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Low prices and some gaming of regulations can drive out competitors and create monopolies that allow generic makers to jack up their prices. Experience has shown that it often takes multiple generics to achieve the promised-for downward pressure on prices.
The good news is that generic drug prices are continuing to decrease. As for the rest of the news about generics and biosimilars and their practices, it is complicated. For some classes of drugs, generics remain a price-lowering, cost-saving success. For others, prices are so low that manufacturers may leave the marketplace, creating an opportunity for monopoly pricing. For still others, there is an untapped opportunity for cost savings. “You cannot look at the generic drug and biosimilar markets as homogenous marketplaces,” says Martin VanTrieste, president and CEO of Civica Rx, a nonprofit company formed in 2018 to manufacture generic drugs.
For many generics critical to patient care, there are no more savings to squeeze out, says VanTrieste: “If we continue to do that, they will go away.” Some manufacturers already produce them at a loss, he adds. But for drugs just coming off patent, “there’s a great opportunity to drive the price down to a more affordable level.” Generic manufacturers need to file extensive FDA abbreviated new drug applications (ANDAs) and potentially fight off patent lawsuits from brand-name manufacturers first.
Then there are biosimilars, with a more extensive FDA approval process requiring clinical trials, and a more expensive manufacturing process. That lemon is not yet squeezed.
The big picture
Almost 40 years ago, the Hatch-Waxman Act, known formally as the Drug Price Competition and Patent Term Restoration Act, ushered in a new era at the FDA, speeding up approvals and creating a pathway for approving generic medications. Before Hatch-Waxman, less than 20% of prescribed drugs were generic. Generics now comprise 89% of all prescriptions, according to the Association for Accessible Medicines, a trade group for the generics and biosimilars industry. The FDA has approved some 16,000 generic drug applications since passing the Hatch-Waxman Act. Amendments to the law in 2012 that created a user fee program for generic approvals have also been a major factor in getting more generics on the market.
Generics saved the U.S. healthcare system $293 billion in 2018 alone, according to the FDA, and various other tallies show the savings over the past decade as totaling almost $2 trillion. Although prices have shifted over the years, the Express Scripts overall Price Prescription Index showed generics prices falling 37% between 2014 and 2018, while branded drug prices increased more than 60%. According to 46brooklyn Research, a nonprofit drug pricing research organization, generic drug prices have fallen this year compared with last, notwithstanding some predictions that the pandemic would have the opposite effect. 46brooklyn says driving the overall trend are falling prices for Concerta (methylphenidate), Colcrys (colchicine), Suboxone (buprenorphine-naloxone) and Tamiflu (oseltamivir suspension).
It’s all about the competition
Not surprisingly, supply and demand have an influence on generic drug pricing. An FDA report showed that if the generic has no competition, its average manufacturer price — the price that wholesalers pay to manufacturers — is 39% lower than its brand-name equivalent. If there are two generic competitors, the prices are 54% lower and with four, 79% lower.
There’s a common misperception that a brand-name drug’s price drops when a generic is coming on the market, says Leigh Purvis, director of health care costs and access at the AARP Public Policy Institute. Instead, the brand usually increases its price or stays the same. “That makes it even more important to switch to the generic, because there’s an even greater price differential,” she says.
One reason for the brand increase is that companies sometimes raise the price of the brand-name drug in the months before the generic is available. As a result, the generics may end up with higher pricing than that of the brand-name drug, according to an analysis by GoodRx.
Competition works both ways
In the generic marketplace, about one-third of generic drugs lose money, one-third break even and one-third make money, according to VanTrieste. “The ones that are losing money still make those products to absorb capacity in their manufacturing plants to spread overhead around. It’s better to lose a little than lose a lot.”
But as soon as they can produce a money-making product, they’ll stop manufacturing the
money-losing one. That can cause drug shortages. Avoiding drug shortages is one of the reasons seven health systems and three philanthropies teamed up to start Civica in 2018.
“Civica produces on a cost-plus basis,” VanTrieste says. “Our prices are completely transparent and every member in Civica pays exactly the same price.” The organization works with other manufacturers to produce 41 generic medications in multiple dosage forms, with a goal of manufacturing 100 drugs by 2023.
Other factors in generic drug pricing
Drug pricing in general is a black box, Purvis says, with little to no transparency in what it costs to produce drugs and how pricing is determined. It’s also difficult to pinpoint why prices increase. Prices may be driven up because of higher ingredient pricing or a shortage of ingredients, or prices are raised because the product would not be financially viable to produce otherwise. These and other factors affect generic availability and pricing.
Artificial monopolies for older drugs
The FDA’s Drug Efficacy Study Implementation (DESI) and Unapproved Drugs Initiative programs offer an optional abbreviated FDA approval process for generics that entered the market before 1962. In return for the approved application, the manufacturer is awarded a monopoly on marketing the product. Although initially companies did not abuse the program, some eventually increased prices to resemble branded pricing, according to VanTrieste.
Generics competitors can file an ANDA, but he says it takes about a year to get the paperwork together and another year for the FDA to process it. That gives the initial manufacturer an artificial monopoly for at least two years. Some manufacturers find ways to extend that monopoly, exclusively contracting with all active ingredient manufacturers, for example. Companies making DESI-approved products sometimes lower the product price when competitors are gathering their FDA application data, so they won’t have a profit motive. “Knowing that will happen, other generics don’t enter those markets,” VanTrieste says. One example of the jump in pricing is vasopressin. In the hospital sector, vasopressin costs rose almost 700% between 2014 and 2018, after getting DESI approval in 2014.
More than 500 drugs without patent protection have no generic competition. “Because they (are for) small populations, there may not be enough incentives to create a generic version. They have a monopoly forever because the generic manufacturers aren’t attracted to that product,” Purvis says.
Lawsuits and patent protections
When the patent life runs out, companies may look for ways to continue their monopoly. “If anything, companies are getting more innovative in finding ways to extend their monopoly,” Purvis says. AbbVie obtained more than 100 U.S. patents for manufacturing processes and other issues with Humira; the initial patent expired in 2016. The company mounted legal defenses against companies that wanted to launch biosimilars to Humira for alleged secondary patent infringement for the drug’s formulation or delivery. Six biosimilars for Humira have been approved by the FDA, but none of them will be on the market until 2023 because of legal settlements with AbbVie.
Some companies change their brand-name drug formulations in attempts to maintain market share. That works for some manufacturers, says David Ridley, Ph.D., a professor and faculty director for health sector management at Duke University’s Fuqua School of Business. But “payers and pharmacy benefit managers have been tougher on the drug markets by declining to put drugs with small tweaks on formulary. The games that drugmakers have tried in the past have been thwarted by some of the managed care practices,” he says. There are exceptions, including Teva Pharmaceuticals’ Copaxone, a daily injection for patients with multiple sclerosis. Teva changed the 20-milligram daily injection to a 40-milligram dose, injected three times a week. “They were able to hold on to much of the market and hold off competitors,” he says.
Alleged price collusion
In June 2020, New Jersey’s attorney general and a multistate coalition sued 26 drug companies, alleging conspiracy to artificially inflate the prices of 80 topical generic drugs. The lawsuit claims a violation of federal and state antitrust and consumer protection laws. This is one of at least three price-fixing lawsuits filed in recent years. “It’s not worth it (to collude) because you’re going to get caught and your company will be embarrassed and have to pay a massive fine,” says Ridley. “When you defraud the federal government, you face potentially enormous penalties. They can threaten to exclude you from doing business with the government, which is a major customer in healthcare.”
Biosimilars are the equivalent of generics for monoclonal antibodies and other large-molecule medications. But the biosimilar market and the dynamics of competition on price have been slow in developing for many reasons, including the “patent thickets” that drugmakers have used to protect their brand-name products and to keep biosimilar competition at bay. Since 2015, 29 biosimilars have been approved for nine reference products and 20 are on the market. “Biologics are living organisms and are substantially more expensive” than other drugs, says Purvis. “A lot of what’s coming on the market are products that won’t face generic competition in the way we’re used to seeing it.”
The biosimilar market has been slow to grow, partly because the FDA was slow to give manufacturers guidance, she says. Although costs are generally lower for generic biosimilars compared with the brand, prices are still high. If a drug is $100,000, dropping it by 90% still means a $10,000 bill. “It’s not like where people can get their $5 generic,” Purvis says. The highest discount she’s seen for a biosimilar is 30%. That may change as more biosimilars come on the market and there’s more competition.
FDA approvals for biosimilars require the manufacturer to complete a drug trial. “Although that is costly and painful for the biosimilar manufacturers, it’s good for them in the long run because it helps persuade providers and patients that the products are truly safe and effective,” says Ridley. Longer term, the FDA might relax those requirements, especially if technology allows molecular comparisons to show they’re sufficiently similar. Physicians and other providers currently don’t have much of an incentive to select a cheaper biosimilar when administering drug. Value-based payment models and other payment changes could alter the incentive so use of biosimilars would be to their advantage.
Is there more juice to squeeze from the generic lemon? Yes for biosimilars. Yes to artificial monopolies. Yes to those on extended patent protection. But no to standard generics. “Payers have done an exceptionally good job at driving patients toward generics when available,” Purvis says.
Deborah Abrams Kaplan writes about medical and practice management topics.