Canada: Canadian Bureau Releases Generic Drug Sector Study

On October 29, 2007 the Competition Bureau ("Bureau") released its Canadian Generic Drug Sector Study, initiated in September, 2006, to identify areas where changes in the market framework might attain greater benefits through competition. The study was initiated in response to several studies that had found the price of prescription generics to be high in Canada compared to other countries.

Key Findings of the Study

The Bureau identifies the following as key findings of the study:

• Generic drugs supply framework: In filling physician prescriptions, pharmacies can supply any brand-name or generic drug product listed on provincial formularies (i.e., government drug plan product lists) as interchangeable for the prescribed medication. Drugs are paid for by drug insurance plans or out-of-pocket by consumers, with government and private drug plans providing coverage for approximately 98% of all Canadians. Pharmacies normally charge the manufacturer's invoice price for generic drugs, but receive significant rebates on that price.
• Competitive generic manufacturing: There is strong competition in the supply of many generic drugs in Canada, with more than fifteen manufacturers. Several interchangeable products are now often available within a short time of the end of patent protection.
• Significant rebates to pharmacies: Manufacturers' rebates to pharmacies provide an incentive for pharmacies to select a particular manufacturer's product. Where allowed, these rebates comprise about 40% of the invoiced price. While such rebates are currently prohibited in Ontario and Quebec, legislation adopted in Ontario in 2006, and under consideration in Quebec, allows generic drug manufacturers to provide professional allowances (of up to 20% of the invoice price) to pharmacies.
• Rebates not passed through to payors/consumers: Competition by generic manufacturers to offer lower prices to pharmacies through rebates is not reflected in prices paid by either public or private plans, or out-of-pocket by consumers. Rather, until recently, prices paid for generic drugs across the country tended to reflect the maximum generic drug prices allowed under Ontario's government drug plan. This changed in 2006 when Ontario reduced the maximum it would pay for generic drugs to 50% of the brand-name product price. These lower prices are not paid by private drug plans in Ontario, or drug plans in other provinces, although this pricing discipline is due to be adopted in Quebec in 2008.
• Current drug plans provide little incentive for competitive pricing: While drug plans incorporate various policies, such as maximum generic prices and so-called "most favoured nation" clauses to address their generic drug costs, these policies provide only limited incentives for manufacturers to compete by offering competitive generic (invoice) prices to the plans, particularly to private drug plans, which are typically sponsored by employers, professional associations, and other groups.
• General Recommendation: Significant benefits to drug plans, and in turn to insurers, employers and Canadian consumers could be provided by a regulatory and market framework where incentives to supply drug plans more closely reflect the underlying market dynamics.

The Bureau identifies specifically that private drug plan insurers and their third-party pharmacy benefits managers (PBMs) play only a limited role in seeking lower-cost generic drugs. This represents an important difference between the generic drug competitive frameworks in the US and Canada. In the US, the Bureau notes, insurer-owned and independent PBMs are highly active in negotiating generic drug rebates or discounts from manufacturers, providing important savings on drug costs for drug plan sponsors.

Throughout the study, the Bureau identifies a number of possibilities for enhanced competitive pricing of generic drugs. Measures the Bureau identifies as worthy of consideration in this regard include:

• providing manufacturers with incentives to compete to be listed on provincial and federal government drug plan formularies;
• using competitive tendering processes to determine the products that can be dispensed by pharmacies;
• monitoring the net price paid by pharmacies for generic drugs to ensure the price paid by plans reflects competitive prices; and,
• an increased role for private plans in obtaining lower prices for their customers.

It is evident that the Bureau believes that both provincial governments and private plan reimbursers could and should be exerting greater competitive influence on the generic drug prices paid, in the end, by taxpayers and private drug plan sponsors. It should not be surprising if in the months ahead the Bureau steps-up its advocacy in this regard.

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