Forget Shkreli: Generic Drugs Are Cheaper than Ever

Who could resist the story of Martin Shkreli and Turing Pharmaceuticals? Shkreli is like a villain straight from central casting; having made millions, perhaps fraudulently, as a hedge manager, he turned to pharmaceuticals where, as CEO of Turing, he bought up the marketing rights to Daraprim (pyrimethamine), a drug used by pregnant women and AIDS patients (natch), and jacked up the price from $13.50 a pill to $750 a pill. Not content with monopolizing pharmaceuticals, Shkreli also aimed to monopolize hip hop music.

Shkreli on his own was a great story, but add some big price increases for a handful of other generic drugs and Shrekli became an irresistible lead to a story about seemingly widespread increases in generic drug prices.

If we dig deeper, however, the big news about generic drugs is good news. Generic drug prices are falling. Three recent studies of generic drug prices all point in the same direction. Express Scripts, a large prescription drug manager, found that:

From January 2008 through December 2014, a market basket of the most commonly used generic medications decreased in price by 62.9%.

In an excellent overview, the Department of Health and Human Services concluded that:

Drug acquisition costs fell for a majority of generic Medicaid prescriptions measured by both volume and total generic expenditures.

Finally the AARP studied the prices of generic drugs used by older Americans and found that:

Between January 2006 and December 2013, retail prices for 103 chronic-use generic drugs that have been on the market since the beginning of the study decreased cumulatively over 8 years by an average of 22.7 percent.

— The cumulative general inflation rate in the U.S. economy rose 18.4 percent during the same 8-year period.

Patented drugs are increasing in price, so to evaluate the benefit of price decreases for generics it’s important to know that between 80 to 90 percent of all prescriptions in the United States are for generic drugs.

So what accounts for the small number of large price increases in the generic drug market? It’s a combination of market shenanigans, supply shocks, and FDA delay.

The markets where price increases have been large tend to be relatively small. Daraprim, for example, is only prescribed some 8,000-12,000 times per year in the United States. The small size of these markets is no accident. Keep in mind that, whatever one may think of Shkreli, he did show a kind of entrepreneurial genius in scouring the universe of drugs in the United States to select one where monopoly power could be so effectively exploited. Shkreli found a market where 1) the total size of the market was low so there wasn’t much competition, but 2) the drug treated a serious illness, and 3) there wasn’t a good substitute so the value of the drug to the small number of patients was very high.

In addition, Shkreli knew that he had at least a 3-4 year window of opportunity to exploit monopoly power. To compete with Daraprim a competitor would have to submit an Abbreviated New Drug Applications (ANDA) to the FDA. Despite the name "Abbreviated," it costs at least $5 million to go through the process, and right now there is a backlog of nearly 3,000 ANDAs at the FDA’s Office of Generic Drugs. In recent years, it has taken 3- 4 years to get a generic drug approved. The cost is too high and the delay too long.

(I am focusing on the standard route to market entry and ignoring the possibility of importation or compounding, which I discussed earlier. I’m also ignoring that Daraprim is unusual in that it was approved in 1953 before the current FDA system of safety and efficacy trials, and the FDA is being absurdly cagey about whether they would allow a simple ANDA for Daraprim. I may write about that in a future post — see here for a related case.)

So what’s the good news? In 2012 Congress passed the Generic Drug User Fee Act (GDUFA). Modeled after the very succesful PDUFA, the act earmarks fees paid by generic drug manufacturers to the FDA’s Office of Generic Drugs. As a result of those fees, the FDA has hired more reviewers, and they are rapidly reducing the backlog. That’s the first piece of good news.

A second piece of good news is that FDA delay isn’t the only cause of the backlog. Another cause of the ANDA backlog was an unexpected increase in the number of ANDAs. I would have been much more worried if the number of ANDAs had decreased. Despite new user fees and some increase in regulation, the increase in submissions is evidence that the US generic market is competitive, vibrant, and profitable.

The generic drug market in the United States has been very successful. We are constantly told, for example, that US pharmaceutical prices are the highest in the world and that is true for patented drugs, but generic drug prices in the US are among the lowest in the developed world and most prescriptions are of generics.

We can address the price hiccups in the generic market by opening up to more world suppliers, speeding up the ANDA process, and keeping costs of entry low. Overall, however, we shouldn’t let the price hiccups detract attention from the fact that the generic drug market is competitive, vibrant, and thriving, and we want to keep it that way.

This article first appeared at Marginal Revolution.