The Supreme Court of Canada has upheld Ontario's right to bar pharmacy chains like Shoppers Drug Mart and Rexall/Pharma Plus from selling their own house-brand versions of popular generic drugs, dismissing an appeal filed by the companies earlier this year.

The question before the court was whether the province could prevent Shoppers and the Katz Group, which owns the Rexall/Pharma ​Plus chain, and other drug stores from selling their own generic drugs simply by introducing new regulations to that effect under current laws, which it did in 2010, or if it had to pass new laws.

If pharmacies were permitted to create their own affiliated manufacturers whom they controlled, they would be directly involved in setting the [province-covered drug] prices and have strong incentives to keep those prices high. - Supreme Court of Canada

The court ruled Friday that Ontario didn't overstep its powers by amending the laws governing how prescription drugs are sold in the province to make the changes it wanted and that the changes were consistent with the intended purpose of those laws — namely, reducing drug costs.

"The 2010 private-label regulations contribute to the legislative pursuit of transparent drug pricing," the court said in its ruling.

"They fit into this strategy by ensuring that pharmacies make money exclusively from providing professional health care services, instead of sharing in the revenues of drug manufacturers by setting up their own private label subsidiaries.

"If pharmacies were permitted to create their own affiliated manufacturers whom they controlled, they would be directly involved in setting the [province-covered drug] prices and have strong incentives to keep those prices high."

The unanimous decision is one that will be closely studied by other provinces, such as British Columbia, Alberta and Quebec, that have also been revisiting their provincial drug pricing plans in recent years in the face of prices they say are increasingly out of step with what people in jurisdictions outside Canada are paying for drugs.

So far, Ontario is the only province to ban the sale of private-label generic drugs.

Ontarians paying more for drugs

Ontario is one of the largest purchasers of prescription drugs in the world and spends about $4.3 billion a year on its provincial prescription drug plan. According to the Ministry of Health and Long-Term Care, compared to some U.S. states, Ontario pays as much as five times more for some of the most popular generic drugs for conditions such as diabetes and high blood pressure.

Shoppers Drug Mart and the Katz Group, which owns the Rexall and Pharma Plus pharmacy chain, appealed the ban on private-label generic drugs but lost. (Graeme Roy/Canadian Press)

The discrepancies are even larger when compared with New Zealand, where the 2007 price of the blood pressure medication enalapril was less than one-twentieth of what it was in Ontario, according to the ministry's comparison.

In recent years, Ontario has been trying to reduce those drug costs.

In 2010, the Ontario government amended the Drug Interchangeability and Dispensing Fee Act and the Ontario Drug Benefit Act, which govern how prescription drugs are sold and how the province reimburses pharmacies for the cost of those drugs.

Under the changes, it prohibited pharmacies from having their own private-label generic drugs included in the province's Formulary, which lists drugs covered under the Ontario Drug Benefit Program.

"Private-label products" could also not be declared "interchangeable" with brand-name drugs as generic drugs are. It's that interchangeability that obliges pharmacists to dispense generic drugs unless the prescribing physician specifies otherwise or the patient agrees to pay.

These restrictions essentially banned the sale of private-label drugs in the privately and publicly insured prescription drug markets in Ontario.

Shoppers Drug Mart 'disappointed'

Large chains like Shoppers and Rexall wanted to have the option of selling their own generic drugs in order to save money by not having to buy them from an arm's-length third party. Shoppers created a subsidiary for that purpose in 2009 called Sanis Health Inc. It manufactures generic prescription drugs that are sold under the Sanis label at Shoppers pharmacies — although it outsources the actual making of those drugs to other pharmaceutical companies.

According to the court document outlining Shoppers Drug Mart's appeal, Sanis currently sells 82 drugs in every province except Ontario, as well as in the Yukon and Northwest Territories.

Ontario Premier Kathleen Wynne has been calling on the federal government to play a role in the Ring of Fire. Wynne wrote to Prime Minister Stephen Harper on Nov. 8 asking him to share the costs of developing the mineral-rich region in northern Ontario. (Mark Blinch/Canadian Press)

The pharmacy chains argued that selling generic drugs through their own manufacturers under house brands would allow them to offer the drugs at lower prices, but skeptics said any savings from such a process would likely not be passed on to consumers but be used to recover revenue that pharmacies have lost in recent years.

Ontario feared that allowing private-label drugs would reduce competition and drive up prices of generic drugs for the province, and in 2010, it rejected Sanis's application to have several generic drugs listed in the Formulary and to have them designated as "interchangeable."

On Friday, the governing Liberals said the court's decision would ensure Ontarians pay the lowest possible prices for generic drugs.

"We're very pleased that our program and our initiative has been supported, because there's no reason that people in Ontario should pay more for the same drugs than people in other parts of the country," Premier Kathleen Wynne said during a visit to Leamington, Ont.​

Shoppers issued a short statement saying that it respects the decision but is "disappointed with the outcome."

Changes consistent with mandate

In February 2011, the Ontario Superior Court of Justice ruled that the province went too far in barring the pharmacy chains from selling their own generic drugs, but later that year, an appeal court reversed that decision, which is what forced Shoppers and Katz to appeal to the highest court.

On Friday, the Supreme Court ruled that the province's intervention to restrict the kind of generic drugs that pharmacies could sell did not constitute an outright ban.

"Private-label regulations do not prohibit manufacturers from selling generic drugs in Ontario's markets; they restrict market access only if a particular corporate structure is used," the court said. "That cannot be characterized as a total or near-total ban on selling generic drugs in Ontario."

It stressed, however, that the court's role was not to assess whether the government's 2010 regulations were "necessary, wise or effective" but whether they were consistent with the purpose of the original legislation, which, the court said, was to control the cost of prescription drugs by promoting transparent pricing and eliminating price inflation along the drug supply chain.

The limits on private-label drug sales the government introduced were consistent with those aims, it said.

Other revenue streams

The court battle over pharmacies' right to sell their own generic drugs is a symptom of some of the cost-cutting measures the province has undertaken in recent years.

In 2006, Ontario banned the so-called rebates manufacturers of generic drugs would pay pharmacies to give them incentives to carry their products. Some have estimated these payments added up to as much as $750 million a year.

It was then that chains such as Shoppers started to look for ways to make up that lost revenue and set up subsidiaries such as Sanis to manufacture and sell their own private-label drugs.

Pharmacies in Ontario have seen some of their revenue streams dry up in recent years as the province has moved to phase out fees drug manufacturers used to pay them to carry their generic drugs. (Mark Blinch/Reuters)

In 2010, Ontario also announced its intention to phase out professional allowances, which generic drug manufacturers paid to pharmacies in lieu of the cancelled rebates and which covered patient services such as blood pressure and flu clinics and home drug deliveries to seniors. The eradication of these, to be completed by 2014, would cost pharmacies hundreds of millions of dollars in revenue a year and force them to cut back many of these services, the drug store chains argued.

But Ontario said the allowances were subject to abuse and often went toward fringe benefits, bonuses and overhead costs and that generic drug manufacturers incorporated the cost of the allowances into their prices.

In 2012, the province also reduced how much it will pay for the 10 top-selling generic drugs from 25 per cent of the price of the brand-name equivalent to 20 per cent. It said the move would save about $55 million a year and allow the province to increase spending in other areas such as social assistance and disability payments.

Peter Sklar, retail analyst at BMO Nesbitt Burns, estimated in the Globe and Mail at the time that the move would cut 1.8 per cent from the roughly $10 drug stores get per prescription covered by the public drug plan.

Alberta recently reduced what it pays for generic drugs from 35 per cent to 18 per cent of the price of the brand-name equivalent.

Health Minister Deb Matthews said Ontario's changes to generic drug pricing and fees "have delivered better value for our precious health-care dollars and are saving Ontarians $500 million a year."

"We continue to re-invest these savings to give our patients greater access to new drugs," she said in a statement Friday. "Today's decision upholds this progress and is a victory for Ontarians."