Generic drugmakers are warning that Democrats’ plan to let Medicare negotiate the prices of drugs may undercut competition from lower-cost copycats, inject massive uncertainty into their market and forfeit potential long-term savings.
Why it matters: Experts say the concern about downstream effects on generics is valid and point to larger questions about whether the overriding focus on negotiating prices skews drug development over time.
State of play: The Senate on Sunday passed a $740 billion tax, climate and health care package, making good on longstanding promises to lower the cost of prescription drugs.
- * The bill gives Medicare the ability to step in and negotiate the price of older drugs that still don’t have any competition. The bill sets price ceilings for those drugs.
- * That ends the status quo, under which drugmakers can enjoy monopoly prices for far longer than the exclusivity periods granted under the law — either while they wait for competition or while they block it through patent litigation.
Yes, but: The generic industry is warning that rather than removing brand manufacturer’s incentive to stall competition, the bill will make it harder for competitors to gain entry and ultimately lead to higher prices over time.
- * Robust generic competition often lowers drug prices to a fraction of the brand drug’s, driving the vast majority of demand to the cheaper alternative.
- * “The bottom line is that it’s competition that works,” said Dan Leonard, CEO of the Association for Accessible Medicines. “At the end of the day there will be less competition if this legislation goes into effect.”
And for brand drugs that would otherwise be facing this kind of revenue loss, the Medicare-set rate at a higher market share could actually be a better deal.
- * “We think this potentially sets up a series of perpetual monopolies for the brand products, where sure, they’re going to make less than they would under price controls, but they’re going to make a whole lot more than they would from competition,” said Craig Burton, executive director of the Biosimilars Council.
The big picture: Generic drugmakers may be less willing to enter the market, the industry argues, given the enhanced uncertainty about how profitable it is for them. Some experts warn this isn’t just industry fear-mongering.
- * Once multiple products are on the market, generics are generally sold at low margins. The most money to be made is by the first generic drug to come to market, which is granted 180 days of its own market exclusivity.
- * That drug only has to offer a discount that’s significant enough to attract a large portion of the market away from the branded drug. That discount is much less — and thus more financially lucrative — than the discounts seen once multiple generics are on the market.
- * But if the first generic is competing against a drug priced at the Medicare-negotiated rate, the math is thrown off. And most brand drugs will likely be eligible for negotiations before their patent protections end, at least according to current averages.
- * “The concern is if this makes it so the first generic is less certain about the benefits of challenging patents,” said Ben Ippolito, a senior fellow at the American Enterprise Institute.
The other side: Even if the legislation weighs against the first generic entrant, the product can still be profitable, said Washington University law professor Rachel Sachs.
- *And if drug companies could do a better job keeping generics off of the market, they’d have more incentive to be doing so under current law than under the new one.
- * “I would be very surprised if the government was negotiating for a 90% discount on a small molecule drug in its tenth year on the market. That would be unexpected,” Sachs added. “Given that the expected results of this negotiation are smaller than that, I have a hard time understanding why generic competition would necessarily be impeded.”
Be smart: This calculus could vary for different classes of drugs, as some will be much more dependent on the Medicare market than others.
The intrigue: The biologics market for drugs made of living organisms is a much bigger wildcard, because we’re still gathering early-stage data on what happens when biosimilars come to market.
- * The generic industry isn’t predicting a good outcome for biosimilars.
- * “We’re just getting going, and this legislation, we believe, could throw ice water on this nascent market,” Leonard said.