Generic Drug Sector Study - Chapter 6: Summary of Key Findings

Generic drugs play an important role in helping to manage Canada's health care costs. Generics are developed and manufactured to be substitutable for branded drugs. Their role is to provide competition for patented drugs when their patent protection ends due either to the end of their period of patent protection or when the patents are found to be invalid.

Competition between generic and brand pharmaceuticals takes place within a unique competitive framework. Key elements of this framework are as follows.

Demand

Demand for prescription drugs is determined by a prescribing physician. Physicians' main concern selecting a drug is its perceived effectiveness in treating a condition. The physician does not have a direct financial interest in the drug that is eventually supplied.

Patients normally obtain their prescribed drugs from retail pharmacies located in the community. Many patients are insensitive to the price they pay for generic drugs as they bear none or only a small portion of their drug costs under their public and private drug plans. An estimated 98% of Canadians are covered by these plans.

Dispensing

The choice of which generic product to dispense, except in cases where a prescribing physician indicates that no substitution is permitted, is generally made by the pharmacist from products in stock in the pharmacy. This choice is subject to provincial laws, regulations or policies allowing brand products and their generic products to be dispensed interchangeably. In some cases, patients may play a role where they wish to obtain the brand product or a particular generic product.

Pharmacies' decision of which generics to stock and dispense reflects a number of considerations. Pharmacies stock one or a small number of generic products to keep inventory management costs down. The decision regarding which generic(s) to stock takes into account the invoice price of the product net of any rebates or allowances. Other terms and conditions, such as reliability of supply, or possible benefits of dealing with suppliers providing a broad range rather than a small number of products are also taken into account.

The net pharmacy price has traditionally been a major determinant of product selection in most jurisdictions in Canada. However, recent legislation in Ontario restricting the granting of off invoice rebates and allowances is likely to increase the importance of other considerations, such as the breadth of product portfolio, particularly for sales under Ontario Drug Benefit plans. Rebates have been prohibited for a number of years in Quebec and have recently been the subject of a number of court cases.

Reimbursement of the price paid by consumers for generics dispensed by retail pharmacies is based on public and private drug plans' formulary and reimbursement practices. Private plans' practices tend to mirror or complement public plans' practices. These practices typically base the amount that is reimbursed on the lowest priced generic product on the formulary. These prices generally reflect invoice or list prices and do not include off invoice rebates. Ontario has maximum formulary price restrictions for its public drug plans. In October 2006, the province reduced maximum reimbursement prices for generic prices to a norm of 50% of brand prices. The previous formula stated that most products could be priced at no more than 63% of the brand price. ⁹⁹

Hospital pharmacies account for a significant share of generic drugs demand, particularly for drugs normally provided on an in-patient basis. They obtain much of their needed pharmaceuticals through competitive tendering processes. Hospitals pay for these products out of their budgets and they are dispensed to patients free of charge under the public health care system.

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Distribution

Generic drugs are distributed to pharmacies and hospitals either through independent pharmacy wholesalers and distributors (IPD), self distribution to pharmacy groups such as chains, banners store and franchises, or manufacturer direct shipments. IPD are becoming an increasingly important means for distributing products. They offer services to all manufacturers providing them with an alternative means, besides direct distribution, for getting their products to pharmacies that do not self distribute.

Manufacturing

Manufacturing of independent generic drugs involves significant development and regulatory approval costs. Researchers work to develop a drug that is bio-equivalent to the brand-name reference product. Regulatory approval to sell an independent generic drug in Canada involves obtaining a NOC from Health Canada addressing related patent claims and the bio-equivalency of the generic drug with the brand product. According to those contacted for this study, from the time a decision is made to introduce a generic product, manufacturers may require between three to six years to bring the product to market. Sunk costs may be in the range of $3.5 million (including costs for bio-equivalence studies, development and regulatory approval) for a small molecule. Costs can vary widely depending on the complexity of the product, the potential to spread development costs across international markets, the scope and nature of any associated patent litigation and the cost for bio-equivalence or clinical studies. Obtaining approval to supply authorized generics (AG) involves much lower costs as these products are the same as the brand product already being supplied.

Key determinants in whether to supply a generic product include:

• Demand size and competitors: The projected aggregate demand size of the reference brand product as well as the related therapeutic class play an important role. First, the generic manufacturers take into consideration how many manufacturers are expected to introduce competing generic versions of the targeted molecule. Second, branded companies may in some cases provide added competition to the generic manufacturer by introducing: (i) a competing drug within the same therapeutic class, or (ii) brand extensions to replace older formulations whose patents are about to expire. Brand extensions may reduce the potential demand size available to the generic industry once the original drug looses patent protection with a proportion of patients being prescribed the new version.
  
• Development and approval costs: An important part of the entry decision is the evaluation of the total costs of introducing a generic drug to the market. These costs include drug development, bio-equivalence and/or clinical studies and federal and provincial approvals.
  
• Timing: The length of time it would take to develop the product and obtain approval from Health Canada is a crucial consideration. This is particularly so if it results in the late release of a generic product following the loss of patent protection by the relevant brand product.
  
• Specialization and product portfolio: The manufacturer may have been involved in some related work, or it may specialize in producing drugs within a certain therapeutic class or specialize in certain dosage forms(creams, ointments, injectables), thereby benefiting from economies of scale or scope in production. On the other hand, manufacturers may wish to supply a molecule to make their product portfolio more attractive to customers.
  
• Legal challenge costs: Challenging brand patents, can be a costly and time-consuming process. A generic manufacturer already involved in legal challenges may decide not to enter into another challenge.

While it has not been possible to conduct a full assessment of generic competition, within this framework it appears that strong competition takes place among manufacturers in the supply of many generic drugs in Canada, particularly those products having high annual sales. Whereas in the past the industry was dominated by two large Canada based suppliers, there are now 15 generic drug suppliers in Canada. Many have ownership and other relations with major global generic drug manufacturers. The ending of patent protection for a drug can result in the entry of multiple suppliers.

Granting of off invoice rebates to pharmacies has traditionally been the principal means by which manufacturers have competed with each other. ¹⁰⁰ It has not been possible to obtain detailed evidence regarding the size of these rebates. However, public sources and information provided by parties interviewed for the study indicate that net pharmacy prices have been, on average, at least 40% below the invoice price, and as much as 80% lower in some cases. These rebates have provided incentives for pharmacies to substitute generic drugs for brand products and have been an important source of income for them. It may be noted that competition in the form of rebates, by its nature, is not reflected in price studies comparing invoice prices in Canada versus other countries.

Off invoice rebates provided to pharmacies have typically not resulted in lower prices to consumers nor to public and private drug plans. While the plans may incorporate specific generic drug related policies, they provide limited incentive for pharmacies or manufacturers to compete to supply the plans through lower formulary and reimbursement prices. Rather, these prices, in all provinces, have tended to reflect maximum allowable prices under the Ontario's former ODB maximum price regulations. Other than the ODB sales that are covered by Ontario's new maximum price regulations, this pricing is continuing. Consequently, in Ontario a two-tiered pricing framework exists for ODB plan sales versus sales of drugs for private plans or persons paying out-of-pocket. ¹⁰¹

Alternative public and private drug plan approaches that focus competition on reimbursers, could result in important cost savings for insurers. However, further consideration of these approaches is required in order to assess the barriers to their implementation, how they may be integrated into the current pharmacy and drug plan framework, and how they may be designed to promote and sustain effective competition among manufacturers.

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⁹⁸ Quebec has also established maximum price regulations. However they are not due to come into effect until February 2008 and their effect has been mitigated by the revised Ontario formulary prices that will be automatically adopted under Quebec's formulary policies.

¹⁰⁰ While they are not inherently anti-competitive, in certain circumstances, such as where they are used by a dominant firm to induce exclusive supply, rebates may have anti-competitive effects.

¹⁰¹ However, Quebec's public plan formulary prices are due to be adjusted in February 2008 to reflect the new Ontario maximum price level.