Overview

The life sciences industry is a key contributor to the Canadian and global economies. In the pursuit of competitive advantage, participants in the pharmaceutical, biotech, medical device and diagnostic, and health-care services sectors have seen significant growth attributed to major leaps in technology and an unprecedented demand for health-related goods and services. This growth has paralleled the expansion and imposition of more stringent regulatory requirements, improvement of market access, aggressive patent acquisition and enforcement, strategic M&A activity, and increased product liability claims and other litigation.

This report highlights insights and developments relating to a wide range of legal, business and consumer issues currently impacting the life sciences industry in Canada and abroad. These highlights were prepared by Blakes based on non-confidential information gathered in our practices, as well as through a review of publicly available information. Through a series of articles, we examine the implications of some of the recent legal developments impacting the sector, including the Supreme Court of Canada's decision to uphold Ontario's ban on private-label generic drugs, the enforcement of prohibitions on pharmacy-related loyalty points in B.C., the Competition Bureau's ongoing consideration of competition among pharmaceutical companies, and recent trends in Canadian litigation. We also discuss issues relating to the navigation of transfer-pricing rules, protecting intellectual property in the development of combination products, and obtaining financing for new product development and business expansion efforts. Supplementing our discussion of these matters are snapshots of consumer-facing and market trends, including integrated patient care and direct-to-consumer sales.

SUPREME COURT OF CANADA UPHOLDS BAN ON PRIVATE-LABEL PRODUCTS

Summary

The Supreme Court of Canada (SCC or Court) delivered its highly anticipated decision (Katz Group Canada Inc. v. Ontario (Health and Long‑Term Care)) on private-label products on November 22, 2013.

The Court unanimously upheld the validity of the regulations to the Ontario Drug Benefit Act (ODBA) and the Drug Interchangeability and Dispensing Fee Act (DIDFA) (together, the Regulations) that essentially ban the sale of private-label products in the private and public markets in Ontario. This decision effectively means pharmacies that operate in Ontario will not be able to sell drugs purchased from manufacturers they control if the manufacturers do not also fabricate the drugs.

Background

Before 2006, generic manufacturers typically provided rebates to pharmacies as an incentive to purchase the generic manufacturer's product. Due to the government's belief that these rebates increase the cost of generic drugs to both public and private payers, the Ontario Ministry of Health amended the ODBA and DIDFA and the Regulations in 2006 to prohibit rebates. However, the Ministry of Health thought industry was circumventing the rebate prohibition and responded with more amendments in 2010 (the 2010 Amendments) to further restrict the benefits manufacturers could provide to pharmacies. The 2010 Amendments prohibit not only professional allowances, but also private-label products from being listed in the Ontario Formulary or designated as interchangeable. Inclusion in the Formulary or designation as interchangeable is not required to legally sell a drug in Ontario, but for many generic drugs, inclusion and/or designation is a prerequisite for commercial success. This is why the 2010 Amendments have been referred to as banning private-label products even though such products can still legally be sold in Ontario.

The Katz Group (which controls Rexall and Pharma Plus pharmacies) (Katz) and Shoppers Drug Mart (Shoppers) had taken steps to set up their own private-label manufacturers. Sanis Health Inc., which was incorporated by Shoppers for this purpose, applied in 2010 to list several generic drugs in the Formulary and to have them designated as interchangeable. The Ministry of Health rejected the application on the grounds the drugs were private-label products. Shoppers and Katz both challenged the Regulations as being ultra vires on the grounds that they were inconsistent with the purpose and mandate of the ODBA and the DIDFA. The pharmacies were successful in the Divisional Court, but the Court of Appeal reversed the decision.

THE SCC DECISION

In upholding the relevant provisions of the Regulations as valid, the SCC held that in order for Shoppers and Katz to be successful in their appeal, they must show that the Regulations are inconsistent with the objective of the enabling statute. The Court determined that the overarching purpose of the ODBA and the DIDFA is to control the cost of prescription drugs in Ontario without compromising safety and that, in the past, rebates and professional allowances had driven up drug prices. The Court found that the purpose of the 2010 Amendments relating to private-label products was to prevent another possible mechanism for circumventing the ban on rebates that had kept drug prices inflated. Justice Abella held:

In banning rebates, the expectation was that manufacturers would lower Formulary prices, and that pharmacies would pass these savings on to consumers. If pharmacies were permitted to create their own affiliated manufacturers whom they controlled, they would be directly involved in setting the Formulary prices and have strong incentives to keep these prices high. Rather than receiving a rebate financed by inflated drug prices, the pharmacy would share in the manufacturers' profits from those prices. This was expected to keep the price of drugs to consumers high.

Shoppers and Katz argued that the Regulations were inconsistent with the statutory purpose because they neither could nor would reduce drug prices, since the price at which drugs are reimbursed by the Ministry of Health is independently set. The Court rejected this argument on the basis that whether the Regulations ultimately prove to be successful in reducing drug prices or represent sound economic policy does not answer the question of whether they are consistent with the statutory purpose of the legislation.

The Court determined that the provisions in question were consistent with this purpose through "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." The Court reasoned that if pharmacies were permitted to create their own private label subsidiaries whom they controlled, they would be directly involved in setting Formulary prices and have strong incentives to keep those prices high.

Shoppers and Katz also argued that the Regulations are inconsistent with the statutory purpose because they are under-inclusive since they do not prevent a pharmacy from owning a manufacturer that is also the fabricator of the drug. The Court rejected this argument on the basis that this corporate structure does not currently exist in Ontario, and the government is not obliged in its regulations to anticipate all potentially problematic scenarios for it to be consistent with its statutory purpose. The Court noted that this may become a corporate structure of concern; however, the government is entitled to address this problem in stages.

The SCC dismissed Shoppers and Katz's appeal.

Significance

Although it is only Ontario law in issue, given the size of the Ontario market, this decision has consequences nationally since manufacturers and pharmacies may choose not to pursue privatelabel product arrangements in Canada at all due to the impact the Regulations will now have on a product's overall commercial success.

Pharmacy chains may feel the financial impact of this decision as it was expected they would use the extra revenue from the private-label product model to recover profits lost as a result of the prohibition on rebates and professional allowances. This decision comes at a particularly critical time as an even greater use of generics is expected given the number of blockbuster brand-name drugs coming off patent.

As the law currently stands in Ontario, pharmacies are not prevented from owning a manufacturer that is also the fabricator of the drug. We may see large pharmacy chains exploring this corporate structure, similar to Jean Coutu Group Inc.'s acquisition of Pro Doc Ltd., a manufacturer of generic drugs, six years ago. Since the Ministry of Health deliberately did not choose to ban products with this type of corporate structure in its 2010 Amendments, presumably the Ministry of Health does not object to this type of corporate structure. Only time will tell.

FOCUS ON COMPETITION IN THE HEALTH SECTOR

The Canadian Competition Bureau (Bureau) has publicly indicated its intention to advocate for increased competition in different sectors of the economy, and senior officials have recently identified the health sector as an area of focus for the Bureau. The Bureau's focus on the health sector has been reflected in a number of its initiatives this year:

  • Workshop in the Pharmaceutical Sector. In November 2013, the Bureau hosted a one-day invitation-only "Workshop on Antitrust Issues in the Pharmaceutical Sector." The panellists at the workshop discussed a number of topics concerning how competition law applies to different conduct in the pharmaceutical sector, including the application of competition law to pay-for-delay settlements. "Pay-for-delay" settlements are payments made in settlement of pharmaceutical patent infringement proceedings by a plaintiff originator to a defendant generic in return for the generic agreeing to delay its entry into the market with a competing pharmaceutical product. Among others, the event was attended by the U.S. Federal Trade Commission's assistant director from its Health Care Division. The U.S. Supreme Court recently held that pay-fordelay settlements were subject to and could violate the U.S. antitrust laws.
  • Scrutiny of Regulations of Health Professionals. In December 2013 remarks, the Commissioner of Competition (who leads the Bureau) made reference to the Bureau's "ongoing review of restrictions on advertising imposed by certain self-regulated professions on their members, namely pharmacists, dentists and veterinarians." One example of this ongoing review may have been the Bureau's December 2013 submission in response to a consultation of the Alberta College of Pharmacists (ACP) concerning proposed amendments to its Standards of Practice and Code of Ethics. The proposed amendments would prohibit pharmacists from providing an inducement on the condition that an individual receives a drug or a professional service. (An inducement would include, among other things, time-limited discounts and loyalty points or rewards that retail chains offer to consumers). The Bureau's submission noted that, based on its review of the ACP's consultation documents, the ACP may not have empirical evidence to conclude that negative consequences can be associated with the offering of such inducements by pharmacists to consumers. The Bureau noted that given consumers' income constraints, inducements offered by pharmacists may "translate into greater purchasing power for consumers, particularly for low income Canadians...." The ACP has not yet published a response to the Bureau's response or indicated how, if at all, it intends to amend its proposed rules.

The College of Pharmacists of British Columbia also passed new rules in December 2013 prohibiting pharmacists from offering incentives to customers. Sobeys quickly filed a petition for judicial review seeking to have the court quash these new rules. Sobeys alleges, among other things, that the rules violate the Competition Act. In early January, the British Columbia Supreme Court denied Sobeys' application for an interim injunction against the College of Pharmacists' new rules.

  • Revised Intellectual Property Enforcement Guidelines. At a June 2013 roundtable with members of the bar, senior officials from the Bureau indicated that the Bureau may revise its Intellectual Property Enforcement Guidelines (IPEGs), in part to reflect more modern thinking about the interface between intellectual property law policy and competition law policy that has developed since the original publication of the IPEGs in 2001. The IPEGs provide that where conduct is "something more than the mere exercise of an IP right," the Bureau will scrutinize such conduct under the "general provisions" of the Competition Act (that is, the abuse of dominance, cartel and other general antitrust provisions). Where, however, conduct "involve[s] the mere exercise of the IP right and nothing else," then the Bureau will instead scrutinize such conduct under section 32 of the Competition Act. The "mere exercise" of an intellectual property (IP) right would include, for instance, the patentholder's decision whether or not to practise its patent or license its patent. The "mere exercise" of an IP right does not include, for instance, a patent-holder's licensing practices if they were arrived at through an agreement with a competitor or a patent-holder's transfer of its IP rights. Under section 32, it is very difficult for the Bureau (through the Attorney-General) to obtain an order in respect of the exercise of an IP right, and the IPEGs explain that the Bureau would only seek to obtain such an order "only in very rare circumstances." In the entire history of the IPEGs, the Bureau has never sought an order under section 32 of the Competition Act.

We anticipate that public discussion about the application of competition law in Canada to the health-care sector will continue in 2014, as will the Bureau' efforts to make known its views in this important area. Enforcement action in this sector by the Bureau also remains a real possibility.

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