The Rising Cost of Generic Drugs

Health Letter, July 2016

By Sarah Sorscher, J.D., M.P.H.

The ever-increasing costs of prescription drugs are often in the news these days, with some drugs carrying eye-popping price tags of more than $100,000 per year.[1] Typically the highest prices are for newer, brand-name drugs.

Yet a more surprising pricing story has begun to emerge over the past few years: the climbing cost of generic drugs.

Conventional wisdom says these drugs are kept affordable through healthy competition from multiple suppliers. These widely used drugs, which constitute nearly nine out of every 10 prescriptions filled in the U.S.,[2] have long been credited with saving our health care system billions of dollars per year through affordable pricing.[3]

Yet a changing market has shifted the balance of power increasingly in favor of a smaller and smaller group of massive generic-drug manufacturers, which have been able to raise generic-drug prices at the expense of consumers, employers and government health insurance programs. Without further government action to restore balance in the market, climbing generic-drug prices will remain a threat for the foreseeable future.

Benefits of generic competition

Historically, generic drugs have created substantial savings for consumers, costing an average of 80-85 percent less than their brand-name counterparts.[4] The main reason for this difference is competition: The maker of a patented brand-name drug has a complete monopoly in the U.S. market, but once the patent expires, any company can market a generic version of the drug, provided it first obtains approval from the Food and Drug Administration (FDA) by establishing that its product is effectively the same as a previously marketed version.

This generic competition saves consumers and taxpayers enormous amounts of money: Over the 10-year period from 2005 to 2014, according to the Generic Pharmaceutical Association (GPhA, the generic-drug industry’s trade group), generic products saved the U.S. health system nearly $1.68 trillion.[5]

Rising generic-drug costs

Few could easily forget the story of Martin Shkreli, former chief executive of Turing Pharmaceuticals. Shkreli rose to infamy in 2015 for a huge overnight increase in the price of Daraprim, a drug marketed in the U.S. for well over half a century to treat parasitic infections.[6],[7]

Shkreli’s callous behavior was almost cartoonish for its single-minded devotion to profit over the well-being of patients. Yet it has become clear since the Daraprim story broke that Shkreli did not act in a vacuum, but instead was part of a broader pattern of price gouging made possible by changes in the generic-drug market.

Although historically competition has tended to drive generic-drug prices down over time,[8],[9] more recently the cost of many generic drugs has been going up: Half of all generic drugs saw an increase in cost from July 2013 to July 2014.[10] Nearly one in 10 generic drugs more than doubled their previous price over that period, and some saw increases of more than 1,000 percent.[11]

One such extreme increase involved captopril, a hypertension drug for which the price of a 50 milligram tablet spiked by nearly 4,000 percent from 2013 to 2014, from just a few cents to over a dollar.[12] These price hikes can add up for patients, particularly for products such as captopril, which may be required up to three times per day indefinitely to treat hypertension.[13]

Causes for price increases

Many of the generic drugs with steep price increases in the past few years have been on the market for decades, so what led to these sudden changes?

Industry consolidation

A large part of the explanation comes from changes to the generic-drug market. The past few years have seen increasing consolidation of this industry, leading to fewer major generics makers and thus less price competition. In 2007, the top 10 generic-drug companies had just 28.5 percent of global market share,[14] but by 2014, had captured 64 percent of that market.[15] Last year Teva Pharmaceuticals, already the world’s largest generic-drug company, announced that it was acquiring the third-largest manufacturer, Allergan’s generics unit, for $40.5 billion.[16] Such mergers, and the resulting loss of competition, likely have been a key factor in the dramatic price hikes of many generic drugs.[17]

Shortages

Drug shortages also play a role in increasing drug prices. For example, the price of the drug tetracycline rose dramatically during 2013 and 2014 after a drug shortage. The drug was once made by two manufacturers, Teva and Watson, which had charged just 5 cents per 500 mg dose. But starting in 2012, both manufacturers began experiencing manufacturing delays, and, in 2013, Watson stopped making the capsules, resulting in a shortage.[18],[19] In October 2013, Heritage, a third manufacturer, obtained FDA approval to produce the drug.[20] Yet the drug’s new price was much higher than before, costing $8.59 for a 500 mg dose that once cost just pennies, an increase of nearly 18,000 percent.[21]

The underlying issues that lead a company to stop drug production are sometimes unavoidable. In the tetracycline case, both Teva and Watson experienced manufacturing difficulties that led to production delays.[22] In other cases, the FDA discovers a quality concern and production must be shut down so that corrective steps can be taken. For example, in 2014 the FDA, after discovering serious violations of manufacturing standards, banned an Indian facility, run by the generic-drug manufacturer Ranbaxy, from producing or distributing drugs for the U.S. market.[23]

Such shutdowns and delays often are needed to protect the public from substandard products. Yet reduced competition means that these types of temporary shutdowns, even if they only affect one or two companies, are more likely to lead to systemwide shortages, which can create opportunities for drug price spikes as the remaining manufacturers may exploit the shortage to charge more for a scarce product.

FDA regulation — a red herring

One factor that probably does not play a dramatic role in generic-drug pricing is FDA regulation of new drugs entering the market. The FDA must approve a new generic drug as safe and effective before it can be marketed in the U.S., and for the past several years the agency has struggled with a backlog of generic-drug premarket applications.[24] While it is possible that slow review times could have hindered competition, it is not clear how many price spikes have involved drugs with little or no competition, for which applications from additional manufacturers were delayed by FDA review.

The FDA prioritizes review of generic approvals for drugs facing shortages, as well as review of “first generics,” or drugs that will be the first to compete with a brand-name drug coming off patent (no first generics are part of the FDA’s current backlog[25]). The FDA recently has taken other steps to speed approval of generics for certain other drugs that lack generic competition.[26],[27]

The FDA has worked aggressively to reduce the backlog of generic-drug applications, and the problem now seems to be waning: Most new generic-drug applications are now approved within 15 months, and this time is expected to be shortened to 10 months by the end of this year.[28]

Hope for the future?

Changes in the generic-drug market have not gone unnoticed. In February 2015, Senator Bernie Sanders (I-Vt.) and Representative Elijah Cummings (D-Md.) implored the Department of Health and Human Services’ Office of Inspector General (OIG) to look into the issue of rising generics prices.[29] They also introduced a bill that would require all generics makers to pay an additional rebate to Medicaid programs when the prices of their generic drugs rise beyond inflation.[30] Their bill was eventually passed into law as a provision in the Bipartisan Budget Act of 2015 (P.L. 114-74).[31] The OIG released a report in December 2015, which calculated that the provision would have saved Medicaid a total of $1.4 billion during the previous decade (2005-2014) on the top 200 generic drugs reimbursed each year under the program.[32]

Efforts to curb generic-drug prices may be having an effect. Median generic-drug prices fell almost 2 percent in the last three months of 2015, a decline that is expected to continue through 2016.[33]

The trend towards consolidation in the generic-drug industry may also be slowing. The merger deal proposed last year between Teva and Allergan’s generics unit now has been delayed as the companies negotiate with regulators, possibly over anti-competitive concerns.[34]

The Federal Trade Commission (FTC) has the power to prevent such corporate mergers completely if the merger would significantly lessen competition or create monopolies.[35] Consumer groups, including Public Citizen, have previously pressured the FTC to more aggressively exercise its powers to prevent mergers between the generic-drug-industry giants.[36] Such steps may be the best hope for stopping price gouging, and will promote genuine, robust competition among generic-drug suppliers.


References

[1] Thomas K. The complex math behind spiraling prescription drug prices. New York Times. April 27, 2016. http://mobile.nytimes.com/2016/04/28/business/high-drug-prices-explained.html. Accessed May 12, 2016.

[2] Generic Pharmaceutical Association. Generic Drug Savings in the U.S. (7th ed. 2015) http://www.gphaonline.org/media/wysiwyg/PDF/GPhA_Savings_Report_2015.pdf. Accessed June 6, 2016.

[3] Generic Pharmaceutical Association. Generic Drug Savings in the U.S. (7th ed. 2015) http://www.gphaonline.org/media/wysiwyg/PDF/GPhA_Savings_Report_2015.pdf. Accessed June 6, 2016.

[4] Food and Drug Administration. Facts About Generic Drugs. http://www.fda.gov/downloads/Drugs/%20ResourcesForYou/Consumers/BuyingUsingMedicine%20Safely/UnderstandingGenericDrugs/UCM305908.pdf. Accessed May 12, 2016.

[5] Generic Pharmaceutical Association. Generic Drug Savings in the U.S. (7th ed. 2015) http://www.gphaonline.org/media/wysiwyg/PDF/GPhA_Savings_Report_2015.pdf. Accessed June 6, 2016.

[6] Pollack A, Goldstein M. Martin Shkreli all but gloated over huge drug price increases, memos show. New York Times. February 2, 2016. http://www.nytimes.com/2016/02/03/business/drug-makers-calculated-price-increases-with-profit-in-mind-memos-show.html. Accessed May 12, 2016.

[7] CNN Money. Who is Martin Shkreli? A timeline. December 18, 2015. http://money.cnn.com/2015/12/18/news/companies/martin-shkreli/index.html. Accessed May 19, 2016.

[8] AARP. Generic drug prices fall for fifth consecutive year. Disabled World. July 21, 2011. http://www.disabled-world.com/medical/pharmaceutical/generic-drug-prices.php. Accessed May 12, 2016.

[9] Fein AJ. Retail generic drug inflation reaches new heights. Drug Channels. Aug. 12, 2014. http://www.drugchannels.net/2014/08/retail-generic-drug-inflation-reaches.html. Accessed May 12, 2016.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] DailyMed. Label: captopril. https://dailymed.nlm.nih.gov/dailymed/drugInfo.cfm?setid=364ea93e-6bdb-4736-a5a3-1cfc9ffef1d5. Accessed June 13, 2016.

[14] Business Insights. The Top 10 Generic Pharmaceutical Companies. http://www.emballagedigest.fr/dotclear/images/BONUS%202008/septembre_08/Top%20Genericspdf.pdf. Accessed March 8, 2016.

[15] EvaluatePharma®. World Preview 2015, Outlook to 2020. June 2015. Page 48. http://info.evaluategroup.com/rs/607-YGS-364/images/wp15.pdf. Accessed March 8, 2016.

[16] Rockoff JD, Mattioli D, Hoffman L. Teva to buy Allergan generics for $40.5 billion. Wall Street Journal. July 27, 2015. http://www.wsj.com/articles/teva-to-buy-allergan-generics-for-40-5-billion-1437988044. Accessed February 2, 2016.

[17] Elsevier Clinical Solutions. Generic Drug Price Increases: Causes and Impact. 2015. https://www.elsevier.com/clinical-solutions/insights/resources/insights-articles/drug-information/whitepapers/whitepaperrising-generic-drug-prices. Accessed February 2, 2016.

[18] Is there a tetracycline shortage? Consumer Reports. August 8, 2012. http://www.consumerreports.org/cro/news/2012/08/is-there-a-tetracycline-shortage/index.htm. Accessed May 12, 2016.

[19] American Society of Health-System Pharmacists. Tetracycline Capsules. October 13, 2014. http://www.ashp.org/menu/DrugShortages/CurrentShortages/bulletin.aspx?id=816. Accessed May 12, 2016.

[20] Ibid.

[21] Fein AJ. Retail generic drug inflation reaches new heights, Drug Channels. Aug. 12, 2014. http://www.drugchannels.net/2014/08/retail-generic-drug-inflation-reaches.html. Accessed May 12, 2016.

[22] Is there a tetracycline shortage? Consumer Reports. August 8, 2012. http://www.consumerreports.org/cro/news/2012/08/is-there-a-tetracycline-shortage/index.htm. Accessed May 12, 2016.

[23] Food and Drug Administration. FDA prohibits Ranbaxy’s Toansa, India facility from producing and distributing drugs for the U.S. market. January 23, 2014. http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm382736.htm. Accessed May 12, 2016.

[24] FDA News. FDA ahead of schedule in reducing generic drug application backlog. October 23, 2015. http://www.fdanews.com/articles/173705-fda-ahead-of-schedule-in-reducing-generic-drug-application-backlog. Accessed May 12, 2016.

[25] Regulatory Affairs Professionals Society. FDA’s Woodcock: Generic drug application backlog will be eliminated before GDUFA II. January 28, 2016. http://raps.org/Regulatory-Focus/News/2016/01/28/24195/FDA%E2%80%99s-Woodcock-Generic-Drug-Application-Backlog-Will-be-Eliminated-Before-GDUFA-II/. Accessed May 12, 2016.

[26] Silverman, E. FDA changes policy to prevent the next Martin Shkreli. STAT (Pharmalot). March 15, 2016. https://www.statnews.com/pharmalot/2016/03/15/martin-shkreli-fda-drug-prices/. Accessed May 12, 2016.

[27] Food and Drug Administration. Manual of Policies and Procedures. MAPP 5240.3 Rev.2. Center for Drug Evaluation and Research. March 11, 2016. http://www.fda.gov/downloads/AboutFDA/CentersOffices/OfficeofMedicalProductsandTobacco/CDER/ManualofPoliciesProcedures/UCM407849.pdf.

[28] Implementation of the Generic Drug User Fee Amendments of 2012 (GDUFA). Testimony of Janet Woodcock, M.D. January 28, 2016. http://www.help.senate.gov/imo/media/doc/Woodcock5.pdf

[29] U.S. House of Representatives Committee on Oversight and Government Reform. HHS to Probe Skyrocketing Generic Drug Prices. April 14, 2015. http://democrats.oversight.house.gov/news/press-releases/hhs-to-probe-skyrocketing-generic-drug-prices. Accessed February 2, 2016.

[30] U.S. House of Representatives Committee on Oversight and Government Reform. Sanders, Cummings File Bill on Rising Rx Prices. May 18, 2015. http://democrats.oversight.house.gov/news/press-releases/sanders-cummings-file-bill-on-rising-rx-prices-taxpayers-would-save-1-billion-in. Accessed February 2, 2016.

[31] Congress.gov. Public Law No: 114-74 (November 2, 2015). Sec. 602. Applying the Medicaid Additional Rebate Requirement to Generic Drugs. https://www.congress.gov/bill/114th-congress/house-bill/1314/text. Accessed March 8, 2016.

[32] Department of Health and Human Services, Office of Inspector General. Average Manufacturer Prices Increased Faster Than Inflation for Many Generic Drugs. December 2015. http://oig.hhs.gov/oas/reports/region6/61500030.pdf. Accessed February 2, 2016.

[33] Bidnessetc. Teva, Mylan, Endo: Why generic drug prices are dropping. May 9, 2016. http://www.bidnessetc.com/68667-teva-mylan-endo-generic-drug-prices-dropping/. Accessed May 12, 2016.

[34] Allergan’s Q1 revenue rises, income beats estimates after acquisition. USA Today. May 11, 2016. http://www.usatoday.com/story/money/2016/05/10/allergans-q1-revenue-rises-income-beats-estimates-after-acquisition/84174940/. Accessed May 12, 2016.

[35] Federal Trade Commission. Mergers. www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/mergers.

[36] Consumers Union, Consumer Federation of America, U.S. PIRG, Public Citizen, et al. et al. Generic drug manufacturer consolidation is problematic for consumers. Letter to the Federal Trade Commission. July 14, 2015. http://consumersunion.org/research/generic-drug-manufacturer-consolidation-is-problematic-for-consumers/. Accessed February 2, 2016.