Shoppers Drug Mart and the Katz Group, which owns the Rexall and Pharma Plus pharmacy chain, appealed the ban on private-label generic drugs but lost. Graeme Roy/Canadian Press
The Supreme Court of Canada has dismissed an appeal by Shoppers Drug Mart and the Katz Group, owner of the Rexall and Pharma Plus pharmacy chain, which had argued that the province of Ontario couldn't stop them from selling their own cheaper versions of popular generic drugs without passing a law to that effect.
The question before the court was whether the province could bar the drug store chains from selling their own generic drugs simply by introducing regulations to that effect, which it did in 2010.
The court ruled Friday that Ontario didn't overstep its powers by amending regulations to make the changes it wanted and that the changes were consistent with the intended purpose of the existing laws governing how prescription drugs are sold in the province — namely, reducing drug costs.
"The 2010 private-label regulations contribute to the legislative pursuit of transparent drug pricing," the court said in its ruling.
"They fit into this strategy by ensuring that pharmacies make money exclusively from providing professional health care services, instead of sharing in the revenues of drug manufacturers by setting up their own private label subsidiaries. …
"If pharmacies were permitted to create their own affiliated manufacturers whom they controlled, they would be directly involved in setting the [province-covered drug] prices and have strong incentives to keep those prices high."
Part of cost-cutting
Ontario is one of the largest purchasers of prescription drugs in the world and spends about $3.4 billion a year on generic drugs.
In recent years, it has been trying to reduce those drug costs.
In 2010, the Ontario government amended the Drug Interchangeability and Dispensing Fee Act and the Ontario Drug Benefit Act, which govern how prescription drugs are sold and how the province reimburses pharmacies for the cost of those drugs.
Under the changes, it prohibited pharmacies from having their own private-label generic drugs covered under the Ontario Drug Benefit Program.
"Private-label products" could also not be declared "interchangeable" with brand-name drugs as generic drugs are. It's that interchangeability that obliges pharmacists to dispense generic drugs unless the prescribing physician specifies otherwise or the patient agrees to pay.
Large chains like Shoppers and Rexall wanted to have the option of selling their own generic drugs in order to save money by not having to buy them from an arm's-length third party. Shoppers created a subsidiary for that purpose in 2009 called Sanis Health Inc. It manufactures generic prescription drugs intended for sale mainly at Shoppers pharmacies, and it sells these private-label drugs in other provinces.
But Ontario feared the practice would reduce competition and drive up prices of generic drugs for the province, and in 2010, it rejected Sanis's application to have several generic drugs listed in the province's Formulary, which specifies the drugs for which the province covers the full or partial cost, and to have them designated as "interchangeable."
In February 2011, the Ontario Superior Court of Justice ruled that the province went too far in barring the pharmacy chains from selling their own generic drugs, but later that year, an appeal court reversed that decision, which is what forced the pharmacies to appeal to the highest court.
On Friday, the Supreme Court ruled that the province's intervention to restrict the kind of generic drugs that pharmacies could sell did not constitute an outright ban.
"Private-label regulations do not prohibit manufacturers from selling generic drugs in Ontario’s markets; they restrict market access only if a particular corporate structure is used," the court said. "That cannot be characterized as a total or near-total ban on selling generic drugs in Ontario."
It stressed, however, that its role was not to assess whether the government's 2010 regulations were '"necessary, wise or effective" but whether they were consistent with the purpose of the original legislation, which, the court said, was to control the cost of prescription drugs by promoting transparent pricing and eliminating price inflation along the drug supply chain.
The limits on private-label drug sales the government introduced were consistent with those aims, it said.
Other revenue streams
The court battle over pharmacies' right to sell their own generic drugs is a symptom of some of the cost-cutting measures the province has undertaken in recent years
In 2006, Ontario banned the so-called rebates manufacturers of generic drugs would pay pharmacies to give them incentives to carry their products. Some have estimated these payments added up to as much as $750 million a year.
It was then that chains such as Shoppers started to look for ways to make up that lost revenue and set up subsidiaries like Sanis to manufacture and sell their own private-label drugs.
In 2010, Ontario also announced its intention to phase out professional allowances, which generic drug manufacturers paid to pharmacies in lieu of the cancelled rebates and which covered services such as blood pressure clinics and medication reviews. The eradication of these, to be completed by 2014, would also cost pharmacies millions of dollars in revenue, the drug store chains argued.
In September 2012, the province also reduced how much it will pay for the 10 top-selling generic drugs from 25 per cent of the brand-name equivalent to 20 per cent. It said the move would save about $55 million a year and allow the province to increase spending in other areas such as social assistance and disability payments.
Peter Sklar, retail analyst at BMO Nesbitt Burns, estimated at the time that the move would cut 1.8 per cent – or 18 cents – from the roughly $10 drug stores get per prescription covered by the public drug plan.
Other provinces that are also revisiting their drug pricing plans have been watching the court case closely.