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What About Generics?

Econ Focus
Fourth Quarter 2017
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Brand-name drugs typically get about 13 years of market exclusivity before they face competition from generic drugs. (Some of the initial 20-year patent term is taken up by clinical testing.) That competition has increased substantially in recent decades: Since 1994, the share of prescriptions filled with generic drugs has climbed from 36 percent to nearly 90 percent.

The generic industry got its first shot in the arm in 1984, when Congress passed the Drug Price Competition and Patent Term Restoration Act, commonly known as the Hatch-Waxman Act. Among other provisions, the law simplified the Food and Drug Administration (FDA) approval process for generic drugs. As generics became easier to manufacture and the quality improved, most states passed laws allowing pharmacists to automatically substitute generic for brand-name drugs unless the doctor specifies otherwise. Insurance companies promote generic drugs by charging lower co-pays for them or sometimes by not covering brand-name drugs if an equivalent is available.

Once multiple competitors have entered the market, the generic version of a drug sells for about 85 percent less than the brand-name version. Within a year of a generic entry, the branded drug's market share declines from 100 percent to 16 percent or less, according to research by Henry Grabowski, professor emeritus at Duke University, and Genia Long and Richard Mortimer of Analysis Group, an economic consulting firm. The IMS Health Institute estimates that generic drugs saved the U.S. health care system $1.67 trillion between 2007 and 2016.

Brand-name manufacturers can employ a variety of strategies to try to retain their market share. For example, it's common for pharmaceutical companies to file additional patents for new versions of existing drugs by asserting the new version is clinically superior in some way, such as requiring fewer doses or having fewer side effects. Firms also can seek "orphan drug" status for an existing drug if it can be used to treat a rare disease, which creates an additional period of market exclusivity. Critics view these follow-on drugs and orphan drug applications as attempts to curtail competition by gaming the system. 


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Sometimes, branded drug manufacturers just pay generic manufacturers to stay out of the market. These "pay-for-delay" agreements aren't necessarily illegal, although in 2013 the U.S. Supreme Court upheld the Federal Trade Commission's (FTC) ability to challenge them on antitrust terms. (In 2009, the FTC had filed a complaint against Solvay Pharmaceuticals for paying generic manufacturers as much as $40 million per year to delay launching a testosterone treatment for nine years.) Pay-for-delay has become less common since the court decision, but it hasn't gone away. In 2015, the last year for which the FTC has released data, manufacturers struck 14 agreements affecting drugs worth about $4.6 billion in sales.

The FDA allows citizens to file petitions when they have concerns about a product's safety. In recent years, more than 90 percent of the "citizen petitions" related to generic drugs actually have been filed by competitor companies. Even if the FDA ultimately denies the petition — which it usually does — the investigation can delay a generic drug's approval for several months. In the case of a blockbuster drug, those few months can be worth hundreds of millions of dollars to the brand-name manufacturer. Last year, the FDA implemented new rules designed to limit the potential abuse of the citizen petition system.

Generic drug manufacturers may have engaged in questionable business practices themselves. At the end of 2016, the attorneys general of 45 states and the District of Columbia filed a lawsuit against six generic drug manufacturers, alleging they had colluded to divide customers and fix prices. In October 2017, the AGs named 12 more companies and two individuals in the suit.

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