Why Generic Medicines Are Less Expensive?

Pharmaceuticals are an essential aspect of any healthcare system, offering important medications to help millions of patients manage their health. But when patients—and often their providers and payers—see the price of many of these medications, it's not uncommon that the price tags cause sticker shock. And here come generic medications, which in most cases come without the name and lower price. To better understand the lower costs of generic drugs, we will look at a number of factors: production methods, patents, the market.

Define Generic Medicines

The medicines that are referred to as generic medicines have identical active ingredients, strength, dosage form, and route of administration to their brand-name counterparts. After a brand-name drug has been out on the market for long enough for the patent to expire, any manufacturer could produce and sell a product that is identical to the original product, though sold under a generic brand. Generic medicines such as Enzalutamide, Abiraterone, Pomalidomide, etc, are subjected to extensive testing to establish that they are therapeutically equivalent to their branded brothers, meaning they act in the same way and provide the same health benefits when used. 

Even though a generic medicine has the same chemical composition as its branded alternative, they are generally sold at a lower price; often, the price difference can be considerable--typically between 30% and 80% lower than the comparable branded product.

Factors Contributing to Lower Costs

There are a few factors that contribute to the lower cost of generic medicines, making them more affordable for patients. These factors include no research and development costs, competition in the market, and no marketing costs.

• No Research and Development Fees

The biggest reason generics are less expensive is that generic manufacturers do not incur the upfront expenditures for drug discovery and clinical trials, nor for the development and manufacturing of a new formulation. The R&D process for a new drug is expensive to say the least, costing billions (usually) of dollars and can take years to complete. A pharmaceutical company that creates a brand name must recover development costs, which subsequently are passed on to consumers in the price of their medications.

The generic drug manufacturer does not need to spend resources to develop a new drug and review the costly and timely R&D process. The generic manufacturer has the research and original drug data from the product and does not need to incur the same R&D cost and time.

• No Marketing and Advertising Expenses

Another significant cost saving is that generic drug manufacturers do not engage in marketing and advertising. Brand-name drug manufacturers typically spend considerable amounts of money on marketing campaigns to create brand awareness and market their products to doctors and patients. The cost of advertising is then passed along to consumers in the pricing of their drugs.

Generic manufacturers generally do not need to advertise their products in the same way. They depend on the reputation of the original drug and the fact that the generic is therapeutically equivalent.

• Market Competition

Once a patent for a branded drug is exhausted, any number of different companies are able to make and sell that drug as a generic. The increase in competition among multiple manufacturers of generics puts downward pressure on cost. On the other hand, the original branded drug had little competition during the patent protection period, which allowed it to maintain a much higher price.

In addition to the fact that there are multiple generic manufacturers, the presence of competition among parties also establishes an environment driven by supply and demand. Generic drug makers compete with each other so that they can provide the consumer with the best possible price, which is ultimately beneficial for patients and subsequently lowers total health care costs.

The function of patents and exclusivity

Pharmaceutical companies receive patents for a drug to protect the financial commitment made to create the drug. They receive a patent for a drug for some time, generally for 20 years, which gives the producer exclusive rights to market and sell the pharmaceutical for that period of time. Exclusivity protects the drug from competition and affords the producer an opportunity to recover the costs associated with the research and development (R&D) of the drug.

Once the patent period is over, and assuming the generic manufacturer has fulfilled the regulatory requirements, generic pharmaceutical companies can produce a generic version of that drug. This move from branded drugs to generic drugs plays a role in the reduction of cost of medications. When generics are produced, at which point the exclusivity barrier no longer exists, generic manufacturers can enter the marketplace and sell the drug for lower prices. All of these savings will be passed to the users of the drug.

Oversight of Generics

Generics are subjected to regulatory standards to guarantee their safety, effectiveness and quality. In the United States, for instance, the Food and Drug Administration (FDA), asks generics to demonstrate bioequivalence to the original branded drug.

Bioequivalence means that the generic must deliver the same amount of active ingredient into the bloodstream at the same rate and extent of the original drug.

Although generics don't have to undergo the same battery of clinical trials as the branded drugs, they still must provide and meet rigorous testing and regulatory requirements to show they are safe and effective. Regulatory oversight gives employers and patients confidence generics are just as viable as branded products.

Effect of Healthcare Expenditures

The presence of generic medications has had a tremendously positive impact on health-care expenditures. generics have reduced overall drug spending which gives patients better access to the medications they need at a lower cost. Actually, generics account for about 90% of the medications filled in the U.S. and a very small portion of total drug spending.

Patients with chronic conditions who will need medications over the long-term will especially benefit from using generics; as patients save a significant amount of money over time, thinking about their overall costs to manage their health, can be less burdensome

Summary

The lower prices associated with generic medicines are mainly due to lower up front costs of R&D, marketing, and exclusivity for generic medicine manufacturers. The fact that there are many generic companies competing (or potentially competing) to sell a drug will also assist in driving prices lower. For patients selected generic options will assist in lowering medication costs without compromising quality or efficacy. As the healthcare system evolves, generic medicines will likely play a significant role in increasing access to affordable healthcare.

When we understand the differences in costs, patients, health care providers and policymakers can better support the use of generics and improve their ability to remove a financial burden on healthcare.

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