Effects of 'Authorized Generics' on Canadian Drug Prices

• Author: Paul Grootendorst
• Pages: 255-310

255

chapter 3

Ef‌fects of “Authorized Generics” on

Canadian Drug Prices

Paul Grootendorst2

A. INTRODUCTION

is paper examines how the use of “authorized generics” (AGs) inf‌lu-

ences Canadian prescription drug prices. An AG is “the actual brand

name drug product, manufactured by the brand company, but sold

as a generic by a licensee or subsidiar y of the brand, competing with

independent generics.” AGs are to be distinguished from independent

generics (IGs), which operate independently from the brand f‌irm.

eoretically, AGs have of‌fsetting ef‌fects on drug prices. On the

one hand, AGs compete again st IGs and, as I discuss below, increas-

es in the number of generic competitors should lower prices. On the

 Financial suppor t from Industry Canada a nd the Competition Bureau is grate-

fully ack nowledged. M.S. Shim, Yuqian Lu, and Ivana Todorovic provided

capable research assi stance. e author thanks A idan Hollis and particip ants

at the symposium for helpfu l comments on an earlier draf t.

 Associate Professor, Lesl ie Dan Faculty of Pharmacy, Universit y of Toronto.

 Authorized generics are s ometimes referred to as “pseudo-generics.”

 A. Hollis and B. A. Liang, “Assessing the Ef‌fect s of Authorized Generics on

Consumer Prices” () : J. of Biolaw & Bus. .

 256

other hand, as Hollis and Kong and Selden have noted, the threat

of AG entr y into a therapeutic market might deter entry by IGs and

this would lessen competition. Moreover, brand f‌irms might increase

prices of their brand drugs to increase demand for their AG if there

are no IGs available.

Why might the threat of AG entry deter entry by an IG? According

to Hollis, the reason is that the AG, should it be the f‌irst generic to en-

ter a market, typically captures a signif‌icant and durable market share.

is reduces the demand for the IG and may make entry into margin-

ally prof‌itable therapeutic ma rkets unprof‌itable. One would therefore

expect that the threat of AG entry might deter IG entry in markets

with only modest revenue potential.

B. GENERIC DRUG COMPETITION IN THE CANADIAN DRUG

MARKET

How does generic drug competition lower drug prices? In a conven-

tional market, increases in the number of suppliers reduce the average

price paid by consumers — suppliers lower prices in an attempt to gain

market share. In the limiting case, k nown as a perfectly competitive

market (one with very many buyers and sellers of a homogenous prod-

uct), price will decline to the marginal production cost. e Canadian

market for generic prescription d rugs is dif‌ferent. First, two generic

companies, Apotex and Novopharm, control over half of the market.

Second, although there are many consumers in this market, includ-

ing private insura nce plans and cash-paying customers, the market is

dominated by several large provincial government d rug plans, nota-

bly the plans operating in Ontario (the Ontario Drug Benef‌it Program

 A. Hollis, “e Anti-competitive Ef‌fects of Brand-controlled ‘Pseudo-generics’ in

the Canadia n Pharmaceutical Market” () : Can. Pub. Pol’y .

 Y. Kong and J. Seldon, “Pseudo-generic Products and Bar riers to Entry in Phar-

maceutical Market s” ()  Review of I ndustrial Organiz ation .

 A. Hollis, “e Imp ortance of Being First: Evidence f rom Canadian Generic

Pharmaceutical s” ()  Health E conomics .

 B. Skinner, “Generic Drugopoly: W hy Non-patented Prescription Drugs Cost

More in Canada tha n in the United States and Europe,” Fraser In stitute Public

Policy Sources, No.  (Fraser I nstitute, ) online: ww w.fraserinstitute.c a/

admin/books/f‌iles/GenericDrugopoly.pdf.

  “ ”     257

or ODB) and Quebec (RA MQ) that cover the drug costs incurred

by seniors, those with high drug costs relative to income, and other

groups. e ODB is the sing le largest drug plan i n Canada; it dictates

the amount that it is willing to pay for generic drugs, and these prices

become the de facto prices charged to other customers.

e amount that ODB is wi lling to pay for generic drugs is a pro-

portion of brand drug prices. During the period from May  to

September , the ODB invoked the “/” regulations. e /

regulations stipulated that the f‌irst generic entrant’s price could not

exceed  percent of the incumbent branded d rug price. When the

second generic entered the market, the maximum reimbursement

price dropped to . percent of the branded drug price (i.e.,  per-

cent of the f‌irst generic entrant’s price:  percent of  percent = .

percent). During the period from November  to September ,

the ODB limited the f‌irst generic entrant’s price to  percent of the

incumbent branded drug price. W hen the second generic entered the

market, the maximum reimbursement price dropped to  percent of

the bra nded drug price (i.e.,  percent of the f‌i rst generic entrant’s

price:  percent of  percent =  percent). Since October , the

ODB reimbursement of generic drugs is limited to  percent of the

brand drug price. e ODB, however, will consider increasing the re-

imbursement of the f‌irst generic entrant by up to  percent, on a case-

by-case basis.

Anis, Guh, and Woolcott present evidence that generic prices in

Ontario are set close to the ODB maximum generic drug reimburse-

ment prices. e prices charged for generic drugs in other provinces

tend to match ODB prices. Generic f‌irms that attempted to charge

more would soon be undercut by wholesalers who sell drugs at ODB

prices.

How then do generic f‌irms compete for ma rket share? Once they

become available for sale, generic drugs rapidly replace branded drugs,

owing to the reimbursement policies of almost all drug plans, public

and private a like. Most pla ns limit reimbursement of multi-sourced

drugs (i.e., drugs for which there are both brand a nd generic forms

 A. Anis, D.P. Guh, and J. Woolcott, “Loweri ng Generic Drug Prices: Less Regu-

lation Equals More Compet ition” ()  Medica l Care  [Anis et al.].