In a setback for Canadian drug store chains, the Ontario government has won an appeal to reinstate a ban on private-label generic drugs in the province.

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SDM, Katz lose in court on private-label generics

December 27th, 2011

TORONTO – In a setback for Canadian drug store chains, the Ontario government has won an appeal to reinstate a ban on private-label generic drugs in the province.

The Court of Appeal for Ontario on Friday ruled that a lower court decision overturning the ban, part of provincial pharmacy reimbursement reform in 2010, went too far and that Ontario was within its legislative and regulatory authority to prohibit drug stores from offering private-label generics.

Shoppers Drug Mart Corp. and Katz Group Canada Inc., operator of the Rexall/Pharma Plus chains, had challenged the ban, and on Feb. 3 it was nullified by the Ontario Divisional Court. The Dec. 23 appeals court ruling, however, upheld the province's appeal to restore the ban.

"The company is disappointed that the decision of the Ontario Divisional Court has been overturned by the appeal and is in the process of reviewing the judgment and considering its options," Shoppers Drug Mart said in a statement on Friday.

With the Dec. 23 ruling, chains won't be able to sell private-label generics — generic prescription medications marketed under a pharmacy retailer trade name — in Canada's most populous province. Shoppers Drug Mart rolled out such products in most provinces last year through its Sanis Health subsidiary, and Katz has been planning to introduce private-label generics as well.

Private-label generics have been seen as a way for Canadian drug chains to regain some of the profits lost through provincial health care reforms enacted in 2010, beginning in Ontario. Under the reform, Ontario halved pharmacy reimbursement for generic medications and eliminated professional allowances, or rebates, paid by generic drug makers to pharmacies.

Through the reform, Ontario had sought to lower the cost of generic drugs and deemed the rebates as a key obstacle, contending that the savings aren't passed on to pharmacy customers. The province also saw a potential conflict of interest with private-label generics, arguing that such products open the possibility of chains preferring to dispense their own brands over other generics and, in turn, interfere with its ability to mitigate generic drug costs.

Independent pharmacies also consider private-label generics as a competitive threat, contending that they lack the resources to offer such products and would be at a big disadvantage to chain drug stores.

"In our view, Ontario could reasonably conclude that private-label generics would reduce the competitiveness of the generic drug market, making future price reductions more difficult," the Ontario Court of Appeals stated in its ruling on Friday. "In the same way that rebates shape manufacturers' and pharmacies' incentives in ways that indirectly result in higher prices, private-label generics could also influence the market in various ways. Although the actual effect of private labels on the market is hard to predict, it is reasonable to conclude that the existence of private-label generics could reduce competition in ways that would adversely affect long-term prices."