Why the Supreme Court is wrong on generic drugs

June 27, 2013, 1:00 PM UTC

FORTUNE — On the face of it, the U.S. Supreme Court’s latest decision on generic drugs makes all the sense in the world. On Monday, in a 5-4 vote, the court ruled that since generic drugmakers are only replicating brand-name drugs that have already been deemed safe by the Food and Drug Administration, patients can’t sue to hold them liable for the dangerous design of a pharmaceutical. Since a generic is exactly the same as the name-brand medication, the reasoning goes, it’s unfair to blame the maker of the copycat version.

The logic is fine — it’s the premise that is wrong. There is mounting evidence that generic drugs are different in numerous, and important, ways from their brand-name versions. (Fortune  explored the issue in January.)

The Supreme Court relies, reasonably enough, on the FDA’s definition of what constitutes equivalent drugs. Generics must have the same active pharmaceutical ingredient as the brand-name original and must release a similar amount of that ingredient into the bloodstream

But the FDA’s definition of “bioequivalence” allows for a surprisingly wide range. A generic’s maximum concentration of active ingredient in the blood must not fall more than 20% below or 25% above that of the brand name. That means a potential swing of 45% among drugs that most consumers believe are exactly the same.

That isn’t the only divergence. The other ingredients in a generic drug, known as excipients, can be different from the name-brand version and are often of lower quality. Then there’s the method of manufacturing the non-brand version. As Fortune pointed out in January, “a generic requires reverse engineering, and the result is an approximation rather than a duplicate of the original.” The FDA also does not specifically regulate how quickly the medicine must reach maximum concentration in the blood, an important aspect of time-released medication that can impact its effectiveness.

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A clear example was a generic version of the popular anti-depressant Wellbutrin, distributed by Teva Pharmaceuticals (TEVA). For years, patients complained that the drug, budeprion XL 300 mg., didn’t work as effectively and made them feel sick. The FDA defended the drug and, by extension, its own approval process, and dismissed these complaints as subjective.  But an independent consumer laboratory tested the generic and found that it dumped the active ingredient into the bloodstream at four times the rate of the branded drug. Last October, the FDA took a highly unusual step: It withdrew approval for the generic and required other generic companies to retest their versions.

There are other differences between the manufacturing of generics and branded drugs. A majority of generics are made overseas. A report by the Government Accountability Office found that in 2009, FDA regulators inspected 11% of foreign drug manufacturing plants, compared to 40% of domestic ones. The FDA is aiming to eliminate the gap. But the inspections themselves can differ. Foreign inspections, hampered by logistical restrictions, can last less than a week and allow manufacturers weeks of advance notice, while domestic ones can last up to six weeks and are unannounced. In short, overseas generic drugmakers can more easily game this system.

Ranbaxy, the Indian generic drug giant, is a case in point. In May, Fortune published an investigation on a massive, longstanding fraud at the company. The article revealed that the company fabricated testing data for over 200 drug products in more than 40 countries, including the United States. The FDA learned of this wide-ranging deceit in 2005, not through its inspection system but from a company whistleblower. (In May, Ranbaxy pleaded guilty to seven felony counts of drug adulteration and misrepresentation, and agreed to pay $500 million in fines and penalties.)

So what will happen in light of the Supreme Court’s new ruling? Presumably, many existing suits by users of generics will be thrown out. Before you decide whether that’s good or bad, consider how dire the effects of a drug can be. This week’s Supreme Court decision, called Mutual Pharmaceutical Co. v. Bartlett, involved the case of Karen Bartlett, a New Hampshire patient who in 2004 was prescribed a drug called sulindac for her shoulder pain. She took the generic version, made by Mutual Pharmaceutical Co., a subsidiary of an Indian generic drug company Sun Pharmaceutical Industries, and suffered Stevens-Johnson syndrome, a rare but known risk of the medication. Her skin sloughed off. She suffered burns over 65% of her body and endured 13 eye operations, emerging legally blind. A federal court in New Hampshire found Mutual Pharmaceutical liable for the defective design of the drug and awarded Bartlett $21 million. The Supreme Court has now overturned that decision and provided a significant legal shield for the generics industry — based on the flawed assumption that generics are the same as name-brand drugs.