WHY DON’T DRUG PRICES DROP SIGNIFICANTLY AS SOON AS A DRUG GOES GENERIC?

When a pharmaceutical company invents a new drug, they are entitled to apply for a patent. The patent prevents other drug manufacturers from producing that drug for 20 years. For 20 years, the patent holder will be the sole source of that drug. The patent process encourages innovation and protects the billions of dollars the pharmaceutical company invested in developing the new drug. When the patent expires, other manufacturers are allowed to enter the market and sell bioequivalent versions of the drug under its generic name. You might expect an immediate drop in prices once the original patent expires, but that doesn’t always happen. Why not? Here are some reasons:

  • FDA APPROVAL PROCESS

    As you would expect with any approval process for something as significant as a drug, it takes time. The FDA often grants marketing exclusivity to one generic manufacturer for a period of six months to encourage the initial applicant.

  • EVER GREENING

    The original patent holder applies for new patents to reset the patent clock. The reformulation of the delivery mechanism for generic albuterol in asthma rescue inhalers is a good example of this. The switch from ozone damaging CFC to ozone safe HFA propellants resulted in a new set of patents.

  • LITIGATION

    It is estimated that up to 75% of all applications by generic manufacturers trigger litigation from the original holder of the patent. This litigation often paves the way for “pay for delay” deals, which are discussed next.

  • SUPREME COURT DECISION

    Despite numerous legal challenges and anti-trust concerns, the Supreme Court has not specifically banned pay-for-delay deals between the original patent holder and a generic manufacturer. Under a pay-for-delay deal the generic maker receives payments to stay out of the market from the original holder of the patent. These payments can exceed a hundred million dollars. The Federal Trade Commission estimates that these anti-competitive deals cost US consumers $3.5 billion a year in higher drug prices.

  • CONSOLIDATION BY GENERIC MANUFACTURERS

    About 80 percent of all prescriptions written in the US are for generics. Consolidation among generic manufacturers has resulted in fewer sources and less competition. The big three generic drug manufacturers (Mylan, Teva and Actavis) control approximately 44% of the world wide generic drug market.

  • LOBBYING BY PHARMACEUTICAL COMPANIES

    The pharmaceutical industry spends more on lobbying than any industry by a wide margin. According to the Senate Office of Public records, drug companies have spent $216 million on lobbying in 2018 through 10/24/18. The total for 2017 was $280 million and for the past decade, a staggering $2.4 billion. That is equivalent to $455,000 each year, per member of Congress, for the last decade.