Generic Drugs

Ian McCarthy | Emory University

Generic Drug Entry

Application and Entry

• Hatch-Waxman Act of 1984: generic drugs can be approved by FDA if they are bioequivalent to a brand-name drug
• Drug manufacturer submits Abbreviated New Drug Application (ANDA) to FDA, possibly before patent expiration
  • Must show bioequivalence and appropriate manufacturing practices
• Tentative approval after ANDA review, full approval after patent expiration

Effects of Generic Entry

• Signifcant reduction in prices, over 70% reduction from brand-name price after a few years
• Generic drug market effectively acts as a competitive market
• But there are some exceptions…

Exception 1: Paragraph IV certification

• Generic manufacturer can challenge patent validity
• If successful, 180-day exclusivity period
• If unsuccessful, 30-month stay on FDA approval

Exception 2: Branded Generics

• Brand-name manufacturer can produce generic version of drug
• Relies on brand-name reputation
• Prices somewhere between original brand-name price and generic price

Exception 3: Biologics

• Biologics are drugs made from living organisms
  • More complex than traditional drugs
  • More difficult to replicate
  • Longer patent protection after coming to market (12 years versus 5 years)
• ACA created a pathway for biosimilar approval
  • Similar to generic approval, but not identical
  • FDA must determine biosimilar is “interchangeable” with original biologic

Other barriers to sufficient competition

• Upstream generic drug manufacturers eventually face an approximately competitive market, but…
• Distribution of generic drugs remains subject to market power of pharmacy benefit managers (PBMs)
  • Incentives to favor higher-priced drugs (to extract higher rebates, which is a big revenue source)
  • PBM market dominated by just a few firms (Express Scripts, Medco, and CVS Caremark)
• Sale of final drugs also subject to retail pharmacy market power
  • Also dominated by a few large chains (CVS, Walgreens, Walmart, Rite Aid)