What cereals can teach us about the generic drug market


Imagine walking the aisles of your local supermarket, looking for your favorite cereal. You usually buy the generic version because it tastes almost the same and is much cheaper than the branded version.

But today you notice that the price of branded cereals is only a few cents more expensive than the generic version. You will remember that Congress just passed a law to cap the price of branded grain.

Now, with almost equal prices, you decide to buy the branded cereals instead of the generic. Over time, many more buyers are making the same choices and the demand for generic grains is drying up. Finally, generics disappear completely from the market. Stores are starting to run out of branded cereals as its maker slows down investment in its production now that its potential profit is limited.

Congress is not considering regulating grain prices – not yet, at least. But Democrats are determined to cap the prices of brand name drugs as part of their Build Back Better Act. The result will be the same as in our analogy with grains – the disappearance of many generic drugs from the market. This could have dramatic consequences for access to medicines.

Generics dominate the US pharmaceutical market. They account for nearly 90% of prescriptions in the United States each year and have saved Americans $ 2 trillion over the past decade.

Democrats are focusing on some of the high prices of the remaining 10% – brand name prescription drugs. They would like to allow Medicare to start pricing drugs that are no longer patent protected in 2025, starting with 10, but potentially increasing by 20 more drugs each year starting in 2028.

Critics of the provision lament its chilling effect on the development of new drugs. After all, price controls would reduce the incentive for investors to fund pharmaceutical research. Even if this research is successful – nothing certain, given that only 12% of drugs that begin clinical trials reach the market, according to the Congressional Budget Office – the potential return would be limited by the government.

These price controls would also destroy the generic drug industry.

Here’s how. Medicines have become more and more complex. Some are now made not by chemical synthesis but by living cells. These biologics treat all kinds of vexing illnesses, from cancer to rheumatoid arthritis.

The “generic” version of a biologic is called a “biosimilar”. These compounds are, as the name suggests, extremely similar – but not exact copies – of the original biologic.

There are only 31 biosimilars on the market today. They can be much cheaper than brand name biologics and could save patients up to $ 7 billion each year if they achieve a market share comparable to conventional generics.

It can take a decade and $ 200 million to create a biosimilar and bring it to market. Under Build Back Better, the incentive to undertake this onerous process would disappear. Indeed, the price control of the original biological product would come into force immediately after the end of the period of exclusivity of a biological product – the window during which a brand-name drug is protected from competition -.

There’s no point in investing in a biosimilar if the government sets an artificially low price for the brand name drug it competes against – and effectively eliminates its potential market overnight. Developers of biosimilars will not be able to cover their development costs.

The same principle applies to conventional generics. They compete with brand name drugs on price. If price controls make this competition questionable, then generics will disappear.

The disappearance of generics could have serious consequences for the drug supply chain. Will brand name drug makers have the ability to resume production of the 90% of drugs that generic manufacturers currently manage?

Will they have an interest in doing so, given that government price controls are unlikely to generate much profit? Why invest in increasing manufacturing capacity (new machinery, labor, etc.) if the price-controlled return is low?

The result could be a weak supply chain, with few facilities producing drugs at controlled prices. If just one goes offline, perhaps because of a natural disaster or the need for simple repairs, then people could be without the drugs they depend on.

Just as a price cap on brand-name grains would take generic alternatives like “bone fruits” and “squares of corn” from store shelves, the Democrats’ plan would take affordable generic drugs from drugstores and clinics.

• Sally C. Pipes is President and CEO and Thomas W. Smith Fellow in Health Care Policy at the Pacific Research Institute. His latest book is “False Premise, False Promise: The Disastrous Reality of Medicare for All” (Encounter 2020). Follow her on Twitter @sallypipes.

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