Health Policy 68 (2004) 4754

The effect of generic competition on the price

of brand-name drugs
Joel Lexchin a,b,c,
a Emergency Department, University Health Network, Toronto, Ont., Canada
bSchool of Health Policy and Management, York University, Toronto, Ont., Canada
c Department of Family and Community Medicine, University of Toronto, Toronto, Ont., Canada

Received 22 January 2003; accepted 27 July 2003

Abstract

Background: Literature from the US has shown that brand-name manufacturers do not compete on price once generic com-
petitors become available. This study was undertaken to investigate if this is also true in Canada. Methods: Editions of the
Ontario Drug Benefit Formulary were used to identify brand-name drugs that lacked generic competition in July 1990 but had
acquired one or more generic competitors by December 1998. Prices of the brand-name drugs were compared before generic
competition, at the point when generic competition started and subsequent to the initiation of competition. Results: Price changes
for 81 different products in 144 separate presentations were analysed. There was no statistically significant change in brand-name
prices when generic competition started. The movement of brand-name prices was not influenced by whether the generic was
made by the company producing the brand-name product or price freezes imposed by the Ontario government. When generics
first became available having four or more generics was associated with a rise in the price of the brand-name drugs compared
to having one, two or three generic competitor(s). Interpretation: The lack of price competition may lead to increased costs in
the private market. Private insurance companies generally do not require generic substitution and some provinces do not require
generic substitution for cash-paying customers. Maintaining higher prices on brand-name drugs impacts on the prices of new
patented medications coming onto the Canadian market under the current pricing guidelines of the Patented Medicine Prices
Review Board.
2003 Elsevier Ireland Ltd. All rights reserved.

Keywords: Brand-name drugs; Drug prices; Generic competition; Prescription drugs; Ontario

1. Introduction Products Directorate (TPD) of Health, Canada is

Generic drugs enter the Canadian marketplace fol-
lowing the expiration of the 20-year patent period
granted to brand-name products. The Therapeutic
Present address: 121 Walmer Road, Toronto, Ont., Canada
M5R 2X8. Tel.: +1-416-964-7186; fax: +1-416-923-9515.
E-mail address: joel.lexchin@utoronto.ca (J. Lexchin).
charged with approving generics on the basis of bioe-
quivalence and manufacturing quality. The decision
to list generics on formularies and to pay for them
out of public funds is a provincial matter with each
of Canadas 10 provinces having its own set of rules
for listing and negotiating its own prices with phar-
maceutical companies. TPD approves approximately
5070 new generic products per year and over the

0168-8510/$ see front matter 2003 Elsevier Ireland Ltd. All rights reserved.
doi:10.1016/j.healthpol.2003.07.007
48 J. Lexchin / Health Policy 68 (2004) 4754
period 19992002 the mean approval time has been
between 500600 days [1]. The time taken to be listed
on a provincial formulary varies from an average of
84 days in British Columbia to 466 days in Ontario
[2].
In 2001, 39.6% of all prescriptions in Canada were
dispensed generically representing 14.6% of retail
sales for a value of about Can$ 1.02 billion [3,4]. Apo-
tex and Novopharm are the two largest generic com-
panies in Canada with sales of Can$ 458 million and
248 million in 2000, respectively [5]. Some generics
are made by firms controlled by brand-name compa-
nies, so-called pseudogenerics or ultragenerics.
Ultragenerics are introduced to pre-empt competition
from independent generic companies and are made
and marketed by another division of the same com-
pany or are distributed by another company under
license [6].
When generic drugs enter the market in Ontario,
they are priced substantially below brand-name prod-
ucts. In the early 1990s, there was a 25% discount
when a single generic competitor was available, rising
to a 50% or greater price reduction when there are four
to five generic competitors [7]. Since 1999, the ini-
tial generic approved for listing on the Ontario Drug
Benefit Formulary must be priced at 70% of the com-
parable brand-name product and subsequent generics
must be at least 10% lower than the first [8].
Nearly all Canadian provincial plans have either
mandatory generic substitution or only cover the cost
of the generic product [9] and very few prescrip-
tions do not allow generic substitution [10], so it is
largely irrelevant to provincial payers whether or not
brand-name manufacturers lower the prices of their
products in response to generic competition.
The situation in the private market in Canada may be
different. Few private insurance plans require manda-
tory generic substitution [11], cash-paying customers
may not request generic drugs and provincial legis-
lation may not make it mandatory for pharmacists to
offer generic equivalents to this group. Therefore, in
the private market, drug costs may be substantially af-
fected if brand-name manufacturers decline to com-
pete on the basis of price. Work in the US has tended
to show that the entry of generic drugs does not affect
the price of brand-name products [1214] although
one study found that generic entry did slow the in-
crease in brand-name prices [15].
In Canada, the public sector controls a much larger
segment of the market than in the US, owing to the
existence of the provincial drug plans [16]. The loss
of the public share of the market when generic com-
petitors are listed on provincial drug formularies may
prompt brand-name companies to behave differently
in Canada as compared to the US. Therefore, pricing
behaviour in Canada cannot be assumed to be the same
as in the US. The object of this study is to examine the
effects of the entry of generic competitors on the price
of brand-name products in the province of Ontario.
2. Methods
The Ontario Drug Benefit Plan is a publicly run
programme that pays for drugs in the ambulatory care
setting for seniors (65 years of age) and those on
social assistance. Drugs covered by the plan are listed
in the Ontario Drug Benefit Formulary. The sample
of drugs was derived by comparing formulary no. 29,
issued July 1990 [17], and formulary no. 36, issued
31 December 1998 [18]. All drugs in any presentation
(tablets, capsules, oral liquids, suppositories, injec-
tions, topicals, drops) without generic competitors in
formulary no. 29 were identified. Formulary no. 36
was then searched for the same drugs in the same
presentations and those that were still listed and had
generic competitors were selected. Prices of the drugs
in formulary no. 29 were recorded and then all sub-
sequent formularies up to and including no. 36 were
searched and the following items were recorded: name
of brand-name drug, number of different presentations
of brand-name drug, price of brand-name drug, man-
ufacturer of brand-name drug, the formulary edition
in which a generic competitor was first listed, price
of generic competitor(s), number of generic competi-
tors, manufacturer(s) of generic competitors. Prices in
the Drug Benefit Formulary are calculated per gram,
millilitre, tablet, capsule or other appropriate unit.
Prior to formulary no. 35, prices were for the lowest
amount for which the drug could be purchased in
Canada minus any price reduction granted by the man-
ufacturer or wholesaler to their representatives in the
form of rebates, discounts, refunds, free goods or any
other benefits of a like nature. Prices in formularies
nos. 35 and 36 are those agreed to by the Ontario Min-
istry of Health in negotiation with the manufacturer.
 J. Lexchin / Health Policy 68 (2004) 4754
The price of the brand-name drug in the edition
of the formulary immediately prior to the listing of a
generic competitor was taken as the base price. Prices
in subsequent editions of the formulary were com-
puted as a ratio of this base price. Therefore, if a
drug had price of Can$ 1.50 in the edition of the for-
mulary before the introduction of generic competition
and a price of Can$ 1.65 when generic competition
started its price ratio would be 1.1 (1.65/1.50). All
comparisons were made on the basis of price ratios of
brand-name drugs.
When brand-name drugs face competition only
from ultragenerics, pricing behaviour may be differ-
ent than when competition comes from generics made
by independent manufacturers. The Canadian Generic
Pharmaceutical Association provided a list of indepen-
dent generic and ultrageneric companies. Price ratios
for brand-name drugs were compared when generic
competition was initially only from ultragenerics and
only from generics made by independent companies.
One American study [15] found an association
between the number of generic competitors and sub-
sequent declines over time in the rate of rise of
brand-name prices. This question was investigated by
looking at price ratios for brand-name drugs as a func-
tion of the number of generic competitors both at the
time when generic competition began and subsequent
to the initiation of generic competition.
In 1993, the Ontario government instituted a price
freeze for products listed on its formulary. This freeze
may have affected brand-name companies decisions
about whether or not to alter prices when generic com-
petition began. Therefore, price ratios of brand-name
drugs with generic competition before 1993 were com-
pared to those with competition that began in 1993 or
later.
Time periods are reported in terms of editions of the
Ontario Drug Benefit Formulary rather than in months
or years. The formulary was issued on an irregular
basis (Issue 29July 1990, Issue 30February 1991,
Issue 31April 1992, Issue 32July 1992, Issue
331993 (no month given), Issue 34December
1994, Issue 35May 1996, Issue 36December
1998) and therefore periods of time, for example,
between the edition of the formulary immediately
preceding generic competition and the edition when
a generic competitor was first available, were not
comparable from product to product.
49
Results from a study based on the Ontario formu-
lary may not be applicable to other provinces. To over-
come this problem, a random subset of 15 brand-name
drugs was chosen and prices for these drugs were
compared in formularies from Alberta [19], Manitoba
[20], Newfoundland and Labrador [21], Ontario [22],
Quebec [23], and Saskatchewan [24]. Other provincial
formularies do not list prices.
Comparisons between brand-name prices were
made using Students t-test. The effect of the initial
number of generic competitors was analysed using
analysis of variance and two-factor analysis of vari-
ance was used to assess the effect of the number of
generics over time. Statistical analysis was done us-
ing StatView 5.0.1 for Macintosh [25]. P values of
<0.05 were considered statistically significant.
All prices are reported in Canadian dollars un-
adjusted for inflation. Adjusting prices for inflation
would have been appropriate had companies been
free to either raise or lower prices. However, after
1993, they were unable to increase prices without
losing formulary listing and therefore their remaining
choice, aside from lowering prices, was to maintain
existing prices. In this situation, adjusting for inflation
would make it seem that companies were voluntarily
lowering prices which was clearly not the case.
3. Results
A total of 81 different products, with 144 different
presentations (14 presentations per drug) were iden-
tified that lacked a generic competitor in July 1990 but
had acquired one or more by December 1998.
For nine products (16 different preparations) com-
panies lowered prices when a generic competitor
first appeared with an average price decrease of 30%
(S.D. 15%); in 12 cases (21 different preparations)
prices rose by an average of 9% (S.D. 15%). For
the remaining 60 drugs (107 preparations) prices did
not change. For all 144 presentations, the price ra-
tio of brand-name products at the time of generic
competition was 0.98 (S.D. 0.128) which was not
significantly different from 1 (P > 0.05).
Of the 12 cases where prices rose, 11 occurred be-
fore the government imposed price freeze in 1993.
Conversely, all nine instances where prices dropped
occurred after 1993 (Table 1). Prices rose for three
 50
Table 1
Products with prices raised and lowered upon entry of generic competitors
Products with prices raised Products with prices lowered

Drug and presentation Therapeutic class Manufacturer Date of formulary Drug and presentation Therapeutic Manufacturer Date of formulary
when first generic class when first generic
competitor competitor
appeared appeared
Betamethasone dipropionate Topical Schering April 1992 Acetaminophen Analgesic SmithKline December 1994
ointment in base containing corticosteroid suppository 325 mg Beecham
propylene glycol 0.05%
Clonidine tablet 0.1 mg Antihypertensive Boehringer February 1991 Acetaminophen Analgesic SmithKline December 1994
Ingelheim suppository 650 mg Beecham
Clonidine tablet 0.2 mg Antihypertensive Boehringer February 1991 Cyproterone tablet 50 mg Antiandrogen Berlex December 1998

J. Lexchin / Health Policy 68 (2004) 4754

Ingelheim
Clotrimazole vaginal cream Antifungal Miles February 1991 Gentamicin otic solution Antibacterial Schering December 1998
20 mg/g 0.3%
Flurbiprofen tablet 50 mg NSAID Upjohn April 1992 Hydromorphone injection Analgesic Knoll December 1998
10 mg/ml
Flurbiprofen tablet 100 mg NSAID Upjohn April 1992 Loperamide capsule 2 mg Antidiarrheal Janssen May 1996
Gemfibrizol capsule 300 mg Antilipemic Pfizer February 1991 Methotrimeprazine tablet Neuroleptic Rhone-Poulenc December 1998
2 mg Rorer
Hydralazine tablet 10 mg Antihypertensive Ciba-Geigy April 1992 Methotrimeprazine tablet Neuroleptic Rhone-Poulenc May 1996
5 mg Rorer
Ketoprofen enteric coated tablet NSAID Rhone-Poulenc February 1991 Morphine injection Analgesic Abbott May 1996
50 mg Rorer 15 mg/ml
Ketoprofen enteric coated tablet NSAID Rhone-Poulenc February 1991 Naproxen suppository NSAID Syntex December 1994
100 mg Rorer 500 mg
Metronidazole capsule 500 mg Antibacterial/ Rhone-Poulenc February 1991 Prochlorperazine injection Neuroleptic Rhone-Poulenc December 1998
antiprotozoal Rorer 10 mg/2 ml Rorer
Prazosin tablet 1 mg Antihypertensive Pfizer February 1991
Prazosin tablet 2 mg Antihypertensive Pfizer February 1991
Prazosin tablet 5 mg Antihypertensive Pfizer February 1991
Sodium cromoglycate nasal Antiallergic Fisons December 1994
solution 2%
Tiaprofenic acid tablet 200 mg NSAID Roussel April 1992
Tiaprofenic acid tablet 300 mg NSAID Roussel April 1992
Trazodone tablet 50 mg Antidepressant Bristol-Myers May 1996
Squibb
Trazodone tablet 100 mg Antidepressant Bristol-Myers May 1996
Squibb
Trazodone tablet 150 mg Antidepressant Bristol-Myers May 1996
Squibb
 J. Lexchin / Health Policy 68 (2004) 4754 51

different nonsteroidal anti-inflammatory agents (flur- 1.4

biprofen, ketoprofen and tiaprofenic acid) and three 1.2
antihypertensives (clonidine, hydralazine and pra- ** * #
1
zosin) and dropped in the case of three analgesics
(acetaminophen, hydromorphone and morphine). .8
Rhone-Poulenc Rorer (now part of Aventis) raised .6
prices on two products (ketoprofen and metronidazole)
.4
and lowered them on two products (methotrimeprazine
and prochlorperazine). The only other company to .2

raise or lower prices on more than a single product 0

Four or more generics
One generic

Two generics

Three generics

was Pfizer.
There were 94 instances (72 different drugs)
where presentations of brand-name products faced
competition from generics made only by indepen-
dent companies (price ratio at the time of generic
competition 0.958 S.D. 0.128) and 11 instances
(nine different drugs) where competition came only
Number of generic competitors
from ultragenerics (price ratio 1.017 S.D. 0.023).
The two price ratios were not statistically different Fig. 1. Effect of number of generic competitors on price of
(P > 0.10), indicating that there was no association brand-name product at time of introduction of generic competition.
between who controlled the companies marketing the Price ratio of brand-name products (price in edition of formulary
when generic competition starts/price in edition of formulary pre-
generics and changes in the price of the brand-name ceding introduction of generic competition). Analysis of variance.
product. P < 0.0001 compared to four or more generics; P = 0.0103

The number of generics available when generic compared to four or more generics; # P = 0.0056 compared to
competition began did not lead to price reductions four or more generics. Bars represent 95% confidence intervals.
in the brand-name drug. Fig. 1 shows the price ratio
for brand-name drugs when they first faced generic
competition as a function of the number of generic
competitors that were initially available. Having four 1.2 ** *

or more generics available was associated with a rise

1 Number of generic
in the price of the brand-name drugs compared to competitors:
the situation where there was a single (P < 0.0001), .8

two (P = 0.0103) or three (P = 0.0056) generic .6

One-three
Four or more
competitor(s). .4
In cases where generic competitors were listed in
.2
six successive formulary editions, brand-name prices
were significantly lower than when generic competi- 0

tion had been in place for only three (P = 0.0241) One Two Three Four Five Six

or four (P = 0.0478) formulary editions. However, Number of formulary editions since

there was no difference in price between generic com- generic competition began

petition for six formulary editions and one or two for-
mulary editions (Fig. 2). Brand-name prices were not
affected by the interaction between the number of
generics and the length of time of generic competition.
As Fig. 2 shows, even after there had been generic
competitors listed in six subsequent editions of the for-
mulary there was no difference in price ratios if there
were 13 generics versus 46 generics.
Fig. 2. Effect of time since generic competition began and num-
ber of generic competitors on price of brand-name products. Price
ratio of brand-name products (price in successive editions of for-
mulary after generic competition started/price in edition of for-
mulary preceding introduction of generic competition). Two factor
analysis of variance. P = 0.037 three editions compared to five
and P = 0.0241 compared to six; P = 0.0478 four editions
compared to six. Interaction factor not significant. Bars represent
95% confidence intervals.
52 J. Lexchin / Health Policy 68 (2004) 4754
Whether generic competition started before 1993
or later made no difference in the price ratio of
brand-name drugs, although there was a trend to a
lower price ratio for drugs with competition start-
ing in 1993 or later (pre 1993: price ratio of 1.027,
S.D. 0.022 versus 1993 or later: price ratio of 0.971,
S.D. 0.137, P = 0.059).
All of the 15 drugs in the subsample were avail-
able in all five provinces and had generic competition
except for Newfoundland and Labrador and Quebec
that were each missing three products. Except in one
instance where the Ontario price was Can$ 0.0001
higher, the Ontario price was always the lowest.
4. Discussion
This study shows that brand-name companies do not
compete on price with generic companies in Ontario
regardless of who makes the generic product, how long
generic competition has been present and whether or
not prices are subject to a government imposed freeze.
In finding no evidence of price reductions, these results
agree with those from most of the American literature
[1214].
If generic drugs were made by the brand-name
manufacturers (ultragenerics) themselves they may
not have felt it necessary to compete on price since
they were getting revenue from sales of their own
products. On the other hand, if the generics came
from independent companies, the brand-name firms
might have had more incentive to lower their prices
to retain some market share. However, whether or not
competition came from ultragenerics or independent
generics did not influence brand-name prices.
The price freeze imposed on products listed in the
Ontario formulary in 1993 did not affect prices; if any-
thing there was a trend for the average price to be
higher before the freeze. Before the price freeze, prices
rose for a number of products when generic competi-
tion appeared but the numbers are too small to deter-
mine if this strategy applied to any particular groups
of drugs or was used by certain companies. Price in-
creases may have been an attempt to compensate for
anticipated loss of market share. It is unclear why, af-
ter the freeze was imposed, companies chose to drop
the prices for some products rather than leave them
unchanged.
At no point in time, did the number of generic com-
petitors lead to a price decrease for brand-name drugs.
When there were four or more generic competitors
listed on the Ontario formulary, prices for brand-name
products were higher than when there were one to
three generics. This finding differs from the one re-
ported by Caves and colleagues. In their study of 30
brand-name drugs that went off patent between 1976
and 1987, they found that after five generic man-
ufacturers had entered the market, the brand-name
price was 8.5% lower than it would have been with-
out generic entry [15]. The difference in the time
periods may explain the opposite results. In the US
market of the 1970s and 1980s, brand-name products
may have been able to retain market share by com-
peting on price with generics. The smaller number of
drugs in the sample and the limited number of thera-
peutic classes that Caves et al. analysed may also have
accounted for the discrepancy in the results.
The finding that brand-name prices decreased with
longer periods of generic competition, as measured
by the number of formulary editions, may have been
a spurious result. If companies do tend to lower
prices after prolonged generic competition, then there
should have been a difference in brand-name prices
after generic competitors had been listed in one or
two successive editions compared to six editions, but
such a difference did not exist.
The percent of the market controlled by provincial
drug plans will vary considerably depending on the
particular drug. Drugs used predominantly by people
65 and over will be heavily dependent on sales through
provincial plans, since virtually everyone this age is el-
igible for coverage. Other drugs, such as those used by
women in their reproductive years or products heavily
prescribed to children, will probably have significant
sales through the private market. In the latter case, the
brand-name drug may retain significant market share
and therefore there is no economic rational for com-
panies to lower prices on these drugs.
In the US, drug companies have adopted a pol-
icy of market segmentationretaining product loy-
alty in a price-insensitive group and conceding the
market in a price-sensitive group [12]. In Canada,
the private market would constitute the group that is
relatively price insensitive since private drug plans
do not generally require the dispensing of the low-
est price generic product. The portion of the market
 J. Lexchin / Health Policy 68 (2004) 4754
controlled by the provincial drug plans would be the
price-sensitive group since provincial drug plans only
reimburse pharmacists for the least expensive version
of the drug included on the formulary. Data on the
public/private market sales of generic and brand-name
drugs included in this study was not available to test
the hypothesis that brand-name companies may retain
significant market share in the private market.
When most of a drugs sales is through the provin-
cial drug plan, it is difficult to understand the rea-
sons why companies do not compete on prices. The
brand-name industry claims that only 3 in 10 prod-
ucts make back their development costs [26], but if
sales have fallen dramatically then maintaining a high
price will not increase revenues. By the time generic
competition occurs, companies have usually stopped
large-scale promotion of products and therefore there
is no need to keep prices high to recover marketing
expenses.
The main limitation of this study is that it only
looked at price changes in one of the 10 Canadian
provinces. However, the fact that the price in Ontario
is almost always lower than that in other provinces
lends weight to the assumption that the behaviour of
companies in other provinces, when generic competi-
tion is introduced, is the same across Canada.
5. Policy recommendations
The report from the Congressional Budget Office
in the US notes that the fact that brand-name prices
do not decline following generic competition primar-
ily impacts third-party payers that do not manage their
outpatient drug benefits and consumers who have no
insurance [14]. These same groups may also be af-
fected in the Canadian setting. Benefits packages are
as high as 7% of an employees total compensation
package and companies identify rising drug costs as
the number one cost driver in increasing the cost of
health benefits [27,28]. The fact that private insurance
plans generally do not require mandatory generic sub-
stitution may be one of the factors driving up costs.
Changing this feature of their drug plans may help
employers control costs.
Individuals who pay out-of-pocket for prescription
drugs are at a disadvantage due to the continuing
higher prices of brand-name drugs. Currently, Alberta,
53
British Columbia and Quebec do not require phar-
macists to substitute generic products for cash-paying
customers [29]. Changes in provincial policies about
generic substitution should help keep drugs more af-
fordable for cash-paying customers.
Finally, maintaining higher prices on brand-name
drugs impacts on the prices of new patented medica-
tions coming onto the Canadian market. The Patented
Medicine Prices Review Board (PMPRB), which lim-
its the maximum introductory price for new patented
medicines, currently allows companies to set prices
up to the highest amount charged for other medicines
in the same therapeutic market [30]. By not lower-
ing prices of brand-name drugs, companies thereby
enable new entrants into the same therapeutic market
to charge higher prices. Patented drugs now account
for 65% of total sales of prescription medications, up
from 44% in 1995 [4] and the cost of a prescription
for a patented medication has been rising between 50
and 500% more rapidly than the cost of a generic pre-
scription, depending on when the patented medication
came onto the market [31]. The prices for new patented
medicines is one of the major driving factors in the
cost of provincial drug plans [32]. The PMPRB is
currently reviewing its policies on introductory prices
and should look at the issue of whether to change its
rules in the face of the absence of price reductions of
brand-name medications.
6. Conclusion
The lack of price competition by brand-name man-
ufacturers has economic consequences in the private
sector and indirectly in the public sector. Drug compa-
nies cannot be forced to lower their prices when drugs
go off patent and generic competitors appear but both
private insurers and government can institute measures
to compensate for the effects of these continuing high
prices.
Acknowledgements
Vernon Chiles, Wayne Critchley and Tanya Potash-
nik read an earlier version of this manuscript and
gave valuable feedback. Julie Tam provided key
information about the breakdown of generic drug
54 J. Lexchin / Health Policy 68 (2004) 4754
companies and features of different provincial drug
plans.
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