The Good News on Generic Drugs

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.

Tomorrow: The Good News on the FDA and ANDAs.


Yesterday, Cowen acknowledged that the Republican base consists mostly of cranks. Today, Tabarrok (sort of) acknowledges that the FDA is not the source of all that's wrong in the world. What's next, that tax cuts don't pay for themselves, that excessive inequality causes financial and economic instability, that Silicon Valley's great achievement is an advertising platform, that social security benefits should be increased, that Keynes actually got it right. Have we entered Bizarro World.

Good point, it was implied here that the problem was the FDA being too nitpicky about manufacturing drugs. Yet this demonstrates with a few exceptions generics are in a competitive market and prices come down over time.

Both can be true.

100% parmigiano grated cheese that is 8% cellulose is simply fraud, but when a 8mg dose of anew antibiotic drug is only 6mg, that is both fraud and the cause of your individual and public health deteriorating as bacteria evolve to resist that class of antibiotics.

Reduced dose antibiotics (some reduced to zero) are a common problem in Asia, with the counterfeit drugs sold in packaging with global brand holograms. Counterfeit holograms are cheaper than the active ingredients in some high volume drugs that are manufactured in bulk in factories that supply the global brands and the generic tablet makers.

The FDA regulations are no more burdensome than many other industries require with ISO9000, except government only gets involved after deaths have occurred, like with airbag inflators. Government inspection of records in the latter occurs after the damage is done, but the industry has adopted standards to meet government regulations related to liability that allows tracing back to the root problem and then to go forward to find and replace all defective output.

We the People have been pushing for the same traceability in food ingredients because we are fearful of dying simply because we had a sandwich out, or made a sandwich with ingredients bought in the supermarket. Even Congress, which has denied the FDA and USA the means to do anything about pathogens getting into our food, demand the FDA and USDA explain why deaths happen and why the government isn't preventing the deaths.

If you want to argue that it's purely up to the consumer, and you routinely send most things you buy to consume to an analytics labs to test for purity and correct amounts of advertised ingredients from the drugs you take to the lettuce you put on your family's sandwiches, I applaud you for creating so many jobs by paying for all the lab workers and test equipment factory workers.

The notion that the only method for consumers to know anything about what they're buying in a market economy is to run an analysis themselves of a product's components, is a notion not even worth entertaining in an academic economic debate.

An individual that would make such an argument has likely never heard of certification and testing firms, in which case, said ignoramus is not fit to engage in academic debate on subjects which he is clearly uninformed.

1) Market competition in generics is good.

2) Overall health care costs are rising unsustainably.

3) The FDA created Shkreli's extortionate business model.

These statements are not mutually exclusive.

Agree. And add to that list:
4) There is no market similarity between generic drugs and new, patented drugs. (Patent drugs are exclusively a monopoly market. Generics are, generally, a perfect competition. Shkreli manuevered his drug in to a monopoly situation.)

Generics aren't really a free market despite considerable competition.

PBMs like Express Scripts negotiate massive discounts on behalf of employers, even for generic drugs.

re: "3) The FDA created Shkreli’s extortionate business model"

I think it's not the FDA, but congress and legislation itself. It's the legislation that created Shkreli. I don't understand why congress doesn't simply change legislation rather than grandstand. They act like they're appalled and helpless to change things while at the same time helped create it.

Shane M,

You are correct. I was imprecise. Congress created it; the FDA implements it.

Which makes Shkreli actually not the bad guy at the Congressional hearing.

"Which makes Shkreli actually not the bad guy"

He's a serial fraudster.

Read much?

@WC Varones - this incident lowered my opinion of congress even further. They're simply unable to even correct a problem that both parties overwhelmingly agree is bad policy, and this is entirely within their ability to correct. The hearings exposed this disfunction as much as anything, because it's not really even a political issue. The result of the legislation is producing terrible results, and everyone agrees. Why not act immediately and fix it instead of stopping with soundbites?

Talk about cherry picking your data:
U.S. spending on prescription medicines jumped 13 percent to $374 billion in 2014, the biggest percentage increase since 2001, as demand surged for expensive new breakthrough hepatitis C treatments, a report released on Tuesday showed.

Demand for newer cancer and multiple sclerosis treatments, price increases on branded medicines, particularly insulin products for diabetes, and the entry of few new generic versions of big-selling drugs also contributed to the double-digit spending rise in 2014, the report by IMS Health Holdings Inc found.

Not relevant to generic drugs. What's your point?

That new Hep C drug actually saves money in the long run because it will mean far fewer liver transplants and far fewer deaths. 10,000 Americans die every year from Hep C. (As a point of comparison, there are 14,000 murders). Hundreds of thousands more are hospitalized for complications related to the disease.

This new drug is absurdly expensive but it actually cures the disease in 90% of cases! That's huge.

Once the drug becomes available as a generic, it will save even more money for the health care system and even more lives.

We mustn't be short term focused here.

Here's the always informative Austin Frakt on off-label drug use, their higher risk, and the disincentives for clinical trials for new (off-label) uses of existing drugs. According to Frakt, one out of five prescriptions is off-label. One out of five! Are drugs over-regulated or under-regulated?

Interesting point here about medical inflation. Normal inflation is measured by looking at a market basket of goods (say a dozen eggs a week, a gallon of milk) and noting how the cost of that basket changes at different points in time. Except for some modest changes, that basket doesn't change much over time.

Healthcare, however, is a basket of old and new goods and I suspect there isn't inflation in the old goods. Patent and generic medications demonstrate that clearly but most other healthcare cannot be divided. Your doctor, for example, is a mix of old skills he/she learned back in medical school and new skills learned during her/his career. A hospital has a mix of equipment that would have been familiar to someone in 1980 and some that is cutting edge. My proposal is that we consider that medical inflation is actually new products embedded in old products that are not experiencing inflation.

Actually, as I understand it, this was inflation in old goods - he bought old (sometimes very old) off patent drugs, and increased the prices drastically because of barriers to entry (such as the inability to import from India or the cost of ramping up a new manufacturing line) - so for example the newly priced $750 drug, which was raised from $13.50, had recently been raised to $13.50 by the company that sold him the drug (so they had started implementing the strategy before him - lucky for him or optically the increase would have been worse, although I suppose he paid for it somewhat in the purchase price), but cost less than $1 in India. On top of that, the market of buyers doesn't work very well in negotiating against his price increases (as argued at length elsewhere). Of course, bigger companies might be more restrained than him by bad PR or shame.

The drug that went form $13.50 to $750 was already generic. Other companies can make that drug and sell it. It was an unusual generic in that the number of people who need the drug is very tiny so although competition could be a factor it will likely always be an expensive drug because so few people will need it every year. The 'barriers' to entry are simply the cost of setting up a manufacturing line for a very limited run.

The study above, though, indicates that this is not the typical story. Most drugs used are generic and most generics are dropping in price.

I agree that the Shkreli situation is the exception, not the rule, on generic competition, in that it relies on things like the cost of ramping up a line for a drug (as I noted), so it won't work for high $ volume drugs (or at least, won't work for long) but it's an interesting exception.

On the flip side, I don't understand how drug companies get away with giving "coupons" that apply only to the co-pay (to either compete with generics or just facilitate prescription of expensive drugs). I would think insurance companies would require that the coupon has to apply to the gross price, and then the co-pay applies to the net price. Otherwise, it's not really a co-pay.

In the courts:

Thanks, A Definite Beta Guy.

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

This is exactly the wrong metric. Total spending is dominated by the most expensive drugs not the most common drugs.

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

That last is better, but I'd want to know if it is due to substitutions for more expensive branded drugs (see e.g. the prilosec -> nexium scam).

I’d want to know if it is due to substitutions for more expensive branded drugs

Absolutely this.

Has anyone ever researched cost per dose instead of just total spending?

Shkreli didn't make money as hedge fund manager. In fact he blew up his fund, twice. Then he defrauded his biotech investors to pay off his hedge fund investors, who thought that he was making money in the stock market. So mainly he's made money as CEO of biotech companies, not as a stock trader.

Surely this is meaningless unless we know the base prices used, and how those base prices compare to those found in international markets.

Many if not most rich countries actually pay more for generics than we do. Where we get screwed is on the patented products.

Still the one that sticks in my mind was my wife when pregnant being prescribed some multivitamins, and seeing a bill (covered by insurance) that was about three times what the exact same vitamins would cost OTC.

Yep! People will go to their doctor and for a prescription rather than buy the same thing OTC. "Because, with a prescription I can get it for free."

Tangential: My wife's prenatal vitamins were not covered by insurance, though her birth control certainly was.
Feel free to draw conclusions re: government policy and picking winners/losers.

It is cheaper for an insurer to prevent you from having an unwanted pregnancy than it is to pay for a child birth. Health insurers have always covered birth control at a rate that minimizes their costs. Draw your own conclusions about the nature of corporations.

Corporations are profit-maximizing entities.

Certainly the government and interest groups and certain parties should make a big stink about paying for prenatal vitamins. How can we pay for men's erections and NOT pay for the product for the product of those erections? This is a War on Women, and you are an apologist.

Which is why birth control was free before Obamacare, right Jan? Sorry, it was a political decision, not a business decision

ADBG - I recall seeing an argument in favour of easier access to contraceptive pills, which endorsed requiring men to get a prescription for viagra until rules requiring a prescription for contraceptive pills were removed. Same same but different to what you're saying.

Birth control saves insurers money. Prenatal vitamins probably save them some money, but birth control saves an order of magnitude more.

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

This is an apples-to-monkeys comparison. Of course older generics are dropping in price and volume as they are made less attractive / more obsolete by more effective and/or safer expensive new branded drugs.

One of the big things that helped this trend was the government. They made providers publish their acquisition cost, which finally provided decent way of estimating what the real cost of drugs was. They also published their government buying rates. You may extol the value of the free market, but the free market was basically a web of deceit before government regulation forced transparency. I'm very thankful to the government in this regard.

Also, the big news the last few years has been the patent cliff. Lots of big name drugs coming off patent. It's natural for their price to fall over time as more manufacturers enter the market. This trend is largely coming to a close this year.

Shkrelli's price increase should have been ruled illegal by the government. Way simpler solution then some convoluted "markets will eventually solve this". I don't think you need special local Hayekian knowledge to figure out the cost of production didn't go from $13.50 to $750. He should also be in jail...if not flogged in the public square.

but the free market was basically a web of deceit before government regulation forced transparency. - ----What "free market" are you referring to?

"They made providers publish their acquisition cost, which finally provided decent way of estimating what the real cost of drugs was."

And then what ? How exactly do average consumers digest this "real costs" data and directly leverage it against drug companies to get real price decreases ?

Free Market competition works much better for consumers.
Competing drug companies know the business-- and the "real costs" of producing a given drug. If Company-A is sharply overcharging consumers for a drug-- there's strong incentive for Company-B & Company-C to produce and sell that drug at lower prices. Consumers merely need to compare retail prices.

Markets work very well by that process for all consumer products from toothpaste to houses... unless the government interferes and/or grants monopoly privileges to some sellers.
Of course, the U.S. drug market is very heavily regulated by the government and is not even close to a genuine free market.

How exactly do average consumers digest this “real costs” data and directly leverage it against drug companies to get real price decreases?

Insurers are the ones who do that, not consumers. Except Medicare because it is explicitly prohibited from doing so by statute.

"Insurers are the ones who do that, not consumers."

Bingo. In fairness, there are some online tools consumers can use to get good cash prices, but in those cases its one again some company with professionals analyzing the data.

"Shkrelli’s price increase should have been ruled illegal by the government. Way simpler solution then some convoluted “markets will eventually solve this”."

Price controls are simpler than market prices? Perhaps. Simpler in the way it's easier to bang a tack with a sledgehammer.

The cost of production is not what increased, and any Hayekian would tell you that. They'd also tell you that the producer realized he could raise the price while the government would prevent another producer from undercutting him. So he raised the price.

This is a market economics blog. If you aren't going to at least feign an understanding of simple market economics, why are you here?

"You may extol the value of the free market, but the free market was basically a web of deceit before government regulation forced transparency. I’m very thankful to the government in this regard."

Excuse me while I throw up...

The government makes people adhere to certain safety standards before they sell Rx. They do this because there have been lots of instances of people selling bad or ineffective Rx. That's why the regulation was created.

Why should we let Shkrelli raise the price? Is is a command from on high. Brand medications are justified under R&D, but there is no R&D case here. If the government denied the price increase and forced him to sell at a level that was already profitable enough to produce and distribute the drug for forty years, who exactly would be hurt?

I'm in this thread because I price Rx for a living. I know how the market works. I know how the market works in other countries. I know that other governments buy Rx and healthcare in general better then we do here. In Japan they literally publish a book with the price that everyone in the country has to use. If that's an example of a wage and price control disaster, why does it work so well? Why are people getting access to a quality product serving their needs at a reasonable price?

Not everything in Nixon's wage and price controls. Each market has to be evaluated on its own, and empirical results, not theory, determines what is and isn't the best way to organize things. When the free market leads to good outcomes, like at your grocery store, I'm in favor of the free market. When it doesn't, I'm not. My libertarian sympathies are purely consequential in nature, if the empirical results aren't there I'll look beyond libertarianism.

So go throw up. I'm a part of why those prices came down, and I know government intervention and regulation were a key pillar of how we made it happen.

You have been deceived as to the origins of government regulation. It sounds like roses and unicorns that the government witnessed an injustice in the market and benevolent politicians swooped in and saved us all from the evil capitalists by keeping them in "check," but that's not how government regulations actually developed. Their functional purpose is to restrict competition in the market. There's a reason big, established firms lobby for regulations in their market - and it's not because they have an altruistic sense of compassion. They intend to raise artificial barriers to market entry that prevent competition from entering and undercutting them.

Why should we *let* Shkreli raise the price? The government doesn't set prices in a market economy. "We" have no control over how he prices his product. He can price his product however he wants, since it's his product. In a normal market, if he prices it too high, he will be undercut by competition and forced to bring his price down. In the actual market, the FDA makes it unprofitable to enter the market and undercut him through onerous regulations that serve to raise the barrier to entry and thus restrict competition in the market, and so he raises his price without consequence.

I can't believe I have to explain this on a blog dedicated to market economics.

And your profession is proof positive that participation in a market is no indication that you are an expert on the economics of that market.

In Soviet Russia, they wrote the book on publishing a book with a price that everyone in the country has to use. It worked great... right?

Sure, you can rely purely on empiricism to inform your sense of reality. Eventually, you're going to need some theory to make sense of your observations. I always find it interesting when people try to separate the two. Even those who claim pure empiricism are constructing theories to explain their observations, whether they admit it or not.

There is not any situation in which a free market would not lead to an optimal outcome. Where you see poor outcomes, you can be sure that there was no functioning market operating behind them.

You're part of the problem, as far as I'm concerned. You refuse to fault the FDA for its draconian and ridiculous approval process that costs about a billion dollars and takes years, even for a product that is already on the market and already approved. Government intervention and regulation are the wrenches in the spokes of our market economy, and you're the bystander blaming the cyclist for wrecking the bike, shouting "We need more wrenches!!!"

Tainted or placebo Rx get sold all the time in the free market. This stuff isn't made up. Even basic research would show this to be a real problem.

I'm not convinced government is keeping restrictions so tight that cheap generics aren't making it to market. Almost all major and even minor drugs receive massive competition rather quickly. There are often 10+ manufacturers and the price drops like a rock. There is little evidence to your assertion that they keep generic manufacturing market too small. Shkelli had to go hunting to find an outlier.

Someone will enter the market, but not before he's price gouged people for a short period. This is a drug people need to live. They aren't going to wait a even a short while for someone to start up a production line.

What purpose is served by this? Both the practical and romantic aspect of capitalism is providing value to people. Not exploiting loopholes to take advantage of people so you can be an aimless hedonist. A world without Thomas Edison is a worse world. I'm not convinced a world without Martin Shkelli is. Exactly what value is he creating?

Modern Japan = Soviet Union. Got it, I must have missed that while I was over there.

There are actually a lot of theoretical frameworks that explain why regulated healthcare markets work out well empirically. You can go look them up, if you want.

"There is not any situation in which a free market would not lead to an optimal outcome. Where you see poor outcomes, you can be sure that there was no functioning market operating behind them."

Take a logic class, please.

The FDA process for making a copycat generics doesn't take billions of dollars or years. It tends to happen pretty quick and pretty cheap, especially if the molecule is simple. Your thinking of new Brand drug development. Last time I checked libertarians were gung ho about intellectual property rights, patents, and people being able to get rich off their R&D. A world in which the FDA doesn't approve drugs is also a world where people can just copy your molecule and produce it for a few bucks because you don't have a patent from the FDA.

My guess is that more government would mean less overall regulation in the healthcare system. Systems abroad are pretty simplified compared to here. One of the hallmarks of good regulation is it makes a market simple and transparent, so markets can go on doing what they are suppose to do. For instance, making people publish their prices publicly decreased inefficiency in the system with an absolute minimum of government involvement.

Laws and regulations and the result of complex legislative and administrative procedures that involve many different people pursuing individual agendas. To say that there is one, singular "functional purpose" and that this purpose is inevitably to serve some class of incumbent capitalists is just vulgar, reductionist, neo-Marxism. I don't think anyone is under the illusion that special interests don't influence the legislative and administrative procedures that shape regulation. Of course they do although, interestingly, some of the same people who agree with that will strenuously deny that big-money campaign donors have a corrupting influence on policy.

I don't get the Shkreli shout-out; I don't think his company was producing a generic, except insofar as it was off patent.

It's a generic with an FDA-granted marketing monopoly.

FDA didn't grant the monopoly. The FDA simply enforces the law passed by Congress to ensure the safety of a generic drug's manufacturing practices before it can be mass marketed.

That sure sounds like an FDA-granted monopoly.

"The FDA grants market exclusivity to companies that are willing to take “grandfathered” compounds into compliance with their current regulatory framework, and that’s led to some ridiculous situations with drugs like colchicine and progesterone."

It's not a monopoly if anyone can get it.

Now, maybe the FDA steps are too burdensome and/or take too long. But it's no more a monopoly than requiring every meat-packer to follow meat-packer guidelines. (I say this with no inference about whether the meat-packing guidelines are too loose, too strict, or just right.)

"market exclusivity"

How is that not an IP monopoly?

"It’s not a monopoly if anyone can get it."

Alternatively, if market entry barriers are high enough, we can have an illusion of competition and a reality of monopoly at the same time. Consider Google. Nothing is formally stopping anyone from entering the field. But the reality of their technological advantage due to early entry results in a virtual monopoly over online searches, and presumably only the prospect of regulatory and consumer backlash has kept them more or less in line to date.

Dan Weber,

"It’s not a monopoly if anyone can get it."

I don't think you understand the process. Once a first mover does it and gets approved, it's a Congress-created, FDA-enforced monopoly.

That's the definition of monopoly. Anyone can't get it.

AlexT once again advocates deflation. When will he learn that it's not the end-all and be-all of life? If you believe AlexT, our mission in life is to live at the boundary Marginal Cost = Marginal Revenue, which is Malthusian subsistence level.

All generic drugs are essentially ripping off patented drugs, which have too short terms of protection (hence the numerous extensions to the patent term due to FDA delay, which is a recognition of too short a term of protection).

Is AlexT also celebrating that his students can photocopy and/or download his super-expensive textbook on economics? Why or why not? AlexT is a good teacher: 'do as I say, not as I do, as I make you buy my overpriced textbook so I can get a nice $10k or so royalty at the end of the year'. Hypocrite.

s AlexT also celebrating that his students can photocopy and/or download his super-expensive textbook on economics?

Well, since MRU is free perhaps Alex believes there are alternative ways to make money than expensive textbooks.

I am an economics students and I have been following the careers of some of the most influential entrepreneurs in the United States in order to help guide me on my career path. Joel Hyatt is one of the most successful lawyers in the United States. I have learned a lot by following his career. Here is a comprehensive blog post that gives some background information about Mr. Hyatt.

Your data sources all supported the ACA, and cherry picked non-public data because they are all profiting handsomely. See, e.g .

More importantly, where we're the APIs for those generics made? See

See also

I suspect those studies may be significantly out of touch with developments in the last couple of years. For a completely different take, see _Life Extension_ magazine March 2016 (unfortunately, not yet online but it should be available soon at ), the editorial by William Faloon titled "_New England Journal of Medicine_ Exposes Generic Price Scandal", referring to . The LE Foundation set up a pharmacy to attempt "to slash prices of generic drugs to our members". However, "generic makers raised prices so high that even *copays* on certain drugs remained *unaffordable*, even though the _cost_ of to make most generics is virtually nothing."

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