Generic drug pricing in Canada: components of the value-chain

The problem of obtaining fair pricing for generic drugs has led to a series of regulatory measures in Canadian provinces. This paper offers a new way of thinking about the problems that need to be addressed, by considering three core components of the value chain of getting generic drugs to Canadians: litigation, production, and pharmacy services. The paper proposes that each component of this value chain should be paid for separately, using a royalty to reward successful litigation that benefits payers; a competitive market framework to pay for production; and a transparent, independent regulatory process to set dispensing fees for pharmacies. This approach would enable the total expenditures to match costs, would enable provinces to set appropriate quality and convenience standards for pharmacy, and would provide a measure of predictability for investors. The paper emphasizes that it is important to establish a separate mechanism for rewarding litigation that eliminates invalid patents. The savings to Canadians from such litigation exceeds one billion dollars annually. Without addressing the need to reward this valuable activity, it is dangerous for payers to drive down generic prices, since generic firms will lack incentives to invest in costly litigation. The paper also encourages governments to establish independent regulatory authorities to set fair fees for pharmacies by employing processes similar to those used in other price regulation agencies.