The Economics of Generic Medication – Healthcare Economist

One piece of excellent information for shoppers is that generic costs are falling. Nonetheless, generic costs could also be falling a lot that drug shortages are occurring (which isn’t a very good factor). Information from a working paper by Sardella (2023) finds a dramatic drop in generic costs in recent times.

The authors declare that shortages in generic medication are brought on by three major causes: (i) low profitability, (ii) low worth for high quality, and (iii) advanced, international provide chains.

With no distinguishing product differentiation or high quality monitoring [e.g., reputation] within the trade to tell apart product high quality variations, market competitors within the generic drug trade, with out market exclusivity, focuses on the dimension of value.

Value competitors is very intense as a result of 3 giant pharmacy profit managers (PBMs) management 92% of the US market. Value competitors has lead most generic medication are manufactured outdoors the US. According to the FDA:

…as of August 2019, 72% of FDA-approved API manufacturing services have been outdoors of the US. A latest 2021 deeper dive revealed that roughly 75% of COVID-19 associated medication, 97% of antibiotics, 92% of antivirals, and 83% of the highest 100 generic medication consumed haven’t any US-based supply of APIs

Overseas markets are engaging due to authorities subsidies, decrease prices of labor, and fewer regulatory oversight. Nonetheless, as a result of high quality will not be reimbursed, there are some points:

  • Better than 80% of APIs for FDA-defined important medicines and over 90% of prime antibiotics and antivirals haven’t any US manufacturing supply
  • Lower than 5% of large-scale API websites, globally, are situated within the US – the vast majority of large-scale manufacturing websites are in India and China
  • India and China have the best variety of API services supplying the US market and over ten p.c of those services have an FDA Warning Letter1

Total, being a generic drug producer will not be an awesome enterprise. EBITDA (Earnings earlier than curiosity, taxes, depreciation and amortization) has fallen in recent times. Return on funding has fallen from near 10% in 2013 to only 5% in 2023.

As a result of margins are so low, there’s little room to spend money on high quality. Furthermore, compliance with FDA high quality requirements is falling.

…the speed of trade close-out of regulatory points (i.e., points resolved to the FDA’s requirements) has dropped from one-in-four warning letters closed out to one-in-twenty by 2022… 26% of the nation’s prescriptions now being equipped by corporations which have obtained warning letters since 2020.

The writer proposes 3 options to the issue which you’ll learn here.