Let’s quickly review how a drug goes generic in order to better understand how the process functions as a built-in price control. After a drug has been approved, its patents grant it a limited time of market exclusivity, after which competitors may create their own versions and enter the market as exact-copy generics, so prices are driven down by competition (and prices sometimes fall by more than 95%).
How long is that pre-generic window? Well, patents last for twenty years, and a lot of that time (10-11 years on average) is eaten up by R&D before a drug is even approved. In 1984, the Hatch-Waxman Act added incentives for drug development by restoring half the time the drug spent in development and regulatory review, up to a maximum of 14 years post launch. So that has long been about the average time a drug had exclusivity for before going generic.
And remember, the patent does not guarantee a monopoly; it does not prevent someone else from inventing a different drug that treats the same condition in a similar way. Most novel branded drugs compete with other drugs, which impacts their prices.
Once a drug’s patents expire, copies flood the market and erode the price down to about twice the cost of producing the drugs. That’s what we call a drug going generic. So genericization effectively is a built-in price control. Or at least it ought to be. We already talked about the reasons that it sometimes doesn’t happen as it should. Feel free to go back to Chapter 5 for a refresher, but here are a few reasons why:
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A small market might not attract many competitors, keeping prices high. These markets (often under $100M) are already underfunded, making drug investments risky. If only 2-3 competitors exist, one dropping out can cause shortages due to unmet production needs.
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Drug companies may extend exclusivity using patent thickets that delay competition beyond the original patent term. If these patents cover only minor features of the drug without real benefits to patients or society, it’s considered patent gaming, which is when companies extract more profits than originally anticipated from the initial (~14 year) patent period.
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Some drugs are hard or impossible to copy (remember Zolgensma?).
In all these cases of a “market failure” to achieve the intent of the patent system (which is for the drug to become reliably inexpensive after the initial patients have expired), a price control may be needed after the initial patents have expired.
Let’s look forward at an example that would be a huge deal for society: Curing Alzheimer’s