How Expanding Generic Drugs Can Add to America’s Health Care Woes

Jul 06, 2017

One smart way to reduce the cost of health care, according to many experts, is to expand generic drugs. Scott Gottlieb, the new commissioner of the FDA, for example, wants to speed generic approvals. The idea is that with more generic drugs on the market, prices will fall, in turn making health care both more accessible and affordable. But, in many ways, expanding generic drugs doesn’t solve problems. It actually creates them.

Generics certainly seem like perfect products. They are identical to the original patent-protected drugs, but come at a much lower price. A recent study by IMS Health showed that generic competition can reduce the price of a drug by about 80%. That’s a remarkable price decline.

Unfortunately, believing that generic drugs are a key to better and lower-cost health care is wishful thinking, and ignores the impact of generics on the U.S. health care system and the behavior of pharmaceutical companies.

First off, most generic drugs generate little profit. One of the few things that most people in health care can agree on is that when there are multiple players in a generic market, prices will be low. This means that margins for manufacturers will be small, making it difficult to generate significant profits. I was teaching a course at one large pharmaceutical company recently and learned that they had the ability to produce several different generic drugs, but opted not to launch the products because there was little profit upside. It’s not an uncommon situation.

Eliminating the profit on a drug seems positive. After all, who wants to give more money to the pharmaceutical industry?

In reality, the lack of profit on generic drugs creates a series of problems. One problem, frequently and correctly highlighted by industry experts, is that an accelerated generic pathway reduces the incentive for companies to do costly R&D work and field expensive clinical trials on generic products. If we want to find new therapies, we need to give firms reason to invest.

Another issue is that companies generally do not field clinical trials on generic drugs to identify new indications or compare effectiveness of different products. A rational firm isn’t going to field a $50 million dollar study on a generic product; there would be no way to recoup the investment given the low prices. This means that companies cease efforts to find additional ways to use generic drugs. They halt long-term outcome trials when possible. Could fluoxetine (Prozac) or simvastatin (Zocor) have different uses? Absolutely. We won’t know, however, because firms won’t conduct the trials.

Drug companies instead do clinical trials on new molecules that have patent protection and some profit opportunity. This means that we only learn new things about new drugs, which often carry a very high price.

Second, companies halt marketing efforts on generic products. It makes no sense for a corporation to spend money marketing a generic; there is no profit upside, so the return on investment from a marketing campaign would almost certainly be negative.

This means that doctors only hear about new molecules. There are few seminars on generic products. There are no elaborate displays at conferences about generics. There are no enthusiastic sales representatives encouraging doctors to use generic alendronate sodium (Fosamax) or methylphenidate (Ritalin). Physicians aren’t paid to share best practices on using generics. When a patient walks in with a particular condition, will the doctor think first of the generic, or the patent-protected product that just released a new clinical trial?

Third, because generic products receive no direct-to-consumer marketing support from companies, you don’t see television spots for them. This means patients aren’t familiar with these drugs. They don’t discuss them. They don’t ask physicians for them.

Generic products don’t have patient support programs, either. It is naïve to think that the care process ends when a physician writes a prescription. People have to actually get the drug, which can be a complex process due to insurance challenges. They have to use it properly, taking the drug at the right time and in the right way. They have to deal with side effects, and then stick with it.

Companies help patients navigate all of these hurdles for branded drugs. Some firms provide phone numbers that patients can call with questions. Others assign a care representative to each patient, in order to monitor progress, identify potential side effects, and remind them about proper use. Companies of course have an incentive to do all of this—they will profit if people take the drug, have a good experience, and then stick with it.

Generic products are quite different. There is usually no one to call when you are using a generic drug. You have to hunt to figure out who manufactured it. You are on your own. If there is a problem, you can try to reach your physician, but this can be a challenge, and your doctor isn’t likely to be thrilled to hear from you when you forgot whether to take the drug before dinner or after.

Finally, generic drugs often have supply problems. Companies don’t really worry about running out of stock of a generic product. There is no reason to invest in capacity to meet the potential demand of a generic when missing out on sales of a generic drug isn’t a big financial issue.

Companies managing a branded product have a very different incentive. When you are making profits off of each sale, you certainly don’t want to miss out. You have a clear reason to increase production capacity to meet demand.

The U.S. approach to drugs is not the only way to manage a pharmaceutical market. In many countries, companies invest in branded versions of generic products. They compete on overall value: perceived quality and price. Even in the U.S., over-the-counter drugs work in a very different fashion; firms battle based on branding, marketing, and quality in addition to price. Tylenol and Claritin don’t have patent protection, but they compete in part by building strong brands.

Instead of thinking about ways to expand cheap generic products, we should be thinking about ways to increase competition based on quality, patient outcomes, total health care costs, and price. A blind rush to generics will only create more problems, and ultimately hurt patients.

Tim Calkins is clinical professor of marketing at Kellogg School of Management at Northwestern University where he teaches courses including Biomedical Marketing and Marketing Strategy.

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