Canadians Could be Paying Less for Generic Drugs, Competition Bureau Study Finds

OTTAWA, October 29, 2007 — Strong competition exists in the supply of many generic drugs, but the benefits of this competition are not reaching the Canadian public in the form of lower prices, the Competition Bureau concluded in a Generic Drug Sector Study released today.

The Bureau found that to compete for space on pharmacies' shelves, generic manufacturers offer rebates or other payments to pharmacies in most provinces. Public sources and information provided by parties interviewed for this study indicate that these are on average 40 per cent of the price the pharmacy is invoiced. Under the present system, in most provinces, pharmacies have limited incentive to pass on these cost savings to those who pay for them — public and private plans, people paying out of pocket, and taxpayers.

"Canadians deserve to reap the benefits of the competition we observed," said Sheridan Scott, Commissioner of Competition. "This study helps to explain why they are not, and points to possible solutions."

Pharmaceuticals are the second-largest and fastest-growing source of health care costs in Canada. Generic drugs play an important part in helping to control prescription drug costs and provide competition for brand-name products when their patent protection ends. Despite this, several studies have found the price of prescription generics to be high in Canada compared to other countries.

Shifting the focus of generic competition from the pharmacies to public and private insurers and consumers could provide Canadians with large savings. In its study, the Bureau says measures for accomplishing this goal may include:

• Providing manufacturers with incentives to compete to be listed on provincial and private plan lists of drugs that will be reimbursed;
• Having plan providers decide which versions of generic drugs will be dispensed at the pharmacy based on a bidding process by manufacturers;
• More in-depth monitoring of the net price paid by pharmacies for generic drugs to ensure the price paid by the plan reflects the rebates given to pharmacies; and
• An increased role for private plans in obtaining lower prices for their customers.

The Competition Bureau will continue its work in the generic drug sector by examining possible options for obtaining the benefits from competition and the impediments to their adoption.

For a summary of the Bureau's key findings, please refer to the Generic Drug Sector Study Backgrounder.

The Competition Bureau is an independent law enforcement agency. We contribute to the prosperity of Canadians by protecting and promoting competitive markets and enabling informed consumer choice.

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Backgrounder

The development and supply of pharmaceuticals are important parts of health care delivery in Canada. In 2006, total retail and hospital expenditures on pharmaceuticals at invoice cost were $17.8 billion. Generic pharmaceuticals account for a large and growing portion of pharmaceuticals dispensed in Canada. In 2005, 43 per cent of all drugs dispensed through retail pharmacies were generic and total generic drug spending in 2006 was $3.2 billion.

On September 28, 2006, the Bureau announced that it would be undertaking a study of the generic drug sector as part of its mandate as competition advocate. The Bureau initiated this project in response to several studies that found the price of prescription generics to be high in Canada compared to other countries.

Canada's health system is an area where competition is often seen as playing a limited role. The reality is that competitive markets are responsible for delivering many of the products and services on which our health system relies. Given their importance to the welfare of Canadians, health-related markets have been a key enforcement and advocacy priority for the Bureau for several years.

In conducting the study, the Bureau relied on publicly available information, data purchased from data providers and information obtained from sector participants in interviews and contacts conducted over the January to April 2007 period.

The Bureau's key findings are:

• Generic manufacturing has become more competitive over the past 15 years. It appears that strong competition exists in the supply of many generic drugs in Canada.
• In most provinces, an important way in which manufacturers compete to have their product stocked by pharmacies is to offer them rebates off invoice prices. Rebates provide an incentive for pharmacies to select a particular manufacturer's product. Public sources and information provided by parties interviewed for this study indicate that these are on average 40 per cent of the price the pharmacy is invoiced. Rebates are currently prohibited in two provinces, Ontario and Quebec. However, legislation adopted in Ontario in 2006, and under consideration in Quebec, allows generic drug manufacturers to compete by paying for pharmacies' professional services such as patient counselling.
• Rebates and allowances are not typically reflected in amounts paid for drugs by public or private drug plans, or out-of-pocket by consumers. Until recently, prices paid for generic drugs across the country tended to reflect the maximum generic drug prices allowed under Ontario's drug plan. This changed in 2006 when Ontario reduced the maximum it would pay for generic drugs to 50 per cent of the brand-name product price. These lower prices are not paid by private drug plans in Ontario, which represent over half of the market in that province, or drug plans in other provinces, although they are due to be adopted in Quebec in 2008.
• Plans incorporate various policies to reduce their generic drug costs. However, they provide limited incentive for manufacturers to compete by offering competitive prices to end payors.

The Competition Bureau will be continuing its work in the generic drug sector by examining possible options for obtaining the benefits from competition and the impediments to their adoption. Implementing new approaches would require important changes to the system for generic drugs that would have to be carefully considered.

Private plans also do not appear to be obtaining competitive prices from manufacturers. An increased role in obtaining lower prices for their customers could provide significant savings to businesses and individuals in Canada. The Bureau will be doing further work in this area to determine why this is not happening.