Generic Drugs have Market Vulnerabilities Too
As mentioned in the previous post generic drugs now account for more than 70% of prescriptions filled in the US and that percentage is likely to increase with patent protection expiring on several blockbuster products over the next 3-5 years. With additional support from the Obama administration to exploit the potential cost savings from the use of more generic drugs and continued efforts to ease the way to market for generic drugs, including biologics, you would think the future for generic drugs has never looked more promising. Yet, there are five vulnerabilities and risks that could undermine the cost savings potential and success of generic drug manufacturers in the future.
- Manufacturing Quality
Drug manufacturing is difficult, especially delivering lot-to-lot consistency for tablets and capsules and ensuring the sterility of injectable products. One of the biggest concerns raised most often about the use of generic drugs is whether they are, in fact, the same as the branded products. The FDA goes to great lengths to dispel purported generic drug misinformation and to provide definitive answers to common questions regarding comparability. According to the FDA website:
“Health care professionals and consumers can be assured that FDA approved generic drug products have met the same rigid standards as the innovator drug. All generic drugs approved by FDA have the same high quality, strength, purity and stability as brand-name drugs. And, the generic manufacturing, packaging, and testing sites must pass the same quality standards as those of brand name drugs.”
I’m not sure how the FDA can possibly making sure “all generic drugs have the same high quality, strength, purity and stability as brand-name drugs.” When you consider the increasing number of generic drug products being made available by more manufacturers (many, if not most, not even in this country), their assurance seems a bit definitive and even suspect (lacking credibility) given FDA’s already stretched resources and limited inspection capacity and capabilities.
Generic drug vulnerability in manufacturing quality comes with the potential for some well publicized cases of documented manufacturing problems, safety issues, or FDA warnings about any quality concerns that would compromise healthcare provider and public confidence in the efficacy or safety of generic drugs. In fact, any concerns voiced by the FDA with regards to the use of generic drugs could destroy the confidence of an already skeptical patient population.
- Unsustainable low prices
Even though generic drug manufacturers have built their business models around being low cost providers they still must make a reasonable profit to stay in business. It is important to note that drug manufacturing, especially sterile injectable drugs, is not cheap. Regulatory compliance and cost of goods can still make pharmaceutical manufacturing expensive, even for generic drugs.
When the healthcare market (e.g., pharmacies, wholesalers, Pharmacy Benefits Managers) drives competitive prices down to a point where even generic drug manufacturers can no longer make a reasonable profit, fewer manufacturers participate in that market and ultimately the healthcare market becomes more susceptible to shortages for those products. I believe this is a major reason for the current shortage of over 150 medically necessary drugs, many which are generic drugs.
So, generic drug manufacturers are vulnerable to the negative financial impact of unsustainable low prices. When they decide to manage this by limiting or eliminating the manufacturing of low or no margin products they leave themselves open to criticism and diminished public confidence as more of the critical drug shortages start to be blamed on the generic drug industry rather than on Big Pharma (the perception today).
- Supply of Active Pharmaceutical Ingredients (APIs)
As generic drug manufacturers squeeze their suppliers for lower prices, those suppliers also lose interest in delivering at those low prices and a cascade of events begins to drive a shortage of APIs when you need them. Without the financial incentives (reasonable profits) to ensure supply availability, even API suppliers start to limit and maybe even discontinue making the lowest margin products on a regular basis in favor of higher margin opportunities.
Unlike in other markets, the regulatory and manufacturing challenges of pharmaceuticals makes it difficult and time consuming for new manufacturers (API or generic drugs) to step in and take advantage of these drug shortages. Even if a new manufacturer were able to begin production, the finished generic drug’s price would almost certainly be much higher than the previous generic drug price. Again, potentially irritating and alienating the healthcare market and patients.
- Burdensome Government fees
Additional fees levied on generic drug manufacturers (i.e., FDA reviews) as proposed by the Obama administration could erode the cost savings potential to the healthcare providers system. Expecting generic drug companies to absorb these incremental fees could be counter productive (resulting in higher generic drug prices). More importantly, high fees across a portfolio of products could put sustainable profitability for smaller generic drug companies at risk, even forcing some out of the market.
- Product Liability
As more products become available and more patients take generic drugs, product liability cases will inevitably increase for generic drug companies. As a result, they may become more inclined to avoid or quit manufacturing products with the potential for an inordinate amount of litigation. Again, with their low cost of operations and thin profit margin business models, repeated and protracted litigation for low margin products may not be financially feasible, will add to their overall cost base, and could negatively impact healthcare provider and patient perceptions of quality.
The potential liabilities for generic drug companies is especially noteworthy in light of the pending Supreme court review of whether or not generic drug companies can be held liable for “failure-to-warn” when they rely on the prescribing information developed by the branded drug company and approved by the FDA. Should generic drug companies not prevail, it will open generic drug manufacturers to new potential liabilities and future litigation which could further compromise their low cost business models.
So, while the future looks very promising for generic drug manufacturers, it is not without challenge or risk. For the market to continue to reap the financial benefits of a consistent and safe generic drug supply, generic drug manufacturers must guard against these vulnerabilities. And as much as insurers and patients might enjoy the low prices we pay for generic drugs, the low prices only matter when the products are as effective as the brand, are safe to take, and are available when we need them.