11/22/2013 10:49 EST | Updated 01/25/2014 04:01 EST

Ontario can limit pharmacy-brand drugs, Supreme Court rules

The Supreme Court of Canada has dismissed an appeal by Shoppers Drug Mart and the Katz Group, owner of the Rexall and Pharma ​lus pharmacy chain, which had argued that the province of Ontario couldn't stop them from selling their own cheaper versions of popular generic drugs without passing a law to that effect.

The question before the court was whether the province could bar the drug store chains from selling their own generic drugs simply by introducing regulations to that effect, which it did in 2010.

The court ruled Friday that Ontario didn't overstep by amending regulations to make the changes it wanted.

"Far from being 'discriminatory,' the distinctions they draw flow directly from the statutory purpose and the scope of the mandate," the court said in its ruling.

Part of cost-cutting

Ontario is one of the largest purchasers of prescription drugs in the world and spends about $3.4 billion a year on generic drugs.

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

In 2010, the Ontario government amended the regulations governing the sale of prescription drugs in the province to prohibit pharmacies from selling their own private-label generic drugs.

It feared the practice would reduce competition and drive up prices of generic drugs for the province. 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 has a subsidiary, Sanis Health Inc., that manufactures generic prescription drugs intended for sale mainly at Shoppers pharmacies, and it sells these private-label drugs in other provinces.

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

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 like Sanis to manufacture and sell their own private-label drugs.

In September 2012, the province also reduced how much it will pay for the 10 top-selling generic drugs from 25 per cent 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 at the time that the move would cut 1.8 per cent – or 18 cents – from the roughly $10 drug stores get per prescription covered by the public drug plan.

Other provinces that are also revisiting their drug pricing plans have been watching the court case closely.