The short run impact of grey market imports of Canadian drugs is lower prices.
The long run impact is that drug companies will no longer develop new drugs, because they will be unable to recover their development costs.
The reason drugs are less expensive in Canada, is the fact that they have capped the price they will pay for pharmaceuticals. American drug companies have already developed and tested the drugs, which constitutes a huge fixed cost - in other words, the costs that do not vary based on how many pills they sell. Now all they face is the variable cost of production, which generally drops the more they sell.
Consider the following example: Supposed you spent ten million dollars developing a drug, including research, testing on animals, testing on people, approval from the FDA, and all the other costs. Now you have an asset - a drug patent. You are also ten million dollars in the hole - that's how much you have to make before you show a profit. Would you:
-Sell one million pills a year in the U.S. only. These one million pills cost $1.25 to produce, but you can sell them in the U.S. for $2.00 each. You will have two million dollars in gross revenue. The pills cost $1.25 million to produce, and you have a margin contribution (that portion of revenue that can be applied to recovering the investment and servicing the debt) of $750,000.
or, would you:
-Sell one million pills in the U.S. and an additional hundred thousand pills in Canada. Because you are making more pills, your production can be more efficient, so they cost $1.20 each. However, you can only sell the pills in Canada for $1.50 each. Gross revenues in this scenario are $2,150,000. Production costs are $1,320,000 so the margin contribution is $830,000 - 11% more applied directly to the debt you incurred developing the product.
That pretty closely approximates the current situation. Now, suppose all your U.S. customers bought drugs in Canada - What would that do to your margin? Instead of $830,000, you would have $330,000 left over after you paid for the costs of producing the drugs. You still have to service the debt on the $10 million you borrowed (or got from shareholders - basically the same thing, for the purpose of this example) How long do you think capital would continue to flow to the pharmaceutical industry in that kind of world?
We have the best medicine in the world in this country, and the rest of the world benefits. If we were to attack the pharmaceutical industry in the name of lower costs today, we would find that there were no new drugs tomorrow.
there is some canadian guy on FR who insists that canada pays the drug companies the same price as they get in the US - but then subsidizes the cost of them through their socialized medical system, so the end consumer sees a lower cost at retail. he says that what the re-importation really does - is take money from the canadian taxpayer subsidy.
not sure what to make of his explanation, we were with him on another thread about this.