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The Competition Bureau promotes and protects competitive markets across the entire economy. The Bureau is not only responsible for enforcing the civil and criminal provisions of the Competition Act, it is also responsible for advocating for greater reliance on market forces to deliver the benefits of ompetition to Canadians.
Canada's health system is an area where competition is often viewed as playing a limited role. The reality is that competitivemarkets are responsible for delivering many of the products and services on which our health system relies. Given their importance to the welfare of Canadians and because this is a large market — at approximately 10% of GDP, health related markets have been a key enforcement and advocacy priority for the Bureau for several years.
The Bureau's health‑related advocacy activity has focused on pharmaceuticals. This reflects the role of pharmaceuticals in treating patients and their importance as a source of health care costs — at $17.8 billion in 2006, they are the second largest source of health care costs. The Bureau has specifically focused its attention on prescribed generic pharmaceuticals. Generics play an important role in keeping health costs down by providing competition for brand drugs when they lose patent protection.
Several studies have found prescription generics to be relatively more expensive in Canada than in other countries. Thestudies prompted the Bureau to conduct the generic drug sector study to examine the generic drug market and identify areas where changes in the market framework may secure greater benefits through competition.
In conducting the study, the Bureau relied on publicly available information, data purchased from data providers, and information voluntarily provided by sector participants. In July 2007, a preliminary draft of the study was circulated to key interest groups for fact‑checking and to provide them with an opportunity to offer additional information.
Key findings in the study include the following:
- Generic drugs are supplied through a unique and complexframework. Physicians prescribe medication to be taken by patients.In filling the prescription, pharmacies can supply any brand‑name orgeneric drug product listed on formularies (or drug plan productlists) as interchangeable for the prescribed medication. Drugs arepaid for by drug insurance plans or out‑of‑pocket by consumers.Government and private drug plans provide coverage for approximately98% of all Canadians. Pharmacies are normally paid the invoice price.
- Generic manufacturing has become more competitive over thepast 15 years. It appears that strong competition exists in thesupply of many generic drugs in Canada. The end of patent protectionfor a drug can now lead to supply within a short period of manyinterchangeable generic products.
- In most provinces, an important way in which manufacturerscompete to have their product stocked by pharmacies is by offeringthem rebates off invoice prices. Rebates provide incentive forpharmacies to select a particular manufacturer's product. It has notbeen possible to obtain detailed evidence regarding the size of theserebates. Public sources and information provided by partiesinterviewed for this study estimate these to be 40 per cent of theprice the pharmacy is invoiced. Rebates are currently prohibited intwo provinces, Ontario and Quebec. However, legislation adopted inOntario in 2006, and under consideration in Quebec, allows genericdrug manufacturers to provide professional allowances to pharmacies.
- Competition by generic manufacturers to offer lower pricesthrough rebates is not reflected in prices paid by either public orprivate plans, or out of pocket. Rather, until recently, prices paidfor generic drugs across the country tended to reflect the maximumgeneric drug prices allowed under Ontario's drug plan. This changedin 2006 when Ontario reduced the maximum it would pay for genericdrugs to 50% of the brand‑name product price. These lower prices arenot paid by private drug plans in Ontario, or drug plans in otherprovinces, although this pricing discipline is due to be adopted inQuebec in 2008.
- Plans incorporate various policies, such as maximum genericprices and so‑called "most favoured nation" clauses, toreduce their generic drug costs. However, these policies providelimited incentive for manufacturers to compete by offeringcompetitive generic prices to the plans.
A regulatory and market framework where incentives to supplydrug plans more closely reflect the underlying market dynamics couldprovide significant benefits to drug plans, and in turn to insurers,employers and Canadians.
The Competition Bureau will continue its work in the genericdrug sector by examining possible options for obtaining the benefitsfrom competition and the impediments to their adoption. Measures foraccomplishing this goal may include, for example:
- providing manufacturers with incentives to compete to belisted on plan formularies;
- using competitive tendering processes to determine theproducts that can be dispensed by pharmacies;
- monitoring of the net price paid by pharmacies for genericdrugs to ensure the price paid by plans reflects competitive prices;and,
- an increased role for private plans in obtaining lower pricesfor their customers.
Table of contents
- Canadian generic drug manufacturing
- Independent pharmacy distributors
- Retail and hospital pharmacies
- 4. A. The Canadian retail pharmacy sector
- 4.B. Hospital pharmacies
- The generic drug reimbursement framework
- 5.A. Public health plans
- 5.B. Third party drug plans
- Summary of key findings
List of tables
- Table 1. Ranking of generic manufacturers by sales
- Table 2. Status of the first generic entrant
- Table 3. Status of the authorized generic after independent generic entry
- Table 4. Share of pharmaceuticals ($) by distribution channel (DC)
- Table 5. Pharmacy sales by therapeutic class, 2006
- Table 6. Retail pharmacy count by category
- Table 7. Canadian frontstore and dispensary revenue by pharmacy category
- Table 8. Historic pharmacy return on ODB branded versus generic drugs sales
- Table 9. Current pharmacy return on ODB branded and generic drug sales
- Table 10. Top ten therapeutic classes by hospital purchases, Canada, 2006.
- Table 11. Ranking of hospital sales by generic manufacturer, 2006
- Table 12. Inter‑provincial pharmacy/hospital price ratio analysis, 2006
- Table 13. Average unit pharmacy invoice prices of generics relative to Canada average, 2006
- Table 14. Current formulary listing price of generics drugs as a percentage of the brand price
- Table 15. Public plans versus private plans unit price ratio, 2006
- Table 16. Sources of provincial formulary prices
List of charts
The development and supply of pharmaceuticals is an important part of health care delivery in Canada. Pharmaceuticals are the second largest and fastest growing source of health care costs in Canada. In 2006, they accounted for an estimated 17% of all health care spending in the country. Footnote 1 Total retail and hospital expenditures on pharmaceuticals (at invoice cost) in 2006 were $17.8 billion. Footnote 2
Generic pharmaceuticals (“generics”) play an important part in helping to control prescription drug costs in Canada. Generics are determined by Health Canada to be “bio‑equivalent” to patented pharmaceuticals. Their role is to provide competition for brand‑name products when their patent protection ends.
Generics account for a large and growing portion of pharmaceuticals dispensed in Canada. Their share of prescriptions dispensed through retail pharmacies in 2005 was 43%. In 2005, total generic drug spending was $3.2 billion, with an annual growth rate of 13.6%. From 2004 to 2005, retail purchases of generic drugs grew at 12.1%, twice the growth of brand‑name drugs. Generic drugs captured a smaller share of hospital spending at 11.6% in 2005, but were 36.4% higher than in 2004, four times the growth rate for brand‑name drugs. Footnote 3
The benefits of generics are indicated by their share of pharmaceuticals costs relative to their share of prescriptions. While accounting for 43% of drug prescriptions in 2005, they accounted for only 18% of drug expenditures. Footnote 4 As discussed later in the report, generic retail drug prices are frequently significantly lower than the corresponding bio‑equivalent brand‑name product prices.
Despite these savings, there is widespread concern in Canada that generics are not providing the benefits they could. A series of studies have found Canadian pharmacy invoice prices for generic drugs, which generally reflect the amount reimbursed by public and private drug plans, to be on average substantially higher than in othercountries. For example, the June 2006 report on generic prices by thePatented Medicines Price Review Board (
Generic drugs are an important area of interest under the NationalPharmaceutical Strategy (
Provincial governments are also acting individually to reduce theirgeneric drug costs. In June 2006, the Ontario government amendedlegislation to require that generic drugs reimbursed under provincialdrug plans normally be priced at no more than 50% of their brand‑namereference product. Footnote 10 Previously, maximum pricesfor the first generic in Ontario were set at 70% of the brandedequivalent, with subsequent generics having a maximum price of 90% ofthe first generic. In February 2007, Quebec adopted a new policylimiting the price of the first generic drug to 60% of the price ofthe brand‑name drug and subsequent generics to 54% of the brand‑namedrug. Footnote 11
While there is widespread concern regarding the supply andpricing of generic drugs in Canada, there is substantial uncertaintyabout the underlying causes for the findings of high Canadian prices.Potential explanations include the following:
- The use of inappropriate statistical methodologies Footnote 12
- Higher domestic concentration of the generic manufacturingindustry
- Provincial and federal government regulatory practices
- Provincial pharmaceutical reimbursement practices.
Assessing these and other possible reasons for the performanceof the Canadian generic drug sector requires an understanding of theunderlying competitive framework. This framework involves a complexinterplay of:
- Provincial and federal legislation and regulation
- Domestic and foreign generic drug manufacturers and suppliers
- Pharmacy benefit managers
- Rural, banner, mass merchandise and other pharmacies
- Provincial, federal and private insurance plans.
While studies have been done concerning separate elements ofthis framework, the interplay between the various elements has notbeen systematically examined.
Bureau purpose and interest in conducting the generic drug sector study
The Competition Bureau, under the direction of the Commissioner ofCompetition, is responsible for the administration and enforcement ofthe Competition Ac, a federal statute that applies to allsectors of the Canadian economy. The Commissioner is also responsiblefor the administration and enforcement of the ConsumerPackaging and Labelling Act, the Textile Labelling Act andthe Precious Metals Marking Act. The purpose of the CompetitionAct, as set out in section 1.1, is to maintain and encouragecompetition in Canada in order to promote the efficiency of theCanadian economy and provide consumers with competitive prices andproduct choices.
The Act defines a number of practices that are prohibited ascriminal offences or are subject to review by the Competition Tribunalunder the civil provisions of the Act. The Act does not provide theBureau with any authority to decide the law or to compel business toadopt any particular type of conduct. Further information is availableon the Bureau website, at www.competitionbureau.gc.ca.
The Bureau promotes competition in two ways.
- It is a law enforcement agency. It investigates allegationsof anti‑competitive conduct and pursues criminal and civil remediesto stop anti‑competitive behaviour.
- It also acts as an advocate for competition. To that end, itfrequently makes submissions to legislative bodies or regulators onhow to implement reforms that encourage competition.
In its advocacy role, the Bureau strives to ensure thatcompetitive factors are taken into consideration in the formulation ofpolicies. It advocates that regulators and policy makers rely onmarket forces to achieve the benefits of competition, namely lowerprices, better quality and improved product choice for Canadians.Given the important benefits of competition, regulation should onlyinterfere with market forces where necessary, and then, only to theminimum extent needed to achieve other policy objectives.
The Bureau's interest in conducting the current study comes fromits advocacy role. The intent of the study is to outline and describethe competitive framework for prescribed generic drugs in Canada, witha focus on market structure and regulatory features.
The purpose of this study is not to examine Canadian genericdrug prices relative to other countries. Rather, it is to provide anunderstanding of the underlying competitive framework in order toidentify potential areas for further promoting the benefits ofcompetition. These areas will provide the basis for further Bureauanalysis and advocacy work on generic drugs.
In conducting this study, the Bureau relied on publiclyavailable information as well as information provided voluntarilythrough extensive interviews and contacts with industry participantsfrom the private and public sectors. The Bureau would like to thankall parties that have provided information for the study.
Organization of the report
The competitive framework for generic drugs involves a complexset of interactions between manufacturers, distributors, drugdispensers (pharmacies and hospitals) and payers or reimbursers(public and private drug plans and patients). This report outlines keyfeatures and roles of industry participants at each level related togeneric drug competition.
Chapter 2 examines generic drug manufacturing in Canada. Chapter 3discusses the role of independent pharmacywholesalers and distributors(IPD). Chapter4 addresses the practices of dispensers of generic drugs. Section Aconsiders retail pharmacies, section B deals with hospital pharmacies.Chapter 5 examines key features of the reimbursement framework forgeneric drugs. Public drug plans, the largest source of retailprescription drug funding in Canada, are considered in Section A. Therole of private insurers is examined in Section B. Chapter 6provides a summary of key findings.
2. Canadian generic drug manufacturing
Section 2.1 of this Chapter describes the Canadian generic drugmanufacturing sector. Section 2.2 outlines the considerationsmanufacturers take into account in determining whether to supply aparticular generic drug. Section 2.3 discusses the barriers to entryinto the supply of a generic drug. Section 2.4 examines the dimensionsfor competition among generic manufacturers. Finally, section 2.5considers the state of manufacturing competition in Canada.
2.1 Manufacturing description
There are over 15 suppliers of generic drugs in the country with 13companies having manufacturing facilities in Canada. The largestCanadian manufacturer, Apotex, is domestically owned and controlled. Footnote 13 Of the next nine largest suppliers, seven have a parent company orgroup that is foreign‑based.
The larger manufacturers tend to offer a large portfolio ofdrugs across multiple therapeutic classes and in a variety of forms,while others are less diversified or more specialized. For example,Taro Pharmaceuticals, an Israeli pharmaceutical company entered theCanadian market in 1984 and specializes in topical products. Hospira,a 2005 entrant, specializes in products used in hospitals includingcritical care products and specialty injectable pharmaceuticals.Sandoz acquired Sabex in 2004, and it specializes in injectable andophthalmic generic pharmaceutical products.
|2006 Rank||Manufacturer||Year 2006 $(000s)||Year 2006 (%)||Year 2006 Cumulative (%)|
Source: IMS Health.
|3||Genpharm Footnote 14|
|8||Mayne Pharma Canada Footnote 15|
|9||Taro PharmaceuticalsFootnote 16|
|10||Ranbaxy Pharmaceuticals Canada|
Generic manufacturers provide their products through three main supplyroutes: Independent pharmacy distrubutors (
2.2. Generic drug supply considerations
Manufacturers consider several factors when determining whether or notto develop and introduce an independent generic (
- Demand size and competition: The projected aggregate demandsize of the reference brand product as well as the relatedtherapeutic class, play important roles. First, the genericmanufacturers take into consideration how many manufacturers areexpected to introduce competing generic versions (independently orunder licensing agreements) of the targeted molecule. Second, brandedcompanies may in some cases provide added competition to the genericmanufacturer by introducing: (i) a competing drug within the sametherapeutic class, or (ii) brand extensions to replace olderformulations whose patents are about to expire. Brand extensions mayreduce the potential demand size available to the generic industryonce the original drug loses patent protection, with a proportion ofpatients being prescribed the new version. Footnote 17
- Development and approval costs: An important part of theentry decision is the evaluation of the total costs of introducing ageneric drug to the market. These costs relate to drug development,the need to conduct bio‑equivalence and/or clinical studies andfederal and provincial approvals.
- Timing: The length of time it would take to develop theproduct and obtain approval from Health Canada is a crucialconsideration. This is especially so if it results in the laterelease of a generic product after the relevant brand‑name productloses patent protection. Footnote 18
- Specialization and product portfolio: For example, amanufacturer involved in some related work, or specializing in drugswithin a certain therapeutic class or in certain dosage forms(creams, ointments, injectables), would benefit from economies ofscale or scope in production. On the other hand, manufacturers maywish to supply a drug to make their product portfolio more attractiveto customers.
- Legal challenge costs: Challenging brand patents, asdiscussed below, can be a costly and time‑consuming process. Ageneric manufacturer already involved in legal challenges may decidenot to enter into another challenge.
Once all factors and risks are considered, the manufacturer isthen in a position to calculate its projected sales versus costs. Ifthe expected return on investment is favourable, then the decision todevelop the product may go forward. There is no unique entry thresholdfor molecules coming off patent. It varies among manufacturers anddepends on the characteristics of the molecule, the manufacturer andthe barriers to entry.
2.3 Barriers to entering the supply of a generic product
Generics may be classified into IGs,developed and supplied without authorization by the brand drugmanufacturer, and authorized generics (
The development of IGsnormally involves three key steps:
- Securing the active pharmaceutical ingredient (
API): Described bysome as the "key to the industry", an API can be obtainedthrough two sources: (a) international suppliers from India, Chinaand other countries operating in Canada; or (b) internal sourcingthrough integrated arms of the manufacturer.
- Pre‑Formulation: At this stage, generic manufacturers engagetheir chemists to develop drug formulations based on an analysis ofthe product itself as well as its monograph (listing both the activeand non‑active ingredients).
- Formulation: This stage involves continuing research anddevelopment (R&D)and the actual preparation of test batches of generic versions, firstin the laboratory (initial small batches) and then in themanufacturing facilities (pilot batches).
The development costs of an IGmay not be specific to the sale of the product in any particularcountry. Generic products developed and manufactured in one countrycan be supplied to other countries, provided they meet the othercountries' specific regulatory requirements for approval.
Those contacted for this study indicated that development costsfor a generic product can vary greatly from one to the next. Even insimple cases, costs may be around $1.5 million. However, they can beseveral times higher for more complicated products, such as biologics.
In order to market an IG in Canada, a manufacturer must obtain approval from Health Canada under the Patented Medicines (Notice of Compliance) Regulations (NOC Regulations). The NOC Regulations, as explained in detail in Appendix 1, address two issues, first, whether the IGis bio‑equivalent to the Canadian brand reference product, and, second, whether the IG infringes any valid patents.
To market an IG, the manufacturer must file an Abbreviated New Drug Submission (ANDS) with the Therapeutic Products Directorate (TPD) of Health Canada, containing data that demonstrate the drug'sbio‑equivalence with a Canadian reference brand product.
The ANDS must contain sufficient information for Health Canada to assess the bio‑equivalence of the generic to the brand‑name product, as well as evidence of tests conducted on potency, purity and stability of the new drug. Footnote 21
Standard bio‑equivalence studies measure the rate and extent ofabsorption — or bio‑availability — of a generic drug. This is thencompared to the same characteristics of the reference drug product.The bio‑availability of the generic drug must fall within anacceptable range of the bio‑availability of the reference product.According to those contacted for this study, typical costs for conducting bio‑equivalency studies are in the range of $1‑1.5 millionper product.
In the case of generic drugs, clinical trials are generallyrequired for:
- More complex formulations
- When a brand‑name product is claimed to be'process‑dependent'
- When a blood‑sample study is inappropriate.
For example, topical products do not enter the blood stream sothey are tested through clinical trials.
Clinical trials are research programs conducted to evaluate anew medical treatment, drug or device. These studies involve patientsin the testing of treatments and therapies. Clinical trials, measure adrug's safety, effectiveness, dosage requirements and side effects.They are normally much more costly and time‑consuming thanbio‑equivalence studies.
In doing its assessment of the bio‑equivalence of a generic product(or an NDS), Health Canada relies on dataprovided by the brand‑name firm at the time it applied for a Notice ofCompliance (NOC) for itsproduct. These data are subject to a minimum period of protection fromthe date the reference product received its approval from HealthCanada to be marketed. This period of protection, originally fiveyears, was lengthened to eight years under amendments to the NOCRegulations in 2006. Where it extends beyond the life of the patent,the extended period of data protection may create an additional delayin bringing the generic drug to the market. The new regulations alsoallow six added months of data protection for drugs that have been thesubject of clinical trials in children.
Once the NDS is filed and, when applicable, the period of data protection ends, Health Canada typically takes between 12 and 18 months to complete its review. Footnote 22
After filing an NDS with the Minister, generic manufacturers are required under the NOCRegulations to serve a Notice of Allegation (NOA) on the patentee that the generic product will not infringe any patent rights. The patentee maythen apply to the court for an order prohibiting the Minister of Health from issuing an NOC on the basis that one of its patents is being infringed. In such cases, the Minister cannot issue an NOC until 24 months have passed or the application has been dismissed. Therefore, the patentee can prevent a generic product from entering the market for up to 24 months, simply by alleging that its patents have been infringed.
Prior to 2006, generics were required to address all patents added by the patentee to the Patent Register with respect to the reference drug product. In 2006, the NOC Regulations were amended to restrict the ability of a drug innovatorto prevent a generic from getting an NOC by adding patents to the patent register after the generic manufacturer files an ANDS. Footnote 23 The generic now only has toaddress patents that were listed on the register in respect of the reference drug prior to the filing date of the NDS. Footnote 24
If a patentee obtains a stay preventing the Minister from issuing an
In addition to the NOC Regulations, in some cases, the patentee may rely on a patent lawsuit to prevent entry of a generic drug or to recover damages. In such cases, a generic might succeed under the NOC Regulations, market the drug and then be sued by the brand‑name manufacturer for patent infringement. In this case, if the brand‑name manufacturer is successful, the generic would likely be required to pay damages to the patentee. Conversely, a generic manufacturer may challenge the validity of a patent under the Patent Act if it is preventing the company from receiving a NOC.
Success in the NOC proceedings by a particular firm does not automatically create free entry for all generic firms. Other generic firms still have to obtain an NOC, and address any patents on the Patent Register. Subsequent generic firms may, however, make the same arguments in litigation as the first successful generic. In some cases, the patentee may stop contesting these NOC cases.
Those interviewed for this study, while not providing related data, indicated that patent challenges under the NOC Regulations are commonly encountered and are a normal part of bringing an IG to market. Legal costs for the first generic to challenge were said to becommonly in excess of $1 million and potentially much higher incomplicated cases. However, the costs for subsequent generic manufacturers, for the same reference product, can be as low as a few thousand dollars when NOA are no longer being challenged.
Provincial formulary listing
Once an NOC is issued,a product can be sold anywhere in Canada. However, in order to bereimbursed under provincial drug programs and obtain significant salesvolumes the generic product must be listed on provincial formularies.For an IG, the formularylisting process can take several months from the time an NOC is issued.
In sum, from the time a decision is made to produce a genericdrug, manufacturers typically require between three to six years tobring the product to market. While costs can vary widely from case tocase, they can be in the range of $3.5 million (including costs forbio‑equivalence studies, development and regulatory approval) even fora relatively non‑complex product.
These costs may be lower where, for example, patent challengesare not encountered or product development costs can be spread acrosssales in countries other than Canada. On the other hand, they can bemuch higher when product development is more complicated, clinicaltrials are required, or relatively high patent challenge costs areencountered. For example, the costs for the development ofbio‑generics can be as high as $25 to $50 million. Industry sourceshave indicated that it may take as long as three years after a genericproduct is introduced to market before it will break even, recoupingits sunk developmental and approval costs.
2.4 Competitive dimensions
Competition between generic manufacturers takes place in a number ofdimensions. The key ones are: timing to market, patent challenges,pricing, AG,and breadth of product line.
Timing to market
Those contacted for this study cited timing to market as being akey dimension of generic competition. Pharmacies are less likely toswitch to a new generic product if they already have one or twoversions in stock. Stocking multiple manufacturers of the samemolecule is cumbersome and inefficient. For this reason, "timingis of the essence" in the generic drug industry. Productdevelopment and approval is carefully planned to maximize thelikelihood of having a generic version ready as soon as a brand‑nameproduct loses patent protection.
The advantage of being first to market is supported by analysisperformed on molecules that lost patent protection and encounteredgeneric entry between January 1998 and December 2006. As shown inTable 2, for about two thirds of the molecules, the first entrant wasable to maintain the leader's position at the end of 2006.
|Number of Molecules||Percentage|
Data source: IMSHealth.
|First generic entrant stayedfirst||49||65.3|
|First generic dropped to 2ndposition||14||18.6|
|First generic dropped to 3rdposition||6||8.0|
|First generic dropped to 4thposition or lower||6||8.0|
A competitive dimension related to timing to market is companies'patent challenge strategies. A generic company may file its NDS to market a generic becausethe brand‑name drug's main patent has expired or is about to expire.By marketing the generic, the generic company is not infringing on anyof the other patents that are held by the brand‑name company. Footnote 26 However, sources contacted for the study indicated that genericcompanies commonly enter the market prior to the expiry of all listedpatents based on the belief that any remaining brand company patentsare invalid or would not be infringed.
Companies that are the first to file a challenge may gain an advantageover others by getting their product into the supply chain earlier.However, not all generic manufacturers aggressively pursue legalchallenges. According to industry sources, some generic manufacturerschallenge only those patents where there is a perceived certainty of apositive outcome, such as where a brand company is no longerchallenging NOAs. They mayavoid the costs of legal proceedings altogether by timing their entryto the market in line with the brand's patent expiration.
While a generic that first successfully challenges brand patentsmay have the advantage of being first to market, this can be a costlyprocess. The generic manufacturer has to evaluate whether costs sunkinto a patent challenge can be recouped after the product launches.
In cases where the brand manufacturer fights the first genericchallenger but gives up further challenges, thereby opening the marketto all generics, the first generic challenger may not obtain a majorfirst mover advantage. The generic may be in a situation where it isout of pocket for legal costs and has to compete against othergenerics, IGs or
In the case of sales to retail pharmacies, pricing decisions bymanufacturers consist of two elements: the establishment of theproduct's invoice price and the net pharmacy price. The net pharmacyprice is the price paid by the pharmacy net of any off invoice rebatesand discounts. Invoice prices are the amounts typically reimbursed bypublic and private drug plans. As developed further in section 5.A.,limited competition appears to take place in invoice prices. Untilrecently, invoice prices have tended to reflect maximum generic pricesallowed under Ontario legislation. Price competition amongmanufacturers has tended to take place at the pharmacy level in theform of lower net pharmacy prices. Once generic versions of brand‑nameproducts are placed on provincial formularies and are designated asinterchangeable, they essentially become commodity products. Footnote 28
This situation results in pharmacies being the most important andinfluential customers of generic manufacturers. Traditionally, themost important factor in competing for pharmacies' business, wherethere are multiple generics available, has been generic manufacturersproviding rebates off invoice prices. Footnote 29Rebates on generic drugs arenot recorded on invoices, but are provided to pharmacies and hospitalsin a separate transaction often as a lump sum for drugs purchased in agiven period.
It has not been possible to obtain information about the precise sizeand nature of rebates from manufacturers to retail pharmacies andhospitals. Average rebates have been estimated to be 40%, althoughsources indicated they may have been higher. Footnote 30 Sources further indicatedthat rebates have been as high as 80% for individual generic products.
The traditional role of rebates as a competitive dimension is beingaltered by the Ontario Transparent Drug System for PatientsAct, 2006, discussed further in Section 4.A.2. The legislationprohibits the granting of rebates to pharmacies. While it allowsprofessional allowances to be provided as a possible alternative torebates, these are capped at 20% of pharmacies' costs for drugsdispensed under Ontario Drug Benefit (
While the full effects of the Ontario legislation are to bedetermined, the capping of generic drug professional allowances limitsa key dimension of competition among generic drug manufacturers. Thealtered competitive framework may be particularly problematic forgeneric drug manufacturers with limited product portfolios. Theability to grant higher rebates or allowances can provide them a meansto enter and expand market share in competition against rivals withbroader product lines. With rebates and allowances being restricted orprohibited, it can be anticipated that competition in other areas,such as breadth of product line, will assume greater importance.
While the full effects of the Ontario legislation are to bedetermined, the capping of generic drug professional allowances limitsa key dimension of competition among generic drug manufacturers. Thealtered competitive framework may be particularly problematic forgeneric drug manufacturers with limited product portfolios. Theability to grant higher rebates or allowances can provide them a meansto enter and expand market share in competition against rivals withbroader product lines. With rebates and allowances being restricted orprohibited, it can be anticipated that competition in other areas,such as breadth of product line, will assume greater importance.
AG are theactual brand‑name drug product manufactured by the brand company, butsold as a generic by a licensee or subsidiary of the brand, competingwith independent generics.Footnote 32 Because they are identicalto the branded drugs and approved by the patent holder,
Introducing an AGprior to the expiration of a brand‑name product's period of patentprotection runs counter to the business interests of a brand‑namemanufacturer. The lower‑price
A brand‑name manufacturer may decide to license the manufacturing anddistribution of the AGto an IG manufacturer. Thedecision of an IGmanufacturer to partner with a brand‑name manufacturer for the releaseof an AG isbased on several factors. These may include their ability to source
An issue about introducing an AG is that it may affect the incentive for a generic manufacturer to develop an IG. Footnote 33 This is unlikely to be an issue for drugs having high sales relative to entry costs. However, it has the potential to affect the entry of IGs for drugs having relatively smaller valued sales. This may be particularly significant when the AG is able to obtain a first mover advantage. This matter is considered in Table 3.
Statistical analysis was performed on a set of molecules that lostpatent protection between 2001 and 2006 and where the first genericcompetitor entered within the period. An
|Number of molecules|
Data source: IMS Health.
The sample does not show a clear and consistent pattern of
Breadth of product line
As discussed further in section 4.A, given the commodity nature ofgeneric drugs, other things equal, pharmacies can reduce their costsby dealing with as few manufacturers as possible. This provides morediversified manufacturing firms with a competitive advantage overcompetitors with smaller product lines as they are able to bundle aportfolio of products across multiple therapeutic classes. Footnote 36 As indicated above, one means by which less diversifiedmanufacturers have been able to overcome this disadvantage has been byoffering lower net pharmacy prices.
2.5 State of competition
The current competitive structure of the Canadian generic drugmanufacturing sector is significantly different from that of the early1990's. At that time, Apotex and Novopharm accounted for the majorityof sales in the domestic market (72.8%). Footnote 37 In 2006, although the twolargest firms remained Apotex and Novopharm, with approximately 50% ofsales, the top four firms accounted for under 72% of sales.
The dynamics of the generic drug manufacturing sector is alsobeing altered by increasing globalization. In 2000, Teva, a largeIsraeli generic drug manufacturer, entered the Canadian sector bypurchasing Novopharm. This was followed by the expansion into Canadaof Ratiopharm, a German generic drug company and one of the leadinginternational generic producers. The third Canadian largest supplier,Genpharm, was recently acquired by a U.S. generic company, MylanLaboratories from Merck, based in Germany. Indian genericmanufacturers have also entered the Canadian sector through the entryof Ranbaxy in 2005, and the acquisition of Taro by Sun Pharmaceuticalsin 2007.
An in depth analysis of the competition across the sector could not bedone as the information on such matters as the net pharmacy prices andmanufacturing costs for individual drugs was unavailable. Footnote 38 However, it appears that supply for many generic products ishighly competitive. The expiration of brand‑name pharmaceuticalpatents can be met by the introduction of multiple genericproducts. The number of competitive suppliers is more likely to belarge in markets for popular molecules, the so‑called blockbusterdrugs. Chart 1 shows the number of generic entrants per molecule andthe sales of the brand in the year prior to generic entry. As thechart indicates, molecules with large sales tend to attract a largenumber of generic competitors. Footnote 39
Chart 1. Generic entry
Data source: IMSHealth.
The effects of the competition among manufacturers have traditionallynot been reflected in invoice prices for generic drugs. Rather, withprice competition focused on pharmacies, its effects are reflected innet pharmacy prices. As indicated above, these prices have beenestimated to be on average at least 40% below the invoice prices usedby the PBPRBand other pricing studies.
This suggests that other elements of the Canadian generic sectorcompetitive framework must be taken into consideration to explain thedifferences between invoice prices in Canada and other countries. Asnoted above, work done by the
3. Independent pharmacy distributors
Independent pharmacy distributors (
This section outlines the Canadian
3.1 The Canadian IPD sector
As independent intermediaries between the manufacturers and suppliersof drug store products, and pharmacies,
They may provide a variety of services including the following:
- Daily delivery or sometimes twice a day delivery, dependingon the location of the pharmacy
- Consolidation of purchases, reception and payments ofproducts by the pharmacy, including the management of expiredproducts and their return to the manufacturers
- Serving as a back‑up source of supply for other wholesalers'customers or for a self‑distributing chain, when the chain'swarehouse runs out of stock or closes for weekends
- Inventory management with continuous replenishment through alinked information system
- Electronic access to a product catalogue, product orders,billing and information research
- Controlled storage and temperature control of a variety ofpharmaceutical products
- Refrigeration systems for specialty products
- Inventory of high‑value‑low‑turnover products.
Because of these services, distributors' costs include majorexpenses for warehousing, transportation, human resources andinformation systems. They may also help finance customers' inventoryby providing them with lines of credit.
McKesson Canada is the largest pharmacy distributor in the country. Itcarries more than 35,000 products, in 16 distribution centers. Itprovides logistics and distribution to over 800 manufacturersdelivering their products to 6,800 retail pharmacies, and 1,350hospitals, long‑term care centres, clinics and institutions all overCanada. AmerisourceBergen Canada is the second largest distributor inthe country. It has 12 distribution centers and services independentretail pharmacies, national and regional chains, and hospitals. Kohl& Frisch Limited has 5 distribution centers across Canada. Otherdistributors, such as Unipharm Wholesale Drugs Ltd, UPE Group ofCompanies and McMahon Distributeur Pharmaceutique
3.2 Role of IPDin the generic drug competitive framework
IPD are one ofthree means by which generic drug manufacturers can distribute theirproducts. The others are through drugstore group self‑distribution,and direct distribution by manufacturers.
Under self‑distribution, distribution centres are maintained bypharmacy chain, banner and franchise groups, for supply to pharmacieswithin the group. Self‑distribution involves similar roles andactivities to those of IPD,but within a group of pharmacies.
Major self‑distributors include, Shoppers Drug Mart, Groupe Jean Coutu(PJC), Familiprix Inc., Lawton'sDrugstore, and London Drugs.
In direct distribution, as the name implies, manufacturers shipdirectly to drugstores.
IPD arebecoming an increasingly important means for distributingpharmaceuticals in Canada. In 2006, they accounted for 57% ofpharmaceuticals distributed in Canada, other than to Wal‑Mart. This is6% more than in 2002. Self‑distribution also increased over thisperiod from 30 to 34%. In contrast, direct distribution fell by morethan half, to 9% from 19%.
|Distributor (%)||Chain DC(%)||Direct (%)||Total (%)|
|Source: Canadian Associationfor Pharmacy Distribution Management (|
According to those contacted for the study, the increased use of
While ancillary terms may vary, such as discounts for promptpayment, the price paid by wholesalers for pharmaceuticals is based onthe provincial formulary or manufacturers' list price. In the case ofgeneric drugs, the price to distributors is discounted by thedistribution fee (or mark‑up) allowing the drugs to be distributed topharmacies at their invoice price. According to sources, these feesare typically in the range of 5% of the value of the generic drugsdistributed. This is not the case with branded products, wheredistribution fees are typically paid by the pharmacy and are inaddition to the drug invoice price.
4. Retail and hospital pharmacies
Pharmacies and hospitals provide the main interface betweengeneric drug suppliers, patients and reimbursers. They are the mainfocal point for competition among generic manufacturers.
This chapter provides an overview of relevant features of theCanadian pharmacy and hospital sectors, and develops their role in thecompetitive framework for generic drugs.
4. A The Canadian retail pharmacy sector
There are more than 7,900 retail pharmacies in Canada. Footnote 42 In 2006, they purchased $15.74 billion worth of prescriptionpharmaceuticals and filled over 422,000,000 prescriptions. Footnote 43The ten therapeutic classes of drugs most frequently dispensed byretail pharmacies in 2006 are indicated in the following table.
|Rank 2006||Therapeutic Class||Purchases 2006 ($000,000s)|
Source: IMS Health.
Neurological disorders, miscellaneous
Retail pharmacies in Canada are organized into a range ofbusiness structures. Key categories include the following:
An independent pharmacy is not affiliated with any corporatelyrun banner, franchise or chain program. The name of the store isunique to that store, and the owner controls, among other things,ordering, marketing strategies and store image.
Banner pharmacies are independently ownedpharmacies that are affiliated with a central office. They pay feesfor the right to use a recognized name (such as I.D.A., Guardian,Uniprix, Price Watchers, Pharmasave) and to participate incentralized buying, marketing, professional programs and otherservices. While banner stores usually assume a required “lookand feel,” the stores themselves are independently owned andthe owners retain a high level of autonomy in areas such as localmarketing and professional services.
Franchise arrangements vary widely forretail pharmacies in Canada. The two largest franchises are ShoppersDrug Mart and Jean Coutu. The franchisees (or“associates” in the case of Shoppers Drug Mart) do notnecessarily own the physical store or the fixtures, and master leasesare usually held by the franchisor. However, they enjoy some autonomyin local marketing, buying and in‑store services, as well as accessto programs developed by the head office.
Chain pharmacies, such as Pharma Plus andLawtons, employ pharmacy managers who are salaried employees. Headoffice directs all marketing, merchandising, buying, and professionalprograms as well as other matters.
- Foodstore & Mass Merchandiser (“Food/Mass”)
Food and mass merchandiser pharmacies are departments withinsupermarket or mass merchandise outlets, such as Loblaws and WalMart. They employ salaried pharmacy managers (except in Quebec, whereregulations require pharmacists to own the dispensary). The managersfollow the direction of the head office for all marketing,merchandising, buying, professional activities, and other matters. Footnote 44
As indicated in the table below, retail pharmacy groups, includingchain, banner and franchise pharmacies, collectively accounted forover 4,600 pharmacies in Canada in 2006, or about 58% of all retailpharmacies in the country. Food and mass merchandisers accounted for1,592 stores and independents for 1,686 stores, or about 20 and 21%,respectively. Footnote 45
The allocation of Canadian retail pharmacies to the abovecategories has undergone substantial change over the past severalyears. Table 6 indicates that there has been a significant trend awayfrom independent pharmacies to other pharmacy categories. Over the2001 to 2006 period, while the total number of pharmacies increased bymore than 900 outlets, the number of independent pharmacies actuallyfell from 1,837 to 1,686.
While independents remain a major category, their share of allretail pharmacies fell from 31 to 21%. The total number of stores inboth other categories increased, with proportionately larger growth infood and mass merchandise outlets. These increased their share of allretail pharmacies from 14% to 20%. While the total number of chain,banner and franchise outlets increased, their share of all retailoutlets decreased slightly from 60% to 58%.
|Pharmacy Category Footnote 46||2001||2002||2003||2004||2005||2006|
The two largest retail pharmacy groups in Canada are the Katz Group(Rexall), with over 1,100 outlets, and Shoppers Drug Mart (Pharmaprixin Quebec) with over 820 outlets. Collectively, they account for closeto 25% of all retail outlets in Canada. Other major retailers includeLoblaws, Pharmasave and Jean Coutu with, respectively, 470, 364 and320 outlets. Collectively, these five pharmacy groups account forabout 39% of all retail pharmacy outlets in Canada. Footnote 47
The significance of individual pharmacy groups may vary significantlyfrom province to province. Although Jean Coutu has the fourth highestnumber of outlets in Canada, these are concentrated in Quebec wherethe company's share of retail outlets is in the range of 18%. The nextlargest group in the province, Familiprix, has over 260 stores,representing about 16% of all pharmacy outlets. Footnote 48
Regardless of their category, retail pharmacies in Canadatypically have two main sources of revenue:
- Pharmacy operations, consisting of the dispensing of brandand generic prescription pharmaceuticals;
- Front store operations, consisting of the sale of
OTC medication, health and beautyaids, general and seasonal merchandise. Footnote 49
While the importance of these sources of revenue can varysignificantly according to pharmacy category, the following tableindicates that prescription drug sales are the principal source ofrevenue for all pharmacy categories. For all categories, prescriptionsales account for well over 50% of all revenues.
Source: 2006 Trends and Insights Online Report, The PharmacyGroup. Footnote 50
|Average Rx volume|
|Usual and customary fee($)|
|Rx share of sales (%)|
|Total Sales ($ million)|
4.A.2 Role of retail pharmacies in the competitive framework for generic drugs
Retail pharmacies play a pivotal role in the competitive frameworkfor, and pricing of, generic drugs in Canada. Though they do notprescribe pharmaceuticals, after a drug has been prescribed,pharmacists normally have broad scope, under provincial andprofessional laws, policies and regulations, to substitute amonginterchangeable generic and brand drugs products when fillingprescriptions. Footnote 51 As well, to minimize theircosts, pharmacies have an interest in stocking only one, or a smallnumber of interchangeable products.
Because of this, competition among generic manufacturers andsuppliers to supply generic drugs to patients in the community hastended to focus on pharmacies. As indicated in the manufacturingchapter, this competition takes place in a variety of ways. Animportant dimension has been to grant rebates to retail pharmacies offpharmacy invoice prices.
Previous analysis of the Canadian pharmaceutical sector and testimonyprovided in recent hearings on amendments to Ontario's generic drugrelated legislation and regulations indicate that these rebatesprovide important returns to pharmacies. Footnote 52
Rebates have also provided a financial incentive for retailpharmacies to substitute generic products for branded products. Asindicated in the manufacturing chapter and discussed further insection 5.A, off invoice rebates and discounts and other suchbenefits, have normally not been reflected in prices reimbursed bypublic and private insurers. Rather, those contacted for this studyindicated that reimbursed prices for newly introduced generic drugsreflect the former maximum limits under Ontario provincial drugbenefit legislation.
The following table shows the incentive provided to dispense genericdrugs through off invoice rebates and discounts, and their impact onthe profitability of pharmacies. The table is based on arepresentative branded drug prescription cost of $40 reimbursed underthe Ontario Drug Benefit (ODB)guidelines prior to the Transparent Drug System for Patients Act. Themaximum generic drug invoice price, based on the former Ontariomaximum generic drug price legislation is $25.20. Footnote 53 The table uses an allowablemark‑up of 10% of the cost of pharmaceuticals. Footnote 54 Rebates are set at 40%. Inrecent Ontario provincial generic drug related hearings, this was thelower range of rebates paid on average to independent Ontariopharmacies. Dispensing fees are set at $6.54. Footnote 55
Based on these numbers, the sale of a generic drug provides a netreturn to the pharmacy of $19.18 versus $10.54 for the brand product.Footnote 56
|Branded ($)||Generic ($)|
|Total (=Retail Price)|
|Rebates (40% of invoice)|
|Return (mark‑up+dispensing fee+rebate)|
In Ontario, pharmacy returns from the sale of generic drugs under
Manufacturers are now prohibited from granting rebates on genericdrugs but they can provide professional service allowances in eightapproved categories. For drugs dispensed under
The implications of these changes on pharmacies' return on
|Branded ($)||Generic ($)|
|Allowable Mark‑Up (8%)|
|Total(= Retail price)|
|Professional Allowances (20%)|
Under the new Ontario legislation and policies, if maximumprofessional allowances are provided, pharmacies retain a financialincentive to dispense generic drugs for provincial plan beneficiaries.However the return to pharmacies in the form of rebates or allowancesis reduced by just over 75%, from $10.08 to $4.00. The total return,including mark‑ups and dispensing fees, is reduced 34.2% to $12.60from $19.14.
Based on 40% rebates prior to the Transparent Drug System For PatientsAct, 2006, the net price received by the generic drug manufacturer onODB sales is higher underthe revised reimbursement framework. This framework, in effect,establishes a net pharmacy price floor at 40% of the brand drug price.By comparison, at 40% rebates under the previous
While the full impact of the new Ontario legislation and regulationson pharmacies and manufacturers is yet to be determined, as developedfurther in Chapter 5, the lower ODBprices have not been extended to non‑
It is anticipated that Quebec will receive the benefit of lowerOntario provincial drug plan prices because of their policy that theyreceive the lowest formulary prices offered in other provinces. Footnote 57 However, the potential impact of this change on pharmacies ismitigated by Quebec's pre‑existing prohibition of rebates. Further,the province is also considering implementing a professionalallowances scheme parallel to Ontario's. Footnote 58
4.B Hospital pharmacies
While retail pharmacies are the principal dispensers of drugs inCanada, hospital pharmacies also play a significant role. In 2006,they purchased $2.08 billion of drugs, compared to $15.74 billionpurchased by retail pharmacies.
Hospital pharmacists oversee the dispensing and storage of allmedicines given to patients in the hospital (in‑patients). Generally,pharmacists in hospitals face greater clinical complexity inmedication management while community pharmacists face more complexbusiness and customer relations issues.
Under the Canada Health Act (CHA),all necessary drug therapy administered in a Canadian hospital settingis insured and publicly funded. Footnote 59 Out‑patient medications areoutside the Act's authority.
Provincial and territorial governments are responsible forproviding hospital care in their jurisdictions. This includesplanning, financing and evaluation of services, such as drugadministration and management. Drugs purchased for hospital patientsare covered by hospital budgets.
Hospitals maintain their own drug formularies listing all drugsavailable for prescription by a physician. Formularies tend to besimilar from one hospital to another within the same province.However, significant differences may be found from one province toanother, especially on expensive therapies such as cancer drugs.Hospital drug formularies tend to be more specialized than provincialor private plan formularies. This is due to the inclusion ofmedications that might be given only in a hospital setting, such asintravenous (IV) drugs and othertherapies that must be provided on an in‑patient basis.
Most hospitals have Pharmacy and Therapeutics (
In a retail pharmacy, drugs are dispensed for a specific number oftreatment days for acute symptoms, or for a 30‑day to 90‑day supplyfor chronic symptoms. The standard of care for a hospital pharmacy isto dispense drugs on a unit‑dose — a single dose of the medication. Inunit‑dose dispensing, medication is dispensed in a package that isready to administer to the patient. Footnote 60
The main therapeutic classes of drugs used in hospital settingsdiffers greatly from retail pharmacies. Table 10 shows the top 10therapeutic classes of drugs dispensed in hospitals by purchase costin 2006. Cancer drugs are, by a wide margin, the largest class ofdrugs purchased by hospitals although they were not among the 10largest classes purchased by retail pharmacies. Cardiovascular drugs,the largest class of drugs purchased by retail pharmacies, were the9th largest class purchased by hospitals. In total, of the 10 largestclasses of drugs purchased by hospitals, only 3 ranked among the 10largest retail pharmacy categories.
|Rank 2006||Therapeutic Class||Hospital purchases $(000,000s)|
Top 10 hospital classes
4.B.2 Role of hospitals in the competitive framework for generic drugs
Differences in hospital versus retail pharmacy drug purchasesare also reflected in the ranking of generic manufacturers by hospitalsales. While diversified producers offer a wide range of products in avariety of forms, others may specialize in injectables or topicalapplication products that are more widely used in hospitals than inretail pharmacies. Table 11 indicates this. The table compares genericmanufacturers' rankings for sales to hospitals versus total sales tohospitals and pharmacies for molecules that lost patent protectionduring the 2001 to 2006 period.
|Rank Hospital Sales||Share of Hospital Sales (%)||Manufacturer||Rank Total Sales||Share of Total Sales (%)|
Data source: IMSHealth.
Mayne Pharma Canada was the largest seller of these genericdrugs to hospitals in 2006, but was the eighth largest genericmanufacturer measured by total sales including both hospitals andretail pharmacies. Sandoz, ranked seventh in total sales, was rankedsecond measured in hospital sales. Apotex, which had the highest totalsales, was ranked fourth in hospital sales only.
Prices for generic drugs used by hospitals are generally determined bynegotiations and contracting between the hospitals themselves and themanufacturers. While this may be done on a hospital by hospital basis,it is increasingly being done through group purchasing organizations (
GPOs, such asHealthPro, MedBuy and Contract Management Services, are stand aloneoperations whose shares are held by hospitals and other health careorganizations. They were established by hospitals and other healthcare facilities to economize on their goods and material costs byproviding centralized procurement and obtaining the benefits frombuying in higher volumes.
RHAs were establishedby most provincial governments in the 1980s and 1990s to amalgamatevarious health services, including hospital services, within regions.Footnote 61Although RHAs mayparticipate in GPOprograms, they may also do their own group purchasing.
A Request for Information (RFI)process may be used, gathering information from members and suppliers.Supplier information is sought later, allowing for an economicalvalue‑added benefits analysis. These analyses are usually an integralcomponent of the Request for Proposal. Footnote 62
A Request for Proposal (RFP),outlining the market size, the items and conditions under which thecontract will be developed, is issued to all interested suppliers. Thecontract awarded is often a sole source agreement with the supplierfor participation by all of the
Contracts with brand/patented drugs manufacturers often include aright‑of‑first‑refusal clause for cases where a generic drug becomesavailable during the term of the contract with the brand manufacturer.If the price of the generic drug is lower than the negotiated pricefor the brand/patented product, the
In some cases, packaging, colour and/or shape of a drug can play acritical role in purchasing decisions.
As with retail pharmacies, drugs used by hospitals may be obtainedthrough IPD. Bystreamlining their pharmaceuticals procurement through an
- Competitive contracting processes may be used to obtain
IPD services. Keyconsiderations are whether the IPD can:
- Service all members within its membership
- Provide simplified invoicing
- Guarantee delivery times
- Ensure IT systemcompatibility for logistics management between the
IPD and the GPO members.
Since drug prices are negotiated with the manufacturers, the mainpoint of negotiation with
According to persons contacted for the study, bidding for multiplesource generic products can be highly competitive. Rebates off invoiceprices are often included in the contract negotiations. In the case ofGPOs, manufacturerrebates are sent in a lump sum on a regular basis, usually quarterly,semi‑annually or annually.
Table 12 indicates how hospitals pay relatively low invoice prices forgeneric drugs. The table compares invoice prices paid by hospitals toretail pharmacies for individual generic products, identified by
Data source: IMSHealth.
|Number of Drugs|
As indicated by the table, retail pharmacy invoice prices tendto be well in excess of hospital invoice prices. On average, pharmacyinvoice prices were approximately 39 per cent higher than hospitalinvoice prices, with differences within provinces ranging from 20% inSaskatchewan to 48% in Nova Scotia.
It was not possible to obtain data on any rebates provided tohospitals that are not accounted for in their invoices. To the extentsuch rebates are provided, they constitute a further gap between thenet price paid by hospitals and the retail pharmacy invoice pricesnormally reimbursed by private and public drug plans.
5. The generic drug reimbursement framework
Public and private drug plans cover about 98% of all Canadians. Footnote 64 Provincial plans cover about nine million Canadians with anotherone million covered by federal plans. These people include many inrelatively high use groups, such as seniors and persons suffering fromserious illnesses. A further 2/3 of Canada's population is covered byprivate prescription drug plans obtained through their employer orpurchased on an individual basis. Footnote 65
Though covering fewer Canadians than private plans, public drug plans,reflecting the high use groups they cover, are the largest source offunding for retail prescription drug purchases in Canada. Of estimatedprescription Canadian drug expenditures of $21.1 billion in 2006,including pharmacy mark‑ups and dispensing fees, public plansaccounted for an estimated $9.6 billion or 45.5%. Private insurersaccounted for $7.6 billion in expenditures or 36%. Out of pocketpayments for drugs, co‑payments and other prescription drug expensesnot covered under either private or public plans accounted for $3.9billion in expenditures or 18.5%. Footnote 66
The prevalence of public and private drug plans makes them keydeterminants of the competitive framework for generic drugs in Canada.This chapter examines relevant features of both categories of drugplans and their implications for the Canadian generic drug competitiveframework.
5.A. Public drug plans
5A.1. Scope and nature of public plans
In 2006, according to
Public plan pharmaceutical product coverage
Public plans fully or partially reimburse drugs that are listed ontheir drug formularies. These are developed in consultation withexpert drug advisory committees and reflect individual plans' listingand reimbursement policies. Footnote 68 In order for genericproducts to be considered for formulary listing, the standard filingrequirements include the following:
- Consent to access information about the drug from variousagencies
- Confirmation from the manufacturer of its ability to supplythe drug
- Data indicating bio‑equivalence to the brand drug product
- Health Canada NOC
- Price information
- Approved product monograph. Footnote 69
In addition to meeting these filing requirements, generic drugs may also be subject to additional interchangeability requirements in order to be listed on a formulary.
Interchangeability can deal with factors beyond a drug'sbio‑equivalence to a brand product. For example, bio‑equivalent drugsmay not be deemed interchangeable with a reference brand product dueto:
- Difficult packaging or delivery devices
- A particularly bad taste
- The lack of a marking on a tablet allowing it to be easilydivided into two where such a marking exists on the brand referenceproduct.
If these or other characteristics of a generic product couldinterfere with the proper use or delivery of the drug, the product maynot be listed on the formulary.
The timing of the listing of generic drugs on public formularies canvary significantly across provinces, depending on the frequency withwhich provincial formularies are updated and reviews of generic druginterchangeability are conducted. Footnote 70
Public plan beneficiaries
The coverage of public plans can vary substantially fromprovince to province. All provincial and territorial drug plansprovide coverage for seniors (New Brunswick and Newfoundland andLabrador apply an income test) as well as residents receiving socialassistance.
Through specific targeted programs, or more generally, throughplans available to all residents, all provinces and territories alsoprovide coverage for residents with specific medical conditions and/orwho may face exceptionally high drug costs. The specific medicalconditions most commonly covered are cystic fibrosis, diabetes,cancer, organ transplant, AIDS/HIV, and multiple sclerosis.
Four provinces offer universal eligibility for drug coverage: BritishColumbia, Alberta, Saskatchewan and Manitoba. The Ontario Trilliumdrug plan provides coverage to all residents who are not covered undera private plan and who have high drug costs relative to their income.Quebec maintains cost and income based drug plans that are availableto all residents who do not have private drug insurance. Footnote 71 New Brunswick, Nova Scotia, P.E.I., Newfoundland and Labrador, andthe territories do not provide universal or general cost andincome‑based programs.
There are six federal drug benefit programs, serving:
- First Nations and Inuit
- Members of the military
- Prisoners in federal correctional facilities
The Non‑Insured Health Benefits (
Drugs covered by public plans are normally acquired by patientsfrom retail pharmacies. The amount reimbursed is determined by theapplicable public plan policy on allowable drug costs and pharmacymark‑ups and professional fees, less any applicable patientco‑payments and deductibles.
Limited exceptions to the delivery of pharmaceuticals through retailpharmacies apply in the cases of the Department of National Defense (
5.A.2 Public plan generic drug related policies
Public plans may incorporate a variety of policies pertainingdirectly or indirectly to generic drugs. Key among these are thefollowing:
- Provincial interchangeability laws
- Formulary price caps
- Maximum cost reimbursement
- Net acquisition cost
- Standing offer contracting
- Most favoured nation provisions
- Deductibles and co‑payments.
Interchangeability laws provide the legal basis forinterchanging generic products and brand pharmaceuticals. The lawsgenerally apply to all interchangeable products, whether they aredispensed under public or private plans or paid for out‑of‑pocket.They generally consist of two elements:
- Provisions that allow pharmacists to interchangebio‑equivalent products
- Provisions that protect the dispenser of the interchangeddrugs against related legal proceedings.
Interchangeability laws may be mandatory, requiring that thelowest cost interchangeable products be dispensed, or, they may bevoluntary, permitting, but not requiring, pharmacists to interchangeproducts.
Provinces having mandatory interchange laws include Saskatchewan,Manitoba, Newfoundland and Labrador, and Prince Edward Island.Newfoundland and Labrador and P.E.I. further require that theinterchangeable product dispensed be the lowest priced productavailable. Footnote 73
In the remaining provinces, Nova Scotia, New Brunswick, Quebec,Ontario, Alberta, and B.C.,legislation permits interchange, but does not make it mandatory.Pharmacists may substitute a prescribed drug with aninterchangeable drug. Footnote 74
Most provinces' legislation also provides protection for pharmacistsfrom liability for any legal proceedings stemming from thesubstitution of an interchangeable drug, provided that substitution islegally allowed in that province. Footnote 75 However, in all provinces,physicians can prevent interchange of generic products by indicatingthat "no substitution" is to be made. This may occur where there is amedical reason why a patient must receive a specific brand of drug.Also, a patient may request "no substitution" and pay any additionaldrug costs out‑of‑pocket.
Formulary price caps
Under formulary price caps, a generic drug must be priced at orbelow a maximum price in order to be listed on a public planformulary. Two provinces, Ontario and Quebec, currently use price capsto limit maximum prices for generic drugs under their provincialformularies.
In Ontario, under the Transparent Drug System for PatientsAct, 2006, generic drugs normally must be priced at no more than 50%of the reference brand product price in order to be listed on the
In Quebec, a regime is being implemented under which the price of thefirst generic drug will be limited to 60% of the price of thereference brand product. The price of subsequent generic drugs will belimited to 54% of the brand‑name drug. Footnote 77
In Ontario, after an initial formulary price is established,subsequent price increases are regulated.Changes to the drug benefitprice of products on the provincial drug plan formulary are subject toapproval by the Executive Officer of Ontario Public Drug Programs.
Quebec implemented a policy in 1994 preventing price increases fordrugs listed on the province's formulary, except in certaincircumstances. Footnote 78 However, the province is inthe process of implementing a mechanism to allow drug price increasestied to the province's consumer price index. Footnote 79
Maximum generic cost reimbursement
Maximum generic cost reimbursement policies, generally listed underprovincial plans as maximum allowable cost or lowest cost alternativereimbursement policies, do not prevent generic drugs from being listedon public plan registers if they are relatively high priced.Footnote 80Instead, they provide an incentive to dispense low cost genericsby stipulating a maximum amount that will be reimbursed for a group ofinterchangeable products. If a higher cost brand or generic product isdispensed, the difference must be paid by either the patient or the pharmacy.
Maximum cost reimbursement policies apply in all provinces as well asthe Yukon. Footnote 81 In most cases, maximum cost reimbursement prices are obtained frommanufacturers. The exception is B.C.,which sets maximum reimbursement cost based on pharmacy pricesobtained through its Pharmanet system.
As with interchangeability policies, exceptions may be made tothe maximum generic cost reimbursement policies in limitedcircumstances. For instance, if a patient must receive a particulardrug for medical reasons, or the lowest cost product is unavailabledue to a supply shortage, provincial drug plans may reimburse the costof a more expensive product, with no additional cost to the patient.
Net acquisition cost
Pharmacies actual acquisition costs of drugs, whether they arepatented or no longer patent protected, are used by many provinces asa basis for reimbursing drugs under their public plans, subject to anyapplicable maximum price or cost reimbursement policies. In theseprovinces, the maximum amount that can be reimbursed for generic drugsis the lower of the pharmacy actual acquisition cost or the maximumgeneric cost reimbursement price.
In some provinces, regulations or policies further stipulate that theactual acquisition costs reported by pharmacies should be the netacquisition cost, incorporating the value of any purchase pricereduction, rebate, allowance, free products, or discount received bythe pharmacy or dispensing physician. These provinces are Nova Scotia,New Brunswick, Quebec, Saskatchewan and British Columbia. Footnote 82
Standing offer contracting
Standing offer contracting involves the use of a competitive biddingprocess to establish the maximum price that will be reimbursed. Thewinning manufacturer guarantees delivery of the specific drug at thecontracted price. In return, the manufacturer's product is givenpreference or used exclusively during the contract period. Footnote 83
A number of provinces have attempted or considered using astanding offer contract process. However, Saskatchewan is the onlyprovince currently following this approach. The province uses standingoffer contracting for 91 high volume interchangeable drug groups.
Most favoured nation provisions
Most favoured nation provisions require that the price offeredto a provincial drug plan by a manufacturer for a particular drugproduct be no more than the lowest amount charged to other provincialdrug plans elsewhere in Canada.
Most favoured nation provisions currently apply under the drug plansof two provinces: Quebec and Newfoundland and Labrador. Footnote 84 In Quebec, all generic drug manufacturers must sign a commitmentthat they will submit a guaranteed selling price for any drug theywish to have entered on the list of medications. Footnote 85 The guaranteed selling pricemay not be higher than any selling price granted by the manufacturerfor the same drug under other provincial drug insurance programs.Footnote 86
In Newfoundland and Labrador, in order to have a product listed on theformulary, the manufacturer must provide for a specific period, aguaranteed price for the product that is no higher than the best priceavailable elsewhere in Canada. Footnote 87
Deductibles and co‑payments
Deductibles are amounts that patients covered by drug plans mustspend on prescription drugs before the plan will begin to reimbursecosts. Co‑payments are amounts that beneficiaries are required to payfor prescription drugs that are partially reimbursed under a drugplan.
Provincial drug plans typically implement deductibles andco‑payments as a means to keep overall drug plan costs down and todiscourage over‑use of prescription drugs. However, withinterchangeable generic drugs, significant deductibles and co‑paymentsmay also provide incentive for patients to search for lower pricedproducts.
Co‑payments and deductibles are required under many public drug plans.While in many cases they are limited, in some, plan beneficiaries canspend substantial amounts. For example, under the
5.A.3 Public plan generic drug policies competitive effects
Despite differences among their generic drug plan policies, reimbursedgeneric prices tend to vary little between the provinces. Thefollowing table indicates this, comparing invoice prices of genericdrugs in retail pharmacies. The table compares 2006 average invoiceprices for 579 generic drugs sold by prescription in retail pharmaciesin nine provinces for which data were available. Footnote 88 For each drug, the unitinvoice price in each province relative to the national average unitinvoice price was calculated.
Data source: IMSHealth.
In all provinces, average generic prices are within 2.5% of thenational average. Median prices are within 1.5% of the nationalaverage. Footnote 89
Those interviewed for this study generally indicated that there islimited competition in generic drug provincial formulary pricing.Prices in all provinces for initial and successive generic drugproducts are generally considered to reflect the former maximum priceguidelines under Ontario legislation and regulations. Under theguidelines, the first generic listed on the
This view exists despite public plans policies designed toensure that low cost generics are dispensed. These policies aregenerally considered to have played an important role in ensuring thatthe lowest priced generic drugs on provincial formularies aredispensed or reimbursed. They also help guarantee a minimum level ofcost savings from generic drugs. However, they have not generatedstrong competition among generic drug manufacturers to reduce theirpublic plan list and formulary prices.
This observation is consistent with incentive structure undermost public plan designs. Interchangeability policies, while theyprovide a basis for substituting lower for higher cost drugs, do not,in themselves, provide incentives for companies to reduce theformulary prices reimbursed by public plans.
Maximum cost reimbursement policies similarly provide limitedincentives for generic drug manufacturers to compete on price byoffering lower formulary prices. Key competitive features of thesepolicies include:
- The price of the lowest cost product is publicly listed onprovincial formularies, or maximum allowable cost or least costalternative prices lists.
- Competing generic drug manufacturers can protect theircompetitive positions by matching formulary price decreases offeredby other manufacturers.
- Generic drug manufacturers that are the first to offer lowerformulary prices are generally not given preference under publicplans.
Due to these features, a manufacturer offering a lower formularyprice to a public plan may have a limited opportunity to gainsignificant market share while decreasing its return on sales.Instead, other manufacturers can protect their competitive positionsby offering matching formulary price decreases.
Net acquisition cost policies that are aimed at capturing thevalue of rebates and other such benefits potentially allow publicplans to increase their benefits from competition among genericmanufacturers. However, the monitoring and auditing capabilities ofpublic plans has traditionally focused on pharmacy invoices that donot capture off invoice rebates, discounts and other benefits.
Establishing a framework to ensure that such benefits arecaptured would require much more extensive auditing capabilities toallow public officials to broadly examine pharmacies' operations andfinances. In designing an effective net acquisition cost policy, anadditional concern would be to avoid interfering with efficiencyenhancing or normal business terms, such as volume or loyaltydiscounts and prompt payment rebates.
Public plan maximum formulary price policies require genericdrugs to be priced at or below a maximum price relative to theirinterchangeable branded products. This potentially gives provinces themeans to ensure a minimum cost saving for generic drugs. However,these policies do not reflect either the development and supply costsnor the competitive prices of generic drugs. Further price regulationof this nature runs the risk of preventing the supply of high costgeneric drugs for which the development cost is higher than theallowable price.
Most favoured nation policies, while intended to ensure that aprovince's generic drug prices will be no higher than those of otherpublic plans, can act as a disincentive for manufacturers to competeby offering lower formulary prices to other public plans. They may dothis by ensuring that low formulary prices initially offered in oneprovince will be automatically extended to other provinces having mostfavoured nation policies. Even if the initial offering of the lowprice conveys a competitive advantage in the first province, this willresult in a lower price being received by other provinces with mostfavoured nation provisions.
As noted, significant deductibles and co‑payment requirements applyunder various public plans in Canada. However, no indication wasprovided by research or interviews that these have led to generic drugprice competition among pharmacies. In any case, if co‑payments anddeductibles are increased as an indirect means to promote generic drugcompetition, the issues of health care quality and access would haveto be addressed. Footnote 90
Where it has been possible to apply, standing offer contractingappears to provide significant competitive benefits. As noted,Saskatchewan is the only province obtaining pharmaceuticals throughthis approach.
Of the 91 drugs for which standing offer contracting is used,information on 37 drugs, which were also sold in other provinces (andwere part of provincial reimbursement claims), was available. Footnote 91 The following table compares current Saskatchewan generic drugformulary prices for this set of drugs to prices in British Columbia,Saskatchewan, Manitoba, Quebec and Ontario, expressed as a percentageof the brand product price. Footnote 92On average, Saskatchewan paysthe lowest percentage of the brand price, about 42%. Ontario has thenext lowest average price, 46%, reflecting the recent maximumformulary price caps implemented in the province.
Data source: Brogan Inc.
|Number of Drugs|
While increased direct contracting by public plans may have thepotential to increase their benefits from competition amongmanufacturers, parties with whom this matter was discussed pointed toa number of related obstacles and issues to be addressed. Theyinclude:
- Ensuring that such contracting promotes or sustainscompetition among generic manufacturers, rather than results in aconcentrated and uncompetitive generic drug supply sector.
- The need to effectively and efficiently integrate contractingpractices and pharmacy operations.
In addressing the first of these issues, it would be importantto ensure that competitive contracting is designed to protectcompetition through successive rounds of contracting. Processes thatresult in the exit of manufacturers over time may ultimately lead to aloss of effective competition.
On the second issue, in effectively integrating contractingpractices and pharmacy operations, it is important to consider how todeal with existing inventory when there is a change in contractedmanufacturers. A further consideration may be ensuring that differentinterchangeable products remain available to deal with circumstanceswhere a contracted generic product cannot be used by a patient formedical reasons.
Reliance on competitive contracting also places greater emphasison successful bidders being able to supply the market, and mechanismsto ensure that alternative sources are available where a contractor isunable to meet demand.
The practices noted above are not the only ones that might beconsidered to shift the focus of generic competition to public plans.Others might involve, for example, restricting access to formulariesas a means to encourage price reductions.
Practices shifting the focus of generic competition to publicplans, away from pharmacies, in any case, would increase emphasis onthe regulation of pharmacy professional fees and mark‑ups. As thesepractices would limit the potential to provide rebates or professionalallowances by generic drug manufacturers, they would tend to makepharmacies more reliant on professional fees and mark‑ups, and wouldmake the pharmacy net returns more transparent.
5.B Private drug plans
Private drug plans generally complement public plans by coveringpersons or costs not covered by the public plans. As noted, abouttwo‑thirds of Canadian residents are covered by private insurance.According to the
This section describes the private drug plans sector in Canadaand its role within the competitive framework for the generic drugs inCanada.
5.B.2 The Canadian private drug plans sector
While individuals may purchase private drug insurance, group benefitplans provide approximately 95% of private coverage in Canada. Footnote 94 These plans are normally sponsored by or organized by employers,or professional orders or associations. In choosing the level and typeof coverage to provide, plan sponsors look for a balance between morecomprehensive coverage (desired by plan members), managing their riskexposure, and minimizing their drug coverage or insurance premiumcosts.
Plan sponsors have the option of providing either fixed cost(insured), or uninsured plans for their members.
Under insured plans, drug costs are principally reimbursed bythe drug plan provider. These groups pay a "premium" per employee orfamily. Smaller groups usually choose the premium method of funding asa means to manage their risk. Premiums include the cost of anticipatedclaims expense, administration costs, a charge for risk and anestimate for claim cost increase. At renewal time the claimsexperience is analyzed. If the rate varies from what was anticipated,this may be reflected in either higher or lower rates on renewal.
Administrative services only
Larger groups are more likely to sponsor uninsured oradministrative services only (ASO) plans as the size of theirmembership can adequately diversify their exposure to risk. Thesegroups choose to self insure which means they pay the claim costs plusa percentage or per claim fixed charge for administration. Since thegroup assumes the risk of large claims, no risk charge needs to beincorporated.
Insured and ASO drug plans are provided in Canada by bothfor‑profit insurers, such as Great‑West Life, Manulife and Sun‑Life,and not‑for‑profit companies, such as Green Shield Canada, AlbertaBlue Cross and Medavie Blue Cross.
The administration of these plans is complex and highlytechnical. It requires:
- Maintaining and updating drug formularies
- Developing and maintaining a network of pharmacies
- Claims adjudication
- The manual and electronic processing and settlement of drugclaims
- Expertise in the analysis and assessment of claimsinformation
- Expertise in the development of coverage and reimbursementpolicies
- Expertise in the development of flexible software solutions
- Coordination with provincial plans.
Non‑profit drug plan providers, such as Blue Cross and Green ShieldCanada, have developed capabilities to provide these services fortheir own and other group plans that they administer. Footnote 95 For‑profit drug planproviders widely contract out the electronic processing and settlementof claims to third party pharmacy benefits managers (
PBMs serve asintermediaries between the plan provider and the pharmacy to settleclaims. They may also provide other pharmacy benefit managementservices listed above. In some cases,
5.B.3 The role of private drug plans in the generic drug competitive framework
Private plans may adopt similar policies to those used by public planson generic drug pricing and interchangeability. It has been statedthat in Canada, provincial government drug plans have structured thepricing and gross margins that both public and private plans pay. Footnote 96
The view is supported by the following table comparing genericdrug costs reimbursed by provincial plans in comparison to privateplans. Drugs covered in the table include both generics and brand‑namedrugs that have lost patent protection. They were both public andprivate plans reimbursement claims in 2006.
Prices used for constructing the table include both drug costsand pharmacy mark‑ups reimbursed. For each drug, the average unitprice in Canada was calculated. The ratio between the national averageunit price paid by a public plan and the unit price paid by a thirdparty payer was computed. The table shows descriptive statistics ofthe ratios between the unit prices paid by the provinces on averageand the private plans.
For both brand‑name and generic drugs, the prices paid byprivate plans tend to be higher than the price paid by the publicplans. On average in 2006, non‑patented brand, per unit, cost publicplans about 90% of the cost of private plans. For generic drugs only,the ratio was 93%.
|Non‑patented Brand‑name Drugs||Generic Drugs|
Data source: Brogan Inc.
|Number of Drugs|
The higher prices paid, on average, by private plans versus publicplans may reflect the granting of higher mark‑ups by private plans ortheir payment of higher drug prices than the provinces. Footnote 97
This relationship between public and private plan generic drug pricesis undergoing change. Although Ontario legislation has capped genericdrug prices under ODB plansat 50% of the brand price where more than one generic is available,these prices are not being provided to private plans in Ontario.Consequently, a two‑tiered price structure exists in the province forgeneric drugs. Further concern has been expressed that not onlyprivate plans do not currently benefit from lower generic prices inOntario, private plan prices may increase to compensate for the lostrevenues on ODB sales underthe reduced ODB maximumgeneric drug prices.
The limited role of insurers and
6. Summary of key findings
Generic drugs play an important role in helping to manageCanada's health care costs. Generics are developed and manufactured tobe substitutable for branded drugs. Their role is to providecompetition for patented drugs when their patent protection ends dueeither to the end of their period of patent protection or when thepatents are found to be invalid.
Competition between generic and brand pharmaceuticals takesplace within a unique competitive framework. Key elements of thisframework are as follows.
Demand for prescription drugs is determined by a prescribingphysician. Physicians' main concern selecting a drug is its perceivedeffectiveness in treating a condition. The physician does not have adirect financial interest in the drug that is eventually supplied.
Patients normally obtain their prescribed drugs from retailpharmacies located in the community. Many patients are insensitive tothe price they pay for generic drugs as they bear none or only a smallportion of their drug costs under their public and private drug plans.An estimated 98% of Canadians are covered by these plans.
The choice of which generic product to dispense, except in caseswhere a prescribing physician indicates that no substitution ispermitted, is generally made by the pharmacist from products in stockin the pharmacy. This choice is subject to provincial laws,regulations or policies allowing brand products and their genericproducts to be dispensed interchangeably. In some cases, patients mayplay a role where they wish to obtain the brand product or aparticular generic product.
Pharmacies' decision of which generics to stock and dispensereflects a number of considerations. Pharmacies stock one or a smallnumber of generic products to keep inventory management costs down.The decision regarding which generic(s) to stock takes into accountthe invoice price of the product net of any rebates or allowances.Other terms and conditions, such as reliability of supply, or possiblebenefits of dealing with suppliers providing a broad range rather thana small number of products are also taken into account.
The net pharmacy price has traditionally been a majordeterminant of product selection in most jurisdictions in Canada.However, recent legislation in Ontario restricting the granting of offinvoice rebates and allowances is likely to increase the importance ofother considerations, such as the breadth of product portfolio,particularly for sales under Ontario Drug Benefit plans. Rebates havebeen prohibited for a number of years in Quebec and have recently beenthe subject of a number of court cases.
Reimbursement of the price paid by consumers for generics dispensed byretail pharmacies is based on public and private drug plans' formularyand reimbursement practices. Private plans' practices tend to mirroror complement public plans' practices. These practices typically basethe amount that is reimbursed on the lowest priced generic product onthe formulary. These prices generally reflect invoice or list pricesand do not include off invoice rebates. Ontario has maximum formularyprice restrictions for its public drug plans. In October 2006, theprovince reduced maximum reimbursement prices for generic prices to anorm of 50% of brand prices. The previous formula stated that mostproducts could be priced at no more than 63% of the brand price. Footnote 99
Hospital pharmacies account for a significant share of genericdrugs demand, particularly for drugs normally provided on anin‑patient basis. They obtain much of their needed pharmaceuticalsthrough competitive tendering processes. Hospitals pay for theseproducts out of their budgets and they are dispensed to patients freeof charge under the public health care system.
Generic drugs are distributed to pharmacies and hospitals eitherthrough independent pharmacy wholesalers and distributors (
Manufacturing of independent generic drugs involves significantdevelopment and regulatory approval costs. Researchers work to developa drug that is bio‑equivalent to the brand‑name reference product.Regulatory approval to sell an independent generic drug in Canadainvolves obtaining a NOC fromHealth Canada addressing related patent claims and the bio‑equivalencyof the generic drug with the brand product. According to thosecontacted for this study, from the time a decision is made tointroduce a generic product, manufacturers may require between threeto six years to bring the product to market. Sunk costs may be in therange of $3.5 million (including costs for bio‑equivalence studies,development and regulatory approval) for a small molecule. Costs canvary widely depending on the complexity of the product, the potentialto spread development costs across international markets, the scopeand nature of any associated patent litigation and the cost forbio‑equivalence or clinical studies. Obtaining approval to supplyauthorized generics (AG)involves much lower costs as these products are the same as the brandproduct already being supplied.
Key determinants in whether to supply a generic product include:
- Demand size and competitors: The projected aggregate demandsize of the reference brand product as well as the relatedtherapeutic class play an important role. First, the genericmanufacturers take into consideration how many manufacturers areexpected to introduce competing generic versions of the targetedmolecule. Second, branded companies may in some cases provide addedcompetition to the generic manufacturer by introducing: (i) acompeting drug within the same therapeutic class, or (ii) brandextensions to replace older formulations whose patents are about toexpire. Brand extensions may reduce the potential demand sizeavailable to the generic industry once the original drug loosespatent protection with a proportion of patients being prescribed thenew version.
- Development and approval costs: An important part of theentry decision is the evaluation of the total costs of introducing ageneric drug to the market. These costs include drug development,bio‑equivalence and/or clinical studies and federal and provincialapprovals.
- Timing: The length of time it would take to develop theproduct and obtain approval from Health Canada is a crucialconsideration. This is particularly so if it results in the laterelease of a generic product following the loss of patent protectionby the relevant brand product.
- Specialization and product portfolio: The manufacturer mayhave been involved in some related work, or it may specialize inproducing drugs within a certain therapeutic class or specialize incertain dosage forms(creams, ointments, injectables), therebybenefiting from economies of scale or scope in production. On theother hand, manufacturers may wish to supply a molecule to make theirproduct portfolio more attractive to customers.
- Legal challenge costs: Challenging brand patents, can be acostly and time‑consuming process. A generic manufacturer alreadyinvolved in legal challenges may decide not to enter into anotherchallenge.
While it has not been possible to conduct a full assessment ofgeneric competition, within this framework it appears that strongcompetition takes place among manufacturers in the supply of manygeneric drugs in Canada, particularly those products having highannual sales. Whereas in the past the industry was dominated by twolarge Canada based suppliers, there are now 15 generic drug suppliersin Canada. Many have ownership and other relations with major globalgeneric drug manufacturers. The ending of patent protection for a drugcan result in the entry of multiple suppliers.
Granting of off invoice rebates to pharmacies has traditionally beenthe principal means by which manufacturers have competed with eachother. Footnote 100 It has not been possible to obtain detailed evidence regardingthe size of these rebates. However, public sources and informationprovided by parties interviewed for the study indicate that netpharmacy prices have been, on average, at least 40% below the invoiceprice, and as much as 80% lower in some cases. These rebates haveprovided incentives for pharmacies to substitute generic drugs forbrand products and have been an important source of income for them.It may be noted that competition in the form of rebates, by itsnature, is not reflected in price studies comparing invoice prices inCanada versus other countries.
Off invoice rebates provided to pharmacies have typically not resultedin lower prices to consumers nor to public and private drug plans.While the plans may incorporate specific generic drug relatedpolicies, they provide limited incentive for pharmacies ormanufacturers to compete to supply the plans through lower formularyand reimbursement prices. Rather, these prices, in all provinces, havetended to reflect maximum allowable prices under the Ontario's formerODB maximum priceregulations. Other than the ODBsales that are covered by Ontario's new maximum price regulations,this pricing is continuing. Consequently, in Ontario a two‑tieredpricing framework exists for ODBplan sales versus sales of drugs for private plans or persons payingout‑of‑pocket. Footnote 101
Alternative public and private drug plan approaches that focuscompetition on reimbursers, could result in important cost savings forinsurers. However, further consideration of these approaches isrequired in order to assess the barriers to their implementation, howthey may be integrated into the current pharmacy and drug planframework, and how they may be designed to promote and sustaineffective competition among manufacturers.
Appendix 1: Federal regulatory framework for pharmaceutical products
All drugs that are marketed in Canada are subject to the Foodand Drugs Act Footnote 102 and Food and DrugRegulations. Footnote 103 The Food and DrugsAct defines a drug as in part as "any substance or mixture ofsubstances manufactured, sold or represented for use in the diagnosis,treatment, mitigation or prevention of a disease, disorder, abnormalphysical state, or its symptoms..., restoring, correcting, ormodifying organic functions..., or disinfection in premises in whichfood is manufactured, prepared or kept". Footnote 104
Whether a product is categorized as a "drug" depends on its composition (medicinal value leading to a pharmacological effect), and/or what claims are made for the product.
Part C of the Food and Drug Regulations requires a manufacturer to obtain a Drug Identification Number (DIN) prior to selling adrug in Canada. Footnote 105 A manufacturer or distributor is defined as "a person, including an association or partnership, who under their own name, or under a trade‑design or word mark, trade name or other name, word or mark controlled by them, sellsa food or drug".
In regulatory terms, the "manufacturer" of a drug isnot necessarily the company that makes the product, but the company towhich the product is registered at the time of approval. Themanufacturer may be located outside Canada, but there must be someonein Canada who is responsible for the sale of the drug.
Health Canada is responsible for ensuring compliance with theregulations and non‑compliant products are subject to action.
Pre‑market drug submission requirements
New drugs can be sold in Canada once they have successfully passed areview process to assess their safety, efficacy and quality. HealthCanada's Health Products and Food Branch (
A drug may be regulated as a new drug when it has not been on themarket in Canada for long enough or in sufficient quantity to haveproven its safety and effectiveness under conditions of use. As wellas a DIN, a new drugmust have a Notice of Compliance (NOC) with PartC of the Food and Drug Regulations issued before it can besold in Canada.
A New Drug Submission (NDS)typically involves between 100 and 800 binders of data, containingscientific information about the product's safety, efficacy andquality. It includes:
- The results of both the pre‑clinical and clinical studies
- Details on the production of the drug and its packaging andlabeling
- Information about its claimed therapeutic value
- Information about its conditions for use and side effects.
A clinical trial does not have to be performed in Canada for a New Drug Submission or a DIN Application.
When a generic drug enters the market, Part C of the Food andDrug Regulations allows the manufacturer to file an Abbreviated NewDrug Submission (NDS). The NDS contains data that demonstratethe drug's bio‑equivalence with a Canadian reference product. ACanadian reference product is defined as a drug which has been issuedan NOC and whichis marketed in Canada by the innovator of the drug. Where theinnovative drug (brand‑name drug) is no longer marketed in Canada, adrug acceptable to the Ministry of Health can be used to demonstratebio‑equivalence.
The NDS must meet the same qualitystandards as an NDS and thegeneric product must be shown to be as safe and effective as thebrand‑name product. An NDS typically involves between 10and 20 binders of data. It includes scientific information on thegeneric product's performance compared with the brand‑name product,and provides details on the production of the generic drug, itspackaging and labeling.
Generics do not have to replicate the extensive clinical trialsthat have already been done when the original, brand‑name drug wasdeveloped. Those trials usually involve a few hundred to a fewthousand patients. Since the safety and efficacy of the brand‑nameproduct has already been well established in clinical testing andoften many years of patient use, it is not scientifically necessary,and would be unethical, to require that such extensive testing berepeated for each generic drug that a firm wishes to market. Instead,generic applicants must scientifically demonstrate that their productis bio‑equivalent (i.e., performs in the same manner) as the pioneerdrug, within an acceptable range.
One way scientists demonstrate bio‑equivalence is to measure thetime it takes the generic drug to reach the bloodstream and itsconcentration in the bloodstreams of 24 to 36 healthy, normalvolunteers. This gives them the rate and extent of absorption orbio‑availability of the generic drug, which they then compare to thatof the pioneer drug. The generic version must deliver the same amountof active ingredients into a patient's bloodstream in the same amountof time as the pioneer drug.
A Supplemental NDS (
- The dosage form or strength of the drug
- The formulation
- The method of manufacture, labeling or recommended route of administration.
- An expansion of the claim or conditions of use for the drug.
A DIN application mustbe filed for those products that do not meet the definition of a 'newdrug'. This happens when a substance has been sold in Canada for longenough and in sufficient quantities to have established its safety andeffectiveness for use as a drug.
The review process
If, at the completion of a new drug review,
Filing an NDS as opposed to an
If the submission is complete, it enters the formal review process,which HPFBattempts to complete in 180 days (it may take much longer). Threereviews are performed to determine if the drug complies with the Foodand Drugs Act :
- Chemistry and manufacturing
- Safety and efficacy
- Product information.
If, on completing its review,
The patented medicines (notice of compliance) regulations
The Patented Medicines (Notice of Compliance) Regulations (NOC Regulations)Footnote 107 are the link between the Patent Act Footnote 108 and the review process under the Food and Drugs Act and Regulations. The dual purpose of the NOC Regulations is to ensure that, on the one hand, the timely access to Canadians of lower cost medicines and, on the other hand, the "early working" exception to patent infringement is not abused by second entry manufacturers.
The Therapeutic Products Directorate of Health Canada maintains a patent register consisting of patent lists submitted by first persons (innovators). The Patent Register Footnote 109 is an alphabetical listing of medicines and the associated patents, patent expiry dates and other related information, established in accordance with the NOC Regulations. When a generic or second entry manufacturer seeks approval of a drug in Canada based on a previously approved drug, itmust address all patents listed on this register concerning that drug.
After a generic manufacturer files an NDS on a drug covered by a patent on the Patent Register, and while the safety and efficacy are being reviewed, the applicant must either:
HPFB that it will accept that the NOC will not be issued until the patent expires or
- File a statement claiming that the person who filed the patent list is not the patent owner (or acting with the owner's consent) or
- File a statement that the patent has either expired, is not valid, or is not infringed (a Notice of Allegation, or NOA). Footnote 110
The NOA must be served onthe person who submitted the patent list (generally the holder of theoriginal NOC). Thatperson then may, within 45 days, apply for a court order prohibiting
If it receives notice of such a court application,
The generic manufacturer must address all patents on the patent list given by the patentee to Health Canada. Prior to October 2006, a patentee was able to re‑start the 24 month automatic stay by listing new patents for formulations or uses after a generic company filed its ANDS. This practice would extend market exclusivity long after the initial patent or patents on it had expired.
The new patents could be added at any time, and in some cases, new patents were added days before the original patent on the active ingredient expired. Under the October 2006 amendments to the NOC Regulations, a generic manufacturer who files a submission or supplement for an NOC for ageneric version of an innovative drug need address only the patents on the Register as of that filing date. Patents added to the register after that filing date would not have to be addressed. The register is "frozen" for the generic manufacturer. Footnote 111
If the person who submitted a patent list applies for a court order, an NOC cannot beissued for the generic product until either:
- The 24 month stay expires or
- The patent expires or
- The court declares there would be no patent infringement or
- The court application is withdrawn, discontinued or dismissed. Footnote 112
If the patentee wins the case, the NOC cannot beissued until the final patent expires. If the generic wins, an NOC can beissued as soon as Health Canada has completed its review for safetyand efficacy.
Filing and management of drug submissions
All drug submissions must be accompanied by:
- A completed drug submission application form
- A submission evaluation fee form
- A copy of the proposed label(s)
- The appropriate drug submission certification form.
New drugs must have a copy of the product monograph. Drug submissionsare processed according to the Management of Drug SubmissionsPolicy, which also identifies the performance targets for reviewtime frames for different types of submissions.
The Submission Evaluation Fees Guide identifies theevaluation fee and the timing of payment for different types ofpre‑market drug submissions. Fees are charged for the followingservices linked to the regulation of drugs:
- Drug Submission Evaluation
- Drug Master File Registration
- Issuance of Export Certificates (for non‑controlled drugs).
In addition to the fee for evaluating the safety, efficacy and qualityof a product,
- Fees for maintaining the right to market a product (an annualfee must be paid for each Drug Identification Number (
DIN) that pertains to adrug)
- A fee for an establishment license that certifies the type ofoperations and category of products that the establishment isauthorized to handle.
Once a drug is approved for the Canadian market, it must be packagedand distributed with information that will help consumers make aninformed choice about its use. The general labeling requirements areoutlined in Part C of the Food and Drug Regulations.
Good Manufacturing Practices (GMP)
All drugs marketed in Canada are subject to good manufacturingpractices (GMP) asoutlined in Part C of the Food and Drug Regulations. The
All products regulated under the Food and Drugs Act aresubject to the Canadian Environmental Protection Act, 1999 Footnote 114 and the New Substances Notification Regulations. Footnote 115 Pharmaceuticals, cosmetics, veterinary drugs, food additives,novel foods, biologicals (including genetic therapies),radio‑pharmaceuticals, medical devices, and natural health productsare all included. Before importing or manufacturing a new substance inCanada, importers or manufacturers must provide additional data toHealth Canada so that an environmental assessment can be conducted.
Establishment licenses ensure that manufacturers comply with goodmanufacturing practices (GMP)or equivalent standards for drugs and natural health products. Allestablishments that fabricate, package, label, import, distribute orwholesale these products, or operate a testing laboratory for them,must have an establishment license, unless they are expressly exemptedunder the Food and Drugs Act and Regulations.
HPFBalso inspects manufacturing plants and other sites where productscovered under the Food and Drugs Act are handled to verifycompliance with regulatory requirements. Establishment licenses,issued by Health Canada, are renewed on a yearly basis. Establishmentlicense holders are inspected every three years. Traditionalmedicines, homeopathic preparations, and vitamin and mineralsupplements, when in dosage form and intended for self‑medication, arecurrently exempt from this requirement.
It is mandatory that a person in Canada be responsible for importeddrug products. Importers usually must hold an establishment licenseand have evidence available that the imported products meet Canadian
Where a drug is registered in the name of a company not locatedin Canada, the name of the importer and the business address of theperson in Canada responsible for its sale must appear on the inner andouter labels of the drug. Importers must provide evidence that theirproducts meet the same standards as those manufactured domestically,before they can become available in Canada. This may involveinspection of specific incoming shipments and close cooperation withthe Canada Border Services Agency.
An establishment license is not required if:
- The importer is a practitioner, pharmacist or a person underthe supervision of a practitioner
- The drug is imported for a prescription
- The drug is not commercially available in Canada.
To determine whether imported drugs meet Canada's
The use of inspection reports from recognized partner countries isbased on a rigorous process that has established equivalency of both
Schedule F to the Food and Drug Regulations identifies thosedrugs that are authorized for sale on condition that they areprescribed by a physician. The distribution of drug products for humanuse is governed by the Provinces.
Compliance and enforcement
HPFBhas inspectors who verify compliance with the Food and DrugsAct and Regulations. Where necessary, they take steps to enforce theprohibitions outlined in these laws. Under the authority of the Foodand Drugs Act, inspectors can enter and inspect places where drugsare manufactured, prepared, preserved, packaged or stored. If anynon‑compliance is found, appropriate actions are taken.
Appendix 2: Data description
The data in this study refer only to prescription drugs sold inCanada. Non‑prescription or over‑the‑counter (
IMS health —Canadian drug store and hospital purchases audit
Canadian Drug Store and Hospital Purchases Audit (
The sample data is projected to the universe of drugstores andhospitals to reflect all purchases in Canada. Drug purchase data arecollected electronically and include the following data items:corporation/manufacturer, molecule/chemical, product name, launchdate, strength, package size, dollar sales, units, and prescriptions.Data take into account the purchases of drugstores and hospitalsregardless of whether purchases were made directly from manufacturersor through wholesalers. Therefore, it includes markup by wholesalersfor the volume moving through wholesalers.
The data set used in this report contains information on 108molecules on the Canadian market that lost patent protection between2001 and 2006. For each strength and dosage format, byprovince/region, on a monthly basis, the following information wasavailable: molecule name, product name, therapeutic class level three,manufacturer, strength, product form, launch date, number ofprescriptions, number of extended units purchased and price ofpurchase.
The extended unit may be pills (for oral solids), millilitres(for liquids), doses (for some inhalers) and grams (for powders).
Brogan group — Public and private drug plans database
Provincial data from Brogan Inc.covers British Columbia, Alberta, Manitoba, Ontario, Quebec, NewBrunswick, Nova Scotia, Prince Edward Island, and Newfoundland andLabrador. Brogan provincial data provide information on drugutilization metrics for molecules available in Canada whose patentexpired between 1998 and 2005.
The data set used in this report contains information on
In every province except Newfoundland and Labrador, the costelement includes the drug ingredient cost and the pharmacy mark‑up. InNewfoundland and Labrador the cost consists of: drug ingredient cost +pharmacy mark‑up + pharmacy dispensing fee (for some plans) — patientco‑payment.
The average pharmacy mark‑up was 7% in Alberta, British Columbiaand Manitoba, 8% in New Brunswick and Nova Scotia, 15% in Newfoundlandand Labrador, 10% in Ontario, 12.95% in Prince Edward Island and up to9% in Quebec. In Saskatchewan the pharmacy mark‑up is 30% for a drug cost up to $6.30, 15% for a drug cost between $6.31 and $15.80, and10% for a drug cost of $15.81 to $200.00, up to a maximum of $20.00for drug cost over $200.00. The private plans allowed for an averagemark‑up of 10%.
The following version of each provincial formulary was used toobtain information on formulary list prices.
Source : Brogan Inc.
Alberta HWDBL Full list, January 2007 and Alberta Additions, March 2007
Up to Bulletin of March 21 2007
Manitoba Interchangeable Formulary, December 2006
Interchangeable Drug Formulary, March 2007
New Brunswick: MAP List, March 2007
MAC List, July 2006 and update MAC, February 2007
MAC List, May 2006
ODB Edition 39 and updates, March 2007
Liste de Medicaments, February 2007
Formulary of February 2006 and many bulletins until January 2007
Appendix 3: List of acronyms
AG: Authorized (or licensed) Generics
NDS: Abbreviated New Drug Submission
API: Active Pharmaceutical Ingredient
ASHP: American Society of Health‑System Pharmacists
BC: British Columbia
CAPDM: Canadian Association for Pharmacy Distribution Management
CDH: Canadian Drug Store and Hospital Purchases Audit
CGPA: Canadian Generic Pharmaceuticals Association
CHA: Canada Health Act
CIBC: Canadian Imperial Bank of Commerce
CIHI: Canadian Institute for Health Information
CMDB: Canadian Management Information Systems Database
DC: Distribution Channel
DIN: Drug Identification Number
DND: Department of National Defense
GJC: Groupe Jean Coutu
GMP: Good Manufacturing Practices
GPO: Group Purchasing Organizations
HBM: Health Benefit Managers
HPA: Health Plan Administrator
HPFB: Health Products and Food Branch (Health Canada)
ICES: Institute for Clinical Evaluative Sciences
IDA: Independent Druggists' Association
IG: Independent Generic
IMS: Intercontinental Medical Statistics
IPD: Independent Pharmacy Distributors
IT: Information Technology
MRA: Mutual Recognition Agreement
NB: New Brunswick
NDS: New Drug Submission
NIHB: Non‑Insured Health Benefits
NL: Newfoundland & Labrador
NOA: Notice of Allegation
NOC: Notice ofCompliance
NOD: Notice of Deficiency
NON: Notice of Non‑Compliance
NPS: National Pharmaceutical Strategy
NS: Nova Scotia
OCOTH: Ontario Council of Teaching Hospitals
OCP: Ontario College of Pharmacists
ODB: Ontario Drug Benefit
OECD:Organization for Economic Co‑operation and Development
OTC: Over The Counter
PBM: Pharmacy Benefit Manager
PDCI: Palmer D'Angelo Consulting Inc.
PEI: Prince Edward Island
PIC/S: Pharmaceutical Inspection Cooperation Scheme
NOC: PatentedMedicines Notice of Compliance
PBPRB: Patented Medicines Price Review Board
POS: Point of Sale
P&T: Pharmacy and Therapeutics
RCMP: Royal Canadian Mounted Police
R&D: Research and Development
RHA: Regional Health Authority
RFI: Request for Information
RFP: Request for Proposal
SNDS: Supplemental New Drug submission
TPD: Therapeutic Products Directorate
TPP: Third Party Providers
US: United States