The generic drug industry is known to provide consumers with quality, safe and effective drugs at cost cheaper than those of brand-name drugs. Brand name products are usually higher in price than their generic equivalents. For instance, while the cost of 20mg Prozac antidepressant goes for $2.9, its generic sells at only $0.91. Additionally the while the cost of 15mg BuSpar, a different depressant sells at $2.3, its equivalent generic is sold at only $0.98 (Maisto and Mark, 14). Generally, it is very unusual to find the price of the generic drug going beyond 40% of the cost of the brand name drug. Therefore, due to this large price difference, the monopoly brought by the brand products is killed through the creation of competition. In this paper, I will seek to expound on how the entry of the generic drugs into the market affects the monopoly created before by the brand name drugs.
The major reason why generics sells their drugs at a far much lower price is normally because the 20-year patent that is granted by the government to the brand name company expires and therefore the generic drugs are given the right to produce and sell a totally identical type of drug as produced by the brand name company. On the surface of it, this appears to be a classical example of why monopoly is considered less efficient as compared to competition by charging higher prices to the drugs while maintaining a lower output. Initially, during the 20 years that the brand name drug has been granted by the law, the company makes enormous profits. This is because the law forbids the sale of a similar product being produced by the brand name company through its patent, therefore, this move automatically grants the company monopoly power over the product that they have discovered for the specified period of time.
However, it is worth noting that the high cost of the products is usually meant to cater for the money that the company has spent in advertising and in the research of that drug. The brand name company usually spends millions of dollars in the research for this drug, in fact, most research studies are known to take 15 years or more (Haas 332). Therefore, during this period of time, the company should fund itself or in special cases receive partial sponsorship from the government. Unlike their generic counterparts whom do not incur any costs related to marketing or researching, the brand name drug becomes expensive since all the expenditure costs must be met by their consumers during the purchase of the drug. Nonetheless, competition between the brand name drugs and the generic drug would not be possible if the brand name company did not take the initiative to embark on the research and discover the new drug. Far from the aspect of converting the generic product into a monopoly, the brand name company ultimately turns over a proven drug to their competitors. Therefore in spite of the high profit margin derived by the brand name drug firm, it is obvious that monopoly is a necessary stage that leads to competition especially for the new products that require expensive R&D (United States, July 1998).
The laws regulating generic drugs requires that the nations involved to formulate measures that would ensure that the generic drugs manufacturers exhibits bioequivalence to the brand name drug i.e. the drug should be totally comparable to the innovators drug in its dosage form, route of administration, strength, quality and performance and also in its intended use. In addition, the law and regulation is responsible for offering the companies with the patents or monopoly power over a specified period of time. This patent is usually, a 20 year long period of monopoly in many countries but in the US and the European Union it may at times grant a brand name drug a patent of up to 5 years only. Another part that the law plays a crucial role with regard to the issue of generic drugs is the transfer of the product recognition from the brand name to their generic competitors. Of course, this free transfer is not voluntary. The Hatch-Watchman Act of 1984 largely facilitates this transfer by ensuring that the generic drugs manufacturers are exempted from the repetitive three phase clinical trials that are meant to prove the efficacy and safety of the drug (Maisto and Mark, 17). Understandably, the innovator drug company have not been passively cooperating with the law regarding the compulsory transfer of power. It is nonetheless normal for any company to try and hold on strongly on their patent because once the generic companies are given the go ahead, extreme competition that largely alters the selling price of the drug sets in.
In Europe, the generic drug pricing is purely controlled by the reimbursement price. Below this, the price that is paid by the doctors and chemists is determined by the sales value of the innovators brand, number of licence holders and also the ease of manufacturing. Using a typical price decay graph, the findings would result into a “scalloped curve” that starts in the day that the generic product was launched and consequently falls as competition intensifies. The graph below can be used to show a typical scenario where the price of a brand name drug follows a scalloped curve as the price of the generic drug forces the price down as it competes for the same market share.
Works Cited
Haas, Jennifer S., et al. "Potential savings from substituting generic drugs for brand-name
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Improving Health Care: A Dose of Competition. Washington, DC: U.S FTC, 2004. Print.
Maisto, Stephen A, Mark Galizio, and Gerard J. Connors. Drug Use and Abuse. Belmont,
CA: Wadsworth, 2011. Print.
Musgrave, Frank W. The Economics of US Health Care Policy: The Role of Market Forces.
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United States. Congressional Budget Office. How increased competition from generic
drugs has affected prices and returns in the pharmaceutical industry. Government Printing Office, 1998.
