Cost and Benefit Analysis: Natural Health Products (Unprocessed Product Licence Applications) Regulations

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Executive Summary

Under the Natural Health Products Regulations (NHPR) which came into force in 2004, all natural health products meeting the regulatory definition must receive approval from Health Canada for their safety, efficacy and quality in order to be sold in the Canadian market. This created a problem for the vast majority of products that were already on the market prior to the NHPR promulgation as they created an instant number of unprocessed applications for the Department. While the product licence applicants (typically manufacturers) are waiting for a decision from Health Canada, their products were technically in violation of the NHPR.

To address this problem administratively, Health Canada set out in its Compliance Policy for NHPs that products with a submission number would not be targeted for compliance and enforcement action, except in cases where a risk is identified.

The National Association of Pharmacy Regulatory Authorities has recently raised concerns of this practice and through its January 2010 Position Statement, advises its members not to sell any unlicensed products. This creates a potential for disruption in the market place as well as legal and credibility issues for the Department.

The intent of this regulatory proposal is to provide the proper legal framework for the natural health products market to remain in status quo until the Department could complete its work on all the unprocessed applications. This is accomplished by offering an exemption to the prohibition of sale to those natural health products which have applied for a product licence but after 180 days have not yet received a licensing decision from Health Canada; in conjunction with on-market safeguards such as the filing of safety information upon request, the reporting of adverse events, the maintaining of proper labelling and the stop sale upon demand provisions in place to protect the safety of Canadians during the interim. Consumers and retailers would not incur any additional cost as a result of the implementation of the proposal. Product licence applicants may incur nominal costs, mainly for confirming their desire that the proposal would apply to their products and for the purpose of product differentiations such as labelling.

Depending on the scenario, the regulations may preserve, in the first year, up to approximately $245 million of annual product sales that are, until now being managed administratively under the Compliance Policy for Natural Health Products. Nevertheless, this benefit is expected to decline over 30 months, until it dwindles to $0 as regulatory licensing decisions for all the unprocessed applications are made. In the mean time, the proposal would also provide improved transparency, in particular to the expected roles and responsibilities of Health Canada and the industry, a 180 day performance target for the review of a product licence application and a licensing decision, as well as on-market safeguards that would apply to the affected products during the period in which the regulations are in effect.

Assessment of Costs and Benefits

1.0 Approach and Methodology

According to the Cabinet Directive on Streamlining Regulation issued by Treasury Board of Canada Secretariat (TBS), departments and agencies are responsible for assessing the costs and benefits of regulatory and non-regulatory measures, including government inaction, when determining whether and how to regulate.

The objective of this analysis is to estimate the costs and benefits of the proposed Natural Health Products (Unprocessed Product Licence Applications) Regulations. The proposal will be compared against the scenario of which the Regulations do not exist

Although the Regulatory Affairs Sector (RAS), Treasury Board of Canada Secretariat (TBS) requires high impact proposals to assume a comprehensive and detailed quantitative cost-benefit analysis, a qualitative analysis of costs and benefits for each stakeholder may be appropriate for those proposals with a lesser degree of impact.

For the purpose of calculating the present value, 8% discount rate would be used as recommended by TBS guidelines¹.

Whenever conflicting data are encountered or insufficient information is available, the assumption will be provided wherever it is made.

2.0 Sector Overview and Stakeholders Profile

Natural Health Product Sector

According to a Leverus and Inter/Sect Alliance study commissioned by three sponsoring natural health product industry associations in 2005², Canada's natural health product sector includes retailers, distributors, importers, manufacturers and primary producers engaged in the production and sale of natural health products. It identifies at least 10,000 retail establishments in Canada that offer natural health products, including 2,700 health food stores, 650 traditional Chinese medicine retailers and 7,600 pharmacies. There are more than 800 suppliers, such as manufacturers, importers and distributors that are operating in the Canadian market.

The study also suggests that the sector employs around 25,000 individuals, with approximately 18,000 in the retail sector where around 60% of the positions would be considered part-time. There are about 6,500 individuals working in the supply chain such as distribution and manufacturing. The estimated Canadian wholesale value of these products is about $1.5B in 2005.

Natural health products are mainly sold through health food retailers, traditional Chinese medicine retailers, direct sellers, chain store pharmacies, independent pharmacies and health care practitioners. Of the estimated $2.5B in retail sales that happened during 2005, independent pharmacies and chain pharmacies held approximately 6.8% ($171 million) and 19.1% ($479 million) of the market share respectively.

Leverus et al assumed that the NHP market would grow a minimum of $250 million from 2005 to 2010, or 10% to reach $2.75B this year.

There are various estimates for the retail size of natural health product market.

The Consumer Health Products Canada (CHP Canada), formerly known as the Non-prescription Drug Manufacturers Association of Canada (NDMAC), is an association representing the self-care health products industry in Canada. It profiled the self-care health product market in 2004 and that the combined retail sales for the categories of vitamins, natural health products, herbal remedies, calcium & mineral supplements, medical nutritional supplements, and glucosamine totalled approximately $650 million³.

Euromonitor International, a research company that offers market intelligence on industries, countries and consumers, pegs the Canadian NHP retail sales to about $1.36B in 2007⁴. Sales of vitamins and dietary supplements are estimated to be worth $865 million, with herbal/traditional products, slimming and sports nutrition products contributing $246 million, $145 million, and $110 million respectively. Some NHPs such as homeopathic medicines, however, were not included in this calculation.

Last but not least, an Agriculture & Agri-Food Canada sponsored survey reported the total firm revenue from NHPs were approximately $2.4B and $2.6B for fiscal years 2006 and 2007⁵.

Health Canada

The Natural Health Products Directorate (NHPD) of Health Canada is the regulating authority for natural health products (NHPs) in Canada. Its role is to assure that Canadians have ready access to natural health products that are safe, effective and of high quality while respecting freedom of choice and philosophical and cultural diversity. Its mandate also includes providing relevant authoritative information on natural health products so that Canadians can make informed decisions about their use. NHPD is responsible for administering the Natural Health Products Regulations (NHPR) that govern the manufacturing, packaging, labelling, storing, importation for sale, distribution, sale and human clinical trials of NHPs.

Consumers

Based on a natural health products survey published by Ipsos-Reid in 2005⁶, over 76% of Canadians have purchased natural health products such as vitamins, minerals, homeopathics, and herbal products and 69% of Canadian adults used one or more natural health products at least once a week prior to the survey interview. Over 56% of Canadians bought these items from time to time or regularly.

Health Care Practitioners, including Pharmacists and other Professionals

In addition to pharmacists and their associations such as the National Association of Pharmacy Regulatory Authorities, Traditional Chinese Medicine and homeopathic practitioners, dietitians, herbalists and their respective associations could also be among the health care professionals that would be interested in this regulatory proposal.

3.0 Baseline Case and Analysis

Prior to the implementation of the Natural Health Products Regulations in 2004, a survey was conducted on behalf of Health Canada to gauge the number of product licence applications (PLAs) that the Department should expect for operation and planning purposes. It was estimated at the time that the industry would submit about 14,900 applications before December 31, 2004 and another 21,300 or so afterward for an estimated total of 36,200 applications⁷. Between January 2004 and March 15, 2010, however; Health Canada received about 47,180 PLAs or approximately 30.3%⁸ more applications than anticipated.

The Status of Applications Quarterly Report (December 31, 2009)⁹ indicated that 34,083 applications were processed and 18,105 product licences were issued with 12,976 applications are still outstanding. Internal record, however; suggests that 19,496 PLAs have in fact been approved as of March 15, 2010, an additional 447 are in the process of receiving a licence and 9,879 are awaiting decisions.

The scope of this analysis is based on the assumption that the proposal would come into force on September 13, 2010 or earlier, and apply to any product that has submitted a Product Licence Application, and its sponsor is given a submission number and has been waiting 180 days or more for a product licensing decision from Health Canada. Because of the current risk-based Compliance Policy that is in effect, some of these technically non-compliant products have been and are still allowed to be on the Canadian market.

Cost-Benefit Statement

A. Quantified Impacts $
		Base Year	Final Year	Total (PV)	Average Annual
Benefits	Industry	$196 million	$21 million	$308 million	$102 million
Cost	Industry (Sponsors)	<$ 1 million	$0	<$ 1 million	<$500,000
	Government of Canada	$0	$0	$0	$0 (note 1)
B. Quantified Impacts in Non- $
Positive Impacts:
The proposal may prevent potential employment loss of some 500 full- and 350 part-time positions, depending on the case scenario The industry would now have some certainty regarding the length of time it has to wait for a regulatory decision to legally market a natural health product in Canada.
C. Qualitative Impacts
Consumers should benefit from the status quo of continuing to have access to eligible natural health products that are on the market for which product licence application has been filed but not yet fully processed by the Department; Consumers would be assured explicitly that key on-market safeguards would be in place for those products affected by the regulatory proposal, and that these products would be labelled and could be verified independently; The proposal would reduce any potential legal liabilities of retailers that sell the affected products; and Health Canada could provide additional regulatory formality and safety oversight to the natural health products that are currently sold on the market in technical non-compliance and managed with a compliance policy.

Note 1:
This is possible through the re-allocation of internal resources to address the unprocessed applications within the proposed 30 months or sooner and to comply with the 180 day performance standard for all new product licence applications.  

The retail value of the natural health products affected by this proposal is estimated to be in the range of $221 million¹⁰ to $935 million¹¹ depending on the information source for the size of NHP market. These products are made available to Canadians through various retail channels, of which approximately 25.9% go through the chain¹² and independent pharmacies¹³.

From an economic impact perspective, there are at least two theoretical outcomes that could arise if Health Canada continues to practise its current administrative (non-regulatory) approach to manage the issue:

In the first scenario, the impact is assumed to be borne by the pharmacies and their suppliers¹⁴ - i.e., the chain and independent pharmacies. In this situation, individual pharmacists and owners of the pharmacies would likely consider the perceived health risks to their customers, and the financial and legal risks to themselves. As a retail channel, it must also consider potential loss of market share to other retail channels.

Under this scenario, the overall economic impact could range from $0 to $245 million¹⁵ during the initial year that the NAPRA Position Statement comes into effect, depending on the degree in which the number of pharmacies would stop carrying the affected products, the product mix of pharmacies, and the ability of other retail channels to pick up market shares.

The upper limit of $245 million is the estimated value for the unlicensed products to be initially taken off the market by all pharmacies; assuming the product mix of pharmacies is consistent with other retail channels. The value would be zero if Health Canada clears all the unprocessed applications and all affected products receive market authorization or if all pharmacies continue to sell the affected products despite their unlicensed status.

Alternatively, the relevant products could be removed by all other retail channels in addition to the pharmacies. Under such circumstances, the impact without government intervention could go further than $245 million in the first year alone, an amount with assumed full compliance by the pharmacies to take unlicensed products off their shelves. In a worst case scenario, approximately 34% of the products currently on the market could theoretically be removed, with an estimated amount up to $943 million¹⁶ being taken out of the economy.

In both situations, there would likely be a ripple effect on the potential loss of employment throughout the industry, from retailers upward to manufacturers and producers. Despite the expectation that the affected products will dwindle to $0 within 30 months as Health Canada works through the unprocessed applications to complete the assessment and licensing decisions, the market disruption during the interim may trigger cost reduction measures at the retail level, which would lead to some of the marginal producers, in particular those with minimal product lines, and the smaller firms into financial difficulties and possible demise. Unlike product sales which could be generated quickly, employment tends to be slow in its growth but rapid in its decline. Once companies disappear, they would likely be gone permanently along with the jobs they provide.  

The extent of potential loss in employment would vary according to a number of factors. Nevertheless, there are at least two important considerations. First, the basic law of supply and demand would apply. The potential employment loss would likely reflect a direct and dependent relationship with the reduction in size of the natural health products market - the larger the reduction in market size, the higher the risk and larger the potential loss in employment.

Since the removal of the affected products by a single retail channel or more is the trigger for employment loss, the product mix, the depth of the product lines, as well as the level and concentration of natural health product sales of the individual retail channel would be some of the key elements to consider in estimating the potential job loss up the supply chain. As Health Canada does not have sufficient relevant statistical data in this case, certain assumptions would need to be made.

Based on the Leverus study, there are approximately 25,000 individuals employed in the natural health product sector, with 10,600 part-time¹⁷ and 14,400 full-time positions¹⁸. If employment is proportional to market size, the focus would be on about 8,500 jobs¹⁹. If a further assumption is made that the product removal is confined to pharmacies and their suppliers only, the scope would be reduced to approximately 2,200 positions²⁰. Given pharmacies represent approximately 69%²¹ of retail establishmentsfor natural health products and 26% of the sales²², the sales to establishment ratio would be approximately 37%²³. This ratio could be interpreted as the influence of pharmacies as a conventional retail channel²⁴ in the natural health product industry. The potential employment loss then, if all affected products are to be taken off the shelves of pharmacies and no longer purchased by pharmacies unless they rapidly become licensed products, could be estimated in the range of 500 full- and 350 part-time positions²⁵. This represents about 3%²⁶ of the employment in the natural health products sector.

The estimated risk of 500 full- and 350 part-time positions assumes that the product mix pertaining to natural health products in pharmacies reflects proportionally of the products on the market²⁷ and is similar to that of other retail channels, which may or may not be the case. As well, the estimation of potential job loss would need to consider natural health products as a category of overall product-mix for pharmacies relative to other retail channels. In some way, the sales-establishment ratio has taken this into account as pharmacies likely rely less on natural health products as a product line for their business viability.

In all likelihood, the employment impact could be much more severe on a per capita basis, if other retail channels such as health food stores are to participating in the removal of unlicensed products.

4.0 Costs

Consumers

Consumers would not incur any costs, directly or indirectly as a result of this proposal as the intent is to provide the legal framework for a group of products that are currently being sold in technical non-compliance with the Natural Health Products Regulations (NHPR) but for which a product licence application is pending review by Health Canada. No action or activity would be required from the consumers.

Manufacturers, producers and distributors

Manufacturers and possibly distributors may incur some incidental costs, such as time spent to consent to the posting of the exemption number, product name and applicant name on the Health Canada website. However, the amount would likely be very minimal. There is also the cost of labelling products to display the exemption number assigned by Health Canada. The labelling would provide transparency for consumers and would allow its manufacturers to differentiate their products from those that do not comply with these regulations or the NHPR. Label statements such as "Health Canada approval pending" have currently been seen in business practice to promote a product. To keep the incremental cost and market disruption to a minimum, manufacturers would be asked to relabel their products within a reasonable timeframe, such as within 6-12 months or with any newly manufactured product, whichever is the sooner. Based on internal record, approximately 1,100 firms may be affected. Although the cost could not be quantified due to the lack of available data, the total amount is not expected to exceed $1 million.

Retailers

Like consumers, retailers are not expected to incur any additional costs as a result of this proposal. As the intent is to provide the legal framework for a group of products that are already being sold in the Canadian marketplace, no additional action or activity would be required from the retailers.

Health Care Practitioners, including Pharmacists, other health care professionals and their associations

Similar to consumers and retailers, health care practitioners, including pharmacists and other professionals and their associations are not expected to incur any additional cost following the implementation of this proposal.

Health Canada

Health Canada would expect to incur additional operational and administrative costs to implement this proposal. In general, this includes managing and administering the additional exempted products. To address increased administrative pressures, Health Canada will have to re-allocate internal resources to complete the licensing process for the unprocessed applications and to comply with the 180 day performance standard for all new product licence applications.

Based on the Status of Applications Quarterly Reports, the average monthly numbers for submission reviews completed were 1,173²⁸, 1,572²⁹, and 1,206³⁰ during Q1, Q2 and Q3 respectively. At the same period, Health Canada received 730³¹, 1206³² and 967³³ PLAs. As such, the Department has been making progress in reducing the number of unprocessed applications by a monthly average of 443, 366, and 239 during the first three quarters of the fiscal year.

In order to comply with the 30 month sunset clause, however, Health Canada must be able to complete approximately 330³⁴ reviews more than the number of applications it would receive on a monthly basis all through the period.

This has proven to be achievable in the first two quarters of the 2009-10 fiscal year, although it fell short in the third because of a temporary shift of focus.

In addition, Health Canada must able to complete all new PLAs within 180 days so that no new exemption applications will be added. Based on the data available, it is estimated that the weight average of Health Canada's review performance for all applications is currently at around 211 days³⁵. Assuming all things being equal, an improved efficiency gain (or its equivalent) for the review process of about 17%³⁶ would be needed.

Given the current economic climate, the Department is not expected to receive any external source of funding for this proposal and internal efficiency and other alternatives, such as re-prioritization or re-organization of work and resources would need to be sought.

The development of the online system should improve efficiency. Since Non-traditional and Traditional NHPs submissions made up the bulk of the unprocessed applications, efforts to reduce their review time without compromising consumer safety may also yield some gains.

5.0 Benefits

Consumers

Consumers should benefit from the status quo of continuing to have access to marketed natural health products. In addition, consumers would be assured explicitly that key on-market safeguards would be in place for those products affected by the regulatory proposal, of the products that would be properly labelled, and could be verified independently.      

Industry

Producers, manufacturers, distributors, importers and retailers of products that are covered by the scope of the proposal would be able to lawfully sell their products. The proposal would also allow the product licence applicant to differentiate clearly their exempted products from those that are prohibited from being on the market.

Applicants filing a product licence application will have the benefit of a 180 day performance target to be met by the Department, following which an exemption will be required providing certain criteria are met and if a decision to issue or refuse a product licence has not been made.

Since the gross profit margin of NHPs averages about 40%³⁷, they could contribute significantly to the viability of a retail business. In monetary terms, the proposal could preserve an average of $196 million³⁸ during the first year that may otherwise disappear from the pharmacies minus the amount being partially picked up by other retail channels. The benefit of the regulations would expect to decline to an average of $98 million ³⁹ ($91 million in present value) during the second and $25 million⁴⁰ ($21 million in present value) in the final year.

It would also reduce the risk to pharmacies of losing market shares to other retail channels such as direct sellers. The proposal could also prevent a ripple effect throughout the industry, creating job losses from the retail level upward.  

Health Care Practitioners, including Pharmacists, other health care professionals and their associations

The regulatory proposal should address some of the safety concerns that some health care professionals and their governing bodies have regarding public disclosure of product status, notification of final assessment decisions, and on-market safety measures. In addition, the Regulations would reduce any potential legal liabilities of their members should they decide to continue allowing those affected products be sold in their premises.

Health Canada

The regulatory proposal would allow Health Canada to process the applications for these products, while addressing the expressed legal and safety concerns of various stakeholders.

As well, it would achieve a normalized regulatory licensing program with performance standards which afford predictability for the market.

6.0 Conclusion

Based on the analysis above, there would be little incremental cost to be incurred by the stakeholders if the Natural Health Products (Unprocessed Product Licence Applications) Regulations were being implemented. On the other hand, the benefits in the form of preserving status quo could potentially be substantial. The proposal also offers more transparency and better accountability such as the 180 day performance target, of which monetary measurement may not necessarily be applicable in some cases.

For the regulatory proposal to meet the sunset clause and be successful, Health Canada would need to ensure, through internal means, that it could complete on average of 330 submission reviews more than it receives on a monthly basis for the entire 30 months.