Prescription for Generic Drugs

STACY LAWRENCE

Generics are at the heart of efforts to improve the quality of available medical care while attempting to control costs. In the United States, with its relatively expensive branded drugs, generics account for more than two of every five prescriptions filled, and cost only one-third as much as branded drugs: the average retail price of a generic drug is $25; the comparable brand-name products average $80. Among Americans with health insurance, this translates into an average out-of-pocket co-payment of $10 for a generic drug, versus $25 to $45 for a branded one.

Insurers use the difference in the co-payments to encourage consumers to choose generics. Currently, slightly more than half of all branded drugs that have a generic equivalent are actually replaced, according to IMS Health. Overall, patients are becoming more comfortable buying generics, with only one person in ten insisting on branded products when a generic is available. And legislation in one-quarter of the states in this country mandates that pharmacists substitute a generic when available.

Legislators, insurers, and consumers all take greater advantage of generic prescriptions to control health care costs, and so far, that strategy has been marginally helpful. While the growth of other health care expenditures, particularly hospital care, has increased dramatically, the pace of growth in drug costs has slowed: last year, it was 13%—still vigorous, but down from the latter half of the ’90s, when it averaged more than 18%. That’s due, at least in part, to the increasing use of generics. Prescription drug spending accounted for about one-fifth of all u.s. health care spending growth last year, a much smaller slice than the one-third it claimed in 1999. Recent figures from the Congressional Budget Office, which estimates costs associated with pending legislation, projects that for each 1% increase in the market share of generic drugs, consumers save $1.3 billion each year.

The federal government is trying to help drug-makers bring generics to market quickly and inexpensively. Recent legislation attached to the Medicare prescription proposal may limit the roadblocks that can delay the release of generic versions of drugs.

One such roadblock is the patent litigation “stay,” often used by a pharmaceutical company as a legal ruse to extend its patent claim for two and a half years while pursuing an infringement lawsuit against a generic-manufacturing company—and continuing to profit (see “Columbia’s Lesson,” page 14 of Acumen, Issue 3). The current proposal would limit pharmaceutical companies to a single patent litigation stay per branded drug.

In another type of tactic, generics companies sometimes accept payment from pharmaceutical companies to delay the introduction of generic versions of drugs, allowing the patent holder to profit a while longer. Under the proposed legislation, however, generics companies that engage in this market manipulation would be denied their initial six months of exclusivity for a new generic—a period that’s highly profitable.

Even without these fixes, revenue growth for the generic-pharmaceuticals industry in the United States continues to slightly outpace overall pharmaceutical revenue growth. The United States constitutes almost half of the generic-drug market, the same share it holds of the wider pharmaceutical industry. European consumption of generics is comparatively low, given price controls and public subsidies that lower prices for branded pharmaceuticals.

But since the late ’90s, generics have played an increasingly crucial role in developing countries. The manufacturing of generic pharmaceuticals in such countries as Brazil, India, and Thailand—sometimes in violation of patents—has brought widespread access to drugs. In those countries, generics offer an immediate solution, though they have opened a Pandora’s box of moral, intellectual property, and economic issues. Availability of generic drugs when the branded versions are still under patent protection has been used to force pharmaceutical companies to lower prices, yet it often threatens broader trade and aid negotiations.

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Additional charts accompanying text include:

U.S. Generic-Drug Market

Financials of Generic Drug Companies

Revenue of Drugs with Pending U.S. Patent Expiry

Metrics

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