Ontario will soon have a new pricing scheme that will halve costs for certain generic drugs for plan members. Proponents say similar programs abroad have produced enormous savings and have resulted in better access to drugs. Observers overwhelmingly agree that the scheme is a great deal—for the Government of Ontario.

Ontario’s Competitive Agreements for generic drugs, which will come into effect Oct. 1, is a follow-up on the Transparent Drug System for Patients Act of 2006.

Designed to lower the cost of generic drugs for the province’s benefits plan, the scheme chooses two pharmaceutical companies that provide their drugs at half the generic brand price. According to Ontario’s Ministry of Health, the plan will improve patient access to drugs and strengthen the transparency and accountability of the public drug system.

However, questions are being raised about the wisdom of the plan, as drug companies are likely to look to private plans to make up lost revenue. According to Tim Clarke, benefits practice leader with Hewitt Associates, lower prices for public plans may lead to increased costs for private ones. “I think the fear would be that lower prices on the government side would actually lead to higher prices on the employer side,” he says.

Mike Sullivan, president of the drug plan management firm Cubic Health, says that the province already enjoys a cost advantage over the private sector and that the Competitive Agreements will only increase the disparity between public and private plan members. “They’re the only winners here,” he says.

The province maintains that similar schemes in New Zealand and the U.S. have resulted in savings of up to 81% for public plans. Mark Nesbitt, the media relations coordinator with Ontario’s Ministry of Health, links competitive pricing agreements to the discounts. “In most cases, prices paid in these jurisdictions for certain drug products are much lower than in Ontario,” he says. “We believe the bulk buying and cost negotiations are what brought the prices down.”

While the province enjoys these savings, Sullivan says a similar move by private plans is coming, albeit slowly. “We’re moving toward it, but a lot has to be sorted out between now and then.” He says pressure for change from private plan members is needed. “Eventually, people are going to get smart and wonder why they’re paying twice the cost, or more, for drugs than the public sector.”



OMERS Has a Plan

OMERS Administration Corporation has created a plan that lays the groundwork for generating enhanced wealth to continue to meet its pension promise to its members and sponsors. The 2008-2012 strategic plan outlines several priorities, including the creation of a new global entity, OMERS Worldwide; the establishment by OMERS Worldwide of another entity to form capital pools with like-minded investors; the pursuit of opportunities to manage the pension funds of thirdparty plans; and, as requested by many stakeholder groups, the development and promotion of new financial products.

Going, Going, Gone

After an active search, Saxon Financial has found a buyer for itself and a price it likes. Mackenzie Financial will pay a generous price for the firm, offering shareholders $287 million, or $21 in cash per Saxon share. Saxon manages about $13 billion in assets, $11 billion of which are managed through its institutional money management division, Howson Tattersall. Mackenzie currently manages $17 billion, meaning that the combined projected institutional assets will be $28 billion.

No End in Sight

After the Ontario Court of Appeal provided a brief respite from the emotional roller coaster that is Canada’s third-party asset-backed commercial paper (ABCP) market, investors may now have a new reason to worry. Ivanhoe Mines plans to seek leave to appeal to the Supreme Court of Canada. The company is appealing on the same basis that it argued in the Court of Appeal, claiming that the restructuring is not fair because ABCP participants receive broad immunity from lawsuits.


Licence to Trill

Do Canadian investors need another asset to invest in? According to a report by the C.D. Howe Institute, yes they do.

The report, written by Mark Kamstra, an associate professor of finance at the Schulich School of Business at York University, and Robert Shiller, a professor of finance and economics at Yale University, suggests that the Government of Canada create a new debt security that would provide stable long-term cash flows for pension fund managers.

“The problem a lot of investors have right now—which I think personally, in part, led to the financial crisis we have—is the chasing of returns,” says Kamstra. “There just aren’t a lot of assets for investors to invest in. I know that sounds strange, given how big capital markets are and how many things there are to invest in. But there actually aren’t enough instruments that are easy to value and have relatively high returns.”

This new security—to be called a Trill—would have its coupon tied to Canada’s gross domestic product (GDP). It would be named a Trill because its coupon payment would be one-trillionth of Canada’s GDP . “Similar to shares issued by corporations paying a fraction of corporate earnings in dividends, the Trill would pay a fraction of the ‘earnings’ of Canada. Given the characteristics of GDP growth, our valuation of the Trill indicates its yield would be very attractive to the issuer, the Government of Canada—and, for the same reasons, would be a useful new source of income to investors who want exposure to income growth and protection against inflation,” notes the report.

Since nominal GDP would be used to determine the coupon value of the Trill, its inflation-protection properties would be similar to those of Canada’s real return bonds (RRBs) and the United States’ Treasury Inflation-Protection Securities (TIPS).

The report says the inflation protection alone, which would be comparable to the existing interest for RRBs and TIPS would be sufficient to generate interest in Trills. And Trills would protect relative standards of living in retirement because they are a constant share of GDP , whereas RRBs or TIPS purchase a declining real share of growing GDP over time.

Apart from pension funds, Trills would be attractive to the average investor. Target date and lifecycle funds could also increase participants’ holdings in the investment as they approach retirement.

“The biggest impact of the Trill is that it would generate a new asset that would be very attractive and a great alternative to very hard-to-value assets,” says Kamstra. “Something like a Trill, or regular government debt, is very easy to value, it’s not going to go belly up, and there would be a huge demand from the investor side for this kind of asset.” — April Scott-Clarke and Craig Sebastiano