Wednesday, December 3, 2008

Competition Bureau Report on the Generic Drug Industry

Grade: Incomplete ;)

As noted below, last Thursday (November 25), the Competition Bureau came out with “Benefiting from Generic Drug Competition in Canada: The Way Forward”. This was the second report in an ongoing advocacy effort by the Competition Bureau to encourage governments to adopt policies that will increase competition in the generic drug industry (see, which discusses the Bureau’s health industry efforts).

Inevitably, this sort of report always contains lots of grounds for criticism, and I have little doubt that criticisms will appear in print (and, of course, behind the scenes) in the near future. But when I read this report, one big comment leaps to mind. (and I think its a whale*)

This report ignores the role of generic drug companies in making drugs “generic” in the first place. As a result, it risks recommending measures that might decrease the cost of generic drugs but increase the cost of pharmaceuticals to Canadians overall. It also misses the opportunity to investigate which measures might best decrease the cost of generic drugs to consumers while maintaining the pipeline of drugs moving to a generic, multisource market.

“Brand name” drugs are drugs protected by patents held by the producing company. As with patents in all industries, some patents issued in the pharmaceutical industry are invalid (i.e. never should have been issued in the first place) or issued with claims that are too broad. In most industries, a company that sees a competitor with patents that it thinks are invalid or too broad may choose to simply launch its product and see if the competitor wishes to risk its (weak?) patent position in a lawsuit.

The pharmaceutical industry is different. Under the PM (NOC)** regulations, a generic company that wants to bring a product to the marketplace that is nominally protected by a patent must notify the patent owning brand name company. Under the regulations, the brand company can then begin a proceeding for a non-binding determination of whether the generic company’s products would infringe the patent – and obtain an automatic 24 month injunction forbidding Health Canada from giving permission to the generic company to market a generic version of the drug. Meanwhile, if the generic loses the non-binding, summary proceeding (a proceeding with only limited evidence and argument), Health Canada is permanently forbidden to allow the generic product on the market until the final expiry of the patent. On the other hand, if the brand name company loses, it still can get a second kick at the can by suing the generic for patent infringement.

In other words, pharmaceutical patents by government regulation pose greater barriers to entry than patents in other industries. Generic companies must surmount these hurdles before bringing their less expensive medicines to the public.

And this costs money.

The PM(NOC) system rests, as a matter of policy, on generic drug companies with the capability and interest in supporting patent challenges. This may be looked at in two ways: are the Canadian markets for generic drugs profitable enough to justify a generic company spending money to challenge patents via the PM(NOC) process?; and do the generic drug companies interested in the Canadian market have enough reliable profits to fund the risky endeavour of challenging questionable patents?

In other words, reducing the profitability of generic drug companies that supply the Canadian market – for example, in the pursuit of lower prices for the paying public – comes at a cost of reducing challenges to pharmaceutical patents in the future. Given the high expense of pharmaceutical drugs, and a typical drop of some 80% in costs for a medicine after it becomes generic, the costs to consumers of delaying the move of even a few drugs to a generic status via patent challenges – i.e. maintaining higher prices for presently-patented drugs - could easily outweigh the benefits of lower generic drug prices. For example, one year of Lipitor freed of patent protection and supplied at generic rather than brand name prices would be word hundreds of millions of dollars alone. Recall that generic drugs are already off-patent, and thus relatively inexpensive.

This is a key trade-off in health policy in respect of pharmaceutical pricing. The generic and patented drug markets are directly connected in Canada, and their effects on consumer welfare cannot be coherently analyzed in isolation.

However, there is no mention of this trade-off in the latest Competition Bureau report – and scarce mention in the previous report in 2007. The latest report seems to assume that drugs become generic following patent expiry, and simply goes on to discuss how competition may be improved in the already-generic drug market.

This lack of attention is particularly worrisome, since the Competition Bureau report finds that competition among generic drug companies is already fierce – suggesting that policy changes that further squeeze the profitability of generic drug companies may have a meaningful and negative impact on these companies’ ability to fund future patent challenges.

Undoubtedly, this is a difficult trade-off, and really needs to be addressed through empirical investigation. Of course, this is easier said than done – for example, the European Competition Commission report on the pharmaceutical industry in Europe*** is admirably empirical, but obviously a huge undertaking (the results are not directly applicable in Canada, since Europe does not have a PM(NOC)-style linkage system).

However, the Competition Bureau is presumably motivated by consumer welfare – and when making policy analyses and recommendations in an industry, it should at least raise the more obvious routes through which the industry being studied affects consumer welfare, even if only to clearly state that its recommendations are limited by a lack of empirical knowledge on a particular point.

The absence of discussion on this point in the Competition Bureau’s report is unfortunate, as there is no necessary conflict between the goals of lowering generic drug prices for consumers and maintaining the incentives and ability of generic drug makers to challenge pharmaceutical patents. There are many players involved in the generic drug market other than generic drug manufacturers, and the Competition Bureau report itself has several suggestions to lower the cost of generic drugs to the public that would not meaningfully affect the profitability of generic drug companies.

Even if one considers measures aimed specifically at achieving lower drug prices from the generic drug companies, such measures could be designed to maintain an incentive for generic drug companies to challenge patents. For example, one could temporarily allow the first generic to successfully challenge a patent to temporarily be the only generic in the market – say, for six months, as is done under equivalent legislation in the United States. Similarly, provinces could implement progressively more aggressive pricing strategies over time starting from a successful PM(NOC) challenge, thus maintaining some reward for challenging patents.

Personally, I hope to see issues like this highlighted in the next Competition Bureau study.

* In keeping with my recent focus on harpooning whales, not minnows ;)
**Patented Medicines (Notice of Compliance)

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