Pharmaceutical Industry

The first pharmaceutical company in Canada was established in Toronto in 1879 by E.B. Shuttleworth. The first foreign-owned subsidiary was started in Windsor by Parke, Davis and Co in 1887. Branch-plant operations were primarily set up to take advantage of provisions in the Canadian tariff laws designed to protect domestic manufacturers from foreign competition. In order to undercut a competitor's price, a company would establish a manufacturing facility in Canada. These branch plants usually confined their activities to secondary manufacturing (combining the active and inactive ingredients into their final form) and sales.

In the 1940s the Canadian industry underwent a dramatic transformation. As potent new drugs were rapidly developed and marketed, the location of pharmaceutical preparation shifted from the drugstore to the factory where sophisticated technological processes were employed. Economies of scale became possible in the manufacture of these drugs and production was centralized in a few locations. Unable to compete on the scale demanded by the new technology, small domestic companies fell under foreign control. The 1970s and 1980s saw the emergence of Canadian-controlled generic drug companies, and more recently a number of Canadian-owned innovative and biotechnology companies have started operations.

Companies engaged in the manufacture of pharmaceuticals fall into three types: subsidiaries of foreign multinational companies which manufacture brand name drugs; generic companies which manufacture drugs that are ineligible for patents, drugs for which patents have expired and patented drugs for which they have obtained compulsory licences; and small biotechnology companies which at this point are just at the stage of developing products and typically only have one or two on the market.

The Pharmaceutical Manufacturers Association of Canada, founded in 1914, represents 62 companies, about 50 of which are subsidiaries of foreign multinationals. Canadian-owned generic companies formed the Canadian Drug Manufacturers Association in 1963, which now has 14 members.

The Canadian pharmaceutical market, estimated at $6 billion in 1995, is the world's ninth largest, representing about 2% of global pharmaceutical sales. While Canadian-owned generic companies have experienced a resurgence since 1969 when the Patent Act was amended, foreign subsidiaries still dominate. In 1995 this group accounted for almost 87% of total sales, but because brand name drugs are more expensive than generics, they accounted for only 62% of the 228 million prescriptions written in that year. The largest company in Canada according to IMS Canada is Merck Frosst with 1995 sales of $365.4 million. There are Canadian-owned generic companies in the top 10: Apotex is fifth and Novopharm is ninth with sales of $272.3 million and $240.1 million, respectively. All the rest of the top 25 companies are foreign owned.

Total employment in the pharmaceutical industry was just over 21 200 in 1995. Foreign-controlled companies accounted for about 83% of the total. Employment is concentrated around Toronto and Montréal where almost 90% of the employees work. Profits have traditionally been much higher than those in other industries. In the 8 years ending in 1995, profits before taxes, on shareholders' equity, were 29.6% for pharmaceutical manufacturers compared to 10.7% for all Canadian industries.


Patents on pharmaceuticals are issued for both the product itself and the process used to make the product. Patent life is 20 years from the date the patent was filed for. Nearly all Canadian pharmaceutical patents are owned by foreign companies. The company holding the patent on a drug generally has a monopoly on its sale for the life of the patent. In 1923, in order to encourage competition and thereby reduce prices, the Patent Act was amended to allow compulsory licensing to manufacture. Under this provision companies could apply for permission to manufacture a drug before its patent expired. The company would pay the patent holder a royalty. Little use was made of this provision. Companies were reluctant to apply for these licences because of the high cost involved in setting up and operating a manufacturing facility to supply just the Canadian market.

In the 1960s, 3 federal reports identified patent protection as a key factor in inhibiting competition and leading to drug prices in Canada being among the highest in the world. The Harley Commission recommended that the Patent Act be amended to allow compulsory licensing to import drugs still under patent. The federal government acted, and in 1969 passed Bill C-102.

Being able to import ingredients rather than manufacture them in Canada allowed companies to bypass the high costs of producing fine chemicals. Firms receiving these licences are called generic companies and the products they market are referred to as generic drugs. The multinational companies strongly objected to the introduction of Bill C-102 and lobbied vigorously against it.

As a consequence of this continuous criticism of compulsory licensing, in 1984 the federal government appointed economist Harry Eastman to head an inquiry into the pharmaceutical industry. Eastman's 1985 report concluded that compulsory licensing had stimulated competition and as a result Canadians saved at least $211 million on pharmaceutical costs in 1983. Eastman also found that since 1969 growth in the pharmaceutical industry had been more buoyant in Canada than in the US, where compulsory licensing did not exist.

Despite the conclusions in the Eastman Report, the Conservative government of the time under Brian Mulroney introduced and passed two pieces of legislation: Bill C-22 in 1987 and Bill C-91, which although passed in 1993 was made retroactive to December 1991. Bill C-22 gave companies up to 10 years of protection from compulsory licensing for all drugs marketed after June 1986 and Bill C-91 abolished compulsory licensing completely. In return for the increased patent protection, the PMAC member companies promised to invest 10% of sales in research and development (R&D) by 1995 and to directly create 2000 new R&D jobs. Both pieces of legislation were opposed by the CDMA and many consumer and senior citizen groups, including the CONSUMERS' ASSOCIATION OF CANADA. They claimed that the government's estimate that Bill C-91 would cost $129 million between 1992 and 1996 was too low. The CDMA countered with a claim that the loss of compulsory licensing would be $1.7 billion from 1993 to 2000 and $4 billion by 2010. Some provinces felt that their drug plans might be endangered if there were large cost increases. There were also concerns expressed about the continued viability of some generic drug companies. The effects of both bills will be the subject of a parliamentary review in 1997.

Drug Prices

Bill C-22 created the Patented Medicine Prices Review Board (PMPRB) with a mandate to control the introductory price of new patented medications and to keep the rising price rate of patented drugs within the rate of inflation. Until the early 1990s Canadian prices for new patented medicines were high by international standards, but changes in the way the PMPRB operates have reversed that situation. Since 1987, the rise in the price of patented drugs at the manufacturers' level has dropped below the rate of inflation and in 1994 and 1995 actually deflated by slightly less than 0.5 and 1.75%, respectively. However, many manufacturers have voluntarily given up their patents, which until recently allowed them to escape the jurisdiction of the PMPRB. At the same time the price for a prescription has been rising at about 12% per year because older, less expensive drugs are being replaced by newer, more costly drugs. From 8.4% of total health care spending in 1980, drugs now consume 12.7% of the health care dollar.


Drugs are often given credit for many of the significant positive changes in health that have been observed over the past century. It is undoubtedly true that INSULIN, discovered at the University of Toronto in 1921, revolutionized the treatment of diabetes. Other developments such as the polio vaccine and antibiotics have saved many lives and reduced the suffering of millions. However, the decline in mortality from infectious diseases such as rheumatic fever and tuberculosis started long before the era of modern drugs. Most of the increase in lifespan can be traced to a sharp decrease in the infant mortality rate which largely resulted from improved living and nutritional standards.

Worldwide, the pharmaceutical industry spends billions of dollars annually on research. Drug companies do develop treatments for rare diseases, but since the companies operate on the profit motive most of their research expenditures go into developing products that serve large markets and have the potential for substantial sales. It is currently estimated to cost about $300 million to research and market a new drug. About 80 new drugs are marketed annually in Canada. Fewer than 10% of these represent "breakthrough" medications or substantial improvements over existing therapies, 49% are moderate or negligible therapeutic improvements and 43% are modifications of already existing drugs.

The pharmaceutical industry is intensive in research in comparison to other sectors of Canadian manufacturing history. Research can be divided into 3 categories: basic, clinical and process. Basic research includes the search to discover new biological processes, the synthesis of chemical compounds and testing in animals.

Once the basic research has been completed the company submits a Preclinical New Drug Submission containing all known data on the substance to the Health Protection Branch (HPB) of Health and Welfare Canada. If this submission is approved the company proceeds to the clinical research stage which is the determination of the safety and therapeutic effectiveness of the drug in humans. This phase of research, usually conducted in hospitals, is governed by a protocol giving a detailed description of the proposed tests.

By the end of 1995 companies were spending about 12% of sales ($624 million) on research, compared to just 6.1% in 1988, but still less than the 16-18% spent in countries like the United Kingdom and the United States. Of the total, $130 million was on basic research, while almost $370 million was spent on clinical trials. Canada has a comparative advantage in clinical research over many other countries because of a highly skilled medical establishment and hospitals with excellent facilities.

At the conclusion of clinical testing a New Drug Submission (NDS) is sent to the HPB with complete information on the new drug. Approval of the NDS results in the company receiving a Notice of Compliance (NOC) allowing the drug to be sold in Canada. The NOC is accompanied by a Product Monograph which summarizes all the information about the drug and is available to health professionals to guide them in their use of the new drug. Prior to 1967 drugs were not required to have a Product Monograph.

The final type of research, process research, involves looking for ways to reduce the costs of drug production or of improving the quality of the product. Fifteen percent of the research dollar is spent here.

After a new drug is marketed the company is required to notify the HPB of all new and unusual occurrences with the product, until the HPB decides that enough is known about the drug. In addition the HPB operates the Drug Adverse Reaction Program. However, reporting to this program is voluntary and it is believed that only 1% of all adverse reactions are documented.

Government Activity

The federal government had no power to limit the sale of drugs until the 1939 amendment to the Food and Drugs Act. That amendment gave the government the authority to control the sale of any drug likely to be injurious to health. In 1951 it became mandatory for companies to submit safety data to the Food and Drug Directorate (now the HPB) prior to marketing a new drug. This change was provoked by the realization that Canada was being used as a proving ground for foreign manufacturers to test-market their new drugs.

The Canadian laws were changed again in 1963, following the experience with thalidomide. Pregnant women who took this drug gave birth to babies with congenital malformations of the limbs. About 115 such children were born in Canada. Besides strengthening safety standards, the 1963 amendments required manufacturers to submit information showing that their products were effective for the conditions recommended. Neither the 1951 nor the 1963 changes were made retroactive and there are still a number of drugs available that are either worthless or lack real medical benefits.

Although the Food and Drugs Act prohibits false advertising, the HPB makes only informal spot checks on drug advertisements. Products can only be promoted for those conditions for which they have been proved to be safe and useful. However, the HPB has no control over how doctors actually use drugs.

Provincial governments have all instituted programs to cover the costs of drugs. BC, Manitoba, Québec and Saskatchewan have universal coverage. The other provinces provide drugs to senior citizens and those on social assistance. About 44% of Canadians are covered under these programs with a similar number belonging to private insurance plans.

Provincial governments attempt to limit the cost of their programs by permitting pharmacists to product select; that is, to dispense a lower price generic drug in place of a more costly brand name one. Provincial formularies list those drugs where this practice is allowed. Some provinces encourage product selection by limiting the reimbursement to the pharmacist to the cost of the lowest priced version of the drug. In recent years provinces have tried to restrain the costs of their programs by limiting the prices they pay for drugs and by charging recipients, even those on welfare, for part of the cost.


Pharmaceutical companies spend almost $1 billion annually promoting their products. Advertising in medical journals plus advertising/promotion messages conveyed via audio, visual, audio/visual, electronic and computer means of communication is regulated by the Pharmaceutical Advertising Advisory Board, established in 1976. Representatives from the pharmaceutical industry and medical, pharmacists' and consumer associations sit on this board and there is an adviser from the HPB. Its effectiveness has been questioned, especially since the only sanction for violating the board's guidelines is either modifying or withdrawing the ad in question. Other forms of promotion, such as company sales representatives, are governed by the PMAC voluntary code. Over half of the promotional budget is spent on salaries and expenses of sales representatives.