What's the future for the Canadian economy — innovator or imitator?

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The economic relationship between Canada and the United States is critical for both nations. But Canada's misguided approach to pharmaceutical patent assessments continues to hold back stronger trade, investment and research ties with the United States — as well as Canada's potential to become a more innovative economy. The United States should use Prime Minister Justin Trudeau's visit to Washington this week — the first state visit by a Canadian prime minister in 19 years — to push Canada to resolve this issue by getting it to return to the approach used for patent assessments by the rest of the world.

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The issue at hand is that Canada has allowed its courts to use a subjective and arbitrary test — known as the "promise doctrine" — to determine the usefulness of a drug, which has placed an unrealistic evidentiary burden on pharmaceutical patent applications. This has led to the invalidation of 24 patents on 20 innovative foreign drugs since 2005. All of these cases involve retrospective challenges to drugs already under patent protection. Innovative pharmaceutical companies have suffered over $1.1 billion in lost sales from such premature termination of patents in Canada.

Canada is an outlier in this regard as no other country uses this approach; others instead abide by longstanding obligations under the World Trade Organization's Trade-Related Aspects of Intellectual Property Rights Agreement. These obligations, which are also set forth in other U.S. trade agreements, including the North American Free Trade Agreement (NAFTA) and the pending Trans-Pacific Partnership (TPP), lay out three clear criteria that innovators must meet to secure a patent.

In contrast to the global norm, Canadian judges are taking one of these three core criteria — whether a patent is useful or has "utility" — and redefining it years after a patent has been granted by Canada's patent office and approved by Canada's health regulator for a specific use. Indeed, in some cases, different judges have found the same patent to hold different "promises." Canadian courts are essentially requiring companies in the early stages of drug development to specifically determine precisely what their chemical compound will deliver before they've had the chance for detailed research and development, never mind clinical trials.

The truth is that Canada's promise doctrine isn't about "usefulness," but about benefiting Canada-based generic drug companies. Virtually all of these cases have been initiated by Canadian generic drug companies pursuing self-interest: to get a patent revoked in order to allow them to copy intellectual property and sell their own versions of the drugs in Canada. For if a drug isn't "useful," why would a company want to contest its patent? The promise doctrine has allowed Canadian companies to unfairly take intellectual property without contributing to genuine innovation.

In part because Trudeau has made innovation a central theme of his new government, he should seize the opportunity to take a fresh look at this critical issue. While the previous government asserted it would not discuss the issue due to a pending case brought by Eli Lilly under NAFTA provisions — a position undercut by the fact that the Canadian government has regularly discussed timber trade issues despite ongoing legal proceedings — this issue is too important to U.S.-Canadian trade relations not to be forthrightly addressed at the outset of the Trudeau administration.

Canada's treatment of the innovative life sciences sector is particularly disappointing because it's at odds with Canada's goal of becoming a more innovation-based economy. At January's World Economic Forum, Trudeau commented, "We don't want technology simply because it's dazzling. We want it, create it and support it because it improves people's lives." The life sciences sector does exactly that. Yet given the large fixed costs entailed in research and development (R&D), testing, and approval, and low marginal costs for producing each copy of a drug, intellectual property (IP) protections are essential to enabling continued innovation in medicines. Unfortunately, Canada is undermining a central pillar of IP protection.

The difficulty in securing life sciences IP rights in Canada has also contributed to the country's faltering R&D investment in the sector, reflected in the Canadian pharmaceutical sector's share of total manufacturing R&D falling to 6.9 percent in 2015 (a share less than half the level in 2002), and just 40 percent of the industry's share of R&D in the United States.

Unfortunately, Canada's faltering investment in life sciences R&D parallels the country's broader underinvestment in research. Since 2001, Canada's national R&D intensity (total R&D investment as a share of gross domestic product) has fallen by over 20 percent, from 2 percent in 2001 to 1.6 percent in 2014. This has widened the gap between Canada and peer nations, as average R&D intensity in Organization for Economic Co-operation and Development (OECD) countries increased from 2.13 percent to 2.37 percent over that timespan. If Canada wants to become that innovative economy, it's going to have redouble efforts to invest in scientific research and protect the IP it produces.

Accordingly, U.S. policymakers should keep pushing Canada to return to global norms for patent assessments. This issue goes to the very heart of whether Canada wishes to be a country of innovators or imitators. Canada's 25th-place showing (out of 56 countries) in a recent ranking of countries' impact on global innovation shows that Canada has significant potential to make stronger contributions to the global innovation system. The Canadian government cannot avoid the fact that its innovation performance will never be as strong as it could be so long as this issue persists. In the meantime, the investment, jobs and IP produced by the pharmaceutical sector will continue to go elsewhere.

Ezell is vice president for global innovation policy at the Information Technology and Innovation Foundation (ITIF), a think tank focusing on a host of critical issues at the intersection of technological innovation and public policy. Cory is a trade policy analyst at ITIF.

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