able to compete, we see the results that we can't," says Rx&D president Russ Williams. "We could be a leader if we had the proper environment … Canada is becoming less and less competitive."

Williams says competing jurisdictions have developed effective mechanisms for commercialization and strengthened patent protection in recent decades, while Canada has made a few minor enhancements that have failed to keep pace. At stake is a share of the $110 billion in pharma R&D conducted globally every year.

What is required, he says, is to match the legislation of competing jurisdictions in the areas of data protection, effective right of appeal, and patent term restoration.

The Rx&D perspective stands in stark contrast to that of the generic drug industry. In a press release, the Canadian Generic Pharmaceutical Association stated that the PMPRB data offer "further proof that there is no link between longer market monopolies and increased investments". It further asserts that pressure from brand-name drug companies to extend the period of market exclusivity for patented drugs is playing a role in the Canada-European Union Trade Agreement negotiations currently underway. It describes the EU proposals as a "cash grab" that will add billions of dollars to the cost of purchasing drugs in Canada.

The Rx&D stand is also countered by health policy experts who say that drug companies will decide on where to conduct their R&D on the basis of excellent science, infrastructure and research platforms, not on Canada's existing patent protection regime.

"I fundamentally do not agree with Rx&D … Patent term restoration and market exclusivity will not generate R&D investment in Canada. We have not allowed intellectual property protection for medicine to decline (but) it's great fodder for rhetorical claims," says Dr Steve Morgan, associate director of the UBC Centre for Health Services and Policy Research. "If Canada wants to be competitive in attracting R&D to the country, we have to be productive in research … We need great scientists, great infrastructure and great platforms to be competitive. We have a diverse population which provides opportunities for drug development. Not enough attention is paid to this."

Morgan attributes much of the decline to the global restructuring of the pharmaceutical industry but adds that Canada "never punched above its weight" during the explosion of small molecule drugs development in the 1970s and 1980s, allowing more successful jurisdictions to secure and hold R&D leadership positions.

"But we punch above our weight in biotechnology. We need to focus on areas of strength," says Morgan."

In addition to calls for improved patent protection, Rx&D is also critical of the methodology employed by PMPRB to calculate the industry's R&D expenditures. Williams says the PMPRB does not count all "legitimate R&D" and related activities because it falls outside the definition used to calculate Scientific Research and Experimental Development (SRED) tax credits.

"SRED is a tax definition not a research definition and Budget 2012 is reducing what is admissible under SRED. University research chairs and the recent Merck investment in Toronto don't fit the SRED definition but are research-oriented," says Williams. "For last year's figures, PMPRB reports about $1 billion but we counted $1.3 billion and another $200 million over and above that. We need a more realistic definition of research approved by government."

To that end, Rx&D, Industry Canada and others commissioned a study by KPMG for 2010 that reinforced the association's claims. A follow-on KPMG study is underway for 2011. Williams says the study's findings demonstrate that "we have honoured our commitments from the 80s".

Morgan disagrees and argues that it's in the industry's best interests to paint a bleak picture as part of its pitch for patent reform and a broader definition of eligible R&D.

"It may be politically expedient to use the tax credit argument (but) the economics of a successful R&D investment are pretty clear — be strategic and be consistent. My ideas are probably rather mainstream. Much of what I've said is parroting what others are saying," he says. "This is the politics of R&D and the theatre of trade negotiations. The industry would like to portray a doom and gloom scenario as the trade negotiations are ongoing."

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