Canada / Analyst Insights
Using the Pharmaceutical Patents in US-Canada Trade Negotiations

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by Ediz Ozelkan Analyst
Sep 24 2018

Federal officials have dealt with mounting trade pressures from the United States for the current administration’s entire tenure. Trade disputes have arisen involving lumber, primary metals and the automotive sector, among others. As tensions persist, considerations for nontariff options have come up. A potential target of new trade barriers could be the $310.7-billion pharmaceutical manufacturing industries in the United States and Canada.

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Reports have surfaced suggesting Canadian officials’ potential plans to target US pharmaceutical patents as a way to boost their negotiating power. This type of regulatory change presents a point of friction in trade agreement negotiations. Placing these patents in the scope of trade talks would enable the production of previously patented medicines by domestic generic pharmaceutical manufacturers (IBISWorld report 32541bCA), which would mitigate the position of power for the lucrative US pharmaceutical manufacturing market (32541a and 32541b). The US market is expected to generate total revenue of $298.7 billion in 2018. Comparatively, the Canadian pharmaceutical manufacturing sector, including both generic and brand name (32541aCA) manufacturers, is forecast to generate just $12.0 billion this year. Giving domestic generics manufacturers a chance to effectively compete against brand name manufacturers in the US market through a loss of patent exclusivity could prove to be a powerful trade tool.

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The ramifications of such a strategy could facilitate a shift in North American pharmaceutical output as Canadian pharmaceutical companies compound their rising profitability over the past five years to more effectively compete in the US market. Canadian producers are reliant on exports and this shift would not only aid their position in US markets, but bolster their exports to other regions as well. Canadian pharmaceutical manufacturers have increased their profit margins over the past five years across generic and brand name segments. Generics manufacturers boosted profit margins from 13.2% in 2013 to an anticipated 14.7% in 2018, while brand name producers are expected to drive profits up to 24.5% in 2018 from 20.9% in 2013. US-based companies in both sectors have endured falling profitability in aggregate and would be further pressured by northern competition bereft of patent exclusivity in the production process. Furthermore, while brand name pharmaceutical manufacturing is not expected to grow in Canada as quickly as its southern counterpart, generics manufacturing is projected to climb more than twice as fast over the five years to 2018. Generics production is increasingly becoming a mainstay in the domestic pharmaceutical sector and giving Canadian producers the competitive advantage of disabling patent exclusivity could put the sizable US pharmaceutical lobby to work for Canadian interests.