Generic Drug - Economics

Economics

Generic drugs are usually sold for significantly lower prices than their branded equivalents. One reason for the relatively low price of generic medicines is that competition increases among producers when drugs no longer are protected by patents. Companies incur fewer costs in creating generic drugs (only the cost to manufacture, rather than the entire cost of development and testing) and are therefore able to maintain profitability at a lower price. The prices are low enough for users in many less-prosperous countries to afford them. For example, Thailand has imported millions of doses of a generic version of the blood-thinning drug Plavix (used to help prevent heart attacks), at a cost of 3 US cents per dose, from India, the leading manufacturer of generic drugs.

In the UK, generic drug pricing is controlled only by the reimbursement price. Beneath this, the price paid by chemists and doctors is determined mainly by the number of licence holders, the sales value of the originator brand and the ease of manufacture. A typical price decay graph will show a 'scalloped' curve, which usually starts out on the day of generic launch at the brand price, and then falls as competition intensifies. After some years, the graph typically flattens out at approximately 20% of the originator brand price. In about 20% of cases, the price 'bounces', which means some licence holders withdraw from the market when the selling price dips below their cost of goods. The price then rises for a while until they re-enter the market with new stock.

Generic manufacturers do not incur the cost of drug discovery. Sometimes, reverse-engineering is used to develop bioequivalent versions to existing drugs. Generic manufacturers also do not bear the burden of proving the safety and efficacy of the drugs through clinical trials, since these trials have already been conducted by the brand name company. (See the Approval and regulation section, below, for more information about the approval process.) The average cost to brand-name drug companies of discovering and testing a new innovative drug (with a new chemical entity) has been estimated to be as much as $800 million. Merril Goozner estimates the true cost is closer to $100–$200 million.

Generic drug companies may also receive the benefit of the previous marketing efforts of the brand-name drug company, including media advertising, presentations by drug representatives, and distribution of free samples. Many drugs introduced by generic manufacturers have already been on the market for a decade or more, and may already be well known to patients and providers (although often under their branded name).

For as long as a drug patent lasts, a brand name company enjoys a period of “market exclusivity” or monopoly, in which the company is able to set the price of the drug at a level which maximizes profitability. The profit often greatly exceeds the development and production costs of the drug. (This is partially offset by research and development of other drugs which do not make a profit.) The advantage of generic drugs to consumers comes in the introduction of competition, which prevents any single company from dictating the overall market price of the drug. Competition is also seen between generic and name-brand drugs with similar therapeutic uses when physicians or health plans adopt policies of preferentially prescribing generic drugs as in step therapy. With multiple firms producing the generic version of a drug, the profit-maximizing price generally falls to the ongoing cost of producing the drug, which is usually much lower than the monopoly price.