WINNIPEG — Any breathing room the fall of the federal government afforded Canada's Internet pharmacy industry could slowly evaporate in early 2006 because of a new U.S. drug benefit that will compete for many of the same patients.

Observers on both sides of the border don't believe the plan will be the death knell for the $1-billion-a-year cross-border drug industry.

But on the heels of a year when the strong Canadian dollar thinned profit margins and federal Health Minister Ujjal Dosanjh weighed measures that would effectively drive the industry out of Canada, it's not exactly how mail-order druggists want to ring in 2006.

"We know in the end this is not a good thing," said David MacKay, a consultant for about 20 Internet pharmacies. "Medicare Part D will have an effect on our sales and we're bracing for it and we realize we're going to take a hit as a result of this program."

The industry estimates the Canadian market for uninsured and underinsured Americans looking for cheap prescription drugs is capped at about two million.

But Medicare Part D gives everyone with Medicare coverage access to prescription drug coverage regardless of their income or health status for the first time in the United States.

Enrolment in the $400-billion Medicare expansion is voluntary, but MacKay says the U.S. government has said it hopes to have as many as 30 million people enrolled in the first year alone.

It operates like an insurance plan, with patients paying deductibles and premiums in exchange for more affordable medications.

The Canadian International Pharmacy Association, the largest national lobby group for online pharmacists, says the industry has already plateaued because of the strong dollar and supply problems that have forced companies to refer U.S. prescriptions to foreign pharmacies -- many of them in the European Union -- to be filled on a commission basis.

Association president Andy Troszok says he believes Part D will help some people, but still leave Canada as a niche market for those who fall through the cracks.

One of the largest U.S. programs that refers American bargain-hunters to Internet pharmacies expects many patients to opt for a combination of Part D and Canadian drugs once they realize the U.S. plan isn't a cure-all.

"There will be combo issues going on," said Peter Wyckoff, an executive with the Minnesota Senior Federation. "But this is still a total abrogation of coverage by the government and privatization of our health-care system even more."

An estimated 14,000 patients from all 50 states are using the federation's drug website to link up with two of the largest online companies in Canada.

The U.S. Food and Drug Administration says drug importation is illegal, but it's believed no one has ever been charged for importing small quantities for personal use.

One of the FDA's main arguments against legalizing the cross-border trade has been the risk of counterfeit drugs being sold to unsuspecting Americans.

Two Canadian cases of counterfeit drug sales earlier this year highlighted the potential danger.

In Hamilton, RCMP raided King West Pharmacy last fall and charged a former part-owner with 11 offences related to the alleged sale of counterfeit heart medication, Norvasc. Police do not believe the pharmacy was shipping drugs to the United States.

However, a Toronto-area online pharmacist was accused of selling Americans bootleg Viagra. His online operation has since been forced to shut down.

The Canadian Pharmacists Association says the busts highlight why the federal government should have shut down the cross-border industry long ago.

But Troszok says the cases prove the current checks and balances in the drug supply system work. However, better regulations would ensure legitimate businesses flourish while rogues are quickly shut down.

Both Troszok and Wyckoff say they've seen no signs in recent months that U.S. customers have heightened safety concerns because of the counterfeit cases.

But safety is just one of several alarm bells the industry seems to routinely set off for opponents.

Groups such as the Canadian Pharmacists Association, the Canadian Medical Association, medical and pharmaceutical regulatory bodies and patient advocacy groups are among those who say federal government action is long overdue.

Their list of concerns is long: The industry is unethical because pharmacists are filling prescriptions co-signed by Canadian doctors who have never examined the U.S. patient; Canada's federally regulated pricing could be jeopardized; Canadian doctors and pharmacists are treating Americans instead of more Canadians; and Canadians could face drug shortages caused in part by the cross-border trade.

On the question of shortages, they point to last fall's decision by Roche Canada to halt sales of Tamiflu, the drug considered the best defence against a bird flu pandemic, because of a huge spike in demand as evidence the situation is urgent.

Some pharmacy groups said Internet pharmacies were in part responsible for a chunk of the increased sales.

"Will any government monitoring of the system detect a shortages problem faster than the manufacturer is able to?" asked Jeff Poston, executive director of the Canadian Pharmacists Association.

Poston and others who thought Dosanjh was finally set to get tough in late November were disappointed to realize the only measures he was prepared to take would have allowed the status quo to remain.

Dosanjh introduced legislation in the dying days of the Liberal minority government in November that would have banned bulk exports to the United States in the event of a shortage or likely shortage. The measure was universally supported as a necessary step to protect Canada from any future U.S. legislation that might allow wholesale imports.

The minister also proposed an early warning system that would help Health Canada detect shortages.

But he stopped short of trying to address ethical concerns about the industry, in part because the provinces argue regulating doctors and pharmacists is their turf.

"There is significant resentment on the part of a number of provinces, B.C., Quebec and our own province, about federal intrusion in an area they're not really responsible for," said Manitoba Health Minister Tim Sale.

The province is the birthplace of the Internet pharmacy industry and remains home to the majority of the industry's estimated 6,000 jobs.

The outcome of the Jan. 23 election will likely determine how quickly the cross-border trade is revisited by Parliament, if at all. But Poston says the greater impact of the election could come from any fluctuation in the dollar.

"If the value of Canadian currency falls, and therefore our drugs become even more attractive to the American consumer, then I think we will see a resurgence of the trade," he said.

Some facts about Canada's Internet pharmacy industry:

• Origins: Started in late 1999 when a young Manitoba pharmacy graduate began selling Nicorette gum, a stop-smoking aid, over Ebay at the same time another Manitoba pharmacist started selling small quantities of insulin supplies to North Dakota.
• Financial impact: Estimated to be worth as much as $1 billion Cdn (retail value). Year-over-year comparisons tracked by IMS Health show wholesale sales to Internet pharmacies decreased by 18 per cent for the year ending June 30, 2005 -- to $506.6 million from $617.8 million.
• Reasons for demand: Americans can typically save about 40 per cent in Canada because brand-name drug prices are regulated by the Patented Medicines Prices Review Board.
• Challenges: Strong Canadian dollar has slimmed profit margins; a re-elected federal Liberal government could proceed with measures related to ethics that would effectively drive industry out of Canada; a new U.S. Medicare drug benefit that takes effect Jan. 1 could lead many American patients to abandon Canada.
• What's Next?: Canada -- Outcome of Jan. 23 federal election will determine how quickly, if at all, Parliament revisits issue. United States -- It will likely be several months before full impact on the industry of U.S. Medicare Part D is clear.