Generic Drug Sector Study - Chapter 1: Introduction

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. ¹ Total retail and hospital expenditures on pharmaceuticals (at invoice cost) in 2006 were $17.8 billion. 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. 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. 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 other countries. For example, the June 2006 report on generic prices by the Patented Medicines Price Review Board (PMPRB) concluded that Canadian retail pharmacy invoice prices for generic drugs are substantially higher than in 10 of the 11 comparator countries considered. ⁵The PMPRB estimated that Canadian non-patented prescription drug spending could have been reduced by as much as 32.5%, or $1.47 billion in 2005, if Canadian retail pharmacy prices were the same as the corresponding international median prices. ⁶Acting on these concerns, provincial and federal governments in Canada have taken, or are considering, a number of actions to reduce their generic drug costs.

Generic drugs are an important area of interest under the National Pharmaceutical Strategy (NPS). The NPS is part of the 10 Year Plan to Strengthen Health Care agreed to by First Ministers on September 16, 2004. ⁷Under the NPS, in October 2005, the PMPRB was given responsibility to monitor and report on non-patented prescription drugs. ⁸ Among the nine elements of the NPS are the acceleration of access to non-patented drugs and the achievement of international parity on generic drug pricing. ⁹

Provincial governments are also acting individually to reduce their generic drug costs. In June 2006, the Ontario government amended legislation to require that generic drugs reimbursed under provincial drug plans normally be priced at no more than 50% of their brand-name reference product. ¹⁰ Previously, maximum prices for the first generic in Ontario were set at 70% of the branded equivalent, with subsequent generics having a maximum price of 90% of the first generic. In February 2007, Quebec adopted a new policy limiting the price of the first generic drug to 60% of the price of the brand-name drug and subsequent generics to 54% of the brand-name drug. ¹¹

While there is widespread concern regarding the supply and pricing of generic drugs in Canada, there is substantial uncertainty about the underlying causes for the findings of high Canadian prices. Potential explanations include the following:

• The use of inappropriate statistical methodologies ¹²
• Higher domestic concentration of the generic manufacturing industry
• Provincial and federal government regulatory practices
• Provincial pharmaceutical reimbursement practices.

Assessing these and other possible reasons for the performance of the Canadian generic drug sector requires an understanding of the underlying competitive framework. This framework involves a complex interplay of:

• Provincial and federal legislation and regulation
• Domestic and foreign generic drug manufacturers and suppliers
• Distributors
• Pharmacy benefit managers
• Rural, banner, mass merchandise and other pharmacies
• Provincial, federal and private insurance plans.

While studies have been done concerning separate elements of this framework, the interplay between the various elements has not been systematically examined.

Bureau Purpose and Interest in Conducting the Generic Drug Sector Study

The Competition Bureau, under the direction of the Commissioner of Competition, is responsible for the administration and enforcement of the Competition Ac, a federal statute that applies to all sectors of the Canadian economy. The Commissioner is also responsible for the administration and enforcement of the Consumer Packaging and Labelling Act, the Textile Labelling Act and the Precious Metals Marking Act . The purpose of the Competition Act, as set out in section 1.1, is to maintain and encourage competition in Canada in order to promote the efficiency of the Canadian economy and provide consumers with competitive prices and product choices.

The Act defines a number of practices that are prohibited as criminal offences or are subject to review by the Competition Tribunal under the civil provisions of the Act. The Act does not provide the Bureau with any authority to decide the law or to compel business to adopt any particular type of conduct. Further information is available on the Bureau website, at www.competitionbureau.gc.ca.

The Bureau promotes competition in two ways.

• It is a law enforcement agency. It investigates allegations of anti-competitive conduct and pursues criminal and civil remedies to stop anti-competitive behaviour.
  
• It also acts as an advocate for competition. To that end, it frequently makes submissions to legislative bodies or regulators on how to implement reforms that encourage competition.

In its advocacy role, the Bureau strives to ensure that competitive factors are taken into consideration in the formulation of policies. It advocates that regulators and policy makers rely on market forces to achieve the benefits of competition, namely lower prices, better quality and improved product choice for Canadians. Given the important benefits of competition, regulation should only interfere with market forces where necessary, and then, only to the minimum extent needed to achieve other policy objectives.

The Bureau's interest in conducting the current study comes from its advocacy role. The intent of the study is to outline and describe the competitive framework for prescribed generic drugs in Canada, with a focus on market structure and regulatory features.

The purpose of this study is not to examine Canadian generic drug prices relative to other countries. Rather, it is to provide an understanding of the underlying competitive framework in order to identify potential areas for further promoting the benefits of competition. These areas will provide the basis for further Bureau analysis and advocacy work on generic drugs.

In conducting this study, the Bureau relied on publicly available information as well as information provided voluntarily through extensive interviews and contacts with industry participants from the private and public sectors. The Bureau would like to thank all parties that have provided information for the study.

Organization of the Report

The competitive framework for generic drugs involves a complex set of interactions between manufacturers, distributors, drug dispensers (pharmacies and hospitals) and payers or reimbursers (public and private drug plans and patients). This report outlines key features and roles of industry participants at each level related to generic drug competition.

Chapter 2 examines generic drug manufacturing in Canada. Chapter 3 discusses the role of independent pharmacywholesalers and distributors (IPD). Chapter 4 addresses the practices of dispensers of generic drugs. Section A considers retail pharmacies, section B deals with hospital pharmacies. Chapter 5 examines key features of the reimbursement framework for generic drugs. Public drug plans, the largest source of retail prescription drug funding in Canada, are considered in Section A. The role of private insurers is examined in Section B. Chapter 6 provides a summary of key findings.

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¹ In comparison, hospitals accounted for 29.8% of the forecasted $148 billion spent on health care in Canada in 2006. See Canadian Institute for Health Information (CIHI), “Drug Expenditure in Canada, 1985-2006”, available at: http:// secure.cihi.ca/cihiweb/products/hcic2006_e.pdf.

²Retail pharmacy expenditures were $15.74 billion and hospital pharmacy expenditures on drugs were $2.08 billion. See IMS “ News Release for 2006 Canadian Pharmaceuticals Review“ available at: http:// www.imshealthcanada.com/vgn/images/portal/cit_40000873/7/25/80533297
IMS%20Release%20Final%20English.pdf.

³ Source: IMS Health available at: http:// www.imshealth.com/web/content/0,3148,77303623_63872702_
77770096_77808854,00.html.

⁴Ibid .

⁵PMPRB, June 2006, “Canadian and Foreign Price Trends” . Other studies finding Canadian generic drugs prices to be high in comparison to other countries include: i) Palmer D'Angelo Consulting Inc, August 2002, “Generic Drug Prices: A Canada US Comparison” PDCI Report Series, available at: www.pdci.on.ca/pdf/Generic%20Pricing%20Study%20Final%20Report.pdf ; ii) PMPRB, November 2002, “A Study Of The Prices Of The Top Selling Multiple Source Medicines In Canada”, available at: www.pmprb-cepmb.gc.ca/CMFiles/study-e22SHF-8292005-2710.pdf ; iii) Brett Skinner, August 2004, “Generic Drugopoly: Why Non-Patented ¨ Prescription Drugs Cost More In Canada Than In The United States And Europe”, available at: www.fraserinstitute.ca/admin/books/files/GenericDrugopoly.pdf; iv) Brett Skinner, February 2005, “Canada's Drug Price Paradox: The Unexpected Losses Caused By Government Interference In Pharmaceutical Markets”, available at: www.fraserinstitute.ca/admin/books/chapterfiles/Jun05ffparadox.pdf ; and v) PMPRB, October 2006, “Trends in Canadian Sales and Market Structure”. Both PMPRB reports are available at:
http:// www.pmprb-cepmb.gc.ca/english/view.asp?x=805.

⁶ Federal/Provincial/Territorial Ministerial Task Force, June 2006, “National Pharmaceuticals Strategy Progress Report” , available at:
http:// www.hc-sc.gc.ca/hcs-sss/alt_formats/hpb-dgps/pdf/pubs/2006-nps-snpp/
2006-nps-snpp_e.pdf.

⁷Available at: www.hc-sc.gc.ca/hcs-sss/delivery-prestation/fptcollab/2004-fmm-rpm/index_e.html. Participants in the NPS include the federal government and all provinces with the exception of Quebec.

⁸ Non-patented drugs include brand-name drugs that lost patent protection as well as generic drugs. The June 2006 PMPRB report referred to above was the first of these quarterly reports.

⁹ National Pharmaceuticals Strategy Progress Report, June 2006, supra , note 7.

¹⁰ The Transparent Drug System for Patients Act 2006, S.O. 2006, c. 14, passed third and final reading in the Legislative Assembly of Ontario on June 19, 2006 and received royal assent on June 20, 2006. Certain provisions of the Act came into force upon royal assent and the balance came into force on October 1 st , 2006.

¹¹Price regulation in Ontario and Quebec is examined in more detail in Chapter 3.

¹²Joseph D'Cruz J. , Walid Hejazi W. and G . eorge Fleischman, 2005, “Comparisons of Retail Prices of Generic Prescription Drugs in Canada vs. United States: A Comprehensive Study”, available on the Canadian Generic Pharmaceuticals Association website at: http://www.canadiangenerics.ca/en/issues/Comparison_of_Retail_Prices_of_
Generic_Drugs_in_Canada_vs_US_DCruz_et_al_Nov_2005.pdf.