What cereal can teach us about the generic drug market


Imagine you’re walking the aisles of your local supermarket, on the hunt for your favorite cereal. You usually purchase the generic version, since it tastes nearly the same and is much cheaper than the name-brand version.

But today, you notice that the price of the name-brand cereal is just a few cents more expensive than the generic version. You remember that Congress just passed a law capping the price of name-brand cereal.

Now, with the prices almost equal, you decide to purchase the name-brand cereal instead of the generic. Over time, many other shoppers make the same choice, and demand for generic cereals dries up. Eventually, generics disappear from the market altogether. Stores start running short of name-brand cereal, as its manufacturer slows investment in its production, now that its potential profit is limited.

Congress is not contemplating regulations on cereal prices — not yet, at least. But Democrats are hell-bent on capping prices of name-brand drugs as part of their Build Back Better Act. The result will be the same as in our cereal analogy — the disappearance of many generic drugs from the market. That could have drastic consequences for access to medicine.

Generics dominate the American pharmaceutical market. They account for nearly 90% of U.S. prescriptions every year — and have saved Americans $2 trillion over the past decade.

Democrats are focused on some of the high prices of the other 10% — name-brand prescription drugs. They’d like to allow Medicare to begin setting the prices of drugs no longer under patent protection in 2025, starting with 10 but eventually increasing by 20 additional medicines each year beginning in 2028.

Critics of the provision bemoan its chilling effect on the development of new drugs. After all, price controls would reduce the incentive for investors to fund pharmaceutical research. Even if that research succeeds — no sure thing, given that just 12% of drugs that start clinical trials reach the market, according to the Congressional Budget Office — the potential return would be limited by the government.

These price controls would also destroy the generic drug industry.

Here’s how. Medications have become increasingly complex. Some are now made not using chemical synthesis but living cells. These biologics treat all manner of vexing diseases, from cancer to rheumatoid arthritis.

The “generic” version of a biologic is called a “biosimilar.” These compounds are, as the name implies, extremely similar to — but not exact copies of — the original biologic.

There are just 31 biosimilars on the market today. They can be much cheaper than brand-name biologics — and could save patients up to $7 billion every year if they achieved market share comparable to conventional generic drugs.

It can take a decade and $200 million to create a biosimilar and bring it to market. Under Build Back Better, the incentive to undertake this onerous process would disappear. That’s because price controls on the original biologic would kick in right after a biologic’s exclusivity period — the window during which a branded drug is protected from the competition — ends.

There’s no point in investing in a biosimilar if the government will set an artificially low price for the name-brand drug against which it competes — and effectively eliminate its potential market overnight. Biosimilar developers won’t be able to cover their development costs.

The same principle applies for conventional generics. They compete with branded drugs on price. If price controls make that competition moot, then generics will vanish.

The disappearance of generics could have severe consequences for the drug supply chain. Will branded drug makers have the capacity to take over production of the 90% of drugs that generics makers now handle?

Will they have an interest in doing so, given that the government’s price controls are unlikely to allow for much of a profit? Why invest in ramping up manufacturing capacity — new machines, labor and the like — if the price-controlled return is low?

The result could be a weak supply chain, with few facilities producing price-controlled drugs. If just one falls offline — perhaps because of a natural disaster, or the need for simple repairs — then people could be without the drugs they depend on.

Just as price caps on name-brand cereals would make generic alternatives like “Fruit-Os” and “Corn Squares” disappear from store shelves, Democrats’ plan would make affordable, generic drugs disappear from pharmacies and clinics.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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