Posted: 23 Jan. 2020 10 min. read

Will more generic drug approvals push prices down, or push manufacturers away?

By Andrea Mozzocchi and Ashwin Admala Reddy

The US Food and Drug Administration (FDA) recently announced a record 1,171 generic drug approvals for fiscal year 2019—the result of an increase in applications, a streamlined approval process, and a strong push from the White House and Congress to reduce drug prices by boosting competition in the market.1 However, more drug approvals could be a mixed blessing for generic manufacturers, health systems, and consumers.

About 90 percent of all prescription drug purchases are for generics.2 While more approvals could help spur competition and push drug prices lower, it also could have the opposite effect. The generics business is driven by sales volume because margins tend to be thin. Too many competitors could erase those margins and prompt some manufacturers to leave. If five or six companies manufacture the same drug, the price could drop so low that it is no longer profitable. If enough companies stop producing a particular drug because of a drop in profitability, there is a risk of a drug shortage, and a lack of competition could make it possible for an individual company to essentially become a monopoly and dramatically increase drug prices.3

Even as more generics are approved, generic drug prices continue to rise. Between 2010 and 2015, prices increased by 100 percent or more for 315 out of 1,441 generics studied, according to the US Government Accountability Office (GAO).3 Between 2017 and the first quarter of 2019, the wholesale acquisition cost (WAC) of prescription drugs increased by a median of 25.8 percent, according to a report from California’s Office of Statewide Health Planning and Development. During the same period, the median WAC for generic drugs grew 37.6 percent.4

Drug manufacturing does not typically follow basic supply-and-demand principals. A shortage of a particular drug, for example, doesn’t necessarily lead to higher prices and an incentive to produce more to fill the void. Given that there are usually few application holders supplying the market, if one manufacturer leaves the market, its competitors might be unable or unwilling to meet the increased demand, which could result in a shortage of one or more generic drugs.

A government analysis concluded that it takes five generics to drive brand-name prices down by 60 percent.5 But in the world of generic drugs, there is a balance that should be maintained, and regulators should be careful not to open the floodgates too wide.

Many approved generics don’t make it to market

Not all approved drugs make it into the market. As of June 2019, more than 60 percent of lower-cost generics that had been approved by FDA were not being marketed, according to an October report from the FDA’s interagency Drug Shortages Task Force. The Task Force analyzed 163 drugs that experienced shortages between 2013 to 2017. About half of the drugs studied were generics. During the first six months of 2019, just 134 of 442 approved generics have made it to market.6

There are a number of reasons some generics never make it to market. A brand-name drug’s manufacturer, for example, might use legal maneuvers to block the sale of a generic, or it could negotiate a financial arrangement with the generic manufacturer to delay production in exchange for a percentage of the brand-name drug sales. Some generic manufacturers might decide to market the drug only outside of the US or might sell the approved application to another generic-drug manufacturer. A manufacturer might also determine a drug is not financially viable.

Here are a few more factors that can impact generic drugs: 

  • Consolidation: According to the FDA Task Force report, consolidation among hospital systems, group purchasing organizations (GPOs), wholesalers, and the pharmaceutical industry has significantly boosted their negotiating power. In 2018, for example, the nation’s four largest GPOs accounted for about 90 percent of the market for medical supplies. Some contracts with group purchasing organizations might include clauses that allow competitors to offer lower prices to obtain market share, according to the report. The Task Force suggested that “changes in how drugs are paid for, including potential changes in contracting, could enable generic manufacturers to charge sustainable prices for their products.”
  • The generic market is highly concentrated: About 40 percent of drug markets are supplied by one manufacturer, according to the report. Some generic drugs have gone into shortage because manufacturers do not have strong financial incentives to begin or continue to market them.
  • Manufacturers aren’t required to produce drugs after approval: Once a generic drug is approved, FDA doesn’t set a timeline for bringing that drug to market, or even require that it be produced at all. 

Generic drugs have the potential to effectively reduce prescription drug costs, but there are regulatory hurdles that must be overcome. There is little price transparency in the US because the health system relies on a complex system of rebates between pharmaceutical companies and pharmacy benefit managers. Moreover, even if drug prices drop, the consumer might not notice any direct benefit if a deductible must be met before insurance kicks in. 

Endnotes

1. Secretary Azar statement on FDA’s 2019 generic drug approval record, October 16, 2019

2. Generic retail drug pricing and states, national Conference of State Legislatures, May 28, 2019

3. Drugs Under Medicare: Part D Generic Drug Prices Declined Overall, but Some Had Extraordinary Price Increases, Government Accountability Office, 2016

4. Prescription Drug Wholesale Acquisition Cost (WAC) Increases, California Office of Statewide Health Planning and Development

5. Trump Administration Salutes Parade Of Generic Drug Approvals, But Hundreds Aren’t For Sale, Kaiser Health News, February 7, 2019

6. Many Approved Generics Never Make It To Market, Managed Care, November 21, 2019

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