As the sheer size of the generic pharmaceuticals industry has increased over the past 20 years, it was inevitable that there would come a serious consolidation of that industry. What had been a somewhat “Mom and Pop” type of business, in which the majority of participants only made and distributed a relatively small number of products, has been radically changed into a real global industry in which a small number of major players now dominate the manufacture and distribution of the majority of generic drugs.
At the same time, we have seen cases in which selected generic agents have price increases that (sometimes) boggle the mind. How can this be?
At the end of the day, as usual, it’s all about supply and demand.
Sometimes, during the generic industry consolidation, plants get shut down. This can happen for reasons of efficiency, or it can happen because the FDA has had to become more expert and rigorous in its oversight of the generic drugs manufacturing processes (as the quantity of products has increased), or it can happen for other reasons too. But the result may be that a particular generic drug is only available from one supplier using one manufacturing facility — giving that generic manufacturer a monopoly that is just as strong as the monopoly held previously by the original, innovator drug company that developed and marketed the product. There is nothing illegal about this.
If the product is in high demand, then a particular generic manufacturer is able to — and may choose to — take advantage of the available opportunity (at least until another generic manufacturer can compete again, which may take a while). If the product is in low demand but the demand is imperative for a small subset of patients (e.g., an orphan drug), the same opportunity may be available — but it may not even be worth it to another generic manufacturer to try to compete at all!
The other thing that happens is that a generic manufacturer may decide that it simply isn’t worth it to go on producing a specific generically available product because his cost of goods has gone up too high and the price he can charge still remains low. In that case, there comes a gradual increase in the demand for product from the smaller number of companies making that particular product — and they may all be able to work out that they can increase their prices (without there being any actual collusion) because demand is slightly higher than supply.
Ideally, from a payer and a patient perspective, the price of generic drugs should always be very low, reflecting what has historically been the very low cost of goods related to manufacturing such products. However, we would be making a serious mistake to assume that that inevitably remains the truth today. Bluntly, it doesn’t.
You want to get a little more insight? Have a look at Ed Silverman’s column on the Wall Street Journal web site from last August, or Adam Fein’s article on the Drug Channels blog site, or today’s article by Alpern et al. in The New England Journal of Medicine. For all sorts of reasons, the costs of at least some generic drugs really are going up. The reasons can vary, but the reality is incontrovertible.