Why are Generic Drugs Less Expensive Than Brand Name Medicines?

The more necessary a product or service is to sustaining life, the more expectation it will be reasonably priced to acquire. This is undercut by the forces of competition and resource scarcity.

A lot of the issues with drug prices come from the US market. There the industry churns out over $1.3 trillion in annual economic output. This number includes profits as well as research and development costs.

Multiple factors influence the price tag between generic and brand name drugs. This article takes a look at what makes these medicines so much more expensive than their generic counterparts.

Brand Medicines – Cost Factors

Developing a drug takes resources both in research and development as well as lengthy clinical trials and approvals. In some cases, new manufacturing techniques are developed in parallel.

Let's walk through each of these expenses to understand where they make sense and where they go off the rails.

R&D

To be fair to brand-named medicine, the companies producing them do spend a generous amount of money doing so. Pioneering new technology does have an associated cost.

Research costs don't always pay off, either. Of that trillion-dollar figure, $75 billion gets spent on research in the US. That is more than half of all drug research money spent in the world.

While it is paltry in comparison to the money made, it is money that has to exist upfront.

Researching a new drug takes years to isolate specific compounds and to learn how they react precisely to properly determine dosages and the cut-offs between more rewards and more risks.

Trials and Approval

Once a drug reaches the point where it has been proven to function in analogs, it starts human testing. Analogs can be chemical models, live cultures, and even animal testing. All of which costs money to conduct and to staff labs.

The approval process once human testing begins can take upwards of another eight years.

Various political roadblocks require money to manoeuvre around. These roadblocks may or may not have anything to do with risk or efficacy. Politics are sometimes just politics.

Patents

During all of this time, a development company has made very little money. They put forth the time and effort to create something to help others for nothing.

It makes sense to incentivize this forwarding of medicine with money. The typical patent process does have issues, however.

Even a quick scan of the FDA's FAQ associated with patents raises some flags. The number of years that a patent lasts typically starts at 20. Some differences exist which range widely.

It's important that investors and companies have a shot at financial gain for their efforts. This is the carrot that keeps the industry moving. Keep in mind, not all drugs that get researched get to trials and not all trials are successful.

Patent Expiration

Normally, after the 20 year period (which may be too long in our quickly moving world) a patent opens up. One of the reasons why generic drugs are competitively priced is because they only cost to manufacture. The heavy lifting of R&D and testing is done.

Once a patent opens, the market gets flooded with competitors and the prices go down to reflect the actual manufacturing and procural costs. There is still profit to be had, but it is in line with the demand for the drug and the difficulty in synthesizing materials.

The problem with patents isn't the initial exclusivity enabling companies to profit, it's the lengths of time they get to hold them. That length of time is made worse by the concept of evergreening.

Evergreening

A pharmaceutical company is allowed to extend their patent if they make changes to the formula and processes behind it. That's all well and good, in theory. A drug with a known side effect that gets tweaked to remove it is a net positive.

That's what is known as a novel addition.

Too many companies get away with adding non-novel additions to lengthen their patents. Small additions to some bonding process, a different dosage modified to be taken at different intervals, and so on.

These allow a company to keep a monopoly on something. Any other company is even barred from starting new research.

Manufacturing

Some part of the patenting process is dedicated to the manufacturing of a drug. The formula for combining compounds to be safe and the testing to prove so is only one part of the process.

New equipment capable of performing the synthesis and churning out nearly identical dosages without varying beyond an acceptable limit is also not cheap.

Some drugs can be made on the same equipment, with some changes to the input going in being the only real change.

Others require a totally different set of machines.

Quality

A brand name drug and a generic have nearly identical chemical makeup. Many generic drugs are even produced by brand name companies of other drugs.

The difference between the two is cosmetic and the way they are marketed. The generic has to comply with the same dosages and safety standards as the branded.

The only real difference is that generic's have been shaped by a competitive market to be competitively priced. The artificial price inflation created by the patent goes away.

What is the difference between generic and brand name drugs? The simple answer is competition.

Get It for Less

The market forces which compel generic drug manufacturing to stay competitive rarely exist in band medicines. This subversion of the usually effective free-market creates artificial value for the consumer.