Introduction

With healthcare costs consistently rising faster than the gross domestic product, few question the important role of generic drugs in helping to curb healthcare spending. In fact, a series of studies by the Generic Pharmaceutical Association recently found that from 1999 through 2010, the substitution of generics for brand name drugs saved US consumers more than $1 trillion. However, there is a less tangible cost associated with the use of generics, namely a negative impact on scientific innovation and the development of new drugs.

Background

A generic drug is a pharmaceutical product that is interchangeable with an innovator product. A generic drug is manufactured without a license from the innovator company and marketed after the expiration date of the drug’s patent. Currently, generic drugs account for more than 80% of all prescriptions written in the United States.

On average, the price of a generic drug is 75% lower than its branded counterpart. This is because generic manufacturers do not incur the investment costs of the developer of a new drug. The cost of developing a new drug is now estimated to be at least $4 billion, and it can be as much as $11 billion. Patents are designed to protect this investment, which includes research, development, marketing, and promotion, by giving the company the sole right to sell the drug while the patent is in effect. As patents near expiration, other manufacturers can apply to the FDA to sell generic versions.

Issue

Do generic drugs threaten the viability of pharmaceutical innovation in the United States?

Rule

When the costs of drug research, development, and marketing are greater than the potential profit the drug can expect to make before going off patent, there will be little incentive for the development of new drug entities.

Analysis

With a growing focus on reducing risks, the FDA continues to impose greater, more stringent requirements for bringing a drug to market. These requirements are greatly increasing the cost of innovation, extending the amount of time it takes to bring a new drug to market and decreasing the effective patient life of the product.

At present only about 1 in 3 new drugs that reach the market generate enough revenue during their lifetime to cover the average cost of R&D and provide a return on investment that shareholders of pharmaceutical companies demand.

Pharmaceutical companies typically invest about 18% of their revenue in R&D. When profits are lower, there is less money available to make this investment.

In addition, the current patent protection system actually creates disincentives for companies to create new indications for a drug that will soon lose its patent. Gaining FDA approval for additional indications requires costly and time-consuming clinical trials. While many drug manufacturers do pursue new indications for their drugs, there will be a point in the patent life of a product when clinical trials for new drug indications are not economically feasible. No pharmaceutical organization that expects to make a profit can afford to test new indications for a drug that is already, or soon will be, generic.

Finally, a pharmaceutical company that initially gains FDA approval for a new drug is responsible for maintaining and reporting all adverse events observed in patients using the drug after product launch, even when it is produced by generic companies. The costs of such registries can be staggering, further depleting capital that might have been allocated to R&D.

Conclusion

Although the United States urgently needs new treatments for illnesses such as heart disease, stroke, and diabetes, the current system for gaining market approval coupled with patent protections of insufficient length are discouraging innovation and investment. To protect the huge investment in R&D for new drugs, extending the effective period of marketing exclusivity should be seriously considered by policy makers.

Unless innovation is encouraged more rigorously and a more equitable balance is forged between the marketing of brand name drugs and generics, pharmaceutical innovation will become too costly a venture for the market, and human health, to bear.

For more information on this issue, contact the Kulkarni Law Firm.