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Last week it was announced that the German firm TVM Capital will manage a Montreal fund dedicated to the life sciences sector and meant to allow the multinational pharmaceutical Eli Lilly, amongst others, to set up shop in Quebec’s metropolis.

With $150 million in planned investments, does this mean that Quebec’s industrial policy regarding biotech has suddenly been brought back to life? No, actually, it doesn’t.

On the contrary, the time has come to assess how effective policies regarding the pharmaceutical industry are. For some 20 years, Quebec has put everything in place to attract giants of this powerful industry. The aim was obviously to take advantage of the spillovers regarding investments, research, employment, etc.

But are these spillovers worth it when compared to the financial incentives offered to the industry?

The recent layoffs in pharmaceutical companies in Quebec (more than 350 in 2012 alone) bring the total number of job losses in this sector to more than 3,000 in the last five years (last week’s announcement would generate a dozen jobs for the time being) and leads us to believe that the spillovers are decreasingly attractive.

This impression is well founded, but the roots of the problem are deeper.

Marc-André Gagnon, professor at Carleton University and associate-researcher at IRIS, published an article on the topic in the latest issue of a journal entitled Interventions économiques which came out last week. The title translates as “Financial subsidies to Quebec’s pharmaceutical industry: are they worth it?”

In this article, Gagnon locates the foundations of the current policies in the Mulroney government’s 1987 reform of legislation regarding patented medicines.

Ever since, pharmaceutical firms have taken advantage of the state’s generosity thanks to four types of subsidies to the industry.

Firstly, tax credits. The federal government offers to large firms a 20 per cent credit for R&D, to which Quebec adds a further 17.50 per cent. For small businesses, these tax credits reach 35 per cent and 37.5 per cent respectively, for a combined rate of over 60 per cent. This tax measure equals deductions of $233 million for Quebec pharmaceutical companies, taking into account only the federal tax credits.

Secondly, there is the pricing policy. Canada allows the industry to set a price cap contingent to comparisons with countries where medicines are more expensive. If the price of medicines patented in Quebec was comparable to those available in France, in the United Kingdom, or in New Zealand, the people of Quebec could save between $266 and $1,496 million.

The province of Quebec adds to these policies the 15-year rule, which guarantees companies producing brand-name medication that the government drug plan will completely repay patients for their medicines even after generic medication has reached the market (a cost of over $160 million). Finally, since 2008 Ontario and Quebec have been waging a subsidy war to attract companies on their territory. These subsidies are added to other measures and cost between $27 and $45 million to the province of Quebec.

The sum total of these subsidies appears in the following table, taken from Marc-André Gagnon’s article:

And the spillovers? Gagnon shows that they are becoming less and less consequential. Once the tax credits are taken into account, the pharmaceutical industry’s yearly investments in private R&D only reach $252 million. In 2010, Quebec thus spent between $455 and $1,703 million in all sorts of subsidies to generate in the private pharmaceutical sector investments in R&D, but the sum total of these investments ran to a meagre $252 million. Hence, for each dollar generated by the industry, Quebec paid $1.81 to $6.76.

Therefore, an assessment of Quebec’s pharmaceutical strategy leads us to conclude that the current approach is no longer justified. In fact, the spillovers would be far greater if Quebec chose instead to directly finance public research, e.g. by setting up a public research lab. It would be free from the industry’s commercial constraints which often gear private research towards developing products which complement already existing medicines rather then towards pursuing significant therapeutic innovation.

And there is no need to go to North Korea to find inspiration: the U.S. government announced last year that it would set up and fund a public pharmaceutical lab.

We should point out that the investment plan bringing together TVM Capital and Eli Lilly was made possible by a $65 million investment by Teralys Capital. The latter fund is a creation of the Caisse de dépôts et de placements, the Fonds de solidarité FTQ, and Invest Québec. Again, a lot of money thrown in by the government.

Marc-André Gagnon’s full article is available online in French on Interventions économiques’s website.

You can also watch a video of Marc-André Gagnon, in English, about pharmacare in Canada.

This article was first posted on Behind the Numbers.