Pharmaceutical Industry | The Canadian Encyclopedia


Pharmaceutical Industry

The pharmaceutical industry involves companies that research, create, market and sell both generic and brand-name drugs.
Banting and Best Laboratory
Banting and Best's laboratory where insulin was discovered (courtesy University of Toronto Archives/A1965-0004).

The pharmaceutical industry involves companies that research, create, market and sell both generic and brand-name drugs. The first pharmaceutical company in Canada was established in Toronto in 1879 by E. B. Shuttleworth. Today, the vast majority of drug companies operating in Canada are foreign owned.

Structure of Pharmaceutical Companies

Companies engaged in the manufacture of pharmaceuticals fall into three types: subsidiaries of foreign multinational companies manufacturing brand-name drugs; generic companies manufacturing 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 that generally focus on early-stage research and development and have few products on the market.

In Canada, the association now known as Canada's Research-Based Pharmaceutical Companies (Rx&D), founded in 1914, represents more than 50 brand-name companies, of which the large majority are subsidiaries of foreign multinationals. The Canadian Generic Pharmaceutical Association (CGPA) has 10 member companies, more than half of which are owned by non-Canadian corporations.


In 1879, the first pharmaceutical company in Canada was established in Toronto by E. B. Shuttleworth. Shortly thereafter, in 1887, the first foreign-owned subsidiary was started in Windsor by the American firm Parke, Davis and Company. Branch-plant operations such as this one were primarily set up to take advantage of 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 (i.e., 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. It became possible to produce large volumes of drugs at a reduced cost, 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; however, many of these are now foreign owned.

Sales and employment

In 2011, the total Canadian pharmaceutical market was the world's eighth largest, representing about 2.6 per cent of global pharmaceutical sales.

The Canadian prescription pharmaceutical market was worth an estimated $29 billion in 2013. Also by 2013, generic drugs accounted for just over 66 per cent of the 574 million prescriptions filled in Canada, but represented slightly less than 24 per cent of medication spending, as they are typically less expensive than brand-name drugs. The largest company in Canada is American-owned Johnson & Johnson with 2011 sales of $1.75 billion. The only Canadian-owned company among the largest 10 pharmaceutical corporations in Canada is Apotex, ranking fifth with 2011 sales of $1.21 billion.

Total employment in the manufacturing portion of the pharmaceutical industry went down from about 30,080 in 2006 to 26,950 in 2013. Of these employees, about 16,000 worked for brand-name companies and the remainder for generic companies. Employment is concentrated around Toronto and Montréal.


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 on which the patent was filed. 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. The length of a patent is an international standard, established by the Agreement on Trade-Related Aspects of Intellectual Property Rights (known as TRIPS), one of the treaties administered by the World Trade Organization. Although patents last 20 years, an estimated eight years is usually taken up with the process of developing the drug and doing the clinical tests necessary to get it approved for marketing. Therefore, the effective patent life is about 12 years. In 2014, Canada and the European Union signed the Comprehensive Economic and Trade Agreement, adding up to two years to the effective patent life due to pressure from European countries that are home to a number of large multinational pharmaceutical companies.

In the 1960s, three 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. Under patent protection, there is no competition from lower-priced generic drugs until the patent has expired. In order to counter the issue, the federal government passed Bill C-102, allowing compulsory licensing (i.e., the ability to import lower-priced drugs even if the original was still under patent). Firms receiving these licences are called generic companies and the products they market are referred to as generic drugs. Multinational companies strongly objected to the introduction of Bill C-102 and lobbied vigorously against it.

As part of the negotiations for the Free Trade Agreement with the United States and then the North American Free Trade Agreement with the United States and Mexico, the Conservative government under Brian Mulroney passed two pieces of legislation: Bill C-22 in 1987 and Bill C-91 in 1993 (See Free Trade). Bill C-22 weakened compulsory licensing and Bill C-91 abolished it completely. In return for the increased patent protection, the member companies of Rx&D (then known as the Pharmaceutical Manufacturers Association of Canada) promised to invest 10 per cent of sales in research and development (R&D) by 1995 and to create directly 2,000 new R&D jobs. Both pieces of legislation were opposed by the CGPA (then called the Canadian Drug Manufacturers Association) and many consumer and senior citizen groups, including the Consumers’ Association of Canada and the Canadian Health Coalition.

Drug Prices and Spending

In addition to weakening compulsory licensing, 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. Since 1988 (shortly after Bill C-22 was introduced), the rise in the price of patented drugs at the manufacturers' level has been consistently below the rate of inflation. Despite this, overall prescribed drug spending increased 137 per cent between 2000 and 2012, from $11.7 billion to $27.7 billion. In fact, drug spending is the second largest cost to the Canadian health care system after hospitals. Among the 34 countries in the Organization for Economic Co-operation and Development, Canada has the second-highest per capita spending on drugs after the United States, according to 2012 data. Besides prices, other factors affecting spending are population growth, population aging, inflation, the number and size of prescriptions filled and changes in the drugs doctors choose to treat various conditions.

Prices for generic drugs do not rise as quickly as those for brand-name drugs. Between 2003 and 2013 the price for a prescription for brand-name drugs went from $58.25 to $80.88, compared to a small decrease in the prescription price for generic drugs from $22.44 to $22.11. Despite the lower prices for generic drugs, Canadian generic prices are still high by international standards. Generic drug prices are determined by provincial drug plans and not by the PMPRB.

Payment for Prescription Drugs

Only drugs prescribed to people who are in hospital are covered under medicare. Outpatient prescriptions are paid for in one of three ways: either through provincial drug plans, by private insurance or out-of-pocket. Each province has developed its own plan; some provide coverage based on age (people 65 and over) and whether people are receiving social assistance, and some use income status. The list of drugs that the provinces cover is called a formulary. On average, provinces pay for 38.5 per cent of the cost of prescription medications. Social security funds and the federal government pay an additional 6 per cent. Because of the difference in provincial plans, the amount that people have to pay on their own varies considerably. For example, in 2006 a 40-year-old social assistance recipient taking drugs for high blood pressure and high cholesterol would have received drugs for free in Alberta and British Columbia but would have paid $200 in Québec. Overall, low-income seniors would pay 35 per cent or less of their drug costs in British Columbia, Newfoundland, New Brunswick, Ontario and Prince Edward Island, but up to 100 per cent in Alberta and Nova Scotia. When both brand-name and generic drugs are listed on formularies, provincial plans will only pay for the cost of the generic product.

Before provinces make a decision about whether to cover a drug, the drug is evaluated by the Common Drug Review. The CDR provides advice about the clinical efficacy and cost effectiveness of a drug against other drug therapies so that public funds are optimally used. The CDR is funded by federal, provincial (except Québec) and territorial governments and is governed by a 13-member Board of Directors appointed by federal, provincial and territorial deputy ministers of health. Provinces are not bound by the recommendations from the CDR about whether or not to pay for the drug. As a result, there is variation among provinces in terms of what drugs are covered. Not all drugs approved by Health Canada are paid for by provincial drug plans.

On average, private insurance pays for 35.4 per cent of prescription drug costs in Canada. At least 68 per cent of the Canadian population had private drug coverage in 2010, usually as part of a benefit package through work. Estimates from a 2000 report indicated that 20 per cent of the Canadian population was either uninsured or underinsured for routine prescription drug costs, and people in the lowest income bracket had the highest rates of underinsurance. Whether or not people have drug insurance and their level of income has a large role in determining if they take medications that have been prescribed for them. Based on 2007 data, 3.6 per cent of those with a high income (annual household income of $80,000 or more) and insurance did not take their medications due to cost, while for those with a low income (annual household income less than $20,000) and no insurance it was 35.6 per cent, or in other words ten times greater.


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 spent an estimated USD 137 billion in 2012 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. From 2000 to 2011, for example, only 1 per cent of the 336 new drugs approved were for neglected diseases (i.e., diseases that occur primarily in poor developing countries).

The pharmaceutical industry claims that it costs nearly USD 2.6 billion to research and develop a new drug; such figures have been challenged by critics who estimate that the figure is a fraction of that amount. Research and development (R & D) spending in Canada by the brand-name companies went from 6.5 per cent of sales in 1988 to 12.9 per cent in 1997, but has declined since. In 2013, it was 5.4 per cent. Employment in R & D has also been going down since 2006 and now about 3,300 people are employed in this field by brand-name and generic companies.

About 25 to 35 new active substances (i.e., drugs that have never been on the Canadian market before in any form) are approved annually in Canada. Based on data from the PMPRB, fewer than 10 per cent of these represent "breakthrough" medications or substantial improvements over existing therapies. Other drugs may provide minor advantages in terms of being taken less often or in being better tolerated by some groups of patients.

Drug Regulation

The federal government had no power to limit the sale of drugs until 1939, when amendments were made to the Food and Drugs Act. In 1951, it became mandatory for companies to submit safety data to Health and Welfare Canada (now Health Canada) 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.

Once the basic research for a potential new drug has been completed, the company submits a Preclinical New Drug Submission containing all known data on the substance to Health Canada. If this submission is approved, the company proceeds to the clinical research stage, where the drug is determined to be safe and effective for humans. During this phase, a detailed description of the proposed tests needs to be approved by a Research Ethics Board before it can be carried out. 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 is sent to Health Canada with complete information on the new drug. Approval of this submission results in the company receiving a Notice of Compliance, allowing the drug to be sold in Canada. The notice is accompanied by a product monograph that summarizes all the information about the drug and is available to health professionals to guide them in its use. The monograph is also accessible to the public through the Drug Products Database.

Generic drugs are copies of the original product that contain the same amount of the active ingredient. In order to be able to sell a generic drug, the manufacturer has to submit data to Health Canada showing that its product is bioequivalent to the brand-name drug. Bioequivalence means that the generic drug enters into the bloodstream and is eliminated from the body at the same rate as the brand-name drug.

After a new drug is marketed, companies are required to notify Health Canada of any adverse reactions that they become aware of. In addition, Health Canada operates MedEffect Canada to monitor the safety of drugs. Warnings about safety problems are posted on the MedEffect website. In addition, health professionals and consumers can report adverse drug reactions to MedEffect. In 2012, the website received about 53,000 reports. Reporting is voluntary and it is believed that only 1 to 10 per cent of all adverse reactions are documented. All of the reports are publicly available in a searchable database. About 4 per cent of the drugs that are approved in a five-year period eventually need to be taken off the market because of safety problems.


The Food and Drugs Act prohibits false advertising and companies can only promote their products for conditions that have been approved by Health Canada. However, Health Canada has no control over how doctors actually use drugs, and drugs are often prescribed off-label (i.e., for uses that Health Canada has not approved). Although Health Canada has the legal authority to regulate promotion, for the most part it has turned its authority over to the pharmaceutical industry and various private organizations, although it may still intervene in situations including serious threats to public safety.

Most promotion is for prescription drugs and is directed at doctors. There are no exact figures about the amount spent on promotion in Canada, but it has been estimated at upwards of $2.4 billion annually. Advertising in medical journals and promotion by other means is regulated by the Pharmaceutical Advertising Advisory Board (PAAB), established in 1976. The board includes an advisor from Health Canada, as well as representatives from the pharmaceutical industry and medical, pharmacist and consumer associations, as well as from advertising agencies. The PAAB examines all advertising before it is used to ensure that it conforms to its code. The effectiveness of the PAAB 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 to doctors are governed by the ethics code developed by Rx&D, the organization representing brand-name companies. The code governs the activities of sales representatives and the samples of drugs that they leave with doctors. Sales representatives dealing with physicians are required to complete approximately 250 to 300 hours of study in two units: anatomy and physiology, and pathophysiology and pharmacology. About 90 per cent of all Canadian doctors see sales representatives to get information about drugs, according to a recent survey of physicians. Another recent study found that sales representatives did not provide Canadian general practitioners any information about harmful side effects in the drugs they were promoting in 66 per cent of visits. Rx&D polices its own code and if a violation is confirmed, the penalty ranges from $25,000 for the first to $100,000 for the fourth.

Although direct-to-consumer advertising of prescription drugs is not legal in Canada, companies are allowed to run advertisements naming drugs as long as they do not say what the drug is used for. They can also run what are termed "disease awareness ads." These advertisements mention a condition and suggest viewers "ask your doctor" about a treatment. Complaints about both types of ads are handled by Health Canada, which has been criticized for being slow in responding to complaints.

Canada has always permitted companies to promote over-the-counter products directly to consumers on the assumption that the products are relatively safe for the intended condition of use and that members of the public can readily identify the condition (e.g., a fever or a cough). Since 1997, private agencies have been responsible for regulating this type of promotion. Health Canada does not monitor the performance of these agencies but sets criteria for how they should operate and allows them to "self-attest" that they have met the criteria.

Further Reading