Yesterday, it was announced that Google had reached a settlement with the United States Department of Justice and would forfeit $500M in gross revenue received from Canadian online pharmacies advertising to US consumers through the Google AdWords program.

According to the Government, these advertisements then led US consumers to buy and illegally import prescription drugs from Canada.

The settlement with the Department of Justice (DOJ) was in many ways inevitable.  Once the Government decided to go after Google to the extent of submitting fake online ads on behalf of fake online pharmacies, that Google ran and provided customer support to, the question was not if Google would settle, but for how much?

$500 million sounds a lot, but in the context of 2010 revenue of $29.3 billion, it’s only 1.7% of last year’s sales (if my calculations are correct).  It comes across as a slap on the wrist as Google is only required to forfeit to the Government the “illegal” revenue they obtained over the course of several years.

When Google advised investors earlier this year that they had accrued $500M in anticipation of a possible settlement, the company noted (emphasis added):

“Although we cannot predict the ultimate outcome of this matter, we believe it will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

There is no fine or punitive damages. Reaching a settlement to avoid a criminal prosecution makes sound business sense.

In the Google AdWords case, the reality is that many prescription drugs are cheaper in Canada. Many senior citizens living close to the border go to Canada to obtain their drugs. Although open to abuse, there is nothing inherently wrong in consumers wanting to buy the same product cheaper, if they can readily do so. The power of the internet to reach consumers wherever they may be has brought the power of economics and market forces to all of us.

What the Google/DOJ settlement doesn’t do is address the underlying reason why are many prescription drugs more expensive in the United States compared to Canada?  In other words, it shoots the messenger rather than deal with the underlying problem. If prescription drugs were the same price in both countries, this problem simply would not exist – there would be no market for online pharmacies in Canada.

The settlement announced yesterday and all the compliance features included within it will not stop the practice of US consumers looking to Canada for cheaper drugs. It just means that one advertising and marketing channel has been eliminated.

As Sally Church noted recently on Pharma Strategy Blog, the increasing price of new oncology drugs in the United States is unsustainable.

Why should US consumers pay more for drugs than their neighbors in Canada? After all the currencies are similar in value, and I’d argue the countries are comparable in terms of industrialization, wages and society i.e. we are comparing similar countries in terms of economic development. We are not comparing the price of drugs in a developed country to the price in the third world.

As the world’s largest market for pharmaceuticals, why does the US have the highest prices for prescription drugs? The difference is in the health care systems – the US is a free market where the price is what the market will sustain. Drug prices are not regulated, imports from cheaper countries are prohibited, and the payors (insurance companies) are able to pass on the cost of higher drugs direct to the consumer through higher insurance premiums.

In Canada, the Provincial governments are the payors and they regulate and control the price of drugs.  The United States is a great market for pharmaceutical companies (maximum profits) but poor for the consumer who picks up the price of branded prescription drugs whether through high co-pays or higher insurance costs.

As a result the healthcare system in the United States remains fundamentally broken, despite recent attempts at reform, and to me the Google/DOJ settlement is yet another reminder of this.