By Randall Palmer
OTTAWA (Reuters) - The Supreme Court of Canada dealt a blow to pharmacy chains on Friday when it upheld the province of Ontario's ban on drugstores' sales of their own private-label generic prescription drugs.
Pharmacy companies saw the private-label drugs as a way to reduce the impact of Ontario regulations designed to lower the cost of generic drugs. A lower court ruled that the store brand drugs circumvent bans on professional allowances and rebates.
The Ontario rules have weighed on the earnings of the drugstore chains, including Shoppers Drug Mart Corp, a principal appellant in this case. Shoppers' share price edged lower after Friday's ruling, down 7 Canadian cents at C$59.04.
In the 7-0 decision, Justice Rosalie Abella noted that Canada spends more on prescription drugs per capita than almost any other industrialized country and she highlighted "Ontario's totemic struggle to control generic drug prices."
She pointed out the proportion of government health care expenses that went for drugs had risen to 15.9 percent in 2010 from 9.5 percent in 1985.
The provincial ban on a pharmacy chain's buying from its own subsidiary aims to overcome anticompetitive behavior, or to prevent prices that are unnaturally high.
"Each time the government has introduced new measures, market participants have changed their business practices to obviate the restrictions and keep prices high," Abella wrote.
The ruling only applies directly to Ontario, the biggest market in Canada. But it could inspire similar bans in other provinces, which have already followed Ontario's lead in cutting prices for generic drugs.
Abella referred to a 2007 Ontario government study that found that some of the leading generic drugs were three times more expensive in Ontario than in France, Germany and Britain, five times more costly than in the United States and 22 times more expensive than in New Zealand.
Shoppers Drug Mart had its own Sanis private-label brand. Sanis did not make the drugs itself but bought them from third-party fabricators.
Its major competitor in Ontario, the Katz Group, had also challenged the Ontario rules, and the Supreme Court ruled on the appeals by Katz and Shoppers in one judgment.
Katz operates the Pharma Plus and Rexall pharmacies in Ontario, and, like Shoppers, had taken steps to set up its own private-label manufacturer.
The two companies had argued that the Ontario regulations did not meet the purpose set out in the provincial legislation that governs them, but Abella said no.
"The 2010 private label regulations were ... part of the regulatory pursuit of lower prices for generic drugs and are, as a result, consistent with the statutory purpose," she declared.
The decision does not affect drugstores' ability to sell own-brand over-the-counter generic products like ibuprofen and vitamins.
Shoppers' Quebec-based rival Le Groupe Jean Coutu Group PJC Inc sells its own Pro Doc generic drugs in Quebec, but the chain has relatively few outlets in Ontario.
The name of the decision, combined from the Katz and Shoppers cases, is Katz Group Canada v Ontario (Health and Long-Term Care), 2013 SCC 64.
(Editing by Janet Guttsman and Chris Reese)