08/30/2012 10:25 EDT | Updated 10/30/2012 05:12 EDT

Supreme Court of Canada to hear appeal of Ontario generic drug rules

OTTAWA - A long-escalating battle between the Ontario government and two of Canada's major drug store chains will now be fought before the country's top court.

The Supreme Court of Canada issued a ruling on Thursday announcing it would hear a pair of appeals from Shoppers Drug Mart and Rexall owner the Katz Group of Companies. They are fighting to regain the right to sell generic versions of name-brand drugs in the province.

In keeping with standard practice, The Supreme Court justices did not offer reasons for agreeing to hear the cases.

The decision marks the latest turn in a long and complex battle over the fate of lower-priced private label versions of generic drugs.

The legal rangling erupted after the province enacted regulations in 2010 that stopped pharmacies from selling their own store-brand versions in place of popular name-brand drugs.

It also outlawed professional allowances that generic drug companies paid to pharmacies in exchange for stocking their products, which pharmacies say cost them $750 million a year.

Shoppers Drug Mart (TSX:SC) and Katz launched legal challenges against the government's decisions and won their first victory in February 2011, when a court ruled the province had no authority to ban pharmacies from selling their private label drugs.

Less than a year later, the Ontario Court of Appeal overturned that decision and ruled in favour of the government.

Shoppers Drug Mart issued a brief statement on Thursday praising the Supreme Court's willingness to hear the appeal.

"The company respects the decision of the Supreme Court of Canada and is pleased with the outcome," it said.

Katz, which owns and operates the Rexall and PharmaPlus chains, did not immediately respond to a request for comment.

Ontario Health minister Deb Matthews said the province would continue to fight for the best interests of the province's patients.

"We continue to believe that private label arrangements do not benefit taxpayers or patients and they are not consistent with our drug reforms," she said in a statement.

The ongoing court battles reflect the cash-strapped Ontario government's efforts to cut health-care costs as it struggles to balance its books. A $16-billion deficit has forced the province to review everything from soaring drug plan costs to public sector wages and financial transfers to restrain spending growth.

The initial court ruling in February 2011 said the province went too far with a regulation that barred the sale of private-label generic drugs.

The rule had prevented pharmacies from selling their own lower-priced versions in place of popular name-brand drugs.

However, the appeal judges ruled last December that the lower court's analysis was too narrow, adding the government regulations were not too harsh.

"Neither Shoppers nor Katz is precluded from engaging in the purchase or sale of drugs in Ontario as long as they do so in accordance with the legislative and regulatory scheme," said the ruling.

"This is regulation; it is not a prohibition."

The court also said it agreed that the province could reasonably conclude private label generics would reduce competitiveness and drive up prices.

Private label, or store brand, generic drugs are identical in formula to other generic and name-brand drugs that are made and sold by big pharmaceutical companies.

Big pharmacies contend that private labelling allows them to cut costs by using their own version of the drugs rather than those bought from a manufacturer. Those savings, they argue, could then be used to close the revenue gap caused when the government eliminated professional allowance fees for pharmacists.

The government had previously argued that cutting those fees was the best way to lower the price of generic drugs, which would ultimately lighten the load on the province's health care budget.