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How Parallel Trade Affects Drug Policies and Prices in Canada and the United States

Published online by Cambridge University Press:  06 January 2021

Aidan Hollis
University of Calgary, Institute of Health Economics
Peter Ibbott
King's University College, at the University of Western Ontario


U.S. consumers and Canadian pharmacies have rushed to take advantage of the opportunity presented by price differences in patented pharmaceuticals. This rapidly growing parallel trade has brought the Canadian and U.S. systems for determining pharmaceutical pricing under increased scrutiny, and the pressure for change seems to be building. This paper examines why parallel trade in pharmaceuticals has grown and considers some of the policy options confronting both countries.

To do this we begin by identifying similarities and differences in the Canadian and U.S. regulatory frameworks governing trade in pharmaceuticals. While the differences are considerable, we show that they are not the only reason for the emergence of the price disparity that has fuelled the growth in parallel trade. In particular, we argue that the price discrimination strategies of pharmaceutical manufacturers and exchange rate fluctuations have played an underappreciated role. Following this, we examine the claims that this trade represents a threat to American and Canadian interests, and find that there are good reasons for policy makers on both sides of the border to be concerned. Unchecked, this rising trade presents a threat to R&D funding and continued Canadian consumer access to pharmaceutical products.

Copyright © American Society of Law, Medicine and Ethics and Boston University 2006

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1 Parallel trade is the sale of legitimate brand name goods outside of authorized channels across international borders. The importation of patented pharmaceuticals from Canada by U.S. consumers is a form of parallel trade because it breaks U.S. law and violates the policies of pharmaceutical manufacturers. For a discussion of parallel trade see Gallini, Nancy T. & Hollis, Aidan, A Contractual Approach to the Gray Market, 19 INT’L REV. L. & ECON. 1, 1-21 (1999)CrossRefGoogle Scholar.

2 See Hollis, Aidan & Anis, Aslam, Rx for Canada: Close the Internet Pharmacies, C.D. HOWE COMMENTARY 205: 119, (2004)Google Scholar.


4 IMS Health Canada reports that internet sales in 2003 were $584 million Canadian dollars. Converting this with the Bank of Canada's (2005) reported average exchange rate of 0.7135 over 2003 yields the estimate reported here. IMS Health Canada, What's New at IMS Health, Mar. 7, 2005,; Bank of Canada, Exchange Rates, Annual Averages (2005),

5 Hollis & Anis, supra note 2, at 3.

6 See U.S. DEPT. OF HEALTH & HUMAN SERVICES, supra note 3, at 3.

7 IMS Health Canada, supra note 4, at table 11.

8 See table 1.

9 IMS Health Canada, supra note 4, at table 10 (listing internet pharmacy sales figures). These figures were converted to U.S. dollars using exchange rates from the Bank of Canada. See Bank of Canada, supra note 4. See also, DEPT. OF HEALTH & HUMAN SERVICES, CTS OF MEDICARE AND MEDICAID SERVICES, NATIONAL HEALTH CARE EXPENDITURES PROJECTIONS: 2004-2014, at Table 11; (stating total U.S. prescription drug sales data; prescription drug sales estimates for 2004 were not yet released, so the projected value was reported).

10 Using data from the Vector One data set, estimates that the total number of U.S. prescriptions filled in 2003 was around 3.08 billion. (Accessed September 24, 2005 from Additionally the 2004 number is approximately 3.12 billion prescriptions filled. Kaiser Family Foundation,, Total Number of Retail Prescription Drugs Filled at Pharmacies, 2004,

11 U.S. DEPT. OF HEALTH & HUMAN SERVICES, supra note 3, at 12.

12 See id.

13 See e.g., Health Canada, Drug & Health Products, (stating Canada's view of its regulatory mission). See also, U.S. Food & Drug Administration, FDA: The Nation's Premier Consumer Protection & Health Agency, Jan. 2002, (describing the FDA's description and function).

14 See e.g., President George W. Bush, President Takes Action to Lower Prescription Drug Prices, (Oct. 21, 2002), available at[EN: R17.1.5 for speeches]; see also, Canada Patented Medicine Prices & Rev. Bd, About the PMPRB,

15 See e.g., President George W. Bush, supra note 14. See also, THE 1998 CANADIAN BIOTECHNOLOGY STRATEGY: AN ONGOING RENEWAL PROCESS (1998),

16 See Health Canada, supra note 13.

17 See generally, Health Canada, The Common Drug Review,; FDA, Home Page,

18 See Canadian Institutes of Health Research, What We Do, (last visited Jan. 20, 2006).

19 Patent Act, R.S.C. 1985, c. P-4, s. 1.

20 While the patent system protects a similar set of innovations as in the U.S., there are slight differences in the legislation and common law which occasionally lead to situations in which a patent has expired in one country but not the other.

21 See Hore, Edward, A Comparison of United States and Canadian Laws as They Affect Generic Pharmaceutical Market Entry, 55 FOOD & DRUG L.J. 373, 383 (2000)Google Scholar.

22 See, for example,, A Guide to Reimbursement, Prescription Drug Coverage in Canada, (last visited Mar. 20, 2006).

23 Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, 117 Stat. 2066.

24 For example, in Canada the Patented Medicine Prices Review Board has an explicit mandate of preventing excessively high prices; no such review process occurs in the US.

25 Angell, Marcia, Excess in the Pharmaceutical Industry, 171(12) CANADIAN MEDICAL ASSOCIATION JOURNAL [C.M.A.J] 1451 (2004) (Can.)CrossRefGoogle ScholarPubMed.

26 See Patent Medicines Prices Review Board (PMPRB), Drug Patents and Drug Prices: the Role of the PMPRB,, (last visited Jan. 20, 2006).

27 The proportion of total drug sales innovative pharmaceutical firms devote to Canadian research still remains considerably below that of almost all other countries of a similar income level. See Patented Medicine Prices Review Board, A COMPARISON OF PHARMACEUTICAL RESEARCH AND DEVELOPMENT SPENDING IN CANADA AND SELECTED COUNTRIES, Ottawa: PMPRB Study Series S-0217, (2002) (Can.).

28 Patent Act, R.S.C. 1985, c. P-4, s. 1.

29 Id.

30 Id.

31 Id.

32 Id.

33 Id.

34 Morgan, S. and Hurley, J., Internet Pharmacy: Prices on the Up-and-up, 170(6) CANADIAN MEDICAL ASSOCIATION JOURNAL [C.M.A.J.] 945 (2004) (Can.)CrossRefGoogle ScholarPubMed.

35 Indeed, it seems natural that when a drug which is directly comparable to another in its effects becomes available, prices should fall: but the PMPRB regulations do not enforce the natural competitive outcome.

36 See the Patented Medicine Prices Review Board, Compendium of Guidelines, Policies, and Procedures,, (last visited Jan. 21, 2006).

37 Gardiner Harris, Price of AIDS drug intensifies debate on legal imports, N.Y. TIMES, Apr. 14, 2004, at A1.

38 See Elzinga, Kenneth G. and Mills, David E., The Distribution and Pricing of Prescription Drugs, 4 INT’L. J. ECON. BUS. 287, 287–99 (1997)CrossRefGoogle Scholar.

39 For a discussion of price discrimination, see Church, J. & Ware, R., INDUSTRIAL ORGANIZATION: A STRATEGIC APPROACH, ch. 5 (McGraw-Hill/Irwin) (2000)Google Scholar.

40 Danzon, Patricia M. and Furukawa, Michael F., Prices And Availability Of Pharmaceuticals: Evidence From Nine Countries, HEALTH AFFAIRS, W3-521, 522 (2003)Google ScholarPubMed,

41 Id. at W3-533

42 See generally Elzinga & Mills, supra note 38.

43 Milt Freudenheim, Cutting the Cost of Medicaid Drugs, N.Y. TIMES, January 30, 1990, at D2.

44 Id.

45 See Elzinga & Mills, supra note 38, at 292-93. Note that the action of bulk buyers is to increase the elasticity of demand for the group. The underlying price elasticity of the ultimate consumer is not fundamentally altered. If anything, it is likely that uninsured consumers have greater underlying price elasticity because they tend to be poorer than insured consumers.


47 Danzon & Furukawa, supra note 40, at W3-535.

48 Scherer, F.M., How U.S. Antitrust Can Go Astray: The Brand Name Prescription Drug Litigation, 4 INT’L J. ECON. BUS. 239, 253-54 (1997)CrossRefGoogle Scholar.

49 Elzinga &Mills, supra note 38, at 293.

50 Morton, Fiona Scott, The strategic response by pharmaceutical firms to the Medicaid mostfavored- customer purchase rules, RAND J. ECON. 269, 269 (1997)CrossRefGoogle Scholar.


52 Morton, supra note 50, at 269.

53 Can. Inst. for Health Info., DRUG EXPENDITURE IN CANADA 1985-2004 i (2005), available at

54 The Canadian system for prescription drug insurance is outlined at, (last visited Mar. 16, 2006).

55 Aidan Hollis & Steve Law, A National Formulary for Canada, CAN. PUB. POLICY 445 (2004).

56 The Canadian Coordinating Office for Health Technology Assessment (CCOHTA) was given the mandate to manage the CDR on an interim basis in March 2002. The permanent CDR program was launched in September 2003.

57 Economic evaluation of the cost-effectiveness of drugs has not been systematically introduced into the operations of large buyers in the US, and there is no equivalent of the Common Drug Review to analyze the cost-effectiveness of new medicines. Large insurers, Health Maintenance Organizations (HMOs) and Pharmacy Benefit Managers (PBMs) use cost-effectiveness analysis in their coverage decisions and in bargaining with drug suppliers. However, since their primary objective is profitably competing against other insurers and PBMs, their strategy is not necessarily to look for cost-effectiveness so much as to attract new customers and to beat down the prices charged by suppliers when there are competing drugs available. This is very different from the explicit mandate of provincial insurers to seek out value for money in the set of drugs they cover. State governments may pursue a strategy similar to that of the provincial insurers, but they only cover their own employees, and do not set prices or coverage decisions for other insurers.

58 Hollis & Law, supra note 55, at 450.

59 Many formularies have rules that provide reimbursement for only the lowest price available generic. Quebec's 15-year rule keeps brand name drugs on the provincial formulary whether or not a cheaper generic is available. The Canadian Generic Pharmaceutical Association (CGPA) has argued that eliminating this rule will save Quebec money. The CGPA position is outlined at CAN. GENERIC PHARM. ASS’N, QUEBEC AND THE 15-YEAR RULE, (last visited March 16, 2006).

60 Hollis & Aslam, supra note 2, at 10.

61 Hollis & Law, supra note 55, at 447.


63 If a manufacturer has an expensive new drug that competes with other drugs in the market, they can increase their profits by providing hospitals with price discounts for the new drug in order to encourage them to introduce patients to it. Patients then are more likely to continue with the drug (at full price) after discharge from the hospital. The size of these discounts is confidential.

64 Consumers make their purchase decision based on their doctor's prescription. They usually do not know and are unlikely to ask whether a cheaper alternative is available. While their pharmacist can assist them in identifying alternatives, substitution requires a change in the prescription.

65 Hollis & Anis, supra note 2, at 10.

66 See Patricia Barry, Why Drugs Cost Less Up North: Important Differences in American, Canadian Systems Produce Big Price Disparities, AARP BULLETIN (June 2003),

67 The growing disparity between U.S. prices for patented drugs and the prices all other industrialized countries were paying was documented in three widely read reports:


  2. Danzon & Furukawa, supra note 40.


68 Quon, Bradley S. et al., A Comparison of Brand-Name Drug Prices between Canadian- Based Internet Pharmacies and Major U.S. Drug Chain Pharmacies, 143 ANNALS OF INTERNAL MED.,397 (September 2005)CrossRefGoogle ScholarPubMed.

69 Id. at 402.

70 Id. at 403.


72 Id.

73 Id.

74 IMS Health Canada, Retail Prescriptions Grow at Record Level in 2003 , (2004),

75 Bernard Simon. Pressure on Canada's Drug Sellers, N.Y. TIMES, December 10, 2003, p. W1.

76 See U.S. DEPT. OF HEALTH & HUMAN SERVICES, supra note 3, at 116.

77 See Simon, supra note 75.

78 Alan Sager and Deborah Socolar, Do Drug Makers Lose Money on Canadian Imports, Boston University School of Public Health, (2004), (Sager and Socolar point out that if Canadian internet pharmacies were able to attract U.S. customers who would otherwise not choose to buy pharmaceuticals, then U.S. manufacturers would view this parallel trade as a tool for segmenting the U.S. market and increasing profits through price discrimination. Unfortunately, this is not usually the case. Most U.S. customers of Canadian internet pharmacies are people who have been purchasing their drugs from U.S. sources and therefore would have paid the higher price if they could not buy from Canada. As such, the growth in parallel trade threatens the ability of pharmaceutical manufacturers to continue to segment the market and pursue a profitable price discriminating strategy).

79 Id. Their comfort with ordering over the internet signals that they might well have been better informed than the average within that group.

80 Paul Grootendorst and Mitchell A.H. Levine, Do drug plans matter? Effects of drug plan eligibility on drug use among the elderly, social assistance recipients and the general population, Final report to the Health Transitions Fund pursuant to grant NA227, (2000),

81 Fortune, April 17, 2003, Fortune 500 pp.F-26 and F-59.

82 HHS, supra note 3, at 16-21.

83 Id. at 15.

84 Patricia Barry, FDA Criticized for ‘Scaring’ People Who Buy Medicines from Canada, AARP BULLETIN (May, 2003),

85 HHS, supra note 3, at 59, 64.

86 Id. at 17.

87 U.S. Food and Drug Admin., Test Results of Prescription Drugs from Bogus Canadian Website Show All Products Are Fake and Substandard, FDA , (July 13, 2004),

88 Barry, supra note 84.

89 Buying Prescription Medicine from Internet Foreign Pharmacies, U.S. Customs and Border Protection, (Feb. 22, 2006), (The FDA and the CBP view the importation of prescription drugs as illegal, but have adopted a policy of discretionary enforcement. Consumers are usually permitted to import a three month supply of a prescribed drug for personal use).

90 CBS/AP, Import Drug Bill Clears House, CBS NEWS, July 25, 2003,

91 Id.

92 Id.

93 Id.

94 See U.S. DEPT. OF HEALTH & HUMAN SERVICES, supra note 3, at 1.

95 Id.

96 Ram Kamath & Scott McKibbin, Report on Feasibility of Employees and Retirees Safely and Effectively Purchasing Prescription Drugs from Canadian Pharmacies, OFF. SPECIAL ADVOC. FOR PRESCRIPTION DRUGS, ILL. DEP't CENT. MGMT. SERVICES, Oct. 27, 2003, available at

97 See Letter from William K. Hubbard, Assoc. Comm’r for Policy and Planning, Food and Drug Admin., to Tim Pawlenty, Governor, State of Minn. (Feb. 23, 2004), available at

98 Clark G. Radatz, Brief 04-5: Internet Pharmacies, WIS. BRIEFS: FROM LEGIS. REFERENCE BUREAU (Mar. 2004), available at

99 Anis & Hollis, supra note 2, at 13.

100 Id.

101 Philip Rosson, INTERNET PHARMACIES 12 (2005), http://myweb/

102 Id.

103 Anis & Hollis, supra note 2, at 13.

104 See Theresa Agovino, Pfizer Cuts Some Supplies, Tensions Rise, BOSTON.COM, Feb. 19, 2004,

105 Anis & Hollis, supra note 2, at 13.

106 Id.

107 Id.

108 Id.

109 Patricia M. Danzon & Michael F. Furukawa, Prices and Availability of Pharmaceuticals: Evidence from Nine Countries, HEALTH AFFAIRS, Oct. 29, 2003,

110 Danzon, Patricia M. & Towse, Adrian, Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents, 3 INT’L J. HEALTH CARE FIN. & ECON. 183 (2003)CrossRefGoogle Scholar, available at

111 Id.

112 Id.

113 Patricia Danzon, Wharton Sch., U. Pa., Presentation at BIO 2005 Conference: Drug Pricing – The Return to Innovation and Industry Development (June 21, 2005).

114 Hollis, Aidan & Law, Steve, A National Formulary for Canada, 30 CAN. PUB. POL’Y 445452, (2004)CrossRefGoogle Scholar.



117 See U.S. DEPT. OF HEALTH & HUMAN SERVICES, supra note 3, at 32-34.

118 ROSEN, S., BOOTH, PAUL, DAHLBY, BEV & SMITH, ROGER, PUBLIC FINANCE IN CANADA 108124 (McGraw-Hill Ryerson) (1999)Google Scholar (discussing Canada's federal system and how conflicts over jurisdictions have evolved).

119 Health Canada, The Regulation of Prescription Drugs: Roles and Responsibilities, (last updated May 31, 2004).

120 Anis & Hollis, supra note 2, at 15-17.

121 IMS Health, Growth in Retail Prescription Slows in 2004 (Mar. 7, 2005),

122 David Square & Danylo Hawaleshka, Pills, Profits and…Perils?, MACLEANS, Sept. 2, 2002, available at (responding to questions about the growing internet pharmacy business in her province, Manitoba's Industry, Trade and Mines Minister MaryAnn Mihychuk answered “I’m a big fan of technology and this government is ready to grow this technology-driven industry.”).

123 Michelle L. Kirsche, Should Canadian Internet Pharmacy Fold, Pharmacist Shortage Ensures Jobs Remain, DRUG STORE NEWS, Mar. 7, 2005 (explaining that half of the estimated 6,000 pharmacy jobs available across Canada are located in Manitoba), available at

124 The provinces could close the externality by getting together and bribing Manitoba to end the practice but such a “Coasian” bargain seems extremely unlikely.

125 Gregoire, Lisa, Alberta MDs Warned Not to Co-sign American Prescriptions, 168 CAN. MED. ASS’N J. 886 (2003)Google Scholar, available at (expounding on the College of Physicians and Surgeons of Alberta's position that cross-border prescribing is unbecoming conduct and possibly subject to disciplinary action).

126 Comeau, Pauline, Doctor Fined $25,000 Over Internet Prescriptions, 171 CAN. MED. ASS’N J. 560 (2004)CrossRefGoogle ScholarPubMed, available at

127 Statement by The College of Physicians and Surgeons of Manitoba, Statement No. 805 – Prescribing Practices (2002) (available at (“Prescribing of medications by physicians based solely on information received without direct patient contact fails to meet an acceptable standard of care and is outside the bounds of professional conduct. There is no direct patient contact when the physician relies upon a mailed, faxed or an electronic medical questionnaire or telephone advice to the physician. Counter-signing a prescription without direct patient contact fails to meet an acceptable standard of care and is outside the bounds of professional conduct.”).

128 Square & Hawaleshka, supra note 122.

129 Hollis & Anis, supra note 2, at 5 (indicating Manitoba's lack of zeal in enforcing these standards as only one physician has been publicly censured for co-signing activities. The physician was first warned to stop the activity and then fined after co-signing activity continued. The issued fine in comparison with received profits from the activity was insubstantial). In Manitoba, this has been made easier by the apparent lack of zeal in enforcing these standards. Only three physicians have been censured for their activities in co-signing prescriptions and the assessed fines (from under $3000 to $14,000) were far below the revenues the doctors would have earned through co-signing prescriptions. Given the hundreds of thousands of prescriptions processed through Manitoba internet pharmacies, it is striking that the College managed to identify a total of only three physicians engaged in this business. Evidently, the political pressure to control internet pharmacies in Manitoba is simply not present, and therefore there is little that other provinces can do to stop the internet pharmacy business.

130 Press Release, Nat’l Ass’n of Pharmacy Reg. Authorities, Canadian Pharmacy Regulators Call for Government Action on Prescription Exports (Nov. 13, 2003) (available at; Agreement of Nat’l Ass’n of Pharmacy Reg. Authorities and Nat’l Ass’n of Boards of Pharmacy (May 6, 2003) (available at

131 Square & Hawaleshka, supra note 122.

132 Press Release, The Nat’l Ass’n of Pharm. Regulatory Auth., Canadian Pharmacy Regulators Call for Government Action on Prescription Exports (Nov. 13, 2003), available at The National Association of Pharmaceutical Regulatory Authorities (NAPRA) is Canada's voluntary umbrella association of provincial and territorial licensing bodies. Id.

133 Rosson, supra note 101, at 11-12.

134 STANDARDS OF PRACTICE 2 (Man. Pharm. Ass’n 2002), available at

135 POLICY FOR INTERNET PHARMACIES LOCATED IN MANITOBA 9, THE MPhA NEWSLETTER (Man. Pharm. Ass’n, Winnipeg, Man.), July 2000, at. 6.

136 INTERNET PHARMACY STANDARDS, (Man. Pharm. Ass’n 2001), available at

137 See Canada aims to curb Internet pharmacy trade, THE ASSOCIATED PRESS, Jun. 24, 2005, available at (reporting that federal Health Minister Ujjal Dosanjh was looking at measures to shut down the parallel trade in pharmaceuticals between Canada and the U.S. and that a new regulation prohibiting co-signing of prescriptions was one of the options being examined).

138 See, e.g. Prescription Drug Improvement and Modernization Act of 2003, supra note 23 and discussion p. 16 (including a provision that allows drug importation from Canada but requiring that the Secretary of Health and Human Services certify the safety and savings of the provision before it takes effect). Certification seems unlikely, given the opposition by the pharmaceutical industry and the FDA and given the safety concerns expressed by Canadian regulatory authorities.

139 See the Bank of Canada's exchange rate data, available at

140 Editorial, End to Ban on Reimported Drugs is Good Medicine, USA TODAY, Aug. 22, 2004, at 10A, available at.

141 For instance, the HHS Report on Prescription Drugs explains price differences between Canada and the United States as being simply a result of price regulation. U.S. DEPT. OF HEALTH & HUMAN SERVICES, supra note 3, at 70.

142 Editorial, supra note 140.

143 IMS Health Canada reports that the retail value of prescription sales in Canada, excluding sales to U.S. residents through Canadian internet pharmacies were C$17.3 billion in 2004. IMS Health Canada, supra note 4.

144 Id.

145 Gallini and Hollis, supra note 1, at 20.

146 Jazz Photo Corp. v. Int’l Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), cert. denied, 536 U.S. 950 (2002) (holding that “United States patent rights are not exhausted by products of foreign provenance. To involve the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent.” Id. at 1105. This suggests that sale of a patented product abroad may no longer exhaust the US patent holder's rights to exclude them from sale upon reexportation to the US).

147 See generally Gallini and Hollis, supra note 1, at 9-10.

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