Generic Drug’s Competitive Edge

Brand name drug certainly contributes greatly in improving general health;

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however, it does not come cheap. Brand name drug industry is one of the most profitable industries in the United States. In 2005, of the total of 250 billions that were spent on prescription drug, over 229.5 billion were spent on brand name drug.

Furthermore, the cost of drug is on a steady raise at rate of 14% to 18% per year from 2004 to 2007. Interestingly, while price for brand name increase by an average of 21%, in comparison, the price for generic drug actually decreases by an average of 12.8%.

Brand name drug is expensive and maybe too expensive to more and more people.

During the period of 2004 to 2008, the prescription number for generic drug increase by 12%, while number for branded drug decrease by 6% during the same period. Generic drug use has come a long way, from less than 20% of prescription in 1984 to 78% in 2010.³⁰

Generic drug has several distinctive advantages over branded drug, generic drug is:

1) Substantially cheaper

2) Significantly easier to manufacture with little research & development effort 3) Has very high market erosion rate against branded drug.

One of the most obvious advantages of generic drug is its pricing. Generic drug priced substantially lower than brand name drug. 1998 Congressional Budget Office (CBO) concluded that by using generic drug instead of its branded counterpart part, it has saved consumers between 8 to 10 billion USD this year. Another study publish by Generic Pharmaceutical Association based on independent analysis of IMS

30 C. Scott Hemphill & Bhaven. N. Sampat, Evergreening, Patent Challenges, and Effective Market Life in Pharmaceuticals, 31J.HEALTH ECON.1(2012).

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(Intercontinental Marketing Services) Health’s data, during the period of 1998 to 2008, by using generic drug instead of branded drug have saved 734 billion USD for average consumers and healthcare providers, about 121 billion USD were saved in 2008 alone.

Federal Trade Commission (FTC) estimates that first generic drug typically priced at about 70% to 80% of its reference drug when it first enters the market. As first generic drug’s 180 days market exclusivity expires and more generic drugs enter the market, price will continue to drop. For example, Prozac, a popular anti-depressant that often hailed as one of the most popular drug after the invention of antibiotic.

During its patent term, Prozac sells for 2.13 USD per capsule. After its patent expiration, the first generic version sells for 1.91 USD per capsule when it first enters the market, about 12% less than the brand name Prozac. Price plummet to 0.32 USD per capsule after first generic drug’s market exclusivity expired.

Developing a new drug is never an easy endeavor, it takes average of 15 years and millions of dollar and provided if the research is successfully. Moreover, even if a drug company is able to conquer many obstacles and successfully obtains market approval, new drug will not necessarily guarantee a financial success. Generic drug, on the other hand, is a much safer and reliable venture financially. The catch is: As long as generic company can secure its supply of active pharmaceutical ingredient (API) manufacturer, generic drug only need to pass BE/BA test to obtained market approval and save its self all the costs in discovery and clinical trial. Unlike a lot of brand name companies who synthesize their own API and have direct control over its product from the initial manufacturing to final marketing. Usually General drug manufacturers do not synthesize its product’s own API, they obtain their supply from manufacturers who

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specialize in synthesis API. The source of API can be from plants, fermentation of microorganism or synthesis of chemical compounds. Currently there are about 4000 types of API on the market, 60% of them are generic drugs and rests of the 40% are for pioneer drugs. API can be further categorized into high tech-level API and low tech-level API. As its name suggests, High tech-level API is referring to API that requires sophisticated level of manufacture technique and equipment. For example, there are only 5 supplier of API in the world for Topotecan, a widely used active ingredient in cancer treatment. Low tech-level API referring to active ingredients that are relatively easy to make and usually are for drug that have been widely used, such as anti-inflammatory agent or anti-biotic.³¹

Not surprisingly, generic drug company represents the greatest client sector for API manufacturers since many brand name companies synthesize their own ingredients. The relationship between drug manufacturer and API supplier can be illustrated as a cook and his foodstuff supplier. API supplier provides raw material for drug manufacturer to

“cook” into a dish i.e. a drug. Consequently, for a generic drug company the greatest challenge is to secure a reliable API provider, generic company’s main contribution lies in devising a better delivery system or possible combination with other known drug and marketing, these activities, however, are a lot less time-consuming and capital intensive than researching for a new active ingredient. As the result, once a brand name drug’s patent expired, generic drug company is able satisfy BA/BE test and market its version of branded drug in relatively a short time.

31 「台灣原料藥公司闖出一片天！」，財子學堂網站：

http://www.caizischool.com/blog/4795（最後點閱時間：2013 年 7 月 6 日）。

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Since generic drug is cheaper and relatively easier to produce, it presents great threat to branded drug once it enters the market. Takes previously mentioned Prozac as an example; Generic Prozac claims 65% of market share from brand name company within a month after its introduction and close to 90% after an year. This outlines the basic dynamic within pharmaceutical industry. Brand name company specialized in pioneer drug which is expensive and difficult to make; however, once brand name company succeed in making a blockbuster drug it is going to bring tremendous revenue.

However, the ability to bring revenue lies in its market monopoly granted by patent’s exclusivity. Once branded drug’s patent expires, it will lose its market share rapidly to generic competitors due to their cheap price. In other words, patent right is instrumental in branded drug’s ability to generates revenue and it is only natural for brand name company to want these patents to be last as long as possible especially for their blockbuster drugs.