Monday, August 11, 2008

Ontario Formulary Moves Towards Tendering

Here's a topic that occupied a bit of my time earlier this month. (Then, I went on holiday, and left my colleagues holding the bag ;) ) Its a bit out of date and a bit rough, but still gets the main points across...


The Ontario government recently announced a new tendering program for the listing of generic pharmaceutical products as benefits on the Ontario Drug Benefit (“ODB”) formulary. This program promises to radically change the way multi-source drugs are sold in the $7.6 billion Ontario pharmaceutical market.

A move towards tendering on the ODB formulary is a critical public policy issue, connecting the cost of pharmaceuticals to the public, the cost of administering the ODB programs to the Ontario government, Federal patent and pharmaceutical policy, revenue streams for pharmacies, and the future structure and health of the generic pharmaceutical industry. The resolution of these questions will have significant long-term results, and will also reflect the Ontario government’s ability to generate and implement good public policy. This presents strong challenges – both immediate and long term – for the generic pharmaceutical industry, and may also have a significant long-term impact on the brand-name industry in Canada.

The Ontario Drug Market

To market pharmaceuticals in Canada, a company must first obtain a Notice of Compliance (NOC) from the Canadian federal government. In Ontario, the next step for generic drugs is to be listed as interchangeable and a benefit on the provincial drug plan formulary. Interchangeability, which controls which drugs may be interchangeably dispensed by a pharmacist when filling a prescription, is not affected by the new tendering program.

A listing as a benefit means that the Ontario government will pay for the product for patients who are covered by the ODB scheme, generally based on age and financial status. A key issue is the amount the Ontario government is willing to pay for a given product, the “list price”, which is negotiated up-front. Generally, as long as a generic product was able to ensure supply and meet Ontario’s cost expectations (generally 50% of the reference “brand” price), it would be listed on the formulary.

A listing as a benefit on the formulary is the key to both the public (covered by the ODB scheme) and private markets in Ontario. Most pharmacies stock only two versions of a drug, the brand name and one generic, to minimize the pharmacy’s operating costs. Generally, a manufacturer’s product that is not listed as a benefit is not likely to be purchased by pharmacies, who instead will purchase a product that can be sold to their ODB customers as well as their non-ODB customers. Once listed as a benefit, generic pharmaceutical manufacturers compete for pharmacy shelf-space by offering the pharmacies professional allowances - after-sale rebates that are limited to 20% for ODB sales and unlimited as a percentage of sales in the private sector market.

There is a two-tier pricing system in Ontario under which private sector payers pay more for generic and brand-name pharmaceuticals than the price listed on the ODB formulary. In the case of brand-name drugs, the ODB Executive Officer may negotiate secret rebates from brand-name drug makers for patented products. The tendering scheme extends this to the generic drug sector.

The New Tendering Scheme

Under the new scheme, companies will bid for listing as a benefit on the ODB formulary. The two best bids will be listed as benefits for a two-year term (with a possible one-year extension), while all other companies will be de-listed from the ODB formulary. Companies will compete not on list price (which will remain at 50% of the brand price for all bidding companies), but primarily on a confidential volume-based discount to be rebated to the Ontario government, along with other objective and subjective factors. The amount of the secret rebates will not be disclosed by the government, and any disclosure by the winning companies will result in the forfeiture of the listing. This is expected to widen the spread between the prices paid by the government and private payers for multi-source products.

As a pilot project, four drugs - gabapentin, enalapril, ranitidine, and metformin - will be put up for tender on August 1.

Effect on Generic Industry

This scheme, if implemented widely, will disrupt the business models for firms in the generic pharmaceutical industry that sell in the Ontario market, which represents 39 percent of the Canadian market. Instead of predictable access to the formulary, companies will be engaged in a feast or famine competition for the market. In addition, it may be anticipated that even for the winning companies, profit margins on products will be small as generic companies are squeezed between rebate demands by both the Ontario government (to get on the formulary) and pharmacies (to be stocked). Some Ontario-focused generic companies (Ontario is home to one of the largest concentrations of generic drug manufacturers) may be driven out of business, or less dramatically the industry may consolidate through mergers or acquisitions into larger companies that can better manage the uncertainty associated with multiple tendering competitions.

Effect on Pharmaceutical Patents and Brand Name Companies

The immediate effect of this change on brand name companies will be small. Brand name companies are unlikely to compete directly in the tendering process, as a win would reduce the reference “brand” price, the maximum price at which the brand name is allowed to sell in Ontario, to the “list” price specified in their bid, a maximum of 50% of the original brand price. Brand-name drug companies are particularly sensitive to list price reductions as they can put pressure on their prices in other markets, such as the large and lucrative U.S. market. However, brand companies may compete via authorized generics, a company licensed by the brand company to produce the product under whatever patent protection the brand company may possess. Brand companies may also compete in situations where they are already openly selling their products for lower prices in other jurisdictions, as may happen in Ontario with ranitidine.

The more important effect of the tendering scheme from the point of view of brand name companies may be to extend and strengthen their effective Canadian patent rights. The primary mechanism in Canada to genericize brand name pharmaceuticals and lower their cost is the federal Patented Medicines (Notice of Compliance) or “PM(NOC)” regulations. These regulations, which are similar to the Hatch-Waxman system in the United States, prevent the federal Ministry of Health from issuing NOCs to generic companies as long as there are relevant patents listed on the Patent Register. Listed patents may include patents that expire many years after the expiry of the initial drug patent. However, the regulations also allow generic companies to challenge the patents listed on the Patent Register as either invalid or non-infringed by the generic’s planned production and sales, and thus obtain an early NOC. As a result, Canada is an active site for pharmaceutical patent litigation.

Ontario is 39% of the total Canadian market. If tendering is widely used in Ontario, including for products that are newly genericized, the incentive for generic companies to invest in costly patent challenges under the PM(NOC) regulations will be correspondingly reduced. If generic challenges to brand name pharmaceutical patents decline, brand-name companies may well realize many extra years of monopoly-level sales and profits.

Challenges for the Generic Industry and Ontario

The government announcement has generated particular opposition from pharmacists and the generic pharmaceutical industry. The generic industry must confront the longer-term policy drivers that underpin the Ontario government’s actions. Faced with rising health-care costs, the Ontario government is turning to tendering as a means to lower its spending on generic drugs through the ODB program – and tendering may well lower government spending in the short run. To be persuasive, the industry must present alternatives that address the need for lower spending on health care and longer-term considerations. One approach is to emphasize the long-term benefits of a healthy generic industry with active pharmaceutical patent litigation to Ontario government spending, through the accelerated genericization of pharmaceutical products and through the competition flowing from a large number of generic competitors. This may be persuasive, given that the ODB spent $2.6 billion in 2007 on brand-name pharmaceuticals versus $785 million on generic products, although generic products represented more than half of the actual claims. However, the Ontario government is likely to have significant political difficulties with the size of rebates flowing to pharmacists.

As a final complication, this policy announcement and implementation is proceeding at an unusual pace, with the tendering policy first announced to the industry on July 4, 2008 with no previous consultation, written comments to be received by July 11, and the first call for bids to have taken place on July 25. The only written description of the program provided to stakeholders is a power point presentation and a question and answer document. Furthermore, it appears that the policy has taken various Ontario cabinet ministers by surprise. After industry submissions and meetings with government officials, the date of the first call for bids was pushed back by a week to August 1, 2008. However, it is unclear whether the previously announced schedule – a closing date of August 22 and a decision to be announced on September 12 - will be likewise delayed.

This is perhaps an inevitable result of the design of the relevant institutions for developing drug policy in Ontario, which grants significant power and discretion to one official (the “Executive Officer”), who perceives their mandate as solely to lower the immediate costs of administering the ODB program to the exclusion of any other considerations, including increased costs because of later generic market entry and with little formal oversight by other bureaucrats or elected officials. A combination of power with an exclusionary focus on only one of many public interest objectives is likely to generate poor public policy.

It is also unclear, if the pilot is successful, how widely the tendering system may be used. It has been suggested that the system may be widely implemented; however, in the wake of complaints from industry it has also been suggested by government sources that tendering may be limited to only about a dozen products. In any case, even a limited tendering scheme in the present may turn into a widespread tendering scheme in the future.

Tendering on the ODB formulary is a critical public policy issue. It directly affects the cost of administering the ODB programs to the Ontario government, Federal patent and pharmaceutical policy, revenue streams for pharmacies, the cost of pharmaceuticals to the public, and the future structure and health of the generic drug industry. The resolution of these questions will have very significant long-term results.

Alexander Stack

Gilbert’s LLP

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