Ontario’s Regulations Banning “Private Label” Drug Business Model In Pharmacies Upheld By Supreme Court of Canada

In Katz Group Canada Inc. v Ontario (Minister of Health and Long-Term Care), 2013 SCC 64, the Supreme Court of Canada (SCC) upheld the validity of regulations under Ontario’s Drug Interchangeability and Dispensing Fee Act (DIDFA) and Ontario Drug Benefit Act (ODBA) (together, the Regulations) that prevent pharmacies in the province from controlling a generic drug manufacturer if the manufacturer does not directly fabricate drugs (specifically, DIDFA Reg. s 9 and ODBA Reg. s 12.0.2). The challenge to the Regulations was brought by three giant pharmacy chains: Shoppers Drug Mart, Pharma Plus and Rexall. The result is that a province can effectively ban certain business models in the pharmaceutical realm via regulation, if the regulation is consistent with the purpose and scope of its enabling statute. It is a noteworthy decision for many players in the drug sector in Canada, especially in Ontario, from generic drug fabricators and marketers, to pharmacies. In Canada, healthcare is an area in which both the federal and provincial governments can pass laws. For example, the federal government has relied on its exclusive jurisdiction over criminal law to legislate the Food and Drugs Act, which regulates the drug approval process throughout Canada. In contrast, the sale and pricing of drugs has been a field in which provincial governments have made law, falling under each province’s jurisdiction over matters of a local nature. Ontario has enacted laws such as DIDFA and ODBA pursuant to this power. DIDFA governs the designation of a generic drug as “interchangeable” with its bioequivalent brand-name counterpart. The result is that, except in certain circumstances, pharmacists must dispense the cheaper interchangeable generic over the more expensive brand name drug. ODBA governs the Ontario drug Formulary, which is a list of all the drugs for which the Ontario government will reimburse pharmacies under the Ontario Drug Benefit Program, and the amount it will pay for them. Together, the two Ontario laws have the purpose of “control[ling] the cost of prescription drugs in Ontario without compromising safety.” (para 32) The Regulations at issue in this case prevent “private label products” – drugs sold to a pharmacy by a manufacturer they own or otherwise control, but which did not fabricate the drug itself - from being either designated as interchangeable under DIDFA or being listed on the provincial drug Formulary under ODBA. Since this effectively prevents the sale of such products in the province, the result is a ban on certain vertical business integrations for pharmacies in Ontario. Put another way, the revenue stream for pharmacies in Ontario has been limited to the delivery of professional pharmacy services – efforts to access drug revenue streams through acquisition of drug manufacturers up their drug supply chain have been limited. Ontario’s reasoning behind limiting this potential revenue stream for pharmacies is that if pharmacies were allowed to create their own drug manufacturing operations, they would have strong incentive to keep the drug Formulary prices high, despite the savings to be gained from their integrated business model. Ontario’s position is that any additional cost savings created within the system should benefit consumers directly, in the form of lower drug prices. In this case, the SCC found that the prohibitions set out in the Regulations are consistent with the statutory purpose of DIDFA and ODBA of controlling the price of prescription drugs in the province. The Regulations are therefore valid. There are two notable (and related) takeaways from the decision. First, it is of no relevance whether the Regulation could or would succeed in lowering drug prices. This means that arguments about whether the legislative objective could in fact be achieved by a regulation are irrelevant to the inquiry whether that regulation is valid. Second, a regulation that is too under-inclusive to have its intended effect is not invalid for that reason. In this case, it is noteworthy that the Regulation does currently permit a pharmacy to own a drug manufacturer so long as the drug manufacturer actually fabricates the drug. That is, it is allowable for a pharmacy to own a drug manufacturing business if it is owned from top to bottom, including the step of drug fabrication. The fact that this corporate structure may be equally problematic for Ontario but is not (yet) the subject of a regulatory prohibition does not affect the validity of the Regulation currently in place. This decision is of general interest in signalling a strong posture of deference in Canadian courts towards governmental economic policy when expressed through regulation-making. Specifically, the decision indicates that a province can limit the market access of particular pharmacy corporate structures if the limitation is tied to a concern about drug cost, whether or not, in fact, the regulation does affect drug cost. Summary by: John Lucas