Generic competition is associated with lower drug prices, with the entry of the second generic competitor being associated with the largest price reduction. We base this conclusion on an analysis of IMS retail sales data for single-ingredient brand name and generic drug products sold in the U.S. from 1999 through 2004.
We define a product as having the same compound (active ingredient) and dosage form, ignoring differences in strength and package sizes. For every branded product in the database, we computed the price per dose (extended unit) each month. For the generics, we computed, for all manufacturers of a product, the average price per dose each month and the number of manufacturers. We then combined these two datasets, by product and month, and computed the ratios of the average generic price to the corresponding branded product’s price. We ignored any products for which we did not have both branded and generic sales of at least 1000 doses in a given month. Finally we grouped the ratios according to the number of generic manufacturers and computed the average of the individual price ratios.

On average, the first generic competitor prices its product only slightly lower than the brand-name manufacturer. However, the appearance of a second generic manufacturer reduces the average generic price to nearly half the brand name price. As additional generic manufacturers market the product, the prices continue to fall, but more slowly. For products that attract a large number of generic manufacturers, the average generic price falls to 20% of the branded price and lower.

Makers of generic drugs are not required to repeat the extensive clinical trials that have already been used in the development of the original drug, says Buehler. “But they must scientifically demonstrate that their product is bioequivalent. This means that it performs in the same way as the brand-name drug.”

In the United States, trademark laws do not allow generic drugs to look exactly like the brand-name drug. Thus, colors, flavors, and certain other characteristics may be different. “But these differences don’t affect the way the drugs work or the way they are evaluated by FDA,” says Buehler. “The generic drug must have the same active ingredients.”

Consumers and their health care providers should decide whether it is best to use the brand-name or generic version of a medicine. In addition, consumers should always ask whether they are being prescribed a generic or brand-name drug, and why that particular drug was prescribed.

The Food and Drug Administration will start implementing its final rule governing the speed at which generic drugs can move into the marketplace. The rule aims to speed consumers’ access to generic drugs and reduce the number of barriers to their approval. It limits to one the number of automatic 30-month patent infringement stays that a drug company can file in order to delay a generic drug’s entry.

Also, a company can only make a new patent claim on an existing name-brand medication on the basis of actual changes in the drug’s active ingredient, formulation, composition and delivery method — not in an effort to simply block a competing generic drug from getting the FDA’s nod.

The agency hopes that this step will reduce the number of patent claims that do more to extend market protection of a name-brand drug than to document a true innovation.

“The final rule balances innovator drug companies’ need for intellectual property protections and the desire to have equivalent generic drugs approved and marketed,” according to an FDA statement. “[This] will help speed the approval of generic drugs and should result in billions of dollars in health care savings for consumers.”