Generic Drug Sector Study - Chapter 4: Pharmacies and Hospitals

Pharmacies and hospitals provide the main interface between generic drug suppliers, patients and reimbursers. They are the main focal point for competition among generic manufacturers.

This chapter provides an overview of relevant features of the Canadian pharmacy and hospital sectors, and develops their role in the competitive framework for generic drugs.

4. A The Canadian Retail Pharmacy Sector

4.A.1 Overview

There are more than 7,900 retail pharmacies in Canada. ⁴² In 2006, they purchased $15.74 billion worth of prescription pharmaceuticals and filled over 422,000,000 prescriptions. ⁴³The ten therapeutic classes of drugs most frequently dispensed by retail pharmacies in 2006 are indicated in the following table.

Rank 2006	Therapeutic Class	Purchases 2006 ($000,000s)
1	Cardiovasculars	2,409
2	Antihyperlipidemic agents	1,653
3	Psychotherapeutics	1,623
4	Antispasmodic/antisecretory	1,275
5	Analgesics	746
6	Bronchial therapy	718
7	Anti-arthritics	649
8	Hormones	634
9	Neurological disorders, miscellaneous	617
10	Diabetes therapy	567

Source: IMS Health.

Retail pharmacies in Canada are organized into a range of business structures. Key categories include the following:

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Independents

An independent pharmacy is not affiliated with any corporately run banner, franchise or chain program. The name of the store is unique to that store, and the owner controls, among other things, ordering, marketing strategies and store image.

Pharmacy Groups

1. Banner
   Banner pharmacies are independently owned pharmacies that are affiliated with a central office. They pay fees for the right to use a recognized name (such as I.D.A., Guardian, Uniprix, Price Watchers, Pharmasave) and to participate in centralized buying, marketing, professional programs and other services. While banner stores usually assume a required “look and feel,” the stores themselves are independently owned and the owners retain a high level of autonomy in areas such as local marketing and professional services.
   
2. Franchise
   Franchise arrangements vary widely for retail pharmacies in Canada. The two largest franchises are Shoppers Drug Mart and Jean Coutu. The franchisees (or “associates” in the case of Shoppers Drug Mart) do not necessarily own the physical store or the fixtures, and master leases are usually held by the franchisor. However, they enjoy some autonomy in local marketing, buying and in-store services, as well as access to programs developed by the head office.
   
3. Chain
   Chain pharmacies, such as Pharma Plus and Lawtons, employ pharmacy managers who are salaried employees. Head office directs all marketing, merchandising, buying, and professional programs as well as other matters.
   
4. Foodstore & Mass Merchandiser (“Food/Mass”)
   Food and mass merchandiser pharmacies are departments within supermarket or mass merchandise outlets, such as Loblaws and Wal Mart. They employ salaried pharmacy managers (except in Quebec, where regulations require pharmacists to own the dispensary). The managers follow the direction of the head office for all marketing, merchandising, buying, professional activities, and other matters. ⁴⁴

As indicated in the table below, retail pharmacy groups, including chain, banner and franchise pharmacies, collectively accounted for over 4,600 pharmacies in Canada in 2006, or about 58% of all retail pharmacies in the country. Food and mass merchandisers accounted for 1,592 stores and independents for 1,686 stores, or about 20 and 21%, respectively. ⁴⁵

The allocation of Canadian retail pharmacies to the above categories has undergone substantial change over the past several years. Table 6 indicates that there has been a significant trend away from independent pharmacies to other pharmacy categories. Over the 2001 to 2006 period, while the total number of pharmacies increased by more than 900 outlets, the number of independent pharmacies actually fell from 1,837 to 1,686.

While independents remain a major category, their share of all retail pharmacies fell from 31 to 21%. The total number of stores in both other categories increased, with proportionately larger growth in food and mass merchandise outlets. These increased their share of all retail pharmacies from 14% to 20%. While the total number of chain, banner and franchise outlets increased, their share of all retail outlets decreased slightly from 60% to 58%.

Table 6. Retail Pharmacy Count By Category

Pharmacy Category 46	2001	2002	2003	2004	2005	2006
Food/Mass Merchandisers	979	1,248	1,315	1,503	1,557	1,592
Independents	1,837	1,717	1,614	1,639	1,663	1,686
Chain/Banner/Franchise	4,171	4,298	4,440	4,443	4,558	4,627
Total	6,987	7,263	7,369	7,585	7,778	7,905

Source: CAPDM, Industry Trends Report, December 2006.

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The two largest retail pharmacy groups in Canada are the Katz Group (Rexall), with over 1,100 outlets, and Shoppers Drug Mart (Pharmaprix in Quebec) with over 820 outlets. Collectively, they account for close to 25% of all retail outlets in Canada. Other major retailers include Loblaws, Pharmasave and Jean Coutu with, respectively, 470, 364 and 320 outlets. Collectively, these five pharmacy groups account for about 39% of all retail pharmacy outlets in Canada. ⁴⁷

The significance of individual pharmacy groups may vary significantly from province to province. Although Jean Coutu has the fourth highest number of outlets in Canada, these are concentrated in Quebec where the company's share of retail outlets is in the range of 18%. The next largest group in the province, Familiprix, has over 260 stores, representing about 16% of all pharmacy outlets. ⁴⁸

Regardless of their category, retail pharmacies in Canada typically have two main sources of revenue:

• Pharmacy operations, consisting of the dispensing of brand and generic prescription pharmaceuticals;
  
• Front store operations, consisting of the sale of OTC medication, health and beauty aids, general and seasonal merchandise. ⁴⁹

While the importance of these sources of revenue can vary significantly according to pharmacy category, the following table indicates that prescription drug sales are the principal source of revenue for all pharmacy categories. For all categories, prescription sales account for well over 50% of all revenues.

Table 7. Canadian Front-store and Dispensary Revenue by Pharmacy Category

	Independent	Franchise	Banner	Chain	Food	Dept/Mass
Average Rx volume	45,600	81,000	57,500	39,100	38,300	55,400
Usual and customary fee($)	9.73	9.90	9.61	8.98	8.01	7.51
Rx share of sales (%)	79	59	74	71	71	72
Total Sales ($ million)	2.1	6.71	2.56	2.74	3.01	3.25

Source: 2006 Trends and Insights Online Report, The Pharmacy Group. ⁵⁰

4.A.2 Role of Retail Pharmacies in the Competitive Framework For Generic Drugs

Retail pharmacies play a pivotal role in the competitive framework for, and pricing of, generic drugs in Canada. Though they do not prescribe pharmaceuticals, after a drug has been prescribed, pharmacists normally have broad scope, under provincial and professional laws, policies and regulations, to substitute among interchangeable generic and brand drugs products when filling prescriptions. ⁵¹ As well, to minimize their costs, pharmacies have an interest in stocking only one, or a small number of interchangeable products.

Because of this, competition among generic manufacturers and suppliers to supply generic drugs to patients in the community has tended to focus on pharmacies. As indicated in the manufacturing chapter, this competition takes place in a variety of ways. An important dimension has been to grant rebates to retail pharmacies off pharmacy invoice prices.

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Previous analysis of the Canadian pharmaceutical sector and testimony provided in recent hearings on amendments to Ontario's generic drug related legislation and regulations indicate that these rebates provide important returns to pharmacies. ⁵²

Rebates have also provided a financial incentive for retail pharmacies to substitute generic products for branded products. As indicated in the manufacturing chapter and discussed further in section 5.A, off invoice rebates and discounts and other such benefits, have normally not been reflected in prices reimbursed by public and private insurers. Rather, those contacted for this study indicated that reimbursed prices for newly introduced generic drugs reflect the former maximum limits under Ontario provincial drug benefit legislation.

The following table shows the incentive provided to dispense generic drugs through off invoice rebates and discounts, and their impact on the profitability of pharmacies. The table is based on a representative branded drug prescription cost of $40 reimbursed under the Ontario Drug Benefit (ODB) guidelines prior to the Transparent Drug System for Patients Act. The maximum generic drug invoice price, based on the former Ontario maximum generic drug price legislation is $25.20. ⁵³ The table uses an allowable mark-up of 10% of the cost of pharmaceuticals. ⁵⁴ Rebates are set at 40%. In recent Ontario provincial generic drug related hearings, this was the lower range of rebates paid on average to independent Ontario pharmacies. Dispensing fees are set at $6.54. ⁵⁵

Based on these numbers, the sale of a generic drug provides a net return to the pharmacy of $19.18 versus $10.54 for the brand product. ⁵⁶

Table 8. Historic Pharmacy Return On ODB Branded Versus Generic Drugs Sales

	Branded ($)	Generic ($)
Invoice Price	40.00	25.20
Allowable Markup(10%)	4.00	2.52
Dispensing Fee	6.54	6.54
Total (=Retail Price)	50.54	34.26
Rebates (40% of invoice)		10.08
Return (mark-up+dispensing fee+rebate)	10.54	19.14

In Ontario, pharmacy returns from the sale of generic drugs under ODB plans are being substantially affected by the changes made to Ontario generic drug legislation and regulations in 2006. The maximum cost for generic products reimbursed under ODB plans has been reduced to 50% of the interchangeable brand product, where more than one generic is available.

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Manufacturers are now prohibited from granting rebates on generic drugs but they can provide professional service allowances in eight approved categories. For drugs dispensed under ODB plans, these allowances may equal up to 20% of product costs. For other drugs and other plans, there is no limit on the amount of professional allowances they can provide. In addition to these changes, the maximum allowable mark-up for ODB drugs dispensed to ODB patients has been reduced to 8% from 10% and maximum dispensing fees have been increased to $7.00 from $6.54.

The implications of these changes on pharmacies' return on ODB sales are reflected in the following table.

Table 9. Current Pharmacy Return On ODB Branded and Generic Drug Sales

	Branded ($)	Generic ($)
Invoice Price	40.00	20.00
Allowable Mark-Up (8%)	3.20	1.60
Dispensing Fee	7.00	7.00
Total(= Retail price)	50.20	28.60
Professional Allowances (20%)		4.00
Return(mark-up+dispensing fee+allowance)	10.20	12.60

Under the new Ontario legislation and policies, if maximum professional allowances are provided, pharmacies retain a financial incentive to dispense generic drugs for provincial plan beneficiaries. However the return to pharmacies in the form of rebates or allowances is 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 $12.60 from $19.14.

Based on 40% rebates prior to the Transparent Drug System For Patients Act, 2006, the net price received by the generic drug manufacturer on ODB sales is higher under the 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 ODB maximum price for multiple source generics, the net pharmacy price received by manufacturers was 37.9% of the brand price.

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While the full impact of the new Ontario legislation and regulations on pharmacies and manufacturers is yet to be determined, as developed further in Chapter 5, the lower ODB prices have not been extended to non-ODB drug sales for which there is no maximum allowance. In addition, private sales are not subject to maximum dispensing fees or mark-ups.

It is anticipated that Quebec will receive the benefit of lower Ontario provincial drug plan prices because of their policy that they receive the lowest formulary prices offered in other provinces. ⁵⁷ However, the potential impact of this change on pharmacies is mitigated by Quebec's pre-existing prohibition of rebates. Further, the province is also considering implementing a professional allowances scheme parallel to Ontario's. ⁵⁸

4.B Hospital Pharmacies

4.B.1 Overview

While retail pharmacies are the principal dispensers of drugs in Canada, hospital pharmacies also play a significant role. In 2006, they purchased $2.08 billion of drugs, compared to $15.74 billion purchased by retail pharmacies.

Hospital pharmacists oversee the dispensing and storage of all medicines given to patients in the hospital (in-patients). Generally, pharmacists in hospitals face greater clinical complexity in medication management while community pharmacists face more complex business and customer relations issues.

Under the Canada Health Act (CHA), all necessary drug therapy administered in a Canadian hospital setting is insured and publicly funded. ⁵⁹ Out-patient medications are outside the Act's authority.

Provincial and territorial governments are responsible for providing hospital care in their jurisdictions. This includes planning, financing and evaluation of services, such as drug administration and management. Drugs purchased for hospital patients are covered by hospital budgets.

Hospitals maintain their own drug formularies listing all drugs available for prescription by a physician. Formularies tend to be similar from one hospital to another within the same province. However, significant differences may be found from one province to another, especially on expensive therapies such as cancer drugs. Hospital drug formularies tend to be more specialized than provincial or private plan formularies. This is due to the inclusion of medications that might be given only in a hospital setting, such as intravenous (IV) drugs and other therapies that must be provided on an in-patient basis.

Most hospitals have Pharmacy and Therapeutics (P&T) committees that determine the drug selection for their formulary. Although these committees are multi-disciplinarian, formulary decision-making tends to be physician-driven. Physicians prescribe drugs for patients and the hospital pharmacist ensures that they are available on the formulary. As in retail pharmacies, in cases where there are multiple sources for one drug (brand-name and generics), generic drugs will normally be substituted for the brand drug unless the prescribing physician has indicated “no substitution”.

In a retail pharmacy, drugs are dispensed for a specific number of treatment days for acute symptoms, or for a 30-day to 90-day supply for chronic symptoms. The standard of care for a hospital pharmacy is to dispense drugs on a unit-dose - a single dose of the medication. In unit-dose dispensing, medication is dispensed in a package that is ready to administer to the patient. ⁶⁰

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The main therapeutic classes of drugs used in hospital settings differs greatly from retail pharmacies. Table 10 shows the top 10 therapeutic classes of drugs dispensed in hospitals by purchase cost in 2006. Cancer drugs are, by a wide margin, the largest class of drugs purchased by hospitals although they were not among the 10 largest classes purchased by retail pharmacies. Cardiovascular drugs, the largest class of drugs purchased by retail pharmacies, were the 9th largest class purchased by hospitals. In total, of the 10 largest classes of drugs purchased by hospitals, only 3 ranked among the 10 largest retail pharmacy categories.

Table 10. Top Ten Therapeutic Classes By Hospital Purchases, Canada, 2006

Rank 2006	Therapeutic Class	Hospital purchases $(000,000s)
1	Oncology	557.3
2	Anti-Infectives, systemic	191.8
3	Hematinics	185.0
4	Hemostatic modifiers	164.4
5	Psychotherapeutics	120.3
6	Biologicals	101.2
7	Anti-virals	91.9
8	Immunologic Agents	72.5
9	Cardiovasculars	61.9
10	Hormones	56.1
	Top 10 hospital classes	1,602.5

Source: IMS Health.

4.B.2 Role of Hospitals in the Competitive Framework for Generic Drugs

Differences in hospital versus retail pharmacy drug purchases are also reflected in the ranking of generic manufacturers by hospital sales. While diversified producers offer a wide range of products in a variety of forms, others may specialize in injectables or topical application products that are more widely used in hospitals than in retail pharmacies. Table 11 indicates this. The table compares generic manufacturers' rankings for sales to hospitals versus total sales to hospitals and pharmacies for molecules that lost patent protection during the 2001 to 2006 period.

Table 11. Ranking Of Hospital Sales By Generic Manufacturer, 2006

Rank Hospital Sales	Share of Hospital Sales (%)	Manufacturer	Rank Total Sales	Share of Total Sales (%)
1	32.67	Mayne Pharma	8	2.20
2	24.03	Sandoz	7	3.52
3	14.97	Novopharm	2	16.54
4	14.33	Apotex	1	38.61
5	6.92	Pharmascience	5	7.70
6	4.86	Genpharm	3	14.45
7	1.46	Ratiopharm	4	8.07
8	0.42	Taro Pharma	10	1.06
9	0.12	Cobalt	6	4.29
10	0.03	Hospira	17	0.00
	0.18	Others		3.56
	100	Total		100

Data source: IMS Health.

Mayne Pharma Canada was the largest seller of these generic drugs to hospitals in 2006, but was the eighth largest generic manufacturer measured by total sales including both hospitals and retail pharmacies. Sandoz, ranked seventh in total sales, was ranked second measured in hospital sales. Apotex, which had the highest total sales, was ranked fourth in hospital sales only.

Prices for generic drugs used by hospitals are generally determined by negotiations and contracting between the hospitals themselves and the manufacturers. While this may be done on a hospital by hospital basis, it is increasingly being done through group purchasing organizations (GPOs) or Regional Health Authorities (RHAs).

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GPOs, such as HealthPro, MedBuy and Contract Management Services, are stand alone operations whose shares are held by hospitals and other health care organizations. They were established by hospitals and other health care facilities to economize on their goods and material costs by providing centralized procurement and obtaining the benefits from buying in higher volumes.

RHAs were established by most provincial governments in the 1980s and 1990s to amalgamate various health services, including hospital services, within regions. ⁶¹Although RHAs may participate in GPO programs, they may also do their own group purchasing.

GPO or RHA contracting processes are normally conducted in a public forum. The GPO or RHA will identify its needs for products, usually by conducting a comprehensive review of the products consumed by each member and their respective annual volumes and unit costs.

A Request for Information (RFI) process may be used, gathering information from members and suppliers. Supplier information is sought later, allowing for an economical value-added benefits analysis. These analyses are usually an integral component of the Request for Proposal. ⁶²

A Request for Proposal (RFP), outlining the market size, the items and conditions under which the contract will be developed, is issued to all interested suppliers. The contract awarded is often a sole source agreement with the supplier for participation by all of the GPO's members.

Contracts with brand/patented drugs manufacturers often include a right-of-first-refusal clause for cases where a generic drug becomes available during the term of the contract with the brand manufacturer. If the price of the generic drug is lower than the negotiated price for the brand/patented product, the GPO has the opportunity to sever the contract with the brand manufacturer.

In some cases, packaging, colour and/or shape of a drug can play a critical role in purchasing decisions. GPOs will often request a sample of the drug to evaluate its appearance. To minimize medical errors in drug dispensing in hospitals, the appearance of a drug can make a difference for the pharmacist. These factors may, at times, result in the purchase of a higher priced drug product.

As with retail pharmacies, drugs used by hospitals may be obtained through IPD. By streamlining their pharmaceuticals procurement through an IPD, hospitals can benefit from channel efficiencies, reduced inventory and decreased administrative costs.

• Competitive contracting processes may be used to obtain IPD services. Key considerations are whether the IPD can:
• Service all members within its membership
• Provide simplified invoicing
• Guarantee delivery times
• Ensure IT system compatibility for logistics management between the IPD and the GPO members.

Since drug prices are negotiated with the manufacturers, the main point of negotiation with IPD is their mark-up. Distribution and warehousing services are also negotiated.

According to persons contacted for the study, bidding for multiple source generic products can be highly competitive. Rebates off invoice prices are often included in the contract negotiations. In the case of GPOs, manufacturer rebates are sent in a lump sum on a regular basis, usually quarterly, semi-annually or annually.

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Table 12 indicates how hospitals pay relatively low invoice prices for generic drugs. The table compares invoice prices paid by hospitals to retail pharmacies for individual generic products, identified by DIN. The table does not reflect any off invoice rebates that may be paid to either retail or hospital pharmacies. For each province, for each drug, the ratio between the retail pharmacy and hospital unit invoice price was calculated. ⁶³

Table 12. Inter-Provincial Pharmacy/Hospital Price Ratio Analysis, 2006

Generic Drugs	AB	BC	MB	NB	NS	ON	PEI/NL	QC	SK	Average
Mean	1.38	1.72	1.46	1.72	1.91	1.84	1.71	1.71	1.26	1.64
Median	1.07	1.27	1.14	1.49	1.58	1.54	1.51	1.41	1.00	1.27
Number of Drugs	507	537	474	263	217	680	299	752	400	4129

Data source: IMS Health.

As indicated by the table, retail pharmacy invoice prices tend to be well in excess of hospital invoice prices. On average, pharmacy invoice prices were approximately 39% per cent higher than hospital invoice prices, with differences within provinces ranging from 20% in Saskatchewan to 48% in Nova Scotia.

It was not possible to obtain data on any rebates provided to hospitals that are not accounted for in their invoices. To the extent such rebates are provided, they constitute a further gap between the net price paid by hospitals and the retail pharmacy invoice prices normally reimbursed by private and public drug plans.

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⁴² Source CAPDM Industry Trend Report: Focus on Retail Pharmacy , December 2006.

⁴³ See IMS News Release for “2006 Canadian Pharmaceuticals Review“ available at: www.imshealthcanada.com/vgn/images/portal/cit_40000873/7/25/80533297IMS%20Release%20Final%20English.pdf.

⁴⁴ These definitions are taken from McKesson Canada Trends and Insights Report, 2006, pp. 12–13.

⁴⁵ Note that numbers do not add up to 100 due to rounding.

⁴⁶ Independents or banner store pharmacy owners that have 5 or more stores are considered to be pharmacy chains.

⁴⁷ Source: CAPDM “2006 Pharmacy Who's Who” and the Rexall Group at www.Rexall.ca. Note that these numbers do not include pharmacies using independent pharmacy banner programs operated by McKesson Canada. Pharmacies subscribing to these programs number in excess of 650 across Canada.

⁴⁸ Total provincial retail pharmacy numbers are as provided by IMS Health for May 2006.

⁴⁹ CIBC Report, supra , note 38, p. 30.

⁵⁰ Available at: www.pharmacygateway.ca, p. 31. Numbers are for pharmacies and do not necessarily cover all sales in the relevant stores.

⁵¹ Within the last year, some prescribing authority has been granted to pharmacists in various provinces, with more jurisdictions contemplating some form of prescribing role for the pharmacists. Provincial interchangeability laws, policies and regulations and other relevant aspect of provincial legislation and pharmaceutical plans are developed in section 5.A.

⁵² See, for example, the comments to the Standing Committee on Social Policy on Transparent Drug System For Patients Act, 2006 , by Pharmasave Ontario and the Coalition of Ontario Pharmacy, May 29, 2006 .

⁵³ As discussed further in the public reimbursement discussion below, under Ontario legislation the maximum price for generic drugs reimbursed by the provinces was 70% of the brand equivalent price for the first generic product on the market, and 90% of the first generic product's price for subsequent generics. The numbers used for this example are based on the maximum cost of a second and subsequent generic products on the market.

⁵⁴ The numbers used in the table reflect allowable mark-ups and dispensing fees in Ontario prior to the creation of the Transparent Drug System For Patients Act, 2006. Allowable mark-ups may vary significantly in other provinces. Prior to June 2006, Ontario allowed a maximum mark-up of 10% but this has since been reduced to 8%.

⁵⁵ Dispensing fees can also vary substantially from province to province. For a listing of public drug plans allowable dispensing fees and mark-ups see CIHI, supra, note 1, Appendix.

⁵⁶ The spread between the return to sales of the generic drug versus the brand drug may be greater where allowable mark-ups are not contingent on third party distribution as these costs are normally absorbed by generic manufacturers but not suppliers of brand products.

⁵⁷ The related Quebec policies are discussed in section 5.A.

⁵⁸ Ministerial proposal no 24 of the Quebec February 2007 Drug Policy would allow professional allowances similar to those permitted in Ontario.

⁵⁹ R.S.C. 1985, c. C-6.

⁶⁰ Ringold D.J., Santell J.P., Schneider P.J., Arenberg S. (1999), “ASHP national survey of pharmacy practice in acute care settings: prescribing and transcribing. American Society of Health-System Pharmacists”, American Journal of Health System Pharmacy, 56, 142-157.

⁶¹ RHAs have been established in all provinces except Ontario. RHAs are described in Organization for Economic Cooperation and Development, Competition in the Provisions of Hospital Services , October 27, 2006, pp. 115 – 121, available at www.oecd.org/dataoecd/39/13/37981547.pdf.

⁶² www.medbuy.ca.

⁶³ The unit invoice prices compared were calculated based on retail pharmacies' and hospitals' drug acquisition costs and do not include off invoice rebates or discounts.