An Application of the Quebec’ s General Equilibrium Model Impact of the Elimination of the 15-year Rule Ministère des Finances, Politiques économiques et fiscales Institut de la statistique du Québec Centre de recherches en économie et finance appliquées (CRÉFA, Université Laval) September..., 2002 Conférence entrées-sorties

Table of Contents 1. Challenges of a large-scale model 2.Issues of the 15-year rule 3.Definition of the shock 4.Adaptation of the basic model 5.Interpretation of the results 6. Lessons learned 7.Visualization interface

1. Challenges of a Large- scale Model

Challenges of a Large-scale Model u Time factor — the GAMS solver u Data confidentiality u Importance of a functional interface u Advantage — allows simulation of highly focused shock effects 4.

2. Issues of the 15-year Rule

Patent protection in some OECD countries and the “15-year rule” 6. 1.The 15-year rule applies as of entry on the drug formulary. Accordingly, it may apply more or less quickly, as the case may be. Sources:OECD and Québec government. A. PATENT PROTECTION IN SOME OECD COUNTRIES Appearance of generic substitutes Patent extension B. 15-YEAR RULE IN QUÉBEC Application for patent Full application of the low price policy Appearance of generic substitutes Application for patent 20 years Protection stipulated in WTO agreements Marketing (ten-year average) 20 years Protection stipulated in WTO agreements 15-year rule in Québec 1 (ten-year average) Marketing and 5 years entry on formulary

The Context u The Montmarquette Committee recommended that the government study the impact on Québec’s economy of eliminating the “15-year rule”. u Elimination of the 15-year rule is equivalent to the full application of the “low-price policy”. — According to CCP estimates, this would reduce the cost of the drug insurance plan by $24 million annually. 7.

3. Definition of the Schock

Definition of the Shock u Two possible effects: — The average price of drugs drops because generic drugs increase their market share at the expense of brand-name drugs. — The pharmaceutical research industry reduces its investments in Québec because of: lower profitability further to the drop in price; weakening of the essential factor that determines investment location. 9.

10. Investment growth in Québec and the rest of Canada Growth of stock of capital from 1994 to 2001 Sources: Statistics Canada, Canadian pharmaceutical research companies (Rx&D). 4.4% 9.6% 9.5% 6.5% to to 2001 Québec Canada without Québec (%)

11. Size of the pharmaceutical research industry in Québec Number of jobs, total and R&D investment by province, in 2000 (Rx&D member companies) MaritimesQuébecOntarioWestern provinces Millions of $ Jobs Number of jobsR&D spendingTotal investments Sources: Statistics Canada, Canadian pharmaceutical research companies (Rx&D).

12. Investment growth in Québec since 1994 Stock of capital Québec (millions of current dollars) Source: Statistics Canada (M $)

Investment growth in British Columbia since 1994 British Columbia (millions of current dollars) Source: Statistics Canada Stock of capital (M $)

Definition of the Shock u Pharmaceutical products price reduction — 1.4%, i.e. a reduction of $20 million in government spending u Transfer of the stock of capital of the pharmaceutical industry from Québec to the rest of Canada of $150 million: — a conservative estimate: rise of over $150 million in 2000 and 2001 does not take into account either the cumulative effect over many years, or growth in Canada 14.

4. Adaptation of the Basic Model

16. Adaptation of the Model - main difficulties u Rationing mechanism attenuate disruptions caused by the drop in average price u Formation of value-added of the chemical industry in Québec Cobb-Douglas vs. Leontieff function u Representation of government expenditures fixed value vs. fixed volume

Selected variants u Variant 1 — fixed labour supply by profession (neo-classical closing) u Variant 2 — variable labour supply and wages (labour supply elasticity 0.5) u Variant 3 — inelastic wages (Keynesian closing) 17.

5. Interpretation of Results

19. Main Transmission Channels - II + Government savings % Transfer of the chemical industry’s capital to RoC: $150 M Drop in average price of pharma products : -1.4% Total production % Corporate profits Remuneration of capital -0.3% Corporate savings Labour demand -0.06% Household savings -0.03% Household consumption -0.02% Government spending -0.05% Government revenue -0.08% Total investment Real GDP -0.17% Household income -0.04% Wage rates -0.11%

Interpretation of Results 20. Impact of a transfer of $150 million of the stock of capital of Québec’s chemical industry to the rest of Canada, with a decline in the local price of pharmaceutical products of 1.4% ¹ Results for See Budget, Budget Plan. ² GDP at market prices for See Provincial Economic Accounts, Statistics Canada.

Interpretation of Results 21. External trade variables (variations in real terms)

22. Interpretation of Results u Decrease in GDP — between $300 and $500 million u Decrease in government spending — resulting from the drop in drug prices u Drop in government revenue — resulting from decreased economic activity u Overall: — negative impact on the budget u Rise in drug imports — likely from Ontario, where the generic industry has a significant presence

6. Lessons learned

24. Lessons learned u Chief strength – detailed explanation of economic implications u Versatility of the GEM u Importance of correct formulation of the problem u Importance of sensitivity analyses

7. Visualization Interface

26. Visualization Interface u Challenges: — manage a large volume of output data — maintain confidentiality of results